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Section 297 Companies Act, 1956

Section 297 Companies Act, 1956. Board's sanction to be required for certain contracts in which particular directors are interested. General scheme of Section 297. For the purpose of entering into contracts by Company with the following categories of persons: Director or

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Section 297 Companies Act, 1956

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  1. Section 297 Companies Act, 1956 Board's sanction to be required for certain contracts in which particular directors are interested

  2. General scheme of Section 297 For the purpose of entering into contracts by Company with the following categories of persons: • Director or • Relative of Director (Defined u/s 6 ) or • Any firm in which (i) & ( ii ) is a partner or any other partner of such firm. or • Any private company in which (i) is a Director or Member For : i. Sale /purchase/supply of goods/material or ii. Supply of services or iii. Underwriting the subscription of any share/debenture of the Company

  3. Statutory REquirements • Sanction by way of prior Board Resolution is required in a duly constituted Board Meeting (not by circulation) & • If the Paid-up share capital of the company is greater than or equal to Rs. 1 crore , then Prior approval of Central Govt. (Power delegated to Regional Director) is also required e-Form. 24A.

  4. Consequences of non-compliance or default u/s 297 Since no Penalty/prosecution is provided u/s 297, hence the penalty will be as per Section 629A (Penalty where no specific penalty is provided elsewhere in the Act) Section 629A • The Company and • Officer in default (Section 5) or such other person • Shall be punishable with a fine of Rs. 5000/- or for continuing default Rs. 500/- per day during which the default/contravention continues. Section 621A • Since no penalty by way of imprisonment is provided, hence Penalty/prosecution u/s 297 is a Compoundable Offence, compoundable by Central Govt.

  5. Position as regard with Machino Plastics Ltd. & Machino Autocomp (P) Ltd. • The company has entered into transactions with Machino Autocomp (P) Ltd. (Related Party being Mr. M. D. Jindal Common Director of both the Companies under reference) for supply of Injection Molded Parts. • Since both the Companies have a common director and the paid up capital of the company is more than Rs. One Crore provisions of Section 297 gets attracted. • No approval was taken as per the above stated provisions, neither Board of Directors’ nor of Central Govt., hence the transaction under above stated contract is VOID and attracts penalty u/s 629A (mentioned above), but the same can be compounded u/s 621A.

  6. Remarks Conclusion Board Approval can be sought within three months from the date of entering into the transaction as provided under said section & Since no provision for subsequent approval of the Central Govt. is provided under said section, hence the transaction is Void and has not any legal effect. & Application for compounding can be made to Central Govt.

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