NOTES ON SECTION 293 (1) (a) and 297 of the Companies
Act, 1956
Section 293 states certain
matters where the Board can take action only after the company in general meeting
has empowered the Board to act on any of the said matters. These are mentioned below
(a) Sale,
lease or disposal of the whole or substantially the whole, of the undertaking
of the company.
The
directors of a company are in a fiduciary capacity in relation to the affairs
of a company in which they are directors. They are therefore not expected to
make profits on account of dealing with the company in any way by
themselves or through other bodies in which they are directors [Cook v Deeks
1916 IAC 554 (PC)]. Hence, the Act provides that a director shall make adequate
disclosure of any matter in which they are in any way interested and that in
certain cases the prior approval of the Board shall be taken.
The word "interest" occurring in sections 299 and
300 means personal interest. It is limited to financial interest only but may
include interest arising out of fiduciary duties and closeness of relationship.
In short, the interest should be an "interest" conflicting with duty
of a director. [Makkatukara Catholic Co. Ltd. v Thomas (M. V.)
(1995) 6 SCL 135: (1996) CLA 348 (Ker)]
Sections 297 and 299 regulate the
transactions in which the directors are deemed to be interested. Section 297
requires disclosure of interest of a director and previous approval of the
Board before the company enters into a contract in which a director may be
interested. Section 299 which is extensive and wider in scope, requires
disclosure by the director concerned whenever he is concerned directly or
indirectly in any contract or arrangement.
1. Applicability
Section
297 is applicable
to all companies
whether public or
private.
2. Scope of section 297
Section 297 of the Act embodies the principles of good
faith and fiduciary relationship of a director and enjoins upon him certain
statutory obligations. Section 297(1) states that “a Company cannot enter
into contracts with the specified persons without the consent of the Board.
These types of contracts are:—
(a)
sale, purchase or supply of any goods or materials or services;
(b)
underwriting the subscription of any shares in or debentures of the
company.”
“
3. Non-applicability of section 297
Section 297 does not apply in the following cases:—
(1)
Contracts between two public limited companies.
(2) Contracts
between a company registered under the Companies Act and a company incorporated
outside India
(Foreign Company)
(3) Unless
the contractee company is a private company. [Albert Judan v Rampada
Gupta (1960) 30 Comp Cas 582 (Cal)]
'Private company' does not include a foreign company.
(4) Contract
between company and a private company of which the relative of a director is a
member or a director.
(5) Contracts
for sale, purchase or lease of immovable property. A contract with a person who
deals in or is engaged in the business of providing services relating to
immovable properties may be hit by the section as one of 'supply of services'.
(6) Contract
for employment of a director as managing director or whole-time director. [Circular
No. 13 of 75, dated 5 June, 1975]
(7) Transaction
of a loan made to a director by the company, since it is not a sale or purchase
of goods or a contract to render services.
(8) The
Central Government's approval under the proviso is not applicable to a
Government company in respect of contracts with another Government company. [Notification
No. GSR 233, dated 31 January, 1978]
(9) Professional
services rendered by solicitors/advocates or by firms of solicitors and
advocates. [Circular No. 13, dated 5 June, 1975]
(10) Contracts entered
into by the company with a dealer on a 'principal to principal' basis, provided
the dealer does not acquire the same on agency basis. [Circular No. F.M.
8/297/56-PR, dated 2 August, 1956]
4. Persons covered under section 297
The following are the persons with whom a company cannot
enter into contracts without the consent of the Board of directors and prior
approval of the Central Government is required in case if the paid up capital
of a company is not less than Rupees One Crore:—
(i)
Director of the company;
(ii)
relative of such director;
(iii) a
firm in which such director is a partner;
(iv) a
firm in which relative of such director is a partner;
(v) any
other partner of such firm in which such director is a partner;
(vi) any
other partner of such firm in which relative of such director is a partner;
(vii) a
private company in which such director is a member or director.
The
consent contemplated in the section is not a general consent but consent
referable to each specific contract. [Walchand Nagar Industries Ltd v Rattanchand
AIR 1953 Bom 285]
5. Exemptions under section 297(2) in certain cases
The
prior consent of the Board or Central Government will not be required in the
following circumstances:—
(i) Contract for purchase of goods from the company
or sale of goods to the company, which are for cash at prevailing market
prices.
(ii) Contract for sale or purchase of goods and
services in which the company or other party regularly does business but upto
Rs. 5,000 in a year during the period of the contract.
(iii) Any transaction of a Banking/Insurance
Company in the ordinary course of business of such company with the specified
persons.
6. Approval of contracts by the Board
Before the company enters into a contract of the nature
stated above with any of its directors or with any other specified persons
mentioned above, it must be approved by the Board in the form of a resolution
at a Board meeting. — sub-section (4).
The object of this section is that the Board of Directors
should be made aware of all contracts and arrangements in which any director
has an interest, whether direct or indirect, so that the Board may be in a
position to satisfy itself as to the fairness and reasonableness of the
contract from the point of view of the company and then accord its consent to
it. [Vinod Kumar Jain v Registrar of Companies (1987) 2 Comp LJ
188 (Del)]
However, in such contracts where a director may be deemed
to be interested may be entered into in the circumstances of urgent necessity
even for value exceeding Rs. 5,000 in a year without taking, prior consent of
Board but such consent shall be obtained within three months of entering into
the contract.
7. Non-participation of interested director in
proceedings of the Board Meeting – Section - 300
Section
300 of the Companies Act provides that no interested director can take part in
the proceedings of the Board or vote on the resolution on that matter.
Even if the interested director votes on the resolution
the contract will not be void if the contract would have been carried through
without taking into account the vote of the interested director. [Sundararaja
Pillai v Sakthi Talkies Ltd. (1967) 37 Comp Cas 463 (Mad)(DB)] It
is immaterial whether the conflicting interest belongs to him
beneficially or as a trustee for others. [TR Pratt (Bombay) Ltd. v MT Ltd.
AIR 1938 PC 150]
Directors
cannot issue debentures to themselves as security for money advanced. [Cox
v Dublin City Distillery 2 (1915) 1 IR 345] A general scheme
might be passed at a meeting of the Board of directors under which the
directors could subsequently enter into contracts with the company like any
other member. [Mohanlal v Grain Chamber Ltd 1 LR (1959) All 276]
But
in a private company an interested director is under no such disability.
Further, this restriction is not applicable in respect of a contract which a
private company subsidiary of a holding company enters with the holding company
nor to a contract which may be entered into by a public company in which the
interest of the director consists in his holding the qualification shares or in
his holding not more than 2% of the paid-up share capital.
Section 300 applies to existing contracts and arrangements
and not to prospective contracts and arrangements. [Seth Mohanlal v Grain
Chambers Ltd. (1968) 38 Comp Cas 543: AIR 1968 SC 772]
8. Director should not
participate and vote when his near relative is proposed to be appointed as
director
The question whether, under the provisions contained in
sections 299 and 300, a director can vote on a Board resolution purporting to
appoint a relative of such a director as director or additional director of a
company has been examined by the Company Law Board and their opinion stands as
under:—
"Two different views have
been expressed on the question at issue. One view is that the appointment of a
director is an arrangement entered into by company and the director whose
relative is appointed as a director or additional director is interested in
such appointments and, as such, is prevented from voting on resolutions
purporting to appoint such relative as a director. The other view held in some
quarters is that the word 'arrangement' used in the section is intended
primarily to cover transactions in which a director acquires some right or
incurs some liability as a result of it and not supposed to cover anything that
is likely to have a bearing on the company's affairs. Only a restrictive
interpretation should, therefore, be placed on the word "interested"
used in the section thus excluding a
director who has no pecuniary interest. Where, however,
there is a pecuniary advantage, it must be regarded as an "interest"
within the meaning of the section. The language of the section contemplates a
pecuniary interest, direct or indirect, of the director in the contract or arrangement.
Accordingly the relationship of the director with the contracting party will
not per se make the director concerned or interested in the contract or
arrangement.
The Company Law Board has
carefully considered both the above-mentioned viewpoints. It is of the opinion
that whatever may be the strictly legal position in this regard; the matter is
essentially one to be viewed from the point of view of the development of sound
and healthy company practice. It should, therefore, be held to be a clearly
unsound company practice if a director, whose near relative is proposed to be
appointed to the Board, were to participate in the discussions at the Board
meeting and vote on the proposal for such appointment." [Source:
Circular Letter No. 8/46/(300)/64-PR, dated 27 January, 1965]
9. Specific consent by the Board at a meeting
The consent under section 297 is a specific, a particular
consent and not a general one. This consent should be separately obtained in
relation to different contracts. (Appendix 1) No consent can, therefore, be
accorded by a circular resolution or in any other manner except by a resolution
passed at a meeting of the Board. [Mahesh Co. v Oil Mills Ltd AIR
1955 NUC 3576 (All)]
10. Consequences and penalty where consent is not taken
If
a contract, which requires consent in advance or subsequently, is entered into
without taking the consent, the contract is voidable at the option of the
Board.
A contract affected by a director without the consent of
the other directors is not illegal. The prohibition is against the director and
there is a penalty for any violation of the section. This does not mean that
the contract is void. [Albert Judah v Ramapada Gupta (1960) 30
Comp Cas 582 (Cal): AIR 1959 Cal 715]
The section does not provide any penalty for
non-compliance. The penalty would therefore, be as per the provisions of
section 629A. (Section 629A indicates penalty for such sections of the
Companies Act, 1956 for which no penalty has been specifically provided)
Accordingly, the company and every officer of the company
who is in default or such other person shall be punishable with fine which may
extend up to Rs. 500 for every day after the first day during which the
contravention continues.
11. Offence under section 297 is compoundable
The
offence committed under this section is compoundable in accordance with the
provisions of section 621A of the Companies Act, 1956.
CLARIFICATIONS IN RESPECT OF SECTION 297
(a) Section 297 (1) does
not apply to the employment as managing director/whole-time director: The
Department (now MCA) has clarified vide Circular No. 13 of 1975, dated
5-6-1975 that 'supply of service' is not the same as 'rendering of service' as
managing/whole-time director and that there are specific provisions regarding
the matter. Hence the proviso to section 297(1) does not apply to the above
appointments.
(b) Appointment of additional directors:
Appointment of a relative of a sitting director on the post of additional
director does not violate the requirements of section 300(1) because such
appointment does not amount to any "contract or arrangement".
(c) Transactions in respect of immovable
property: The Department (MCA) has vide Letter No. 9/41/90-CL.X,
dated 27-3-1990 stated that in view of the fact that the proposal of the
subject company related to taking office premises on rental (in which a
director of the company was interested), the section is not attracted as the
contract is in respect of immovable property.
(d) Services of a legal practitioner: The
Department (MCA) has clarified that services of a legal practitioner are not
obtained on the basis of say, lowest tender, but on account of his 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 of the Act and the scope
of the section does not extend to supply of professional services of the nature
given by firms of solicitors and advocates. (Circular No. 13 of 1975, dated
5-6-1975)
(e) Contract for services vis-a-vis contract of
personal services: Section 297 applies to contracts for services but not to
contract of personal services.
(i) Contract
for services
Contract of services includes contract for supply of
services. Further, contract for supply of services may also include supply of
one's own services or supplying the services of some other person.
However, contract of service is quite different from
contract for services. The latter attracts the provisions of section 297
whereas the former has been exempted vide Department (MCA) Circular No.
13/75, dated 5-6-1975, which is dealt separately, hereunder. And in a case
where such a person is appointed at a place of profit, it will not only require
the compliance of the provisions of section 314 but also the requirements of
the proviso to sub-section (1) of section 297 have to be complied with in every
such matter because no exemption is provided in this section unlike section 314
in which monthly remuneration of Rs. 10,000 has been prescribed under section
314 (l)(b).
(ii) Contract
of personal services
The Department's (MCA) views in this connection are
contained in Circular No. 13/75, dated 5-6-1975 that "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 or
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, etc. The
proviso to this sub-section requires that in the case of a company having
paid-up share capital of not less than rupees one crore, no such contract shall
be entered into except with the previous approval of the Central Government."
(f) Contracts on
principal to principal basis: The Department (MCA) has expressed its views vide
Circular No. F.M. 8/Z97/56-PR, dated 2-8-1956 that the provisions of section
297 would not become applicable to contracts entered into by the company with a
dealer on a principal to principal basis, unless the contract is in respect of
goods which the dealer sells or supplies on an agency basis.
(g) Sale or
purchase for cash: Whether includes for cheque also?
The Department (MCA) has expressed its views vide
Circular No. 8/2(Misc)/75- CL.V., dated 6 June, 1975 that a cheque may be
treated as the equivalent of a cash payment for the purpose of this section.
The term "cash" must be interpreted in a
reasonable manner. It would include not only payment in legal tender but also
other modes of payment, which are recognised by law or by customary practice as
amounting to payment in cash. For example, payment by cheque or through a bill
or hundi which is payable on demand would tantamount to payment in cash.
(h) Approval
of the Central Government in case of multiple requirements of section 297(1),
314(1B), 294AA
or 269 of the Act: The Department (MCA) vide its Circular No. 18 of
1976, dated 29 June, 1976 has expressed the following views:
"I am directed to say that 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) of the Companies
Act, 1956 as well as under other provisions viz, section 269 or section
294AA or section 314(1B) of the Act 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 269, section 314 (1B) or section 294AA of
the Act would be enough and no separate approval under section 297 of the Act
is necessary."
12. Are
professional services not within the purview of section 297?
In Bhagwati Developers v Peerless General
Finance & Investment Co. (2005) (5) Comp LJ 377 (SC), the Supreme Court
has remarked that the circulars issued by the DCA (now MCA) do not have any
mandatory effect; these circulars are merely advisory in character, as a matter
of fact, these circulars are read, followed and applied (many times by deriving
a general principle of universal nature from the language used or illustrations
given in the circular) by millions of people of this country as interpretation
of the law, something similar to court rulings.
Accordingly the effect of the above circular is that many
companies and professional exclude all types of professional services from the
purview of section 297, whether legal or those given by chartered accountants,
tax consultants, company secretaries, coat accountants, engineers, architects,
etc.
13. Secretarial checklist
Check
whether exempting provisions contained in section 297(2) of the Companies Act,
1956 were not applicable? If not, check that:—
1.
Consent of the Board of directors was obtained by a
resolution passed at a meeting for entering into contracts in which directors
were interested.
2.
Prior approval of the Central Government (Regional
Director) has been obtained, if the paid up share capital of the company is not
less than Rs. One Crore.
3.
The particulars of the contract were entered in the
Register of contracts, in accordance with the provisions of section 301.
4.
The requisite resolutions were recorded in the minutes
of Board meetings.
Thanks & Regards
Prashant Kumar Kesharwani
