Practicle Problem on 297

TRANSACTIONS WITH DIRECTORS

Example

 1.  We are three pvt. Ltd. Companies

2.  We also have a partnership firm. 

3.   Directors and Partners

                       Note :( Rashmi khanna is wife of Mr. Sunil Khanna)

All companies and firm are dealing in the business of stainless steel commercial food service equipments.

4.  Pvt. Ltd. companies have paid up capital less than Rs. one crore each.

Clarify if:

a)  Company 1 can make sale to or purchase from partnership firm in a financial year for Rs. 50 lacks or more.

b)  Company 1, company 2 and company 3 can do transactions of purchase and sale for Rs. 50 lacks or more.

c)  Is there any formality required for above?

Clarification to (a)

Option 01

This query attracts section 297 of the Companies Act 1956, if the term “sale to or purchase from” is entered through a contract.

As per the provisions of this section if any contract is entered into between a company and with a firm in which the director(s) is interested than such contract require previous approval from board of directors by passing a resolution in Board Meeting only.

However a relaxation is provided on prior approval if due to urgency a contract is entered into and within 3 months a consent of the board is obtained by passing a resolution atboard meeting only.

Here Mrs. Rashmi Khanna, wife of Mr. Dinesh Khanna, is a partner of the firm. Therefore one of the condition, i.e. Firm in which a relative of a director is a partner of the firm, is fulfilled to qualify that the director of the company 1, Mr. Dinesh Khanna, is interested inPartnership Firm. Therefore prior consent in Board Meeting by passing a resolution should be taken before making a contract of sale to or purchase from partnership firm for any amount exceeding Rs. 5000/-.

Option 02

Here, the term “sale to or purchase from” can also be considered

- as ordinary course of business for all the companies & partnership firm, which is also mentioned in the query, and

- For cash at prevailing market price,

Then, there is no need to obtain any prior consent at board meeting.

Therefore if query (a) fulfills the option 02 above then the prior consent at board meeting is not necessary even if the director(s) is indirectly interested in partnership firm.

Clarification to (b)

Option 01

This query also attracts section 297 of the Companies Act 1956, if the term “sale to or purchase from” is entered through a contract.

As per the provisions of this section if any contract is entered into between a company and with a firm in which the director(s) is interested than such contract require previous approval fromboard of directors by passing a resolution in Board Meeting only.

However a relaxation is provided on prior approval if due to urgency a contract is entered into and within 3 months a consent of the board is obtained by passing a resolution atboard meeting only.

Here, Company 1 & 2 attracts section 297 as Mr. Dinesh Khanna is director of both the companies & as well he is interested in both the companies. Therefore prior approval at board meeting is required by passing a resolution in both the companies.

But Company 03 does not fall under the purview of section 297 as the relative (wife), Mrs. Rashmi Khanna, of director, Mr. Dinesh Khanna, of company 01 & 02 is a director of company 03 which is not under the scope of section 297.

Option 02

Here, the term “sale to or purchase from” can also be considered

- as ordinary course of business for all the companies, which is also mentioned in the query, and

- For cash at prevailing market price,

Then, there is no need to obtain any prior consent at board meeting.

Therefore if query (b) fulfills the option 02 above then the prior consent at board meeting is not necessary even if the director(s) is interested in company 01 & 02.

Clarification to (c)

- Interested Director should disclose his interest at a board meeting u/s 299. Disclosure is not necessary if cumulative share holding of all the director does not exceed 2% of paid up share capital of the other company.

- A resolution should have to be passed only at board meeting for approval of such contract.

- Interested should not participate in discussion on such contract.

- Interested should not participate vote.

- Interested should not be counted for the purpose of quorum.

***The End***