The Hindu Business Line : Not all company contracts require government approval

EXAMINE whether the following contracts require previous approval of the Central Government keeping in view the effect of the proviso to Section 297(1) of the Companies Act, 1956:

a) Contracts for purchase of goods from a public company having a paid-up share capital of more than Rs 1 crore by a firm in which a director of the public company is a partner. The purchase is for cash at the prevailing market price.

According to Section 297(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:

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

ii) 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 a company having a paid-up share capital of not less than Rs 1 crore, no such contract shall be entered into except with the previous approval of the Central Government.

However, sub-section (2) carves out certain exceptions to clause (a) of sub-section (1). Clause (a) of sub-section (2) provides that nothing contained in clause (a) of sub-section (1) shall affect 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.

Thus, approval of the Central Government shall not be necessary in this case.

b) Contract attracting Section 297(1) to be entered into by a public company having a paid-up share capital of Rs 1 crore in circumstances of urgent necessity.

According to sub-section (3) of Section 297, no consent of the board shall be required for a contract with a director or any of his specified associates, including his partner in circumstances of urgent necessity.

However, the sub-section requires the consent of the board, to be obtained within three months of the date on which contract was entered into. '

But there is no exemption with respect to approval of the Central Government in case of companies with a paid-up capital of Rs 1 crore and more and the approval of the Central Government is required to be for prior approval.

It is, therefore, doubtful if exemption from board's approval shall also be available since the Department of Company Affairs (DCA) has clarified that wherever approval of the Government as well as approvals at the company level are required, approvals at the company level must be obtained first.

Specimen resolution

DRAFT a resolution proposed to be passed at a general meeting of a public company giving consent to the board of directors for borrowing up to a specified amount in excess of the limits laid down under Section 293(1)(d) of the Companies Act, 1956 and also state the borrowings, which are to be excluded from the said limits.

Resolved that pursuant to the requirements of Section 293 (1)(d), the board of directors be and is hereby authorised to borrow monies but not beyond Rs 50 crore over above the sum total of the paid-up capital and free reserves.

Further resolved that in accordance with Section 293(1)(d), borrowings as aforesaid shall be over and above the temporary loans obtained from the company's banks obtained in the ordinary course of business and repayable on demand or within six months except the loans raised for financial expenditure of a capital nature.

(Suggested answers to the May 2004 CA (Final) paper on corporate laws and secretarial practice.)

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