1. A private co enters into a lease agreement with public co for taking office premises (immovable property) on rent. One director of the pvt co is the whole time director and holds more than 2% shares of that public co. Is entry required to be made in the register u/s 301?
2. A private co receives a certain amount (in lakhs) as loan from its director. The director do not hold any shares of the company. Is entry required to be made in the register u/s 301?
Yes, both the transactions are covered u/s 299 and hence entry has to be made in register u/s 301.
1) Although it is not covered u/s 297 but it is covered u/s 299 hence entry in register is reqd.
2) Entry not reqd. A director is giving loan to a company in which he is director and not holding any share. So entry not reqd
Sneha, criteria of shareholding is not applicable in second case given above. Pl refer Section 299 (6).
Yes, for Sec 299 shareholding is not only the criteria. Sec 299 deals with disclosure of interest by director. This mean if director is holding directorship in any other company or director is member in company it needs to be disclosed.
In the second case, director is giving loan to the Co in which he himself is a director. Acc to me this a normal phenomenon, hence entry for the same is not reqd.
Thanks for the replies.
With regard to the second query- what Sneha has said above appears valid to me. Section 299 deals with disclosure of interest by directors. Therefore as per my view, Sec 301 will apply to any contracts or arrangements in the bodies corporate of which general notice has been given by a director pursuant to sec 299(3). In this case director is giving loan to the company in which he himself is a director.
However, the company will be entering into a loan agreement with the director.
Mr. P C Agrawal: If you still think it would be entered in register u/s 301, request you to explain the reason and the provision for the same.
Dear friends,
Sections 297 to 301 of the Act deal with related party transactions ("RPT"). The idea behind these provisions is that such transactions are at arms length basis and conscious decision is taken by the Board after knowing all facts. It should not happen that a transaction is approved by the Board in a routine manner and subsequently it is brought to the notice that some director was interested in the transaction.
Section 299 deals with disclosure of interest of a director. There may be changes in directorship/ shareholding in other companies and hence disclosure of the same is required in Board meeting. However, a director is deemed to be interested in a contract with the director himself and no separate disclosure for the same is required. It will be funny if we take a separate letter from a director u/s 299 stating that he will be deemed to be interested in a contract that may be entered into with him. Agreement for loan from director as placed before the Board is itself a disclosure u/s 299.
It may be noted that general notice of interest u/s 299(3) is optional (although advisable) and not mandatory. In case general notice is not given by a director, specific notice of interest has to be given by him u/s 299(1) for each RPT.
I think it will not be proper to conclude that a loan of Rs.1 lac taken from a company in which a director is holding only say 5% equity will be a RPT since disclosure is made u/s 299 but a loan of Rs.50 lacs taken from a director himself (in which 100% benefit in the form of interest is going directly to him) is not an RPT.
Other members may give their views.
Thanks
Let us wait and watch if other members have anything else to say and share on this.
Mr. Agrawal, I really appreciate your knowledge. A director giving loan to a company is very much common. The above view of yours might open a pandora's box.
I would like to know one more thing. What is the meaning of the following words of Sec 299 (5):
Nothing in this section shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contracts or arrangements with the company.
Dear Mr Sumit:
1. The meaning of term used in Sec.299(5) as per commentary by Ramaiya is: "As fiduciaries, directors must not place themselves in a position in which there is a conflict between their duties to the company and their personal interest or duties to others."
2. Section 297 is applicable for contracts entered into by a company with its director, as clearly mentioned therein, for supply of goods/services. Section 299 is still wider in scope and covers every director who is in any way, directly or indiretly, concerned or interested in a contract or arrangement. Hence by this logic also Section 299 should be applicable for loans taken by a company from a director.
3. Section 299 talks about a 'contract' and not a 'transaction' of a contract. Hence in case the company takes loan from a director on a regular basis and the number of transactions of taking loans is more, the company can consider entereing into a simple long term contract (say for 10 years) with the director which can provide that the company can take loan from the director from time to time as may be required, at a specified rate of interest, with the condition that the total outstanding at any point of time will not exceed specified limit. Such contract can be approved once by the Board. Against such contract, company can take loan on regular basis without the need of taking Board approval for each transaction.
Contrary views of members are welcome.
Thanks
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