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An analysis of section 297 of the Companies Act,1956

An Analysis of Section 297 of The Companies Act, 1956

This article attempts to make a detailed interpretation of Section 297, which deals with ‘Board’s sanction to be required for certain contracts in which particular directors are interested’.

Sub-Section wise Analysis:

Sub-Section

Deals with

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     297 (1)

Charging / Fixing responsibility to obtain consent of board for entering into contract

     297 (2)

Exemptions / Gateways

     297 (3) & (4)

Modus operandi for obtaining consent

     297 (5)

Consequences of not obtaining consent

It is now clear that Section 297 states about obtaining consent of the board of directors, for entering into certain contracts in which particular directors are interested. Thus, not every contract requires consent of the board, only those contracts in which directors are interested require the consent of board. It is to be noted that usually a contract is entered into with the approval of the board, or even with the authority of the Managing Director/CEO/VP, or with the sanction of the Management Committee. But, here the only way of getting sanction for the contracts (in which directors are interested) is board’s sanction.

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 subscription 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.

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    Comments
     Abhishek Srivastava June 28, 2010
    u r an awesome writer...... where do manage such spectacular writing skills...
     nalini September 8, 2010
    kindly clarify whether electricity power comes under goods and services
    Rahul October 20, 2010
    Whether Joint development agreement of property falls under 297?
     Mohit Bansal December 2, 2010
    Plz tell us the procedure For getting the consent of central govt.???
     nitin January 3, 2011
    If transactions made with any public company and private company which is subsidiary of public company then section 297 is apply or not?
     pratik shah January 19, 2011
    Pvt. Ltd. Company having more than Rs. 1Cr. paid up capital wants to enter into a transxn with a LLP in which all the partners of the LLP are the Directors of the the CO too. Whether 297 approval needs to be obtained, if yes, where is it written??
     cs kanta kiroriwal February 15, 2011
    hi pratik if LLP is traeted as firm then it is require to obtained the approvel of CG. That means section 297 will be applicable in this particular case.
     cs rekha malu April 1, 2011
    I want to know the procedure under sec 297 if a private co having paid capital of Rs 7744000 enter into a contract of purchase with another private co and what form need to file?
     Anu Pasrija April 1, 2011
    nice write up but i want to know whether 297 wil be applicable in case of transfer of shares
     Aditi April 19, 2011
    hey is the transfer if business a transfer of goods?
     GAGAN GOEL May 10, 2011
    but what about definition of goods
     K.B.yadav May 16, 2011
    hey guys transfer of business is not a transfer of goods,business is not like a itemised godds,this type of transfer will not come into the ambit of section297, it will come into mergers,amalgmation $reconstruction of business
     Karan June 6, 2011
    Hey is sharing of common expenses between the companies having common MD falls under the scope of sec 297?
     pawan ashani August 4, 2011
    r a superb witer.please keep it up.thanx for shring
     PRIYANKA August 18, 2011
    whether permission of Central Govt. is necessary,if transactions are done in ordinary course of business with another pvt co. in which director is interested
     Rajni Miglani September 10, 2011
    Your Typewriten in very gud.
    But i have a Query Please Solve it.


    Whether 297 is applicable on NBFC?
     sachin October 8, 2011
    does cash payment in sec 297 exemtion include sale on credit but payable by cheque on expiry of credit
    please opine
     aditya agarwal November 25, 2011
    would lease of an immovable property be covered u/s 297 (other criteria having been met)?
     Geeta Gupta February 18, 2012
    If one of the company is a public limited company and other is a privae company which is the susidiary of a public company and the proposed transaction is transfer of businss by way of slump sale then whether section 297 is applicable ?
     neelam March 13, 2012
    whether approval of CG is required when transaction between public company and NBFC co.
     bhargavi March 20, 2012
    CG approval is not required if both companies are public eventhough it is NBFC.
     bhargavi March 20, 2012
    section 297 applies to the transactions between public company and a private company which is subsidiary of public co.

    only transaction between two public companies exempted and nowhere in the act referred about of subsidiary of public co.
     Ritu Jhunjhunwala May 11, 2012
    wonderful.
    for the first time, sec 297 is very clear to me.
    thanks a lot
    Vijay Ojha June 7, 2012
    Very Nice interpretation, clarify the section very well. Congratulations!
    sumit arora June 12, 2012
    Hello sir,
    can u tell me whether section 297 apply if both the companies is private company

    waiting for your reply
    arjun July 17, 2012
    i learnt one section in companies Act, 1956 thanks a lot...
    arjun July 17, 2012
    yes the contract may be between two private companies. see "Thus, the two parties of the contract must be 1st party - any type of company, and 2nd party - director / relatives / firm / private company." in above article
    Rachayita July 18, 2012
    Does a transaction between a Public Company and its subsidiary , covered under Section 297?
    pauls mi August 10, 2012
    Please advice whether the transaction between a holding company which is a public company and a subsidiary which is a private company with common directors attract Sec 297.
    Rahul Srivastava August 16, 2012
    if the contract is entered with a consultant wef April 2012 for Rs 400000 and that consultant will be appointed as a director wef Aug 2012. Will Section 297 still applies
    Priya August 31, 2012
    Does payment of Electricity bill of a firm by a director of a public company who is also a partner in the firm attract section 297? (The company and the Firm share same land which is divided into two parts, each one using their own part). Your prompt reply would be highly appreciated. Thanks
    Priya August 31, 2012
    Does payment of Electricity bill of a firm by a director of a public company who is also a partner in the firm attract section 297? (The company and the Firm share same land which is divided into two parts, each one using their own part). Your prompt reply would be highly appreciated. Thanks
    Ankul Jain September 29, 2012
    Query : A person is a director in the an indian company and a foreign company. These two companies are related parties as per accounting standerd 18. Now the indian company enters into transactions of sale, purchase with that foreign company then whether Sec 297 becomes applicable.
    Parveen Kaushik December 17, 2012
    There is a query sir
    suppose Mr. x is a director in co. XYZ Pvt. Ltd.
    and Mr. B(Relative of Mr. A) is a member in another co. say ABC Pvt. Ltd. XYZ co. enters in to a contract with ABC Ltd.
    Now question arises whether sec 297 is applicable on XYZ pvt. Ltd or not ?

    Kindly Reply
    u can reply on Kaushik7258@gmail.com
    chirag December 26, 2012
    suppose mr x is a director in PQR pvt ltd and Mr y(relative of Mr x)is a member in NQ ltd and if PQR pvt ltd wants to do contract with NQ ltd then whether section 297 applicable or not?
    Rashmi January 30, 2013
    Whether section 297 applies to transfer of goods(vehicles) from MD to company(MD is there in the same comapany)?
    jessica February 1, 2013
    does sharing of trademark between two private companies attract compliance of s.297 of companies act ??
    Shruti February 5, 2013
    Does 297 applies, if one public company purchases computers from other public company having one common director in both companies???
    Sanjay Kothari February 27, 2013
    Two associate private limited companies have common shareholders/directors and senior management.Sharing of common manpower cost and other infrasructure cost is covered by section 297 companies act 1956?
    Dheeraj March 8, 2013
    As the term service as appearing in the section includes renting of immovable property
    also, any contract for the activity of renting of immovable property will require prior
    approval of the Board/Central Government as the case may be. Though the sale and
    purchase of immovable property is not treated as service neither they come within the
    definition of goods; renting of immovable property is an exclusive amendment in the
    definition of service in the service tax rules and hence, are to treated as contracts
    requiring sanction as per section 297 of the Act.
    ved April 19, 2013
    Does Sec.297 Applies to the Private Company which is subsidiary of public company becoz from the above explanation it is not clear?
    d.srinivasa rao May 30, 2013
    if a managing director of a pvt.ltd.company executed a sale agreement of immovable property of his company without obtaining resolution from his board of directors-what is the effect under the companies act,1956, under what section?-the matter is in the court-please analyse the issue under the companies act,1956
    ANAL June 14, 2013
    WHY SEC.297 DOES NOT APPLY TO THE IMMOVABLE PROPERTY? BCOZ THERE IS ALSO CHANCE FOR MISLEADING TO THE COMPANY.....
    Mahendra Deshpande June 19, 2013
    what is the procedure to enhance the limits of contract amount of 297 which has already approved.
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