Company law - section 297

Section 297 is applicable on the company entering into the contract. In your case A limited entered into the contract and since its paid up capital is more than one crore A limited shall be required to obtain permission from RD.

First check the shareholding of common director. If common director is holding more than 2% of the paid up share capital then only he is interested. Otherwise clause will become inapplicable.

Originally posted by : Mandeep
	Section 297 is applicable on the company entering into the contract. In your case A limited entered into the contract and since its paid up capital is more than one crore A limited shall be required to obtain permission from RD.

Agree with Mandeep, RD's approval is required in this case.

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 subscripttion 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.

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