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Sections 297, 299, 300 & 301 of the Companies Act, 1956 By CS Mamta Binani

Sections 297, 299, 300 & 301 of the Companies Act, 1956 By CS Mamta Binani Past Chairperson (Year 2010), EIRC of ICSI dated : 23.02.2013. Applicability. Section  297  is  applicable  to  companies- whether  public  or  private

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Sections 297, 299, 300 & 301 of the Companies Act, 1956 By CS Mamta Binani

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  1. Sections 297, 299, 300 & 301 of the Companies Act, 1956 By CS Mamta Binani Past Chairperson (Year 2010), EIRC of ICSI dated : 23.02.2013

  2. Applicability • Section  297  is  applicable  to  companies- whether  public  or  private • Except with the consent of the BOD, the mentioned entities shall not enter into any contract with the company: - for the sale, purchase or supply of goods, materials or services OR - for underwriting the subscription of any shares in, or debentures of the company

  3. Applicability In the case of a company having a paid-up share capital of Rs.1.00 crore or more, prior approval of C.G. is mandated Provision not applicable for contracts entered prior to the date of crossing Rs.1.00 crore and subsisting after that date

  4. A Snapshot Sections • 297 - Board's sanction to be required for certain contracts in which particular directors are interested • 299 - Disclosure of interest by director • 300 - Interested director will not form quorum • 301 - Register of contracts, companies and firms in which directors are interested

  5. Quick Bites Five things to remember: • Director • Relative of director • Partnership firm • Other partners • Private company

  6. Analysis of Section 297(1) Consent is required when the other party is: • Director of the company • Director’s relative (Relative as defined under section 6 of the Act)

  7. Sec 6 – Definition of Relative • If and only if: a. they are members of a HUF or b. they are husband and wife or c. the one is related to the other in the manner indicated in Schedule IA. (advisable to seek for list of relatives from Directors)

  8. Continued – 297(1) Consent is required when the other party is: • any partnership firm in which any director is partner • any partnership firm in which any relative of any director is partner • any other partner of the partnership firm in which any director is partner

  9. Continued – 297(1) Consent is required when the other party is: • any private company in which any director of the Company is a member • any private company in which any director of the Company is a director

  10. Approval of contracts by the Board • Before the company enters into a contract, it must be approved by the Board in the form of a resolution at a Board meeting <Section 297(1),(4)> No consent can, therefore, be accorded by a circular resolution or in any other manner. [Mahesh Co. vs. Oil Mills Ltd AIR 1955 NUC 3576 (All)] • In 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 3 months of entering into the contract <Section 297(3),(4)>

  11. Some more important points • Cannot be a general consent but transaction specific [Walchand Nagar Industries Ltd vs. Rattanchand AIR 1953 Bom 285] • If consent is not accorded to any contract, then anything done in pursuance of the contract shall be voidable at the option of the Board <Section 297(5)> [Albert Judah v Ramapada Gupta (1960) 30 Comp Cas 582 (Cal): AIR 1959 Cal 715] Contract voidable at the option of the Board, and not void (invalid). The contract is voidable, which means it can be ratified by the Board

  12. Critical Interpretations - Revision CONSENT OF BOARD Consent of board means - a consent through resolution at a duly convened board meeting, and not by mere circular resolution.

  13. Continued - Revision CONTRACT BETWEEN A COMPANY AND DIRECTOR/INTERESTED DIRECTOR/RELATIVE/ FIRM/PRIVATE COMPANY. The section does not apply to a contract between two public limited companies, because the word used is ‘private company’. Thus, the two parties of the contract: A. First party - any type of company and B. Second party - director/relatives/firm/partner/ private company.  

  14. Continued - Revision ANY OTHER PARTNER IN SUCH A FIRM Section is attracted to the contract entered into by the Company and any other partner(s) of the firm of which the director / his relative is a partner.

  15. Continued - Revision SALE OR PURCHASE OF ANY GOODS, MATERIALS OR SERVICES Section does not apply to a contract of immovable property (e.g: 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.

  16. Exemptions under section 297(2) in certain cases The prior consent of the Board or Central Government will not be required in the following circumstance: (i) Contract for purchase of goods, materials from the company or sale of goods, materials to the company: a. for cash b. at prevailing market prices It is to be noted that: a. cheque is equivalent to cash b. not applicable to service contracts

  17. Clarification 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 equivalent to a cash payment, for the purpose of this section. The term "cash" 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.

  18. Exemptions under section 297(2) in certain cases The prior consent of the Board or Central Government will not be required in the following circumstance: (ii) Contract for sale or purchase of goods, materials, 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: a. services covered b. rs.5000.00 exemption limit calculated on annual basis c. only for the period of contract

  19. Exemptions under section 297(2) in certain cases The prior consent of the Board or Central Government will not be required in the following circumstance: (iii) In the case of a Banking/Insurance Company, any transaction: a. entered in the ordinary course of business b. of such company c. with the specified persons

  20. Continued EXEMPTIONS UNDER SUB-SECTION (2) Exemptions are independent provisions, because the words “or” is used to separate the provisions.

  21. Quick Revision

  22. Reporting under CARO Under COMPANIES (AUDITOR’S REPORT) ORDER, 2003 Auditors are required to report on “Whether the transactions of purchase of goods and materials and sale of goods, materials and services, made in pursuance of contracts, arrangements entered in the register(s) maintained under Section 301(1) of the Companies Act, 1956 and aggregating during the year to Rs.5,00,000 (Rupees Five Lacs) or more in respect of each party have been made at prices which are reasonable having regard to prevailing market prices for such goods, material, or services or the prices at which the transactions for similar goods or services have been made with other parties.”

  23. Non Applicability • Contracts between two public limited companies • Companies should be Indian Companies: a. Foreign Company is a Body Corporate defined in Section 2(7) and hence N.A. b. Applicable only to Companies as defined in Section 3 • It does not cover matters relating to loans • Contracts for sale, purchase or lease of immovable property

  24. Xception 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'

  25. Non Applicability • Contract with a Private Company in which a relative of a Director is a Director • Contract with a Private Company in which a relative of a Director is a Member • Contract with a Private Company in which a partner of the Director is a Director • Contract with a Private Company in which a partner of the Director is a Member

  26. Non Applicability…contd • Contract for employment of a director as managing director or whole-time director [CircularNo. 13 of 75, dated 5 June, 1975] - 'supply of service' is not the same as 'rendering of service' • 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 • 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. GSR233, dated 31 January, 1978]

  27. Non Applicability…contd • Professional services rendered by solicitors/advocates or by firms of solicitors and advocates. [Circular No. 13, dated 5 June, 1975] - 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)

  28. Non Applicability…contd • 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.

  29. Non Compliance Non compliance of these provisions should result into: (a)Penalty on director who authorized transaction/contract etc. without approval of Board/General meeting. (b)Transaction/Contract being voidable at the option of the Board/Company. (c)Director concerned-to account to the company for any gain made by him and to indemnify the company against wrongful gain made at the cost of the company. (d)The Director concerned being deemed to have vacated his office. (e)Disqualification of the director to hold office in the company for a prescribed period.

  30. Should have been there • A threshold limit may be fixed under the Rules in respect of powers of the Board in this regard. • Beyond a limit, the approval of shareholders, by special resolution, should be mandated. The particulars/details pertaining to such contracts/arrangements to be included in the explanatory statement (to relevant special resolution), to be sent to shareholders, should be specified in the rules.

  31. Arms Length • Details of Transactions of the Company with its Holding or Subsidiary or Associate Companies in the ordinary course of business and transacted on an arms length basis should be placed periodically before the Board through the Audit Committee, if any.

  32. This would be fair Details of transactions not in a normal course of business and/or not on an arms length basis with Holding/Subsidiary/Associate Companies should be placed before the Board together with Management justification for the same. A summary of such transactions with each party should form part of the Annual Report of the Company.

  33. Section 299 • Applicability : a. All Companies and b. All Directors* *also applies to Directors nominated by Government

  34. Section 299(1) • Director, whether : a. directly or b. indirectly i. concerned or ii. interested aa. in a (proposed) contract or bb. (proposed) arrangement shall disclose the nature of his concern or interest at a meeting of BOD

  35. Object of this section 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 vs. Registrar of Companies (1987) 2 Comp LJ 188 (Del)]

  36. Section 299(2) • Disclosure shall have to be made: - at the meeting of the Board at which the question of contract etc. is first taken into consideration OR - at the first meeting of the Board held after he becomes interested in the contract

  37. Section 299 (3) • General Notice of Interest-deemed to be sufficient disclosure It is not effective, unless the director concerned EITHER gives it at a: a. meeting of the Board or b. takes reasonable steps to secure that it is brought up and read at the next meeting of the Board after it is given.

  38. Section 299 (3) • General Disclosure Notice a. form no. 24AA b. expires at the end of the FY c. required to be given afresh year after year d. last month of the financial year (ideally should be given by the Directors at the time of appointment and then every year)

  39. Section 299 Once a director has given general notice of interest, it is not necessary for him to once again disclose his interest when the matter comes up before the Board

  40. Section 299 (6) section 299 is not applicable if any one or more directors together holds 2% or less of the paid–up share capital in the other company. a. this % should be verified on the date on which the contract is entered into b. preference shares must be included

  41. Good Governance mandates…. -Failure to make disclosure should be treated as a default. -Director concerned should be held liable to penalties and he should be deemed to have vacated his office. -This should also be a condition of disqualification to hold office of director of that company for a prescribed period.  -Directors’ Responsibility Statement should include an additional clause to the effect that every director has made relevant disclosures as mentioned above. 

  42. Section 300 • No interested director can take part in the proceedings of the Board or vote on the resolution on that matter. If he votes, his vote shall be void. • 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. [SundararajaPillai v Sakthi Talkies Ltd. (1967) 37 Comp Cas 463 (Mad)(DB)] • It is immaterial whether the conflictinginterest belongs to him beneficially or as a trustee for others. [TR Pratt (Bombay) Ltd. v MT Ltd. AIR 1938 PC 150]

  43. Section 300 - exemptions • not applicable to private limited companies, simplicitor • a private company which is a subsidiary of a public company entering contract with the holding company • contract which may be entered into with 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 • contract of indemnity against any loss which the directors may suffer by reason of becoming a surety for the company

  44. Section 301 – Register of Contracts • Mandatory for every company • Applies both for section 297 & section 299 • Date of contract, names of parties, terms, date on which placed before the Board and names of directors voting for/against/neutral • Enter details in register: -Contracts requiring the Board’s approval, within 7 days of the Board Meeting date at which contract approved -In case of other contracts, within 7 days of the receipt of particulars at registered office or within 30 days of the date of contract, whichever is later

  45. Register of Contracts • Register to be placed before the next board meeting and shall be signed by all directors present at the meeting • Register to carry the details as placed under section 299(3) • Register not to carry details of contract etc. whose value is Rs.1000 or less • Register to be kept in registered office • Register to be made open for public inspection (provisions of section 163 to apply) • Extracts and copies thereof allowed

  46. How are these 3 related… SECTION 297- Contract for sale, purchase, supply of goods, materials or service; or Contract for Underwriting for subscription of shares for debentures REGISTER UNDER SECTION 301 PART 1 PART 2 Disclosure made by Directors in Form 24AA, each year SECTION 299 – Contract or Arrangement where Director has a direct or indirect, concern or interest. Details entered in Part 2 will assist in determining whether Section 297 or 299 is attracted, in respect of any transaction

  47. SS 4…REGISTERS & RECORDS U/S 301 • MAINTENANCE: i. Every company should, from the date of its registration, maintain one or more registers, and enter therein the particulars of firms and bodies corporate of which notice of interest has been given by directors and the particulars of all contracts or arrangements in which directors are interested. ii. The register should contain the following particulars, to the extent they are applicable in case of each contract: date of the contract; names of the parties to the contract; principal terms and conditions and whether the terms are in accordance with prevailing market rates or practices; date of receipt of particulars of contract at the office of the company; date of entry in the register; date on which the contract was placed before the Board at its meeting for approval; names of directors present; names of interested directors; names of directors voting for and against the contract or arrangement and names of those remaining neutral; date of next meeting at which the register was placed for signature and names of directors present in that meeting. iii. Entries in the register should be made within 7 days of the date of the Board meeting at which approval of the contract or arrangement was obtained or, if no approval of the Board is required, within 7 days of the receipt at the registered office of the company of particulars of such contract or arrangement, or within 30 days of the date of the contract or arrangement, whichever is later.

  48. SS4….Contd…. iv. Entries should be made in the register in chronological order. v. The register should be maintained at the registered office of the company. • INSPECTION i. The register should be open for inspection to members during the business hours of the company, subject to such reasonable restrictions as the company may impose by its articles or in general meeting so that not less than 2 hours in each working day of the company are allowed for inspection. ii. Members can inspect the register without payment of any fee. iii. Copies of the register can be demanded by any member who inspects the register.

  49. SS4….Contd…. • SIGNING The register should be placed at the Board meeting held next after the meeting in which the contracts or arrangements were considered and should be signed by all the directors present. • AUTHENTICATION Entries in the register should be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose, by appending his signature to each entry. • PRESERVATION The register should be preserved permanently and should be kept in the custody of the secretary of the company or any other person authorized by the Board for the purpose.

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