Disclosure of Interest by Director- Section 184 of Companies Act, 2013

Akshay Aggarwal

Section 184 of the Companies Act, 2013 deals with the disclosure of interest by a director.  It provides that every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year  or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern of interest in any company or companies  or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.

For this purpose Rule 9 of (Meetings of the Board and its Powers) Rules 2014 provides that such disclosure shall be made in form MBP1.

Objective of Section 184:

If a director makes a contract with the company and does not disclose his interest, he will be committing breach of trust. [Yashovardhan Saboo v Groz-Beckert Saboo Ltd. (Company Law Board)]

Applicability for disclosure:

A combined reading of Section 184 with section 149 suggests that for the purpose of Section 184(1) & (2), the word ‘Every Director’ would not include an Independent Director.

Specific disclosure of interest or concern:

According to section 184(2) of the new Act, every director of a company must disclose the nature of his concern or interest if he is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into—

(a) with a body corporate in which such director or such director in association with any other director, holds more than 2%. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be.

It is pertinent to note here that in clause (a) above

• MD, WTD, CFO, COO and CS are not covered.
• The point of time with reference to which the fact whether or not such holding > 2% is the date on which the contract is entered into. [Company News & Notes, dated 1 July, 1963]

Other entity in clause (b) would refer to LLP, Trust, Society, Partnership Firm, etc.

Such disclosure must be made at the meeting of the Board in which the contract or arrangement is discussed and the concerned director shall not participate in such meeting. The words “in any way, whether directly or indirectly, concerned or interested in a contract or arrangement” underscore the wide scope of this provision. Interest of a director may be in any way, whether directly or indirectly, and it is not only interest but also concern and not only in a contract but also an arrangement, that would attract the requirement of disclosure. The disclosure required is a specific disclosure at a board meeting. This provision casts a duty on a director to disclose but also a duty on the company management to bring before the board every contract or arrangement that would attract the provision and it would not be justified to say that a contract or arrangement was not placed before the board (because it did not require to be placed either under the law or the company’s articles of association or its policy) director. The company management will have to place all contracts or arrangements before the board for its approval if any director is in any way, whether directly or indirectly, concerned or interested in such contract or arrangement.

An in-depth reading of the above sections, leads to 2 different sets of conclusions–

(a) That a director is required to make a disclosure in accordance with section 184(1) of the Act read with Rule 9 of the aforesaid Rules.  In case the director is interested in any contract or arrangement by virtue of the requirement laid down in section 184(2), he will not participate in such a meeting and also will not form part of the quorum for the purposes of such a meeting, OR

(b) It signifies that Interested Director shall not have any right to vote.

In my opinion, clause (b) may have been the intention of the lawmakers.

For the purpose of defining concern or interest, it is pertinent to note following points-

(a) Interest means personal interest and not official interest,

(b) Director being simply an employee of other body corporate etc. is not deemed as interested director,

(c) Mere relationship is not enough to establish ‘interest’ of a director, some pecuniary interest has to be proved. [Batts Combe Quarry v Ford]

(d) If any of the relatives has any personal interest in any contract or agreement the concerned directors would be deemed to be “indirectly” interested.

In clause (d) above the word ‘relative’ shall be inferred from section 2(77) read with Rule 4 of Companies (Specification of Definitions Details) Rules, 2014 and would mean-

It should be noted that Daughter does not include Step-Daughter and also the above is an Exhaustive Definition.

1. Members of HUF;

2. Husband and Wife;

3. Father, including step-father;

4. Mother, including step-mother;

5. Son, including step-son;

6. Son’s wife;

7. Daughter;

8. Daughter’s husband;

9. Brother, including step-brother;

10. Sister, including the step-sister

Manner of applicability of Section 184:

(a) Section 184 does not prohibit entering into contract or arrangement but the precondition is the Disclosure to be made as per Rule 9 [Section 184(5)]

(b) Section 184 disclosure requirements not applicable if shareholding does not exceed 2% [Section 184(5)]

Consequences of Non-Disclosure:

The Director shall be liable to –

(a) An imprisonment which may extend to 1 year, OR

(b) A minimum fine of Rs. 50,000/- which may extend to Rs. 1,00,000/- OR

(c) Both imprisonment and Penalty.

It is pertinent here to note that the above is a Compoundable Offence.

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