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Applicability of Section 297 of the Companies Act 1956 in case a director of a public limited

company leases out his property to the Company.

The provisions of Section 297 do not apply to transactions involving immoveable property. Thus, no

specific approvals are required in the aforesaid case. However, Section 299- Disclosure of interest by

director, Section 300- Interested director not to participate or vote in Board's proceedings and Section

301- Particulars of contract to be entered in Register of Contract are applicable.

In the aforesaid case section 299(2)(a) may be considered which requires specific disclosure to be

made by a director when the question of entering into the contract or arrangement is first taken into

consideration at the meeting of board.ExplanationAs per Section 297(1) of the Companies Act, 1956, except with the consent of the Board of directors

of a company a director of the company shall not enter into any 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: Provided that in

the case of a company having a paid-up share capital of not less than rupees one crore, no such

contract shall be entered into except with the previous approval of the Central Government.

However, Sub-section (2) lays down three exceptions to the rule under sub-section (1).

They are as follows:a) When the transaction for sale or purchase of goods and material is on cash basis at prevailing

market prices the consent of the Board is not required. A cheque is considered equivalent to cash for

the purpose of this section. [Letter No. 8/2(Misc.)/75-CL-V, dated 6th June, 1975]b) Where a party to the contract as specified in sub-section (2)(b), regularly trades or does business,

provided that the aggregate value of transactions over a calendar year do not exceed Rs. 5000.

c) In the case of banking or insurance company, any transaction with any director, etc., in the

ordinary course of its business.Such transactions will neither require the consent of the Board nor the previous approval of the

Central Government.Further, this Section does not apply to:

1. Contracts between two public companies [Proviso to sub-section (1) to Section 297]

2. Transaction in immovable properties [Letter No. 9/4190-CL-X, dated 27th March, 1990]The letter issued by the Ministry of Industry, Department of Company Affairs (Company Law Board)

vide No. 9/41/90- CL-X, dated 27-3-90, in reply to an application made by a company seeking

approval under Section 297(1) for taking on rent office premises for the company from a firm in which

directors of the company were interested, is reproduced: I am directed to refer to your letter

No.SS:SB:90 dated 1st March 1990, on the subject mentioned above and to say that in view of the

proposal of the company for taking on rental, premises for the office of the company, and the fact that

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the transactions in immovable properties are not covered by the provisions of Section 297 of the

Companies Act, 1956, the application of the company has been filed.

Thus, contract for sale, purchase or supply of any goods, materials or services comes under the

purview of Section 297 and not immoveable property.

3. Contract of employment of a director or managing or whole-time director [Circular No. 8/11/75-CL-

V, dated 5th June, 1975],

4. Professional services of the nature given by firms of solicitors and advocates, etc. [Circular No.

8/11/75-CL-V, dated 5th June, 1975],

5. A company and a body corporate or a co-operative society in which a director or relative is a

member or director. [Proviso to sub-section (1) to Section 297]

Section 299

Section 299(1) casts upon directors of companies an onerous obligation. It requires every director of a

company who is in any way, whether directly or indirectly, concerned or interested in a contract or

arrangement, or proposed contract or arrangement to disclose, the nature of his concern or interest at

a meeting of the Board of directors.

The Object of Section 299 is that the Board of Directors should be made aware of all contracts and

arrangements in which any director has an interest, whether direct or indirect, so that the Board may

be in a position to satisfy itself as to the fairness and reasonableness of the contract from the point of

view of the company and then accord its consent therefore.

Section 299(2)(a) states that, in the case of a proposed contract or arrangement the disclosure

required to be made by a director under sub-section (1) shall be made at the meeting of the Board at

which the question of entering into the contract or arrangement is first taken into consideration.

Thus, it may be inferred from Section 299(2)(a) that specific disclosure is required to be made by a

director when the question of entering into the contract or arrangement is first taken into

consideration. No department clarification or case laws could be found to support this inference.

Section 299(2)(b) provides that, in case of other contracts and arrangements, the disclosure must be

made in the meeting immediately next after the date on which the director has acquired the concern

and interest in the contract.

Section 299(3) requires the directors to make general notice of interest. Any such general notice shall

expire at the end of the financial year in which it is given, but may be renewed for further periods of

one financial year at a time.

Once a director has given a general notice of interest, it is not necessary for him to once again

disclose his interest when the matter comes up before the board.

Where a general notice is given to the Board as regards the interest of a director in any contract or

arrangement, it is not effective, unless the director concerned either gives it at a meeting of the Board

or takes reasonable step to secure that it is brought up and read at the next meeting of the Boardafter it is given.

It is advisable for every director to make it a point to give written notice to the Board at a Board

meeting, mentioning the companies and firms in which he is interested, and do this at regular

intervals so that he may guard himself against the contravening Section 299. As the consequences are

serious amounting to levy of fine and also vacation of director from his office. Every director is advised

to review his own private interests whenever the company enters into any contract or arrangement in

order to see whether there is anything therein requiring disclosure on his part.