Section 297 & 299 of the Companies Act, 1956
The Directors are appointed by share holders to act on behalf of them. Directors occupy a fiduciary position in relation to a Company. They must act
bona fide and in the interest of the Company. This duty of good faith which
fiduciary relationship imposes is identical with those imposed on trustees. In
this sense, it can also be concluded that the Directors are trustees.
Thus,
if a Director makes any contract with the Company and does not disclose his
interest therein then he will be committing breach of trust.
APPLICABLE
Section 297 applies to
all companies, public as well as private. However, it does not apply to the
contracts where both the parties to the contract are public companies. The
section would apply where one of the two companies (being parties to the
contract) is a private company and the other is a public company, but in such a
case, it will have to be complied with by the public company only.
BOARD’S CONSENT AND CENTRAL
GOVERNMENT’S APPROVAL FOR CERTAIN CONTRACTS IN WHICH PARTICULAR DIRECTORS ARE
INTERESTED [Sec. 297]
The object
of the Section is that the Board should have knowledge of the extent of
interest of a director in any contractual dealings with the company; or of any
person connected with the director and accord their consent to such dealings.
The consent
of Board of Directors of the Company is required for the contracts entered with
the Company, except for the contracts which are exempted under Section 297 (2),
as one of the party and other party being any of the following: -
1)
director of the Company; or
2)
any relative of any director of
the Company; or
3)
any partnership firm in which
any director of the Company is partner; or
4)
any partnership firm in which
any relative of any director of the Company is partner; or
5)
any partner of the partnership
firm in which any director of the Company is a partner; or
6)
any partner of the partnership
firm in which any relative of any director of the Company is a partner; or
7)
any private company in which
any director of the Company is a member; or
8)
any private company in which
any director of the Company is a director.
The Contract
to be entered can be for:
(a) sale,
purchase or supply of any goods or material;
(b) sale,
purchase or supply of any;
(c) for
underwriting the subscription of any shares in, or debentures of, the company.
Apart from
the consent of the Board, previous
approval of the Central Government is also required when the paid up
capital of the Company is Rs. One Crore or more. (However, this power of giving
approval has been delegated to the Regional Director). The Application for approval shall be made to the
concerned Regional Director in Form No. 24A prescribed under Companies
(Central Government’s) General Rules & Forms, 1956 along with a certified
copy of the contract and / or relevant papers and Demand Draft for the fees
payable under the Companies (Fees on Applications Rules, 1968). Further, this
provision does not has any impact on contacts entered into prior to the date of
crossing of the limit of Rs. One Crore, and subsisting after that date.
However, the Central Government’s
approval is not required in respect of contracts entered into by the Government
Company with any other Government Company.
CONSENT OF THE
BOARD OF DIRECTORS
1. A consent
of the Board of Directors to a contract attracting Section 297 may be given:
either before entering into a
contract;
OR
after
entering into a contract in circumstances of urgent necessity, but within three
months of the date of which the contract was entered into.
2. Consent required to be given by the Board cannot be a general one; it must be specific with respect to the particular transaction.
3. Board
must give its consent by a resolution passed at its meeting and not otherwise.
4. 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.
CONTRACTS WHICH ARE
Any contract
falling within the purview of any of the three exemptions as mentioned in
clauses (a), (b) and (c) of sub-section (2) of Section shall neither require
the consent of the Board of Directors of the Company nor the previous approval
of the Central Government. Such contracts are as under:
(i)
The contract for the purchase
of the goods and materials from the company; or the sale of goods and materials
to the Company by any of the parties as mentioned earlier, for cash at
prevailing market price.
(ii)
The contract, between the
company and any one of the parties as mentioned earlier, for sale, purchase or
supply of any goods, materials or services, in which the company or the
director / relative/ firm/ partner / private company regularly trades or does
business and the value of such goods / materials or the cost of the services does not exceed Rs.
5,000/- in aggregate in any year, materials or services;
(iii)
In the case of banking company
or an insurance company, any transaction in the ordinary course of business of
such company with any of the parties as mentioned earlier.
OBLIGATION UNDER SECTION 299
Section 299
casts upon directors of companies an onerous obligation. It is a statutory
obligation violation of which may result in serious consequences. This Section
applies to all companies and all directors. It also applies to directors nominated by Government on the
Board of the Company.
The Object of Section 299 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
therefor.
As per
Section 299, every Director of a company must disclose to its Board of
Directors at a meeting of the Board the nature of his / her interest: -
if he / she is any way, whether directly or
indirectly, concerned or interested in any contract or arrangement or proposed
contract or arrangement entered into or proposed to be enter into, by or on
behalf of the company.
GENERAL NOTICE
OF INTEREST BY DIRECTOR [SECTION 299 (3)]
Where
general notice is given to the Board as regards the interest of a director in
any contract or arrangement, it is not effective, unless the director concerned
either gives it at a meeting of the Board or takes reasonable steps to secure
that it is brought up and read at the next meeting of the Board after it is
given. The Notice then gets entered in the minutes of the Board Meeting at
which it is given or read. The Notice in Form
No. 24AA as prescribed under Companies (Central Government’s) General Rules
& Forms, 1956, is also required to be given afresh year after year, so that new directors who may be coming
into the Board may be aware of the interest of that particular director. Once a director has give general notice of
interest, it is not necessary for him to once again disclose his interest when
the matter comes up before the Board.
Nothing in
Section 299 is applicable to any contract
or arrangement between two companies, if any one or more of the directors
of the one company together holds / hold 2% or less of the paid–up share
capital in the other company. [Section
299 (6)].
This limit
of 2% has to be taken either as an individual director’s holding or the
aggregate holding of two or more directors. It is, therefore necessary for the
company to ascertain the aggregate holding of Directors even if every director
has given in the general notice his individual holding. The point of time with reference to which the fact whether or not
the holding exceeds 2% limit laid down in sub-section (6) should be verified is the date on which the contract is
entered into.
SECTION 25
COMPANIES
Section 299
does not apply to companies incorporated under Section 25 of the Companies Act,
1956, in respect of the cases to which sub-sections (1) and (3) of the Section
297 applies.
SECTION 299 VIS-À-VIS SECTION 297
Section 299 applies
to any contract or arrangement to which a company is party and in which a
director is interested. This Section is wider
in scope than Section 297, which refers to certain direct contracts only.
Thus, the contracts falling within the
purview of Section 297 necessarily attract Section 299, although the
converse may not be true. A contravention of section 297 would also result in
contravention of Section 299, hence its consequences would also follow.
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