A director of a company or his relative, a firm in which a director or his relative is a partner or a private company of which the Director is a member, cannot enter into any contract with the company for sale, or purchase or supply of goods and materials or for underwriting subscriptions to shares or debentures except with the consent of the Board. Such a consent can be given only by a resolution at a Board Meeting passed before the contract is entered into or within three months thereof. In case of companies having a paid up capital of Rs. one crore or more in addition to the Board’s consent prior approval of Central Government would be necessary. There are certain exceptions to this rule which are contained in sub-section (2) of Section 297 of the Companies Act, 1956. A contract in contravention of this provision can be avoided by the Board at its option.
Further, every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement entered into or one proposed to be entered into by the company, must disclose his interest to the company at the Board Meeting (Section 299). An interested director is also restrained from taking part in the discussion of or voting of any contract or arrangement in which he is interested nor can his presence count for the purpose of forming the quorum required for considering such a contract for voting thereat. If he does so, his vote would be invalid. There are certain exceptions to these provisions contained in sub-sections (2) and (3) of Section 300. Similarly, for transaction with certain parties in which directors are interested, it is necessary to ensure that the prices are reasonable having regard to the prevailing market prices vide Companies (Auditor’s Report) Order, 2003 as amended by the Amendment Order, 2004.