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Company law - section 297

Hirak Ghosh (GM CS & Legal) (36 Points)

20 March 2013

'A' is a Public Limited Company got supply of Iron Ore from another Company 'B',which is a Private Company and for which 'A' paid to 'B' for the said supply of Iron Ore.One Director is common in both the Companies - 'A'and 'B',

Prima facie,the transaction attracts Section 297 of the Companies Act-1956.

Comoany 'A' is having Paid-Up-Capital of morer than Rs.1Crores but Company 'B' is having Paid-Up-Capita less than Rs.1 Crores.

Does the permission of RD require ?

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4 Replies

Mandeep (Company Secretary) (47 Points)
Replied 20 March 2013

Section 297 is applicable on the company entering into the contract. In your case A limited entered into the contract and since its paid up capital is more than one crore A limited shall be required to obtain permission from RD.

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Sneha (Company Secretary) (1594 Points)
Replied 20 March 2013

First check the shareholding of common director. If common director is holding more than 2% of the paid up share capital then only he is interested. Otherwise clause will become inapplicable.

Aditya Soni (CS Final Student Trainee) (727 Points)
Replied 20 March 2013

Originally posted by : Mandeep
	Section 297 is applicable on the company entering into the contract. In your case A limited entered into the contract and since its paid up capital is more than one crore A limited shall be required to obtain permission from RD.

Agree with Mandeep, RD's approval is required in this case.

CA Deepak Rathore (EXPERT) (281 Points)
Replied 21 March 2013

Section 297 (1) :

Board’s sanction is required if:

i) a director;

ii) or his relative;

iii) a firm in which such a director or relative is a partner;

iv) any other partner in such a firm ( ie; a firm as stated in (iii) above);

v) a private company of which the director is a member or director;

enters into a contract with the company (a) for the sale, purchase or supply of any goods, materials or services; or (b) for underwriting the subscripttion of any shares in, or debentures of the company.

Further, the board’s sanction to be supported by the PREVIOUS approval of the Central Government, if the company’s paid-up capital is not less than Rs.1 Crore.

Section 297 (2):

Exemption to board’s sanction - to the contract for the sale, purchase or supply of goods, materials or services, ie: Section 297 (1) (a) doest not apply, to the following:

purchase / sale for cash at prevailing market prices; or
regular trade / business between the company and party (director etc.), up to Rs.5,000/- per annum for the contract period;
any transaction in the ordinary course of business (exemption only for banking / insurance company)

Section 297 (3) & (4):

The board should accord its sanction only through a resolution passed at a board meeting (ie; it should not be a circular resolution) before the contract is entered into or within three months of the date on which the contract was entered into (three months allowed only in the case of urgent necessity – sub-section (3)).

If the board’s sanction is not obtained, either before the contract date or within three months (in urgent cases), it will be deemed that the board’s sanction is not obtained, under Section 297.

Section 297 (5):

This sub-section states the consequence of not obtaining board’ sanction, as stipulated under section 297. As per 297 (5), if the consent is not accorded to any contract, anything done in pursuance of the contract shall be VOIDABLE AT THE OPTION OF THE BOARD.

CRITICAL INTERPRETATION:

Now, we will go into few critical interpretation of Section 297.

Aspect	Interpretation
Consent of Board	Consent of board means ‘a consent through resolution at a duly convened board meeting, and not by mere circular resolution.
Contract between a company and director / interested director / relative / firm / private company.	The, the section does not apply to a contract between two public limited companies, because the word used is ‘private company’. If the word used is ‘company’, then it may be interpreted as any type of company (public / private). Thus, the two parties of the contract must be 1st party - any type of company, and 2nd party - director / relatives / firm / private company.
Any other partner in such a firm.	Section is attracted to the contract entered into by the company and any other partners, of the firm of in that the director / his relative are a partner.
Sale or purchase of any goods, materials or services.	Section does not apply to a contract of immovable property (eg: purchase of land, building etc.), because the terms used is goods, materials or services – all are movables. Thus contract for movables only get attracted by the section, immovable properties contracts are excluded.
Exemptions under sub-section (2)	Exemptions are independent provisions, because the words “or” is used to separate the provisions.
Exemption to transactions in the ordinary course of business.	Exemption applies only to banking and insurance companies, and not for all companies.
Rs.5000/- Exemption limit.	Calculated on Annual Basis, only for the period of contract.
Effect on not obtaining consent of board.	Contract voidable at the option of the board, and not void (invalid). The contract is voidable ie; can be ratified by the board.