Resolution for appointment of Sole Selling Agent

Resolution for appointment of Sole Selling Agent
Assuming that the paid-up capital of the company is Rs. 50 lakhs or more, the following is the sample draft resolution appointing sole selling agent of the company's products :
"Resolved that pursuant to the provisions of Sections 294 and 294-AA of the Companies Act, 1956 and subject to the approval of the Central Government, consent of the company be and is hereby given to the appointment of MI s XYZ of Dellii as sole selling agents for selling products of the company in the Union Territory of Delhi and New Delhi
for a period of 5 years effective from 1st July 1990 on a commission of 5% on turnover. .
"Further Resolved that the Board of Directors of the company be and is hereby authorised to effect such changes in the terms and conditions of the aforesaid agreement as may be stipulated by the Central Government while according their approval and agreed to by Mis XYZ and the Board of Directors."

PRACTICAL PROBLEMS

P. 1. Ram and Co. Ltd. having paid-up share capital of Rs. 40 lakhs appoint.ed on 1 st January, 1995 Lakshman and Co. Pvt. Ltd. as sole selling agent for a period of 5 years with effect from 1 st January, 1995 with the approval of the company in general meeting. The Directors of Lakshman and Co. Pvt. Ltd. were holding 40,000 equity shares of Rs. 10 each fully paid-up in Ram & Co Ltd. since 1 st December, 1994. State with reasons whether the appointment is valid. Will your answer be different if Lakshman & Co. Pvt. Ltd. acquired the aforesaid shares only on 1 st December, 1995?
[Based on C.A. (Final) May, 1989J
Ylns. Under Section 294-AA, no company can, except with the prior approval of the Central Government, appoint any individual, firm or body corporate, who or which has a substantial interest in the company as sole selling agent of that company. A person holding paid-up capital exceeding Rs. 5lakhs or 5% of the paid-up capital of the company whichever is less is deemed to have substantial interest in that body corporate [Explanation to Section 294-AAJ.
Thus, Ram & Company should have obtained prior approval of the Central Government for appointing Lakshman & Co as sole selling agents as the latter holds 10% of the paid-up capital of the former company. The appointment is accordingly not valid.
The situation shall be different if shares were acquired by Lakshman & Co. on 1st December 1995. According to a clarification issued by the Department of Company Affairs, if the provisions of Section 294-AA(2) are not attracted to the appointment of sole selling agents at the time of entering of agreement with them, it will not be obligatory on the company to comply with the said provisions for continuance of said appointment for the remaining duration of the current tenure, even if the provisions of Section 294-AA(2) become applicable after the appointment due to sole selling agents acquiring substantial interest.
Hence, Lakshman & Co. Pvt. Ltd. can continue as sole selling agents for a period of 5 years, i.e., upto 31st December, 1999, if it acquired the shares only on 1st December, 1995, i.e., after its appointment on 1st January, 1995.