2016 (12) TMI 1426 - Tri - Companies Law

Compounding of offences - Held that - In the present Application, the Applicants have not taken approval of the Board either prior to any of the related party transactions or within three months of entering into such contracts as per Section 297 of the Companies Act, 1956. There is also no approval obtained from the Central Government for any of the related party transactions during the Financial Years 2009 - 14 which is mandatorily required as per the law. Further the application does not have any facts on number of transactions carried out in a year within the meaning of related party transaction as per Section 297 of the Companies Act, 1956. Thus in the interest of justice, the prayer as sought by the applicants is premature and cannot be considered at this stage. Therefore, the applicants are directed to approach the Board and the Central Government for approval of each of the related party transaction, which took place through the Financial Years 2009 to 2014 in accordance with section 297 of the Companies Act, 1956 and they are at liberty to approach this Tribunal subsequently in accordance with law. In terms of above, the present Company Application is disposed off accordingly.

Summary

Issues:
Violation of Section 297 of the Companies Act, 1956 through related party transactions from 2009-2014.

Analysis:
The case involved an Application filed under Section 297 read with Section 621A of the Companies Act, 1956 seeking permission to compound the offense committed under the Act and requesting a lenient view of the technical contravention. The Applicant Company did not obtain necessary prior approval for related party transactions, contravening Section 297. The transactions involved purchases, commissions, and interest on unsecured loans, with significant financial implications. The Board's approval is essential for related party transactions exceeding a certain value, but in this case, no approvals were obtained from the Board or the Central Government as required by law.

The Tribunal emphasized the importance of obtaining prior approvals for related party transactions to safeguard stakeholders' interests and ensure transparency in corporate dealings. The judgment referenced a previous case highlighting the need for the Board to be aware of all contracts involving directors' interests to assess fairness and reasonableness. Despite the Applicants' argument that transactions were made at prevailing market prices and did not harm stakeholders, the Tribunal stressed the statutory obligations under Section 297.

Ultimately, the Tribunal found the prayer premature and directed the Applicants to seek approvals from the Board and the Central Government for each related party transaction conducted from 2009 to 2014. The Applicants were instructed to follow the legal process and approach the Tribunal subsequently if needed. The Company Application was disposed of accordingly, emphasizing compliance with Section 297 of the Companies Act, 1956.