This article has been written by Taniya Yadav, a law student at Allahabad University. This article seeks to elucidate various aspects of Section 184 of the Companies Act, 2013.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
A director of a company is a person who is appointed to look after the company’s business. He has a fiduciary relationship with the company and acts as its agent, and he is not allowed to enter into contracts with entities in which the company has an interest or is going to have an interest for his own personal benefit. Section 2(34) of the Companies Act, 2013 defines a director as a director appointed to the board of a company. A company’s interests will be highly compromised if a director is allowed to acquire interests in other companies in which the company is also a stakeholder or is going to become one. That’s why Section 184 of the Companies Act 2013, read with Rule 9 of Companies (Meetings of Board and its Powers) Rules 2014, is provided as a safeguard to prevent abuse of power by a person in authority, i.e., a director. This Section provides for a disclosure by the director about his interests in third-party entities to protect and ensure the interests and growth of the company in every way possible.
A detailed explanation of Section 184 of the Companies Act, 2013
Section 184 of the Companies Act, 2013 falls under Chapter 12 of the Act, which deals with meetings of the board and its powers. It provides for the duty of the director to disclose his interest in any company or companies in which the company already has an interest or is planning to acquire an interest. The rationale behind such disclosure is to make sure that the company gets a fair opportunity to decide whether or not to enter into a contract with such a company while safeguarding its own interests and abiding by the law of the land at the same time.
Who is an interested director
An interested director is a director whose personal interests, either directly or through any of his relatives, are in conflict with the interests of the company.
Earlier, Section 2(49) of the Companies Act, 2013 provided for the definition of “interested director” but with the 2018 Amendment of the Act this definition was omitted, which read as “An interested director is a director who either himself, or his relatives, his firm, his corporate body, other association of individuals is a partner, director or a member interested in the contract or arrangement entered, by or on behalf of the Company in which such an “interested director” is a director.”
General disclosure – Section 184(1) of Companies Act, 2013
Disclosure under Section 184(1) read with Rule 9 of the Companies (Meetings of the Board and its Powers) Rules of 2014 has to be made by every director about his concern or interest in any company or companies, bodies corporate, firms, or other association of individuals, including shareholding, on three occasions, in the manner prescribed (i.e., Form MBP 1).
The three instances are –
- At the first meeting of the board of directors in which he participates in the capacity of director of the company.
- At the first board meeting in every financial year.
- At a meeting held after a disclosure or change in interest has been made.
Contract related disclosures – Section 184(2) of Companies Act, 2013
Disclosure under Section 184(2) provides that every director of a company who is directly or indirectly, involved or concerned in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –
- With a body corporate in which such a director or director in association with any other director holds more than 2% shareholding of the body corporate or is a promoter, manager, Chief Executive Officer of that body corporate; or
- With a firm or other entity in which, such director is a partner, owner or member, as the case may be;
It becomes the duty of the director to disclose his interest or concern in the board meeting of directors in which the contract or arrangement is the subject of discussion, entered into, or proposed to be entered into in collaboration with any entity in which such a director has any interest in the manner prescribed. Such a director is further barred from participating in such a board meeting.
A director who was not concerned at the time of entering into such a contract or arrangement by the company but becomes interested or concerned afterwards is required to disclose such interest or concern in the board meeting held after he became interested or concerned in such a contract or arrangement.
Contract voidable at the option of a company – Section 184(3) of Companies Act, 2013
Section 184(3) of the Companies Act, 2013 provides that if the company gets involved in a contract or arrangement in which the director was already a stakeholder and has not revealed the same fact under Section 184(3) of the Companies Act of 2013, then such a contract or arrangement will be voidable at the option of the company.
Exception – Section 184(5) of Companies Act, 2013
Section 184(5)(b) of the Companies Act, 2013 is an exception to Section 184, which provides that nothing in this Section will be applicable to any contract or arrangement entered into by a company with another company in which the director of the former company, either separately or with the director of any other company, holds not more than 2% of the paid share capital in the latter company.
This exception is only available against specific disclosure by directors provided under Section 184(2) of the Companies Act, 2013.
Applicability of disclosure requirements
As per Section 184(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Meetings of the Board and its Powers) Rules, 2014, all directors (both public and private) are covered under the disclosure requirements.
Section 184(2) of the Companies Act, 2013 which provides for specific disclosure, is applicable to every director of a company who either directly or indirectly is concerned or interested in a contract or arrangement or a contract or arrangement in which the company is going to enter.
In the case of a body corporate, such directors include a director who, in collaboration with any other director, holds more than 2% of the shares of a body corporate with which the company is going to enter into a contract or is a promoter, manager, or Chief Executive Officer of that body corporate.
In matters involving a firm or other entity, a director includes a partner, owner, or member of the firm or other entity.
Repercussions in case of non-disclosure
If any director fails to comply with Section 184(1) and Section 184(2) of the Companies Act, 2013 then by virtue of Section 184(4) of the Companies Act, 2013 such a director will be liable for imprisonment, which may extend to one year, or with a fine which shall not be less than Rs 50,000 and can extend to Rs 1,00,000, or both.
In addition to the above penalties, violation of Section 184 by any director will result in that person’s vacation from the office in accordance with Section 167(1)(c) of the Companies Act, 2013.
Moreover, if a director fails to register contracts or arrangements in which the director is interested, which is provided in Section 189 of the Companies Act, 2013 then by virtue of Section 189(6), which provides that every director contravening the provisions of Section 189 shall be liable to a penalty of Rs. 25,000.
Conclusion
Section 184 is a preventive as well as a directive provision introduced by the legislature to prevent the director from misusing his position for his own personal benefits while putting the interests of shareholders at stake, and it directs him to protect the interests of the people with whom he shares a fiduciary relationship.
Overall, it aims at creating a more transparent and efficient system where the interests of the stakeholders and the company is protected by holding the director accountable for his decisions in regard to the company.
Frequently asked questions (FAQs)
Who all are required to disclose under the disclosure provisions?
All the directors of a company are required to disclose under the disclosure provision.
Is it mandatory for a director to make a disclosure irrespective of the percentage of shares in any other company?
Yes, it is mandatory to do so, as no exception is available to general disclosure by the director provided under Section 184(1) of the Companies Act, 2013.
What is the manner of disclosure under Section 184(2)?
The section has not provided for any specific manner for disclosure under Section 184(2). The only thing it has specified is that such disclosure should take place in a board meeting.
What is the validity of a contract entered by the director without making any disclosure?
A director who enters into a contract or arrangement without disclosure under Section 184(2) or collaborates with a director who is concerned or interested in such an arrangement or contract in any manner, directly or indirectly, shall be voidable at the option of the company.
Can a director continue in its position even if he has not met the disclosure requirements?
A director cannot do so because Section 167 of the Companies Act, 2013 mandates a director to vacate his office if he chooses not to disclose his interest in any contract or arrangement in which he is directly or indirectly interested.
References
- https://vinodkothari.com/wp-content/uploads/2017/03/FAQs_on_Section_184.pdf
- https://taxguru.in/company-law/section-184-disclosure-interest-director.html
- https://ibclaw.in/section-184-of-the-companies-act-2013-disclosure-of-interest-by-director/
- https://bnwjournal.com/2021/07/30/directors-duty-to-disclose-interest-under-companies-act/
- https://www.rna-cs.com/wp-content/pdf/DIRECTOR%20Interest.pdf
- https://www.scconline.com/blog/post/2019/05/01/checklist-for-disclosure-of-interest-by-directors/
- https://taxguru.in/company-law/disclosure-interest-director-companies-act-2013.html
- https://thecompany.ninja/section-184-disclosure-of-interest-by-directors/
- /www.davis-stirling.com/HOME/D/Director-Conflicts-of-Interest#:~:text=An%20″interested%20director”%20is%20one,other%20members%20of%20the%20association
- https://vinodkothari.com/wp-content/uploads/2017/03/Interested_Director_how_far_can_a_director_be_interested.pdf
- https://taxguru.in/company-law/interested-director-companies-act-2013.html
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