What does Section 297 of The Companies Act, 1956 deals with?
This article attempts to make a detailed interpretation of Section 297, which deals with
‘Board’s sanction to be required for certain contracts in which particular directors are
interested’.
Sub-Section wise Analysis:
Sub-Section Deals with
Charging / Fixing responsibility to obtain
consent of board for entering into contract
297 (1)
297 (2) Exemptions / Gateways
297 (3) & (4) Modus operandi for obtaining consent
297 (5) 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 board’s sanction.
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 subscription 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):
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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.
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
Contract between a company and director / company’. If the word used is ‘company’,
interested director / relative / firm / private then it may be interpreted as any type of
company. company (public / 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
Any other partner in such a firm.
partners, of the firm of in that the director /
his relative are a partner.
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Section does not apply to a contract of
immovable property (eg: purchase of land,
building etc.), because the terms used is
Sale or purchase of any goods, materials or
goods, materials or services – all are
services.
movables. Thus 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 applies only to banking and
Exemption to transactions in the ordinary
insurance companies, and not for all
course of business.
companies.
Calculated on Annual Basis, only for the
Rs.5000/- Exemption limit.
period 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.
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