Clarification of Sec 297

Yogesh Bhatt (Company Secretary) (475 Points)

19 July 2010

BOARD'S SANCTION TO BE REQUIRED FOR CONTRACTS IN WHICH

DIRECTORS ARE INTERESTED

Whether proviso to the sub-section, requiring approval of Central Government in the case of companies having paid-up capital of Rs.1 crore or more, applies to contract of employment of director as managing director

Clarification 1

Section 297(1) provides that consent of the board of directors of a company shall be necessary for a contract for the sale, purchase or supply of any goods, materials of services entered into by the company with a director of the company or his relative or a firm in which such a director or relative is a partner. The proviso to this sub-section requires that in the case of a company having paid-up share capital of not less than Rs.1 crore, no such contract shall be entered into except with the previous approval of the Central Government. Services of the native of a legal practitioner are not obtained on the basis of say lowest tender but on account of their professional expertise irrespective of the cost involved. Such services cannot be bracketed with a contract for supply of goods or materials. The Department's view is that these services fall outside the scope of section 297 and the scope of the section does not extend to supply professional services of the nature given by firms of solicitors and advocates, etc.

A question has also been raised whether proviso to section 297(1) applied to a contract of employment of a director as a managing or whole-time director. In this connection, it is pointed out that it is a basic principle of the company law that directors are agents or trustees and they stand in fiduciary position not only to the company but also to members and creditors. This position is not changed merely by entrusting them with additional responsibilities for managing the affairs or rendering of services of a professional nature though they are remunerated for those services in accordance with the articles of association of the company subject to the provisions of the Companies Act. "Supply of service" is not the same as "rendering of personal service" as a director or managing or whole-time director. Furthermore, there are specific provisions in the Companies Act for regulating such appointments. Therefore, the Department's view is that proviso to section 297(1) does not apply to the contract of employment of a director as managing or whole-time director.

* CIRCULAR NO.8/11/75-CL-V, DATED 5.6.1975.

Clarification 2

The presumption that proviso to sub-section (1) of section 297 introduced by the Companies (Amendment) Act, 1974 is relevant only in respect of those cases for which approval of the Board is necessary, is not correct. As far as companies having a paid-up share capital of not less than Rs.1 Crore are concerned, no contract shall be entered into except with the previous approval of the Central Government. The only exception to this requirement is the one provided for in sub-section (2) of this section. The relaxation provided for in sub-section(3) of the section does not apply in the case of companies having a paid-up share capital of not less than Rs.1 crore as they will be covered by the proviso to sub-section (1) and the category of cases envisaged by sub-section (3) are not supposed to arise in their case.

* LETTER NO. 8/11/75-CL-V, DATED 29.3.1975.

Clarification 3

Query: Whether contracts entered into for cash at the prevailing market prices are exe3mpted from the purview of the section without any limit. If so, whether payment can be made in cash for purchases without any limit in view of the provisions of the Income-tax Act which requires payments exceeding Rs.2,500 to be made by cheque?

Answer: A cheque may be treated as the equivalent of a cash payment for the purpose of this provision.

* LETTER NO.8/2/(MISC)/75-CL-V, DATED 6.6.1975

Clarification 4

Instances have come to notice in which applications were made simultaneously for seeking approval of the Central Government under the proviso to section 297(1) as well as under other provisions, viz., section 269 or section 294AA or section 314(1B) in respect of same contracts / transactions. The need for according approval under both the sections of the Act has been examined in the Department. It is felt that the provisions of section 297 are of general nature and those of sections 269, 294AA and section 314(1B) are of special nature. In view of this, it has been decided in the interest of administrative convenience and also to avoid multiplicity of applications that where facts and circumstances of a case require approval of the Central Government under section 269 or section 314(1B) or section 294AA and also under section 297, approval under section 269k, section 314(1B) or section 294AA would be enough and no separate approval under section 297 is necessary.

* CIRCULAR NO.18/76(2/103/75-CL-XIV AND 1/1/76-CL-V), DATED 29.6.1976.

Clarification 5

The Central Government is of the view that the contracts already entered into by the companies before 1.2.1975, the date on which the Companies (Amendment) Act, 1974 was brought into force, would not require approval under the proviso to sub-section (1) of section 297. In case, however, any modification is made in the terms of the contract or it is renewed after the expiry of its original period, the approval of the Central Government under the said proviso would become necessary. The Central Government's approval under the aforesaid proviso would be necessary in respect of all the transactions except covered under sub-section (2) of section 297.

* LETTER nO.3/2/75-CL-XIV, DATED 9.7.1975.

Whether proviso to clause (b) of sub-section (2) applies to contracts involving purchase or supply of goods or materials or services in which director / relative regularly trades

Query: The proviso to clause (b) of section 297(2) limits the value of contracts to Rs.5,000. It is presumed that this limit is applicable only to contracts for purchase and supply of goods or services in which the director, relative, etc., regularly trades or does business and not for purchase of goods for cash.

Answer: The presumption is correct. The proviso will apply only to contracts involving purchase or supply of goods or materials or services in which the director / relative, etc., regularly trades or does business.

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Sr.

No.

TYPE OF TRANSACTION

PROVISIONS OF SECTION

PAID UP CAPITAL BELOW Rs. 1.00 CRORE

PAID UP CAPITAL of Rs. 1.00 CRORE or ABOVE

Any contract for sale, purchase or supply of Goods/ Material/ Services

297 (1) (a)

Prior approval of the Board of Directors

Prior approval of the Board of Directors and Central Government

Goods/ Material for Cash (which also includes Cheque) at prevailing market price

Exemption

297 (2) (a)

N. A.

Supply of goods / materials against advance

Exemption

297 (2) (a)

N. A.

Supply of goods / materials at prevailing Market Price against hundies/ promissory notes payable on demand

Exemption

297 (2) (a)

N. A.

None of the Party is regularly trading in that line

Not covered in exemption granted u/s

297 (2) (a)

Prior approval of the Board of Directors

Prior Approval of the Board of Directors and Central Government

Services provided for cash irrespective of value.

Any Contract for Goods/ Materials/ Services total value below Rs.5,000/- p.a. & any one of the party is regularly trading in it.

Exemption

297(2)(b) and proviso

N. A.

Any contract below Rs. 5,000/- per annum but none of the party is regularly trading in it

Not covered in exemption granted u/s

297 (2) (b) and proviso

Prior approval of the Board of Directors

Prior Approval of the Board of Directors and Central Government

10.

Any Contract for Goods/Material/

Services on credit total value above Rs. 5,000/-p.a.

11.

Any transaction by the Banking/ Insurance company in the ordinary course of business

Exemption

297 (2) (c)

N. A.

12.

Underwriting contracts for subscribing of any shares in or debentures of the Company.

297 (1) (b)

Prior approval of the Board of Directors

Prior Approval of the Board of Directors and Central Government

13.

Urgent necessity Contracts for Goods/ Material/ Services irrespective of value

297 (3)

(Also Refer DCA Letter No. 8/11/75 – CL – V dated 29.03.1975)

Approval of the Board of Directors within 3 months from the date of contract

The escape route is not available, since this provision does not escape prior approval of the Central Government.

14.

Loans made by Directors to the Company.

It is not covered under Goods / Services.

N. A.

15.

Immovable property transactions including letting out of premises on rent or otherwise.

Refer Definition of Goods under SOGA.

Section 297 is applicable only to Goods and Services.

N. A.

Also refer Opinion by DCA to Sona Steering Systems Limited vide Letter No. 9/41/90 – CL – X Dated 27.03.1990

N. A.

16.

Contract of any nature with Private Company in which relative of a director is Director or Member.

Because it is not within the purview of the section.

N. A.

17.

Any contract between two Public Limited Companies in which director/s is/are common.

Interpretation.

N. A.

18.

Service contract by a Director not falling under Section 314.

Not covered under exemptions

Prior Approval of the Board of Directors

Prior Approval of the Board of Directors and Central Government

19.

Contract by a Director for extra services on

Remuneration.

DCA Circular No. 18/76 dated 29.06.1976.

Not covered under this section but under Section 314.

Prior approval of BOD & Central Govt. u/s 314 with express reference to Section 297.

20.

Contract of service with

Managing Director, Executive Director, Whole-Time Director.

Circular No. 13/75 dated 05/06/1975 of DCA

N.A.

21.

Professional services of solicitors/ advocates

who is a Director. (Not provided by their firms)

Circular No. 13/75 dated 05/06/1975

N. A.

22.

Any contract by a private limited company with public limited company having common directors

Because it is not within the purview of the section

N. A.

23.

Contracts between a company and a body corporate or a co-operative society in which a director or relative is a member or director

Because it is not within the purview of the section (Refer Ramaiya Page No. 2968 - 16^th Edition)

N.A.

24.

Contracts between Government Companies

Notification: GSR 233 dated 31.01.1978

N.A.

25.

Contracts with Producer Company / Contracts between two Producer Companies

Section 581C(5)

A Producer Company is a Body Corporate. Section 297 is not applicable to Body Corporate

N.A.

26.

Appointment of a Person as an Additional Director who is related to the present Director

Shailesh Harilal Shah Vs. Matushree Textiles Limited.

AIR 1994 Bom. 20:(1995) 82 Com. Cases 5

N.A.

Clarification of Sec 297

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Sr. No.	TYPE OF TRANSACTION	PROVISIONS OF SECTION	PAID UP CAPITAL BELOW Rs. 1.00 CRORE	PAID UP CAPITAL of Rs. 1.00 CRORE or ABOVE
1.	Any contract for sale, purchase or supply of Goods/ Material/ Services	297 (1) (a)	Prior approval of the Board of Directors	Prior approval of the Board of Directors and Central Government
2.	Goods/ Material for Cash (which also includes Cheque) at prevailing market price	Exemption 297 (2) (a)	N. A.	N. A.
3.	Supply of goods / materials against advance	Exemption 297 (2) (a)	N. A.	N. A.
4.	Supply of goods / materials at prevailing Market Price against hundies/ promissory notes payable on demand	Exemption 297 (2) (a)	N. A.	N. A.
5.	None of the Party is regularly trading in that line	Not covered in exemption granted u/s 297 (2) (a)	Prior approval of the Board of Directors	Prior Approval of the Board of Directors and Central Government
6.	Services provided for cash irrespective of value.	Not covered in exemption granted u/s 297 (2) (a)	Prior approval of the Board of Directors
7.	Any Contract for Goods/ Materials/ Services total value below Rs.5,000/- p.a. & any one of the party is regularly trading in it.	Exemption 297(2)(b) and proviso	N. A.	N. A.
9.	Any contract below Rs. 5,000/- per annum but none of the party is regularly trading in it	Not covered in exemption granted u/s 297 (2) (b) and proviso	Prior approval of the Board of Directors	Prior Approval of the Board of Directors and Central Government
10.	Any Contract for Goods/Material/ Services on credit total value above Rs. 5,000/-p.a.		Prior approval of the Board of Directors
11.	Any transaction by the Banking/ Insurance company in the ordinary course of business	Exemption 297 (2) (c)	N. A.	N. A.
12.	Underwriting contracts for subscribing of any shares in or debentures of the Company.	297 (1) (b)	Prior approval of the Board of Directors	Prior Approval of the Board of Directors and Central Government
13.	Urgent necessity Contracts for Goods/ Material/ Services irrespective of value	297 (3) (Also Refer DCA Letter No. 8/11/75 – CL – V dated 29.03.1975)	Approval of the Board of Directors within 3 months from the date of contract	The escape route is not available, since this provision does not escape prior approval of the Central Government.
14.	Loans made by Directors to the Company.	It is not covered under Goods / Services.	N. A.	N. A.
15.	Immovable property transactions including letting out of premises on rent or otherwise.	Refer Definition of Goods under SOGA. Section 297 is applicable only to Goods and Services.	N. A. Also refer Opinion by DCA to Sona Steering Systems Limited vide Letter No. 9/41/90 – CL – X Dated 27.03.1990	N. A.
16.	Contract of any nature with Private Company in which relative of a director is Director or Member.	Because it is not within the purview of the section.	N. A.	N. A.
17.	Any contract between two Public Limited Companies in which director/s is/are common.	Interpretation.	N. A.	N. A.
18.	Service contract by a Director not falling under Section 314.	Not covered under exemptions	Prior Approval of the Board of Directors	Prior Approval of the Board of Directors and Central Government
19.	Contract by a Director for extra services on Remuneration.	DCA Circular No. 18/76 dated 29.06.1976.	Not covered under this section but under Section 314.	Prior approval of BOD & Central Govt. u/s 314 with express reference to Section 297.
20.	Contract of service with Managing Director, Executive Director, Whole-Time Director.	Circular No. 13/75 dated 05/06/1975 of DCA	N.A.	N.A.
21.	Professional services of solicitors/ advocates who is a Director. (Not provided by their firms)	Circular No. 13/75 dated 05/06/1975	N. A.	N. A.
22.	Any contract by a private limited company with public limited company having common directors	Because it is not within the purview of the section	N. A.	N. A.
23.	Contracts between a company and a body corporate or a co-operative society in which a director or relative is a member or director	Because it is not within the purview of the section (Refer Ramaiya Page No. 2968 - 16^th Edition)	N.A.	N.A.
24.	Contracts between Government Companies	Notification: GSR 233 dated 31.01.1978	N.A.	N.A.
25.	Contracts with Producer Company / Contracts between two Producer Companies	Section 581C(5) A Producer Company is a Body Corporate. Section 297 is not applicable to Body Corporate	N.A.	N.A.
26.	Appointment of a Person as an Additional Director who is related to the present Director	Shailesh Harilal Shah Vs. Matushree Textiles Limited. AIR 1994 Bom. 20:(1995) 82 Com. Cases 5	N.A.	N.A.