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An Analysis of Section 297 of The Companies Act, 1956 This article attempts to make a detailed interpretation of Section 297,

which deals with Boards sanction to be required for certain contracts in which particular directors are interested. Sub-Section wise Analysis: Sub-Section \n 297 297 297 297 (1) (2) (3) & (4) (5) Deals with Charging / Fixing responsibility to obtain consent of board for entering into contract Exemptions / Gateways Modus operandi for obtaining consent 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 boards sanction. Section 297 (1) : Boards sanction is required if: i) ii) iii) iv) v) a director; or his relative; a firm in which such a director or relative is a partner; any other partner in such a firm ( ie; a firm as stated in (iii) above); 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 boards sanction to be supported by the PREVIOUS approval of the Central Government, if the companys paid-up capital is not less than Rs.1 Crore. Section 297 (2): Exemption to boards 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 boards sanction is not obtained, either before the contract date or within three months (in urgent cases), it will be deemed that the boards 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 means a consent through Consent of Board resolution at a duly convened board meeting, and not by mere circular resolution. The, the section does not apply to a contract between two public limited companies, because the word used is private company. If Contract between a company and director / the word used is company, then it may be interested director / relative / firm / private interpreted as any type of company (public / company. private). Thus, the two parties of the contract must be 1st party - any type of company, and 2nd party - director / relatives / firm / private company. Section is attracted to the contract entered into by the company and any other partners, of the Any other partner in such a firm. firm of in that the director / his relative are a partner. Section does not apply to a contract of immovable property (eg: purchase of land, building etc.), because the terms used is goods, Sale or purchase of any goods, materials or materials or services all are movables. Thus services. contract for movables only get attracted by the section, immovable properties contracts are excluded. Exemptions are independent provisions, Exemptions under sub-section (2) because the words or is used to separate the provisions. Exemption to transactions in the ordinary course Exemption applies only to banking and insurance of business. companies, and not for all companies. Calculated on Annual Basis, only for the period Rs.5000/- Exemption limit. of contract. Contract voidable at the option of the board, Effect on not obtaining consent of board. and not void (invalid). The contract is voidable ie; can be ratified by the board.