Section 184 of the Companies Act, 2013 (the Act) relates to “Disclosure of interest by directors”. The object of Section 184 of the Act is to bring to the notice of the directors the conflict of interest and duty of any of their colleagues on the Board. The provisions are founded on the principle that a director is precluded from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interest of those to whom he is bound by fiduciary duty to protect. Section 184 of the Act does not prohibit such engagements or contracts or arrangements, but it requires disclosure by the directors of their interests therein to their co-directors.
This article is a compilation and analysis of the relevant provisions relating to the disclosure of the interest of directors. There is also a reference to the exemptions to certain classes of companies.
- General Disclosure by Directors—Every director of the company shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in a prescribed manner (i.e. Form MBP 1). Such disclosure of his concern or interest shall be made by the director of the company at all the 3 occasions:
(i) at the first meeting of the board of directors in which he participates as a director of the company;
(ii) at the first meeting of the Board in every financial year (generally in the month of April or May, if the financial year is April 1 to March 31, or generally in the month of January or February, if the financial year is January 1 to December 31); and
(iii) whenever there is any change in the disclosures already made, then at the first Board meeting held after such change.
- Specific Disclosure by Directors—This disclosure is a transaction-specific disclosure. The compliance checklist is as follows:
(i) Every director of a company who 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 certain parties (discussed later) shall disclose the nature of his concern or interest at the meeting of the Board of Directors in which the contract or arrangement is discussed.
(ii) Such disclosure of concern or interest by the director in a contract or arrangement by the company shall be in relation to the given parties: (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.
(iii) 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. At this stage, it is desirable that this action is noted in the minutes of the meeting of the Board of Directors.
(iv) Such director shall not participate in such a meeting. At this stage, it is desirable that this action is noted in the minutes of the meeting of the Board of Directors.
(v) Where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board of Directors held after he becomes so concerned or interested. At this stage, it is desirable that the date of transaction and date of disclosure is noted in the minutes of the meeting of the Board of Directors.
(vi) Section 189 of the Act relates to “Register of contracts or arrangements in which directors are interested”. According to the provisions, every company shall keep one or more registers giving separately the particulars of all contracts or arrangements to which sub-section (2) of Section 184 or Section 188 applies, in such manner and containing such particulars as may be prescribed. After the necessary entry is made in the register(s), such register(s) shall be placed before the next meeting of the Board of Directors and signed by all the directors present at the meeting. In case of specific disclosure by directors (i.e. under Section 184(2) of the Act), the company shall comply with the provisions of Section 189 of the Act.
- Place of Maintenance of the Notices—All notices shall be kept at the registered office of the company.
- Record keeping and Safe Custody—Such notices shall be preserved for a period of 8 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 authorised by the Board of Directors for the purpose. If there is any other person authorised by the Board of Directors for the said purpose then such resolution shall be passed by the directors of the company (either in Board meeting or by circular resolution).
- Limited Applicability of Section 184(2) of the Act (in Certain Cases)—The provisions of Section 184(2) of the Act shall have a limited application in certain cases. In case of private companies, Section 184(2) of the Act shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest [MCA Notification No. G.S.R. 464(E) dated 5-6-2015]. In case of Section 8 companies (company registered under the Companies Act, 2013 for charitable or not-for-profit purposes), Section 184(2) of the Act shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs 1 lakh [MCA Notification No. G.S.R. 466(E) dated 5-6-2015]. In case of an unlisted public company which is licensed to operate by Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA) from the International Financial Services Centre located in an approved multi-services Special Economic Zones (SEZ) set-up under the Special Economic Zones Act, 2005 sub-section (2) of Section 184 of the Act shall apply with the exception that the interested director may participate in such meeting provided, the disclosure of his interest is made by the director concerned either prior or at the meeting. [Notification No. G.S.R. 8(E) dated 4-1-2017]. In all the cases, it is desirable that the limited applicability and necessary action taken is noted in the minutes of the meeting of the Board of Directors.
- Contract Entered into by the Company with Disclosure of Interest—Contract or arrangement entered into by the company without disclosure under sub-section (2) of Section 184 of the Act or with participation by a director who is concerned or interested in anyway, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.
According to Section 167 of the Act, the office of the director shall become vacant if he acts in contravention of the provisions of Section 184 of the Act or if the director fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of Section 184 of the Act. Therefore, the compliance of the said provisions is very important from the perspective of director’s fiduciary duties and the consequences if not complied with.
Further, by making the necessary disclosure of concern or interest, the directors not only comply with the provisions of Section 184 of the Act but also with Section 166 of the Act (relating to “duties of directors”). According to Section 166(4) of the Act, a director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.