consequences of not complying with section 297 of Cos Act

Others 5857 views 6 replies

Nikhil Agrawal

Article trainee

52 Points Joined July 2009

Hi,

Facts

1. Section 297 of companies act is attracted in my case. Just for a quick reference to the section 297.. it states about obtaining consent of the board of directors, for entering into certain contracts in which particular directors are interested and in my case the client has a paid up capital of more than Rs 1 crore. Hence my client will need a prior approval from the Central Government.

2. The client has not taken the prior approval..However the Board Of directors have passed adequate resolutions and have gone ahead with the transactions

3. The client does not fall in any of the exemptions/relaxations available in the provision.

Our understanding

1. The consequences are as follows:

2. A residuary section for penalty ie section 621 is applicable ie Rs 500 and Rs 50 per day if a continuing default

3. The Board Of Directors is not deemed to vacate the office of director

4. Compounding of offences is possible

Query

1. What are the other consequences if the prior approval of Central Government is not taken?

2. The consequences do not seem to be very serious like vacating of Director’s office or lifting of corporate veil etc

3. Please enlighten me with serious consequences too

Thanks and regards,

Nikhil

Replies (6)

Ajay Mishra

Company Secretary

74352 Points Joined March 2009

Dear Mr. Nikhil

Consequences of non-compliance of section 297

Section 297 does not provide any penalty for non-compliance. The penalty, therefore, will be as per the provision of section 629 A. Default or non-compliance with the section in cases where approval of the CG is necessary would render the transaction void but it would be only voidable where the consent of the Board of Directors’ was necessary and was not accorded.

Where the prior approval of the CG was not obtained for purchasing goods through partnership firm in which some of the directors of the company where interested, it was held that considering the quantity of goods involved was negligible and that having regard to the facts and circumstances of the case, the offence was to be compounded against the company and directors. {Dintex Dyechem Ltd. Re (2001)}

Regard

Ankur Garg

Company Secretary and Compliance Officer

114788 Points Joined January 2009

Hi,

In your case Penalty as provided in Section-629A is applicable as section 297 contain no penal provisions.

Further BOD may rectify the contract later on as contract is voidable and not void.

Regards

kanchan

Trainee- CS

41 Points Joined February 2011

We have a client having same case as stated by Nikhil Agarwal. the company has entered into contracts attracting section 297 and has obtained boards sanction for the same. but the company has paid up capital of more that 1 cr so central government approval is required which the company failed to obtain.

Now can the company apply to regional director for compounding of offences and to make those transactions valid??

Regards