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Interested Director- Provisions of Companies Act and disclosures

Interested Directors- Provisions of Companies Act, 1956 strengthening Corporate Governance

Since directors are in a key position to operate the company and so all the relevant and required transactions and agreements are entered into by the directors with the other parties to run the business of the company. It may sometimes happen that directors of the company may have some interest in the contracts entered into by the companies. Sometimes directors also make use of his position for their personal benefit. The companies act contains some provisions under section 297 and 299 so as to prevent the misuse of key positions by the directors and makes it mandatory to disclose the transactions of the company with the directors. The object of the above section is to bring into the knowledge of the Board of directors, the extent of the interest of a director, in any contract proposed to be entered with the company by the Director or any of his specified associates.

Interested Director:

A director is said to be interested in a contract when the party to a contract is:

·   A director of the company

·   Relative of any director

·  A firm in which such a director or his relative is a partner

·   Any other partner in such a firm

·   A private company of which the director is a member or director

Section 297: 

Object: The object of section 297 is to bring into the knowledge of the Board of directors, the extent of the interest of a director, in any contract proposed to be entered with the company by the Director or any of his specified associates.

Scope:

Applies to:

· All companies whether public or private

· Contract for underwriting subscription of any shares in or debentures of the company

·  Oral Contracts, if it can be proved by circumstantial evidence

· Contract for sale, purchase, supply of any goods, materials or services in which a director or any person connected with a director in any ways mentioned in sub section (1) of Section 297 is interested

It does not apply to:

· Giving or taking of loan

· Contract in respect of immovable goods

· Contracts between two public companies

· Contract for employment of a director or managing director or whole-time director

· Contract for employment of relative of a director

· Contract entered into by the company with a dealer on a principal to principal basis

· Professional service of the nature given by firms of solicitors and advocates etc.

·  Indirect interest of directors as provided under section 299

· Hiring of office premises on rent (as the transaction is an immovable property)

· A government company in respect of contracts entered into by it with another government company

· Any contract for the sale, purchase or supply of goods, materials or services in which:

a). the company or the other party regularly trade or does business and,

b). the value of such contract is not more than Rs. 5,000 in the aggregate in a year.

Procedure for entering into contracts covered under Section 297:

Mandatory Board Approval:

Section 297 mandates to obtain the prior consent of the Board of Directors for contracts (as mentioned above) in which the directors are interested. Section 297 deals with the transactions between the company and

§   A director of the company

§  His relative

§  A firm in which the director or his relative is a partner

§ A private company of which the director is a member or director

§  And a partner of a firm in which the director or his relative is a partner

The contract shall be entered only with the consent of BoD accorded by a resolution passed in the board meeting. Although the prior approval of BoD is required u/s 297, a relaxation under sub section (3) of section 297 has been provided. If the circumstances are of urgent necessity the prior approval of the Board is not required but the consent should be obtained within three months by a resolution passed in the board meeting. But where a company requires the previous approval of central government this relaxation shall not apply.

Approval from the Central Government:

Companies having paid up capital of rs.1 cr. or more are required to obtain prior approval from the Central Government (power delegated to the Regional Director) for entering into contracts covered under section 297.  An application in form no. 24 of the companies’ general rules and forms along with a copy of board resolution and copy of agreement to be entered into should be filed. However if facts and circumstances of a case require the approval u/s 269 or 314(IB) or sec. 394AA and also under sec. 297 then approval u/s 269, 314(IB) or sec. 394AA would be enough and no separate approval under section 297 would be required.

Approval by the Shareholders in General Meeting:

In case if the Board does not have a quorum of disinterested directors the contract shall be approve by the shareholders in General Meting.

Consequences of failure to obtain Approval/ Consent:

Failure to obtain the Board’s consent will make a contract voidable at the option of BoD. The contract shall become void only when the BoD avoids it. Also, if the Central Government’s approval is required, failure to obtain the same would render the transaction void.

Disclosure of Interest:

Every director who is directly or indirectly interested in the proposed contract, should make a disclosure regarding his interest in form no. 24AA at the Board meeting in which contract is approved. Or if, he is not present at that meeting, he should disclose his nature of interest at the first Board meeting after he becomes interested.

Compliance:

The company has to comply with the provision of sec. 640B and rule 20A of the companies (Central Government’s General Rules and Forms) 1956.

Steps to enter into contract covered under sec. 297:

Ø  Obtain the consent of the Board or Central Government or Shareholders as the case may be,

Ø  Make disclosure of Interest at the Board Meeting in form 24AA

Ø  Enter the particulars in the register of contracts with director within 7 days

Ø  Place the register at the first meeting of the BoD and obtain signature

Disclosure of Interest under Section 299:

Every director of a company who is in any way, whether directly or indirectly concerned or interested in a contract or arrangement, or proposed contract or arrangement entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors. In the case of a proposed contract or arrangement, the disclosure is required to be made by a director under sub-sec. (1) shall be made at the meeting of the board at which the question of entry into the contract or arrangement is first taken into consideration, or if the director was not, at the date of the meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after which he becomes so concerned or interested. In case of any other contract, the required disclosure shall be made at the first meeting of the Board held after the directors becomes concerned or interested into contract or arrangement. A general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made. Any such general notice shall expire at the end of the financial year in which it is give, but may be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire

                     Provisions of Section 299 will be attracted not only for a contract but also for other arrangements in which director of a company is directly or indirectly interested or concerned, whereas section 297 deals with the contracts in which directors etc. are directly interested. Section 299 applies in all transactions, whether they relate to movable or immovable property or concerned directly or indirectly.

Procedure of Disclosure of Interest under Section 299:

Ø Ensure that the disclosure were duly made by all directors in form 24AA

Ø A General notice of disclosure has been duly renewed

Ø Particulars of interest entered in the register of contracts etc. in accordance with the provisions of section 301

Ø  The director concerned has given due notice with regard to change in the directorship/ membership

Ø  The director concerned had given notice that notice was read out at the Board meeting and minute to this effect was made with regard to the discussion held at the board meeting

Ø  The register of contracts in which the director concerned or interested is updated within seven days from passing the resolution

Ø  The register of director is updated as envisaged in section 303

Interests required to be disclosed by the directors at the Board meeting:

Ø Direct Interest (when the director himself has personal interest in the contract or arrangement)

Ø Indirect Interest (where the director has no personal interest but any of his relative is interested)

Ø  Pecuniary Interest (if there is some pecuniary interest of director in the contract or arrangement then he is treated to be interested)

Ø Interest in proposed contract (Where concerned director knows that he is directly or indirectly interested shall be disclosed)

Ø  Partner of a firm (where the director is a partner with another firm to the contract)

Ø  Sub-partner (where the director is a sub partner with other party to the contract)

Registrar of contracts, companies and firms in which directors are interested: [Section 301]

Section 301 requires every company to keep one or more registers containing particulars of all contracts or arrangements covered u/s 297 or 299 in which directors are interested are entered into giving detailed information on:

Ø  the date of the contract or arrangement

Ø  the names of the parties thereto

Ø  the principal terms and conditions thereof

Ø  the date on which it was placed before the Board

Ø  the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.

Particulars of every such contract or arrangement shall be entered in the register aforesaid within 7 days (exclusive of public holidays) of the meeting of the Board where approval of the board is required or 7 days of the receipt of the particulars of such contract or arrangement at the registered office of the company or within 30 days of the date of such other contract or arrangement, whichever is later. The register has to be kept at the registered office of the company. The register must be placed before the next meeting of the Board and must then be signed by all the directors present at that meeting. However, for a contract or agreement whose value does not exceed Rs. 1,000 in aggregate in one year and for a contract or arrangement (to which section 297 or, as the case may be, section 299 applies) by a banking company for the collection of bills in the ordinary course of its business, the above requirement of maintenance of register shall not apply.

Interested director not to participate or vote in Boards proceedings: [Section 300]

No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement.

A Director who is directly or indirectly interested in a contract or arrangement shall not –

·  be counted for the purpose of quorum at the time of discussion and voting on any such contract or arrangement

·  participate in the discussion on any such contract or arrangement

·  vote thereon and if he does vote, his vote shall be void

A contravention of the above provisions shall render the director punishable with a fine of Rs. 50,000.

The following decided case laws make will make it clear:

Ø  “If interested director votes on a contract in which he is interested, his vote will be void. But, the contract does not become void. It is voidable at the option of Board and not at the option of another party”. [Movitex Ltd. V. Bulfield 1988 BCLC 104 (Ch D)]

Ø Voting by an interested director will make a contract void in the following two cases:

o  If his exclusion from quorum would have resulted in ‘no quorum’

o  If exclusion of his vote would have resulted in failure of such resolution” [Victors Ltd. V. Lingard (1927) 1 Ch 323]

Comments
 Pankaj June 27, 2011
A, a director, also runs a proprietorship business to which some cos. has given loan. The same cos. hold more than 2% shareholding in the co. in which he is the director. These co. also supply goods to the co. Now, is there any Q. of conflict of interest....? please clarify.
jitendra June 26, 2012
if in the board of a public limited company all the directors are relative being husband wife daughter, mother and father then can they appoint one of them managing director through a board resolution? will section 300 apply to appointment of managing director?
Avneet Kaur June 26, 2013
Can Director give his disclosure of interest dated 30th March if 31st March was sunday.
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