Interested directors - Contracts in which directors are interested - Companies Law - Circular : No. 8/11/75‑CL-V,

Circular : No. 8/11/75 ‑ CL-V, dated 5 ‑ 6 ‑ 1975. Subject:- Interested directors - Contracts in which directors are interested Section 297(1) provides that consent of the board of directors of a company shall be necessary for a contract for the sale, purchase or supply of any goods, materials or services entered into by the company with a director of the company or his relative or a firm in which such a director or relative is a partner. The proviso to this sub‑section requires that in the case of a company having 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. Services of the nature of a legal practitioner are not obtained on the basis of say lowest tender but on account of their professional expertise irrespective of the cost involved. Such services cannot be bracketed with a contract for supply of goods or materials. The Department s view is that these services fall outside the scope of section 297 and the scope of the section does not extend to supply of professional services of the nature given by firm of solicitors and advocates, etc. A question has also been raised whether proviso to section 297(1) applies to a contract of employment of a director as a managing or whole‑time director. In this connection, it is pointed out that it is a basic principle of the company law that directors are agents or trustees and they stand in fiduciary position not only to the company but also to members and creditors. This position is not changed merely by entrusting them with additional responsibilities for managing the affairs or rendering of services of a professional nature though they are remunerated for those services in accordance with the articles of association of the company subject to the provisions of the Companies Act. Supply of service is not the same as rendering of personal service as a director or managing or whole‑time director. Furthermore, there are specific provisions in the Companies Act for regulating such appointments. Therefore, the Departments view is that proviso to section 297(1) does not apply to the contract of employment of a director as managing or whole‑time director.