Section 297 & 299 of the Companies Act, 1956

Section 297 & 299 of the Companies Act, 1956

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.

TYPE OF COMPANIES

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 the other is a public company, but in such a case, it will have to be complied with by the public company only.

BOARD’S CONSENT AND CENTRAL GOVERNMENT’S APPROVAL FOR CERTAIN CONTRACTS IN WHICH PARTICULAR DIRECTORS ARE INTERESTED [Sec. 297]

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: -

1) director of the Company; or

2) any relative of any director of the Company; or

3) any partnership firm in which any director of the Company is partner; or

4) any partnership firm in which any relative of any director of the Company is partner; or

5) any partner of the partnership firm in which any director of the Company is a partner; or

6) any partner of the partnership firm in which any relative of any director of the Company is a partner; or

7) any private company in which any director of the Company is a member; or

8)any private company in which any director of the Company is a director.

The Contract to be entered can be for:

(a) sale, purchase or supply of any goods or material;

(b) sale, purchase or supply of any;

(c) for underwriting the subscription of any shares in, or debentures of, the company.

Apart from the consent of the Board, previous approval of the Central Government is also 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 Government’s) General Rules & Forms, 1956 alongwith 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 Government’s approval is not required in respect of contracts entered into by the Government Company with any other Government Company.

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 meeting and 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.

EXEMPTED CONTRACTS

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:

(i) 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-à-vis the other buyers should be shown as to the prices.

(ii) 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 / private company 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;

(iii) 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 parties as mentioned earlier.

DUTY CAST BY SECTION 299

Section 299 casts upon directors of companies an onerous 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 therefor.

As per Section 299, every Director of a company must disclose to its Board of Directors at a meeting of the Board the nature of his / her interest: -

if he / she is any way, whether directly or indirectly, concerned or interested in any contract or arrangement or proposed contract or arrangement entered into or proposed to be enter into, by or on behalf of the company.

GENERAL NOTICE OF INTERST [SECTION 299 (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 the director concerned either gives it at a meeting of the Board or takes reasonable steps to secure that it is brought up and read at the next meeting of the Board after it is given. The Notice then gets entered in the minutes of the Board Meeting at which it is given or read. The Notice in Form No. 24AA as prescribed under Companies (Central Government’s) General Rules & Forms, 1956, is also required to be given afresh year after year, so that new directors who may be coming into the Board may be aware of the interest of that particular director. Once a director has give general notice of interest, it is not necessary for him to once again disclose his interest when the matter comes up before the Board.

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

This limit of 2% has to be taken either as an individual director’s holding 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 date on 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.

SECTION 299 VIS-À-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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Credit Mohan Kulkarni

Railway accident in Thane on 23rd October 2009

POWER OF ATTORNEY: HOW TO AVOID MISUSE and REVOKE IT

By observing certain safeguards, one can safely grant a power of attorney without having to worry about it being used.

There are many cases where a power of attorney (POA) is granted with a specific intent but with passage of time the attorney holder assumes much more control due to liberal or sometimes even deficient drafting of the POA.
To ensure you power of attorney is not misused or it does not become a source of concern or a loss for you, the following factors should be remembered:

1. Ensure you know the attorney holder personally and do not issue a POA to person you are not confident about. Identification details of the attorney holder such as a passport number, PAN or election card should be available with you.
2. A POA should never be irrevocable unless you are selling a property. Always ensure the POA is revocable so that you can cancel it any time.
3. The POA should always be registered. This way it is easy to cancel or revoke it at the appropriate time.
4. You should not give open ended and sweeping powers in the POA. Avoid the use of words such as “all rights,” “and right”, “any action that the attorney holder deems fit”. You should identify to the purpose for which the POA is needed and draft a POA conforming to the duties and rights needed.
5. Always ensure that the photograph of the executives and the attorney is fixed on the POA.
6. In case the powers to the attorney are needed only for a limited period then you should prepare the POA for a fixed period only.
7. A general POA should be avoided unless absolutely necessary. You should grant a specific POA at all times.

How to revoke a power of attorney
Revocation of a power of attorney is a necessary when the purpose of which the POA is granted is no longer required or when the executants finds that the attorney is either misusing the powers under the POA or is acting against the interest of the executant.
No reasons need to be assigned in case a POA needs to be revoked. A POA is operational during the pleasure and consent of the executants. It can be revoked at any point.
The procedure usually followed when revoking a POA is as follows:

1. A notice of stop of use and cancelling of powers under the POA so granted to the attorney has to be issued. This needs to be done by recorded delivery so that a valid date of cessation of powers is recorded.
2. Further the POA has to be cancelled at the registrar’s office where it was originally registered at the time of issue.
3. In case the POA had been in widespread use then it is always advisable to publish a public notice in a newspaper which has reasonable circulation in the city where the POA was issued.
4. A POA can also be cancelled by destruction of the original document.

A POA is difficult to cancel in the following cases:

1. When the attorney holder and the original POA document is not traceable. Hence is advisable that the attorney is known to you.
2. When the POA is not registered. This creates a lot of hassle in making the POA non-operative.
3. A POA which is irrevocable cannot be revoked unless there are suitable and justified grounds that the irrevocable POA was issued fraudulently.

The key to having a control over the POA you issue and revoking it at your convenience is, to follow all procedure and precautions at the time of issue of POA.

[Source: Consumer Voice, July 2009]

For any query:- deepakmiglani@hotmail.com

PROCEDURE FOR CONVERSION OF PARTNERSHIP FIRM INTO A COMPANY

Conversion of Firm under Part IX of the Companies Act, 1956 :- The firm may be converted into a company by following the provisions of Part IX of the Companies Act, 1956. Sections 565 to 581 deal with conversion of firms into a company under theCompanies Act, 1956.

For the purpose of Part IX so far as it relates to the registration of companies limited by shares, a joint stock company means a company having a permanent paid up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its members the holders of thoseshares or that stock, and no other persons. Such a company, when registered withlimited liability under the Companies Act, 1956 shall be deemed to be a companylimited by shares.

A company cannot be registered under part IX unless the assent of majority of itsmembers as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose is obtained.

Since the liability of the members of the firm is unlimited, when a firm desires to register itself as a company under Part IX as a limited company, the majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned forthe purpose.

Steps for incorporation of company under part IX

STEP 1

Hold a meeting of the partners to transact the following business

• Assent of majority of its members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose of registeringthe firm under Part IX of the Companies Act, 1956. Since the liability of the membersof the firm is unlimited, when a firm desires to register itself as a company under Part IX as a limited company, the majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose.
• To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the firm as a Company.
• To execute a supplementary Partnership Deed to align it with the requirements as under:
• There must be at least 7 partners in the partnership firm;
• The firm may be registered with the Registrar of Firms;
• There must be a fixed capital divided into units ;
• There must be provision of converting a firm into company.
• There must be an agreement by the partners to convert the partnership to a company. This can be done by a contract in writing to this effect to which the partner’s resolution for conversion can be attached as annexure.
• Execute a settlement deed.

Step 2

APPLICATION FOR DIRECTOR’S IDENTIFICATION NUMBER AND DIGITAL SIGNATURERS CERTIFICATE

• Ministry of Company Affairs has made Director’s Identification Number mandatory for each Director. Following details are required for DIN: Name(s) , Father’s Name(s), Permanent Residential Address(s), Present Residential Address(s), Occupation, Name of the Companies in which the promoter is Director/Promoter, Date of Birth , E-mail IDs (Minimum 2 for private company).
• Ministry of Company affairs have initiated the process of E-filing of the Documents, wherein the either of the Director needs to have Digital Signature Certificate. For the matter of Convenience in submission of documents with Registrar of Companies and expediting the processing, it is advisable to obtain the Digital Signature Certificate from prescribed authorities.
• Following documents are required for DIN/Digital Signature: Copy of Passport/ Voter ID/Ration Card/Driving License/ PAN Card/Telephone Bill/Electricity Bill/Bank Statement.
• The application is required to be signed by the promoter(s).
• Normally the process takes 5 to 7 working days after submitting the documents with DIN Cell.

Note: In case of a Private Limited Company at least two Directors should be appointed.

Step 3

NAME APPROVAL

• An application in Form No. 1A needs to be filed with the Registrar of Companies(ROC) with following annexure(s) stating the fact that the partnership firm pro­posed to be converted under part IX of the Companies Act. (Annexure 1).
• Certified true copy of Partnership Deed .
• Certified true copy of the latest balance sheet of the partnership.
• Certified true copy of the latest income tax assessment order/return.
• Consent of all the partners stating that they have agreed to register the partnership firm as a Company .
• Certified True Copy of the resolution passed by the firm in this regard .
• The application is required to be digitally signed by one of the promoters.
• The details to be state in the said application are as follows :

1. Maximum Six alternative names for the proposed company. (in order of preference)

2. Names , Father’s/ Husband’s Name, Permanent Residential Addresses, Present Residential Address, Occupation, Name of the Companies in which the Promoter is Director/Promoter , Date of Birth , DIN of the Promoters.

3. Authorised Capital of the proposed Company.

4. Main objects of the proposed company.

5. State of Registered Office of Company

6. Copy of Trade Mark Application/Certificate If name of proposed company based on a Trade Mark,

Note:

1. 1. As per Indian Companies Act, 1956, a Private Company should have a minimum Paid up Capital of Rupees One Lac.
   2. As per Indian Companies Act, 1956 there should be at least two promoters in a Private Limited Company.
   3. The Registrar of Companies will ordinarily inform within a period of seven days from the date of submission of the application whether any of the names applied for is available.
   4. If the name is not made available, the Registrar of Companies may reject the application and if it happens, new names to be provided for approval.

Step 4

Registration of Company

• On obtaining the approval of name , file the following documents with the registrar of Companies within 60 days from the date of name approval
  • Two sets of Memorandum and Articles of Association of the Company. One set shall be duly stamped. A memorandum of association and articles of association may be made for the company which will be similar in all respects to a normal Memorandum and Articles of Association except that it incorporate therein terms of settlement deed.
  • After drafting The Memorandum and Articles of Association is required to be stamped as per the Indian Stamp Act. (in Delhi its Rs. 200/- on MOA & 0.15% of Authorized Capital on AOA).
  • Thereafter these documents are required to be executed by the promoters in their own hand in the presence of professionals after the date of Stamping of Memorandum & Article of Association in duplicate stating their full name, father’s name, residential address, occupation, number of shares subscribed for & Signature etc.
  • However, if any director is foreigner and not present in India after the date of Stamping of the Memorandum & Article of Association, in that case, his signature should be attested in Indian Embassy located in his home country.
  • Form No. 1 – This is a declaration to be executed on a non-judicial stamp paper by one of the directors of the proposed company or other specified persons such as Chartered Accountants, Company Secretaries, Advocates, etc. stating that all the requirements of the incorporation have been complied with. (Annexure 2)
  • Form No. 18 – This is a form to be filed by one of the directors of the company informing the ROC the registered office of the proposed company. (Annexure 3).
  • Form No.: 32 – This is a form stating the fact of appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors. (Annexure 4).
  • Power of Attorney signed by all the subscribers of MOA authorizing one of the subscribers or any other person to act on their behalf for the purpose of incorporation and accepting the certificate of incorporation.
  • Form No. 37 along with Form No. 39 (Annexure 5 & 6).
  • Declaration by two partners verifying the particulars set forth in the above mentioned documents.
  • Consent letters from Directors
  • Filing fees as may be applicable
  • Other information to be submitted:

i) A list showing the names, addresses and occupations of all persons who on a day named in the list, not being more than 6 clear days before the date of registration were members of the company, with the addition of the shares or stock held by them respectively, distinguishing, in cases where the shares are numbered, each share by its number.

ii) If the company is intended to be registered as a limited company, a statement specifying the following particulars :-

a) the nominal share capital of the company and the number of shares into which it is divided or the amount of stock of which it consists

b) the number of shares taken and the amount paid of each share

c) the name of the company, with the addition of the word “Limited” or “Private Limited” as the case may be, as the last word / words, in case the company is being registered with limited liability.

Step 5

On completion of the formalities, the registrar shall register the Company under Part IX of the Act and issue a certificate of incorporation.

Steps for Incorporation of a public limited company

First Five stages are almost same for incorporation of a public limited company except there should be at least seven subscribers, three directors and the minimum paid up capital are Rs. 5 lacs.

After completion of first three stages a private limited company may commence its business but a public limited company is required to obtain certificate for commencement of business from Registrar of Companies. For obtaining the Certificate for commencement of its business, the Company is required to submit following documents with Registrar of Companies:

• Form 20 to be executed on a non-judicial stamp paper (Annexure 5)
• Statement in lieu of Prospectus
• Affidavit from each directors stating that the Company has not commenced its Business
• Details of Preliminary expenses
• Board Resolution for approval of preliminary expenses.
• Board resolution for appointment of first Auditors
• Consent letter from the Auditors for acting as there Statutory Auditors.

Registrar of Companies thereafter shall process the documents and if all the documents are in order then it will issue a Certificate for commencement of Business.

Steps after incorporation of private company

Once the new company is formed, the takeover agreement would be entered between the Partnership Firm and the newly incorporated company.

Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company and the partner of the firm for the acquisition of business of the firm.

In such a situation, the entire business of the firm along with all its assets and liabilities is transferred to the company.

The company may issue shares or other securities to the Partner of the firm.

Steps after incorporation of public company

Once the new company is formed, the takeover agreement would be entered between the Partnership firm and the newly incorporated company.

Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company.

In the above Board Meeting also fix up the date, time , place and agenda for calling a General Meeting to pass a Special Resolution under section 81(1A) of the Companies Act, 1956 giving powers to the Board of Directors to issue and allot equity shares to Partners of the firm.

Effect of Registration under part IX

• Vesting of Property : All property, movable as well as immovable belonging to or vested in the firm at the time of registration shall, on such registration pass to and vest in the company as incorporated under Part IX.
• The Registration of a company under Part IX shall not in any manner affect its rights or liabilities in respect of any debt or obligation incurred or any contract entered into, by, to, with or on behalf of the firm before registration.
• All suits and other legal proceedings taken by or against the company or any public officer or member thereof which where pending at the time of registration may be continued in the same manner as if registration had not taken place. However, no execution can be done against the property or person of any individual member of the company on any decree or order obtained in such suit or proceeding. If the property of the company is inadequate to satisfy the decree or order, an order for winding up the company may be obtained.
• All provisions of any Indian law or other instrument constituting or regulating the company shall apply to the registered company in the same manner as if the company had been formed under the Companies Act, 1956 and those conditions were required to be contained and were contained in its Memorandum and Articles of Association.
• As per section 383A of the Companies Act, if the paid up capital of the Company is Rs. 500 lacs or more than the company is required to appoint a full time Company Secretary.
• As per section 269 of the Companies Act, 1956 if the paid up capital of the company is Rs. 500 Lacs or more than the Company is required to appoint either Managing Director or Whole Time Director or Manager.
• Debts and liabilities are not automatically transferred to the new company and therefore a novation agreement will have to be entered into by the company with its debtors and creditors.
• Obtain an indemnity from the company to the partnership firm for all acts, deeds and things done after the registration under Part IX and vice versa.
• Comply with all the relevant provisions of the Companies Act, 1956 i.e. call requisite meetings, register charges, comply with section 58A if necessary, etc.
• Stamp duty. Conversion of firm to company is exempted from payment of stamp duty as there is no change in the ownership and no transfer is involved.