Provisions Of Section 297 Of Companies Act Need A Re-look

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: One common shortcoming all legislations suffer from is that they generally fail to keep up with changing times. Every law is created by the government to serve a specific purpose, keeping in view the prevailing circumstances. Similarly, each section in an enactment has a particular objective to achieve as may be envisaged or deemed necessary by the lawmakers. However, with the passage of time the very circumstances that might have necessitated the creation of law may no longer exist. Unfortunately, the experience in India indicates that it is much easier to make a law than to repeal it, even though it might have out lived its utility or may have even become an obstacle.

The recent examples that one can immediately recall are those of MRTP and FERA. With the change in the government’s economic policy in 1991, the provisions of MRTP became an outright hindrance to economic development of the country. Consequently, all the offending provisions were deleted and today MRTP deals with unfair and restrictive trade practices. Similarly, with the opening up of the economy and accumulation of healthy foreign exchange reserves, a draconian law like FERA had no place and has now been replaced by a more friendly FEMA.

A case in the similar genre is that of section 297 of the Companies Act, 1956. This section was introduced in the original statute itself in 1956. The main stipulation under this section is that in respect of certain contracts relating to sale, purchase or supply of any goods, materials or services it is obligatory for the concerned company to obtain necessary consent of its board of directors. Interestingly, the provisions of this section are neither applicable to all companies nor are they applicable to all the contracts.

Any contract between two public companies is outside the purview of the section and no such consent of the board is necessary. However, if one of the two companies to the transactions is a private company the section is attracted. The section was introduced with a view to ensure that any contract with a director or a company/ firm with which the director was concerned in any of the specified capacities, should have the board’s approval. Sub-section (2) provides certain exceptions to the above rule and are applicable in limited cases.