Contracts in which Directors are Interested in a company

Here are the notes on contracts in which directors are interested in a company, with MCQs and answers:

Notes

  • A contract in which a director is interested is a contract between the company and a person in which the director has a direct or indirect interest.
  • The Companies Act 2013 prohibits a company from entering into a contract in which a director is interested, unless the following conditions are met:
    • The contract is approved by the board of directors of the company, with the director who is interested in the contract abstaining from voting.
    • The contract is entered into in the ordinary course of the company’s business.
    • The contract is on terms that are fair and reasonable to the company.
  • If a company enters into a contract in which a director is interested without meeting the above conditions, the contract can be voidable at the option of the company.

MCQs

  1. A company cannot enter into a contract in which a director is interested.
    • True
    • False

Answer: False. A company can enter into a contract in which a director is interested, but only if the following conditions are met.

  1. The following are the conditions that must be met for a company to enter into a contract in which a director is interested:
    • The contract must be approved by the board of directors of the company, with the director who is interested in the contract abstaining from voting.
    • The contract must be entered into in the ordinary course of the company’s business.
    • The contract must be on terms that are fair and reasonable to the company.
    • All of the above

Answer: All of the above. These are the three conditions that must be met for a company to enter into a contract in which a director is interested under Section 188 of the Companies Act, 2013.

  1. If a company enters into a contract in which a director is interested without meeting the above conditions, the contract can be:
    • Void
    • Voidable
    • Valid

Answer: Voidable. A contract that is entered into by a company in which a director is interested without meeting the above conditions is voidable at the option of the company. This means that the company can choose to cancel the contract or to enforce it.

  1. The penalty for a company that enters into a contract in which a director is interested without meeting the above conditions is:
    • A fine of up to Rs. 5 lakh
    • A fine of up to Rs. 10 lakh
    • A fine of up to Rs. 25 lakh

Answer: A fine of up to Rs. 10 lakh. A company that enters into a contract in which a director is interested without meeting the above conditions can be penalized with a fine of up to Rs. 10 lakh.