Corporate laws_directors
arijit
(Querist) 20 December 2011
This query is : Resolved
Dear Sir(s),
A Company named ‘Y’ has a wholly owned subsidiary private limited company in addition to other Companies in the group.
‘X’ is a managing partner of a Law firm and his firm provides legal services to the Company ‘Y’ and its other group Companies for about 2 years now and would continue to do so in the years to come. For this, Company ‘Y’ and its other group Companies makes payment to the Law Firm by cheque.
Now, this is regarding the appointment of ‘X’ as an independent non-executive director in the Board of the Company ‘Y’.
Now, does this attract sec- 297 of the Companies Act, 1956? Do we have to take approval of Central Govt.? Please give a detailed picture.
Request all the experts to provide their valuable opinion?
Regards
Arijit
Sailesh Kumar Shah
(Expert) 20 December 2011
Professional services rendered by Law firm is not covered u/s 297.
Raj Kumar Makkad
(Expert) 20 December 2011
I think Shah and Naddem have failed to fully read the query.
In the given case, X can be got appointed as non executive director of company Y subject to prior approval of Central govt. under the provisions of section 297 of Company Act, 1956.
prabhakar singh
(Expert) 21 December 2011
If BELOW IS THE SECTION
297. Board's sanction to be required for certain contracts in which particular directors are interested
(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, any other 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, material or services; or
(b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company:
1[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.]
2[(2) 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 or private company on the other for sale, purchase or -supply of any goods, materials and 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.
(3) Notwithstanding anything contained in sub-sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the 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 entered into.
(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.
(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.
(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.
THEN SHAH HAS INCORRECTLY OPINED.The word
"or services"used in clause(a) of section seems attracted here.
The Underlying Principle behind provisions enacted in Section 297 of the Companies Act are seems to be founded on the principle that the director is precluded from dealing on behalf of the company as himself and from entering into engagements in which he has a personal interest conflicting or which may possibly conflict with the interest of those with whom he is bound by fiduciary duty.
A director occupies a fiduciary position in relation to a company and he must act bona fide in the interests of the company. If a director makes a contract with the company and does not disclose his interest, he will be committing breach of trust.
prabhakar singh
(Expert) 21 December 2011
But then a caution of mine is that being in district court I never had any opportunity to deal with company law problems.Still sure s297 is a bar and what if many other provisions of the Companies Act is there to question it"as he is either holding office of profit or gaining in money terms"???????
BUT if the "X" is to be appointed by the shareholders, and the shareholders are different from the Company "Y", it can then be said that the "X"appointed by the shareholders of company "Y" do not hold an office of profit under the company since any company is a separate legal entity, an artificial person capable of holding rights and liabilities. A company can buy and sell property, sue and be sued etc.
Sailesh Kumar Shah
(Expert) 21 December 2011
@Makkad Sir/Prabhakar Sir,
The Department has clarified that services of a legal practitioner are not obtained on the basis of say, lowest tender, but on account of his professional expertise irrespective of the cost involved. Such services cannot be bracketed with a contract for supply of goods or materials. The Department's view is that these services fall outside the scope of section 297 of the Act and the scope of the section does not extend to supply of professional services of the nature given by firms of solicitors and advocates. (Circular No. 13 of 1975, dated 5-6-1975)
prabhakar singh
(Expert) 21 December 2011
@Shailesh Kr. Shah!
Thank you very much.But this should have been your first answer to keep me out of confusion as well as for filling the hungry query.
prabhakar singh
(Expert) 21 December 2011
Now I amend myself and agree with Mr.Shah.
Sailesh Kumar Shah
(Expert) 21 December 2011
@Prabhakar Sir,
On the basis of my already knowledge,I answered on query.
and moreover, CG approval needs only, When company having a paid-up share capital of not less than rupees one crore. Author has not mentioned paid up capital.
When Mr.Makkad and you raise doubt, then i search circular and post the same.
Thanks
with Regards,
