Section 184: Disclosure of Interest by Director

As per section 184 of the Companies Act 2013 read with Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014 every director of the Company has to disclose his interest by giving a notice in writing in Form MBP-1. In this article, we are discussing the manner of such disclosure and related compliance under the Companies Act, 2013 and Companies Rules, 2014.

From a bird’s-eye view of the section, the following points are noteworthy-

Definition of Interested Director:

As per Section 2 (49) of the Companies Act, 2013, “interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company.”


Analysis:

(a) The director is said to be an “interested director” if:

(i) The director, himself or; his,

(ii) Relatives;

(iii) Firm;

(iv) Body corporate;

(v) Other association of individuals;

(b) is a Partner, director or a member,

(c) interested in the contract or arrangement entered into,

(d) by or on behalf of the Company,

(e) in which such an “interested director” is a director.

Applicability of Section 184:


This section applies to any contract or arrangement entered or to be entered into between two companies where any of the directors of the one or both company or more of them together hold(s) more than two per cent. of the paid-up share capital in the other company.

In other words, Section 184 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.

However, this section does not override any of the rules of law made for restricting the director of the Company from having any concern or interest in any contract or arrangement with the Company.

Manner of disclosure:
As per Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014, the director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals, including his shareholding, if any, by giving a notice in writing in Form MBP-1. The director shall not participate at the meeting of the Board in which such a contract or arrangement is discussed in which the director is interested.
Also, every Company shall maintain one or more registers in Form MBP-4 as per Rule 16 of Companies (Meetings of Board and its Powers) Rules, 2014 furnishing particulars of company or companies or bodies corporate, firms, or other association of individuals in which the director is, directly or indirectly, interested.

Note:
Any contract or arrangement entered into by the Company without disclosure 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.
Any director who is not so concerned or interested at the time of entering into such contract or arrangement, and becomes concerned or interested after the contract or arrangement is entered into, shall disclose his concern or interest when he becomes concerned or interested at the first meeting of the Board held after he becomes so concerned or interested.

Time for Disclosure of Interest:
At the first meeting of the Board in which he participates as the director and thereafter at the first meeting of the Board in every financial year.
Whenever there is any change in the disclosures already made, then at the first Board meeting held after such change.

Duty of the 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.

Requirement of the Act:
Clause (k) of Section 179 (3) of the Act states that the Board of Directors of a company shall exercise powers for any other matter which may be prescribed on behalf of the company by means of resolutions passed at meetings of the Board.

Such other matter is prescribed in Clause 5 of Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014 which provides that in addition to the powers of the Board specified in Section 179 (3) of the Act, there are other powers which require resolutions to be passed at the Board meetings to come into effect, that is, to take note of the disclosure of director’s interest and shareholding.

Read along with the Sub Section 3 of Section 117 of the Companies Act, 2013, which applies to resolutions passed in pursuance of Section 179 (3), in compliance of which, the Board Resolution shall be filed in Form MGT-14 within thirty days of the passing of such resolution with such fees as may be prescribed.

Preservation of Notices of Disclosure:

All notices 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.

Penalty:


If a director of the company contravenes the provisions of this section, such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both.

Extract of relevant sections and rules are reproduced below for your reference:

Section 179 (3):

The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:—


(a) to make calls on shareholders in respect of money unpaid on their shares;


(b) to authorise buy-back of securities under section 68;


(c) to issue securities, including debentures, whether in or outside India;


(d) to borrow monies;


(e) to invest the funds of the company;


(f) to grant loans or give guarantee or provide security in respect of loans;


(g) to approve financial statement and the Board’s report;


(h) to diversify the business of the company;


(i) to approve amalgamation, merger or reconstruction;


(j) to take over a company or acquire a controlling or substantial stake in another company;


(k) any other matter which may be prescribed.


Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014:


Powers of Board – In addition to the powers specified under sub-section (3) of section 179 of the Act, the following powers shall also be exercised by the Board of Directors only by means of resolutions passed at meetings of the Board:


(1) to make political contributions;


(2) to appoint or remove key managerial personnel (KMP);

(3) to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;

(4) to appoint internal auditors and secretarial auditor;

(5) to take note of the disclosure of director’s interest and shareholding;

(6) to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company;

(7) to invite or accept or renew public deposits and related matters;

(8) to review or change the terms and conditions of public deposit;

(9) to approve quarterly, half yearly and annual financial statements or financial results as the case may be.


Section 117(3):


(1) A copy of every resolution or any agreement, in respect of matters specified in sub-section (3) together with the explanatory statement under section 102, if any, annexed to the notice calling the meeting in which the resolution is proposed, shall be filed with the Registrar within thirty days of the passing or making thereof in such manner and with such fees as may be prescribed within the time specified under section 403:


Provided that the copy of every resolution which has the effect of altering the articles and the copy of every agreement referred to in sub-section (3) shall be embodied in or annexed to every copy of the articles issued after passing of the resolution or making of the agreement.


(2) If a company fails to file the resolution or the agreement under sub-section (1) before the expiry of the period specified under section 403 with additional fee, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default, including liquidator of the company, if any, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.


The provisions of this section shall apply to—


(a) special resolutions;


(b) resolutions which have been agreed to by all the members of a company, but which, if not so agreed to, would not have been effective for their purpose unless they had been passed as special resolutions;


(c) any resolution of the Board of Directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director;


(d) resolutions or agreements which have been agreed to by any class of members but which, if not so agreed to, would not have been effective for their purpose unless they had been passed by a specified majority or otherwise in some particular manner;


and all resolutions or agreements which effectively bind such class of members though not agreed to by all those members;


(e) resolutions passed by a company according consent to the exercise by its Board of Directors of any of the powers under clause (a) and clause (c) of sub-section (1) of section 180;


(f) resolutions requiring a company to be wound up voluntarily passed in pursuance of section 304;


(g) resolutions passed in pursuance of sub-section (3) of section 179; and


(h) any other resolution or agreement as may be prescribed and placed in the public domain.