Contracts in which Directors are Interested

Except with the consent of the board of directors of a company a director of the company or his relative, or a firm in which such a director or relative is a partner, or any other partner in such firm or a private company of which the director is a member or director shall not enter into any contract with the company:

1) for the sale purchase or supply of any goods, materials or services or
2) for underwriting the subscription of any shares in or debentures of the company

Where the paid up share capital of a company is rupees one crore or more, the previous approval of the Central Government shall be required before any such contract is entered into.

Exceptions: The consent of the Board of Directors of a company is not necessary for the sale purchase or supply of any goods, materials or services where:

1) The purchase of goods and materials from the company or the sale of goods and materials to the company is for cash to prevailing market prices or

2) the sale purchase or supply of any goods, material and services in which either the company or the director’s relative firm, partner company regularly trades or does business.

In both the above cases the value of goods materials or cost of services should not exceed Rs 5,000 in the aggregate in any year during the period of the contract.

3) any transaction is in the ordinary courses of banking or insurance company business.

In circumstances of urgent necessity a director relative, firm, partner or a private company may enter into any contract with the company for the sale, purchase or supply of any goods , materials or services, without obtaining the consent of the board even the value of such goods or cost of such services exceeds Rs 5000 in the aggregate in any year of the period of contract. However, in such a case, the consent of the board shall be obtained at a meeting within three month of the date on which the contract was entered into. Every consent shall be accorded by a resolution passed at a meeting of the Board. If consent is not accorded, anything done in pursuance of the contract shall be voidable at the option of the board.

This reaction is extended to contracts for underwriting the subscriptions of any shares or debentures of the company. Further in the case of a company having paid up share capital of Rs 1 crore or more contracts of the above kind should be entered into except with the previous approval of the Central Government.

The object of this provision is that the Board of Directors should have knowledge of the extent of interest of a director or any person related with the director in any contractual dealings with the company. A person who is a director or a member of a specified firm is to be regarded as a director concerned or interested in any contract or arrangements Professionals, services of solicitors / advocates are not contract for supply of goods or materials. Consent of the Board on each contract is required. Transaction in immovable property is not covered by the above provision (Company Board Clarification). This provision also applies to oral contract. Failure to obtain Central Government approval wherever required shall render the contract illegal and void.

Every director of a company who is in any way whether directly or indirectly concerned or interested in a contract or arrangement or proposed contract or an arrangement entered into or to be entered into by or so behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of director.
Source: Business Law