Concept of Interested Director
The directors of the company are its agents and they stand in fiduciary relationship with the company and must act bona fide, therefore Companies Act 2013 laid down extensive provisions such as Section 184 to prevent the misuse of rights and powers by the directors. The object of these provisions is to bring notice to the Board, the extent of the interest of a director, whether directly or indirectly in any contract proposed to be executed by the company to abstrain him from voting, participation in discussions and to ensure fairness in dealing , on any contract or arrangement where he is directly or indirectly interested.
Meaning of Interested Director
A Director can be considered as interested if, his personal interest conflict with the interest of the company. A director can also be considered as interested even he himself is not interested, but his relatives are interested. Moreover, the interest need not to be pecuniary interest always.
Section 184(1) General Disclosure of interest by director
As per section 184(1) of the Companies Act 2013 read with Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014 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 or interest in any company or companies or bodies corporate , firms, or other association of individuals which shall include the shareholding, by giving a notice in writing in Form MBP-1 to the company.
Duty of Director
It shall be the duty of the director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice.
AD HOC Disclosure of interest
Section 184(2) is applicable to every director of a company, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered or to be entered into:
(a) In case of a body corporate –
(i) If such director or such director in association with any other director, holds more than two per cent shareholding of that body corporate; or
(ii) If such director is a promoter, manager, Chief Executive Officer of that body corporate;
(b) In case of a firm or other entity –
(i) If such director is a partner, owner or member, as the case may be.
(NOTE- In case of private companies, an interested director can participate in BM after disclosing his interest)
Timing of Disclosure under 184(2)
If the director is interested from the very beginning, then he shall disclose his interest in BM in which such contract or arrangement is considered and cannot participate in such BM neither in discussion nor in voting in such contract, and will not be counted in quorum for such contract, but can sit in such BM.
If the director becomes interested after the contract or arrangement is entered into, then He shall disclose his interest or concern immediately when he becomes so interested or at the meeting of the Board held after he becomes so concerned or interested.
Observations:
- For disclosure of interest under 184(2) no form is prescribed, therefore director shall disclose interest on plain paper.
- Director shall disclose interest under 184(2) even if he has already given disclosure for such body corporate or partnership firm under 184(1).
- Under 184(2) the word “indirectly” means along with relatives. In other words, if director holds such shareholding in such body corporate along with relatives then he shall comply with legal requirements of 184(2).
- Also as per Section 188 read with Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 if such contract or arrangement is a RPT contract, In other words it satisfied the requirement of Section 188, then disclosure under section 188 shall also be given and such director cannot be present in Board Meeting neither in discussion nor in voting and will not be counted under quorum for such contract, but for other businesses he can sit in Board Meeting.
- In case of Private company such director can participate in discussion and voting, and will be counted in quorum.
- In case the conditions under (2) are not fulfilled (say the shareholding of director is 2% or less) then such director is not liable to disclose his interest and can participate in Board Meeting in such contract and will be counted in quorum.
Few illustrations to get insight of Section 184:
Case-1 Suppose our company (XYZ Ltd) is entering into contract with ABC Ltd and two of our directors B1 holding 1% and B2 holding 2% share capital of ABC Ltd – Now in above case both B1 and B2 Shall disclose their interest under 184(1) and under (2) and both B1 and B2 cannot participate in such BM neither in discussion nor in voting in such contract, and will not be counted in quorum for such contract, but can sit in such Board meeting.
Case-2 Suppose in above case such contract is RPT contract i.e. it satisfies the requirement of section 188 – then in such case disclosure under section 188 shall also be given by such director along with section 184(1) and (2) and above directors cannot be present in Board Meeting neither in discussion nor in voting and will not be counted under quorum for such contract, but for other businesses they can sit in Board Meeting.
Case -3 Our company (XYZ Ltd ) is entering into contract with ABC Ltd and two of our directors B1 and B2 holding 1% each in ABC Ltd, however relative of D1 also hold 10% in ABC Ltd – Now in this case both B1 and B2 Shall disclose their interest in MBP-1, moreover B1 shall disclose their interest under 184(2) and cannot participate in such BM neither in discussion nor in voting in such contract, and will not be counted in quorum for such contract, but can sit in such Board meeting, However B2 need not to disclose his interest and can participate in meeting and will be counted in quorum.
Preservation of Notices of Disclosure and Register:
- Rule 9 of Companies (Meeting of Board and its Powers) Rules 2014 All notices of disclosures shall be kept at the registered office and such notices shall be preserved for a period of eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorized by the Board for the purpose.
- As per Section 189 of Companies Act read with Rule 16 of Companies (Meetings of Board and its Powers) Rules, 2014, The details to be entered into the register of contracts u/s 189 (MBP-4) is divided into three parts viz. Part 1 which pertains to names of bodies corporate, forms or other association of individuals in which any director is having any concern and accordingly has given disclosure u/s 184(1), Part 2 which pertains to details of contracts or arrangements mentioned u/s 184(2) and Part 3 containing details of contracts or arrangements with any related parties u/s 188.
- Proviso to Rule 16 (1) of the Companies (Meetings of Board and its Power) Rules 2014 states that the particulars of the Company or companies or bodies corporate in which a director himself or together with any other director holds less than or equal to 2% of the paid up share capital would not be required to be entered in the register.
- The register shall be kept at the registered office of the company and shall be kept permanently in the custody of the company secretary of the company or such other persons authorized by the board and shall be open for inspection during the business hours and extracts can be taken therefrom.
Observation:
It may be noted from above provision that in case of shareholding of 2% or less by the director, either directly or indirectly, in other body corporate then such director has to comply with provision of 184(1) even if such entry is not made in the register in MBP-4.
Validity of such contracts :
Any contract or arrangement entered into by the Company without disclosure of interest or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.
Consequences of contravention:
In case of contravention under 184(1) then 184(4) provides for imprisonment upto 1 year or Fine maximum 1,00,000 or Both. And in case such imprisonment is 6 months or more, then such director vacate office under section 167(1)(f)
In case of contravention under 184(2) then 184(4) provides for imprisonment upto 1 year or Fine maximum 1,00,000 or Both. Also office of the director is deemed to be vacated under 167(1)(c),(d). Not only this such contract or arrangement is voidable at the option of Board of Directors.
Exemptions:
In case of section 8 companies, prohibition to participate in BM shall apply only if the transaction with reference to 188 exceeds 1,00,000 rupees.
In case of specified IFSC public company, interested director may participate in Board Meeting provided the disclosure of his interest is made by the concerned director either prior or at the meeting.
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