DISCLOSURE OF INTEREST BY THE DIRECTORS

DISCLOSURE OF INTEREST BY DIRECTOR: [SECTION 184]

The office of director in a company is that of ‘trust’. A person holds the directorship in a fiduciary capacity. As trustee of the assets of the company, the director is duty bound to pass on the benefits accruing from all such transactions which belong to the company. At any stage if he becomes interested in a transaction the benefits of which rightfully accrue to the company, he must disclose his interest so that the Board and if required, the company, may take a rational decision whether to continue with that transaction or not. The disclosure of interest to be made by a director includes both ‘general disclosure of interest’ and ‘specific disclosure of interest’. Section 184 of the Act, which contains provisions in respect of ‘disclosure of interest’ by the directors, is applicable to all the companies and their directors. These provisions are discussed as under:

(i) General disclosure of interest [Section 184(1)]: Every director 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 the manner prescribed in Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014. The intention of law behind such disclosure is to make known the other directors of the company about the interest of concerned director in other companies, firms, etc.

When to make general disclosure of interest:

Every director shall disclose his interest:

(a) At the first meeting of the Board in which he participates as a director, and

(b) Thereafter, at the first meeting of the Board in every financial year, or

(c) Whenever there is any change in the disclosures already made, then at the first Board meeting held after such change.

Provisions of Rule 9:

As regards manner of disclosure and certain other matters, the provisions of Rule 9 are given as under:

• Every director shall disclose his concern/interest by written notice.

• In Form MBP-1.

• Such Director shall cause it to be disclosed at the meeting held immediately after the date of the notice.

• All notices shall be kept at the registered office of the company.

• Preserved for eight years from the end of the financial year to which they relate.

• They shall be kept in the custody of the Company Secretary, or any other person authorized by the Board.

(ii) Specific disclosure of interest:

According to Section 184 (2), a director of a company shall make a specific disclosure of interest whenever he, in any way, whether directly or indirectly, is 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 two per cent shareholding of that body corporate.

(b) With a body corporate in which such director is a promoter, manager, Chief Executive Officer.

(c) With a firm or other entity in which such director is a partner, owner, or member.

When to make specific disclosure of interest: The disclosure shall be made as under:

. The interested director shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed for the first time; and

. He shall not participate in such meeting. ‘Non-participation’ implies that he shall not discuss the matter relating to such contract and also shall not vote if there happens to be a voting in this connection.

. It may happen that any director is not so concerned or interested at the time of entering into such contract or arrangement. However, if he becomes interested after the contract or arrangement is entered into, he shall disclose his concern or interest forthwith when he becomes so or at the first meeting of the Board held after his becoming concerned or interested.
 

Exception/Modification

1. In case of a private company which has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section 184 (2) shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest. [Notification No. G.S.R. 464(E), dated 5th June, 2015 as amended by Notification No. G.S.R. 583 (E), dated 13th June, 2017.]

2. In respect of a Section 8 company which has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section 184(2) shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees. [Notification No. G.S.R. 466(E), dated 5" June 2015 as amended by Notification No. G.S.R. 584 (E), dated 13th June, 2017.]

(iii)  Contract voidable at the option of company if there is non-disclosure [Section 184(3)]:
A contract or arrangement entered into by the company shall be voidable at its option if the interested director who has a direct or indirect concern or interest in such contract or arrangement, does not disclose his interest as required by Section 184 (2) or if such director participates in the meeting where such contract or arrangement is discussed.

It may be noted that the contract is voidable and not void and the option of rescinding the contract lies with the company and not with the interested director. Thus, if the company decides to honour the contract, the interested director cannot rescind it because of irregularity.

(iv) Punishment for contravention [Section 184(4)]: If a director of the company contravenes the provisions of Section 184 (1) and (2) i.e. does not disclose his interest or furnishes wrong information in this respect, he shall be liable to a penalty of one lakh rupees.

(v) No restriction on directors: Nothing in Section 184 shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company.

(vi) Exemption from disclosure if the holding is up to two per cent: According to Section 184 (5) (b), the provisions of Section 184 regarding disclosure by interested director shall not apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the either company or two or more of them together holds or hold not more than 2% of the paid-up share capital in the other company.