section 295,297 & 299 of the companies act.

7/28/2019 section 295,297 & 299 of the companies act.

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COMPANIES ACT 1956Section295,296,297


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Section 295:- Loans To Directors

Sub section (1).

No company (herein-after in this section referred to as "the

lending company") without obtaining the previous

approval of the Central Government in that behalf shall,

directly or indirectly, make any loan to, or give anyguarantee or provide any security in connection with a

loan made by any other person to, or to any other person

by:-


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INTERPRETATION OF THE PARAGRAPH.

ANY COMPANY ( THE LENDER)

CANNOT PROVIDE THE SAID BENEFITS:-

1).LOAN ( by the company itself)

2).GUARANTEE ( for the loan provided to a director)3). Provide security( for the security for the loan provided to

director)

These benefits cannot be provided without the permission of

the central government.


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To whom these benefits should not be providedto?

(a) any director of the lending company or of a company which is

its holding company or any partner or relative of any

such director ;

(b) any firm in which any such director or relative is a partner ;

(c) any private company of which any such director is a director

or member ;

(d) any body corporate at a general meeting of which not less

than twenty-five per cent of the total voting power may

be exercised or controlled by any such director, or by two ormore such directors together ; or

(e) any body corporate, the Board of directors, managing

director, 1[***] or manager whereof is accustomed to act in

accordance with the directions or instructions of the Board,

or of any director or directors, of the lending company.


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Exception:- The sub-section (2) is a exception to theabove rule as mentioned in sub-section (1).

Sub Section (2)

The above section (1) shall not apply to:-

(a) any loan made, guarantee given or security provided -

(i) by a private company unless it is a subsidiary of a publiccompany,(that means the pvt. Co. should not be a

subsidiary of the public company) or

(i i) by a banking company ;

(b) any loan made by a holding company to its subsidiary

company;

(c) any guarantee given or security provided by a holding

company in respect of any loan made to its subsidiary

company.]


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Sub Section ( 3) What if, when such a priorpermission could not be taken from the centralgovernment?

Where any loan made, guarantee given or security provided

by a lending company and outstanding at the

commencement of this Act could not have been made,

given or provided, without the previous approval of the

Central Government, if this section had then been in force,

the lending company shall, within six months from thecommencement of this Act or such further time not

exceeding six months as the Central Government may

grant for that purpose, either obtain the approval of the

Central Government to the transaction or enforce the

repayment of the loan made, or in connection with whichthe guarantee was given or the security was provided,

notwithstanding any agreement to the contrary.


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Explanation of Sub Section 3

What If, if such a permission could not be obtained from the

central Government for a loan, guarantee of Security Which

remains outstanding at the commencement of this Act:-

The lending company shall, within Six months from the

commencement of this act or any time as or time granted

by the central government for this purpose, should either

obtain the approval or enforce the repayment of the loan

made, guarantee given in connection to any security, in

spite of any agreement against this rule.


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Sub-Section 4:- Penalties and Fines

Every person who is knowingly a party to any

contravention of sub-section (1) or (3), including

in particular any person to whom the loan is made

or who has taken the loan in respect of whichthe guarantee is given or the security is provided,

shall be punishable either with fine which may

extend to f ive thou sand rupeesor with simple

imprisonment for a term which may extend to s ixmonths


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Further Relaxation in the Penalty amount isprovided under this section .

Provided that where any such loan, or any loan in connection

with which any such guarantee or security has been given

or provided by the lending company, has been repaid in

full, no punishment by way of imprisonment shall be

imposed under this sub-section; and where the loan has

been re-paid in part, the maximum punishment which may

be imposed under this sub-section by way of

imprisonment shall be proportionately reduced.


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Explanation of above Para:

Case -1

Full repayment- Action is no penalty

Case -2

Part Repayment- Action is Proportionate Penalty


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Subsection- 5 (whose Liability to repayment ofloan or settlement of guarantee)

All persons who are knowingly parties to any contravention of

sub-section (1) or (3) shall be liable jointly and severally, to

the lending company for the repayment of the loan or for

making good the sum which the lending company may

have been called upon to pay in virtue of the guarantee

given or the security provided by such company.


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Subsection - 6 (How Can a Officer of the lendingcompany could Avoid this Liability)

No officer of the lending company or of the borrowing body

corporate shall be punishable under sub-section (4) or

shall incur the liability referred to in sub-section (5) in

respect of any loan made, guarantee given or security

provided after the 1st day of April, 1956 610 ] in

contravention of clause (d) or (e) of sub-section (1), unless

at the time when the loan was made, the guarantee was

given or the security was provided by the lending

company, he knew or had express notice that that clause

was being contravened thereby.


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Further explanation of sub section- 6

Therefore the officer of the lending company can escape all

the liabilities if he could Prove that he had no Implied or

Direct knowledge of the Violation of this Section. And no

such Particular Records Proving his knowledge of This

Contravention Could be found and Verified.E.g.- Minute books, Loan Agreement, Official Letters, E-mails,

His presence in the meeting Where other persons were

present.


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Section 297:- BOARD'S SANCTION TO BE REQUIRED FOR CERTAINCONTRACTS IN WHICH PARTICULAR DIRECTORS ARE INTERESTED.

Background

The Directors occupy a fiduciary position in relation to a

Company. They must act bona fide and in the interest of

the Company. This duty of good faith which fiduciary

relationship imposes is identical with those imposed on

trustees. In this sense, it can also be concluded that the

Directors are trustees.

Thus, if a Director makes contract with the Company and

does not disclose his interest therein he will be committing

breach of trust.


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Where it applies

Section 297 applies to all companies, public as well as

private. However, it does not apply to the contracts where

both the parties to the contract are public companies. The

section would apply where one of the two companies

(being parties to the contract) is a private company and theother is a public company, but in such a case, it will have

to be complied with by the public company only.


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Objective of The Section

The object of the Section is that the Board should have

knowledge of the extent of interest of a director in any

contractual dealings with the company; or of any person

connected with the director and accord their consent to

such dealings.

The consent of Board of Directors of the Company is required

for the contracts entered with the Company, except for the

contracts which are exempted under Section 297 (2), as

one of the party and other party being any of the following:-


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Who Should obtain consent

director of the Company; orany relative of any director of the Company; or

any partnership firm in which any director of the Company is

partner; or

any partnership firm in which any relative of any director ofthe Company is partner; or

any partner of the partnership firm in which any director of

the Company is a partner; or

any partner of the partnership firm in which any relative of

any director of the Company is a partner; orany private company in which any director of the Company is

a member; or

any private company in which any director of the Company is

a director.


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The Contract to be entered can be for:

sale, purchase or supply of any goods or material;

sale, purchase or supply of any;

for underwriting the subscription of any shares in, or

debentures of, the company.


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How a Consent can be provided.

CONSENT OF THE BOARD OF DIRECTORS

1. A consent of the Board of Directors to a contract attracting

Section 297 may be given:

either before entering into a contract;OR after entering into a

contract in circumstances of urgent necessity, but within three

months of the date of which the contract was entered into.

2. Consent required to be given by the Board cannot be a general

one; it must be specific with respect to the particular transaction.

3. Board must give its consent by a resolution passed at its meetingand not otherwise; it cannot be accorded by a circular resolution

or in any other manner.

4. If consent is not accorded to any contract, then anything done in

pursuance of the contract shall be voidable at the option of the

Board.

Any contract falling within the purview of any of the three exemptions as


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Any contract falling within the purview of any of the three exemptions as

mentioned in clauses (a), (b) and (c) of sub-section (2) of Section shall

neither require the consent of the Board of Directors of the Company nor

the previous approval of the Central Government. Such contracts are as

under:

The contract for the purchase of the goods and materials from the company;

or the sale of goods and materials to the Company by any of the parties

as mentioned earlier, for cash at prevailing market price.

Note:

A Cheque is to be treated as equivalent of cash payment

This clause is not applicable to contracts of service irrespective of any value

involved.The expression at prevailing market price suggests that the price charged

ought to be the ruling market price of the seller and no extra favour vis--

vis the other buyers should be shown as to the prices.

The contract, between the company and any one of the parties as mentioned

earlier, for sale, purchase or supply of any goods, materials or services,

in which the company or the director / relative/ firm/ partner / privatecompany regularly trades or does business and the value of such goods /

materials or the cost of the services does not exceed Rs. 5,000/- in

aggregate in any year, materials or services;

In the case of banking company or an insurance company, any transaction in

the ordinary course of business of such company with any of the partiesas mentioned earlier.


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Subsection- 1

Except with the consent of the Board of directors of a company, a

director of the company or

his relative, a firm in which such a director or relative is a partner, anyother partner in such a firm,

or a private company of which the director is a member or director, shall

not enter into any

contract with the company -

(a) for the sale, purchase or supply of any goods, materials or services;

or

(b) after the commencement of this Act, for underwriting the subscription

of any shares in, or

debentures of, the company : Provided that in the case of the companyhaving 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.


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Approval of the central Government.

The previous approval of the Central Government is required where

the paid up capital of the Company is Rs. One Crore or more.

(However, this power of giving approval has been delegated to

the Regional Director at Kanpur, Bombay, Calcutta and Madras).

The Application for approval shall be made to the concerned

Regional Director in Form No. 24A prescribed under Companies

(Central Governments) General Rules & Forms, 1956 along with a

certified copy of the contract and / or relevant papers and

Demand Draft for the fees payable under the Companies (Fees on

Applications Rules, 1968). Further, this provision does not has

any impact on contacts entered into prior to the date of crossing

of the limit of Rs. One Crore, and subsisting after that date.

However, the Central Governments approval is not required in

respect of contracts entered into by the Government Company

with any other Government Company.

Subsection 2 Exceptions to theabove rule


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Subsection- 2 Exceptions to the above rule.Nothing contained in clause (a) of sub-section (1) shall affect

(a) the purchase of goods and materials from the company, or the sale of goods, and

materials to

the company, by any director, relative, firm, partner or private company as aforesaid for

cash at

prevailing market prices; or

(b) any contract or contracts between the company on one side and any such director,

relative,

firm, partner of private company on the other for sale, purchase or supply of any goods,

materialsand services in which either the company or the director, relative, firm, partner or

private

company, as the case may be, regularly trades or does business :

Provided that such contract or contracts do not relate to goods and materials the value

of which,

or services the cost of which, exceeds five thousand rupees in the aggregate in any year

comprised in the period of the contract or contracts; or

(c) in the case of a banking or insurance company any transaction in the ordinary

course of

business of such company with any director, relative, firm, partner or private company

as

aforesaid.


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Further exceptions

1. contracts between two public companies

2. transaction in immovable properties [Let ter No . 9/4190-CL -X,dated 27th March, 1990],

3. contract of employment of a director or managing or whole-timedirector [Circ u lar No . 8/11/75-CL-V, dated 5th Ju ne, 1975],

4. contract entered into by the company with a dealer on a principal toprincipal basis [Circular No . FM 8/297/56-PR, dated 2nd Augu st,1956],

5. professional services of the nature given by firms of solicitors andadvocates, etc. [Circ ul ar No . 8/11/75-CL-V, dated 5th Ju ne, 1975],

6. indirect interest of a director as provided in section 299. unlikeSection 299 this Section does not deal with indirect interest of a

director, even though it may be substantial or real.[3]7. a government company in respect of contracts entered into by it

with another Government company [Notif icat ion GSR No.233,dated 31st J anuary, 1978].

8. A company and a body corporate or a co-operative society in whicha director or relative is a member or director.[4]


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Subsection 3 In cases of Urgent necessitySections (1) & (2) can be kept aside subject to

conditions.Notwithstanding anything contained in sub-sections (1) and

(2), a director, relative, firm,

partner or private company as a aforesaid may, incircumstances of urgent necessity, enter,

without obtaining the consent of the Board, into any contractwith the company for the sale,

purchase or supply of any goods, materials or services evenif the value of such goods or cost of

such services exceeds five thousand rupees in aggregate in

any year comprised in the period ofthe contract; but in such a case, the consent of the Board

shall be obtained at a meeting within

three months of the date on which the contract was enteredinto.


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Subsection 4

Every consent of the Board required under this section shall be

accorded by a resolution passed at a meeting of the Board and

not otherwise; and the consent of the Board required under sub-

section (1) shall not be deemed to have been given within the

meaning of that sub-section unless the consent is accorded

before the contract is entered into or within three months of the

date on which it was entered into.


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Subsection - 5

(5) If consent is not accorded to any contract under this section,

anything done in pursuance of the contract shall be voidable at

the option of the Board.


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Subsection- 6

Nothing in this section shall apply to any case where the consent

has been accorded to the contract before the commencement of

the Companies (Amendment) Act, 1960 That means A new

consent to the same has to be obtained for every case which has

arises after the commencement of this Act.


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Applicability of the section 297

The applicability of section 297 of the Act is to be examined at the

time of entering into the contract and the consent should be

obtained within three months of entering into the contract. If a

director becomes interested after the contract is entered into,there is no need to get Boards consent. The term `director

includes alternate director for the purpose of section 297 of the

Act


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Section 299:-Disclosures of interests by directors

Section 299 casts upon directors of companies an burdensome

obligation. It is a statutory obligation violation of which may

result in serious consequences. This Section applies to all

companies and all directors. It also applies to directors

nominated by Government on the Board of the Company.

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.


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Objective

The Object of Section 299 is that the Board of Directors should bemade 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 therefor.


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Subsection-2 (When Should the Directors Make thisdisclosure)

(2) (a) In the case of a proposed contract or arrangement, the

disclosure required to be made by a director under subsection

(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, or if the director wasnot, at the date of that meeting, concerned or

interested in the proposed contract or arrangement, at the first

meeting of the Board held after he becomes so

concerned or interested.

(b) In the case of any other contract or arrangement, the requireddisclosure shall be made at the first meeting of the

Board held after the director becomes concerned or interested in the

contract or arrangement.


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GENERAL NOTICE OF INTERST [Sub SECTION 3]

Where general notice is given to the Board as regards the interest of a

director in any contract or arrangement, it is not effective, unless thedirector concerned either gives it at a meeting of the Board or takesreasonable steps to secure that it is brought up and read at the nextmeeting of the Board after it is given. The Notice then gets entered inthe minutes of the Board Meeting at which it is given or read. TheNotice in Form No. 24AA as prescribed under Companies (CentralGovernments) General Rules & Forms, 1956, is also required to begiven afresh year after year, so that new directors who may be cominginto the Board may be aware of the interest of that particular director.Once a director has give general notice of interest, it is not necessaryfor him to once again disclose his interest when the matter comes upbefore the Board.

Subsection-4 (penalties & Fines)Every director who fails to comply with sub-section (1) or (2) shall be

punishable with fine which may extend to

1[fifty] thousand rupees.


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Subsection-5

Nothing in this section shall be taken to prejudice the operation of

any rule of law restricting a director of a company from having

any concern or interest in any contracts or arrangements with the

company.

(Explanation:- This section Should not be understood as a restraint

on any rule of law Which restrains a director from having a

interest in contracts or arrangement with the company)


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Subsection-6 (does not applies on two companies whereinterested Directors hold Maximum 2 % paid up capital)

Nothing in Section 299 is applicable to any contract or arrangement

between two companies, if any one or more of the directors of the

one company together holds / hold 2% or less of the paidup

share capital in the other company. [Section 299 (6)].

This limit of 2% has to be taken either as an individual directorsholding or the aggregate holding of two or more directors. It is,

therefore necessary for the company to ascertain the aggregate

holding of Directors even if every director has given in the

general notice his individual holding. The point of time with

reference to which the fact whether or not the holding exceeds

2% limit laid down in sub-section (6) should be verified is the dateon which the contract is entered into.

SECTION 25 COMPANIES

Section 299 does not apply to companies incorporated under Section 25 of

the Companies Act, 1956, in respect of the cases to which sub-sections (1)

and (3) of the Section 297 applies.


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SECTION 299 VIS--VIS SECTION 297

Section 299 applies to any contract or arrangement to which a

company is party and in which a director is interested. This

Section is wider in scope than Section 297, which refers to certain

direct contracts only. Thus, the contracts falling within the

purview of Section 297 necessarily attract Section 299, although

the converse may not be true. A contravention of section 297

would also result in contravention of Section 299, hence its

consequences would also follow.


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COMPANIES (AUDITORS REPORT) ORDER, 2003 IN RELATION TO

SECTION 297 & 299OF THE COMPANIES ACT, 1956

Under COMPANIES (AUDITORS REPORT) ORDER, 2003, the Auditors of everycompany are required to include in their report a statement on Whether

the transactions of purchase of goods and materials and sale of goods,

materials and services, made in pursuance of contracts, arrangements

entered in the register(s) maintained under Section 301(1) of the

Companies Act, 1956 and aggregating during the year to Rs. 5,00,000

(Rupees Five Lacks) or more in respect of each party have been made atprices which are reasonable having regard to prevailing market prices for

such goods, material, or services or the prices at which the transactions

for similar goods or services have been made with other parties.

The auditors role would seem to be limited to those transactions or contractand arrangements, which have been entered in the register. They cannot go

beyond the register and make enquiry as to whether all the contracts falling

under Section 297 or 299 have been entered or not, or whether in respect of

such contracts compliance with Section 297 or 299 has been done or not.


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