December 18, 2023 at 10:54 AM
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As per Section 184 of the Companies Act 2013, deals with the Disclosure of Interest by Directors. General Disclosure and Specific Disclosure.
Section 184 of the Companies Act of 2013 governs the disclosure of a director’s conflict of interest. It states that every director must disclose his concern of interest in any company or companies or firms, or other association of persons at the first meeting of the Board in which he engages 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, at the first Board meeting held after such change.
There are two types of disclosure of interest by the director, they are as follows:
The Director must state his concern/interest (including investment) in:
In such a way that may be prescribed: -Rule 9 of the 2014 Companies (Meetings of the Board and its Powers) Rules
A combined reading of Sections 184 and 149 demonstrates that the term “Every Director” does not include an Independent Director for the purposes of Sections 184(1) and (2).
Specific Disclosure of interest or concern:
As per Section 184(2) of the Companies Act,2013 every director of a company must reveal the nature of his concern or interest if he is in any way, whether directly or indirectly, concerned or interested in a contractual obligation or proposed contract or arrangement or entered into:
a) With a body corporate in which such director, alone or in conjunction with any other director, owns more than 2% of that body corporate or is a promoter, manager, or Chief Executive Officer of that body corporate; or
b) With a company or other entity in which the director is a partner, owner, or member, as the case may be;
It is important to remember that MD, WTD, CFO, COO, and CS are not covered in clause (a) above.
The date on which the contract is entered into is the point in time with reference to which the fact whether or not such holding > 2 percent is determined. [Company News & Notes, July 1, 1963]
Other entity in clause (b) would refer to LLP, Trust, Society, Partnership Firm, etc.
This disclosure must be made at the Board meeting where the contract or agreement is addressed, and the affected director must not attend. The terms “in any manner, whether directly or indirectly, concerned or engaged in a contractual obligation” emphazise how broad this rule is. A director’s interest can be expressed in any form, whether directly or indirectly, and it is not only interest, but also worry, and not only in a contract, but also in an arrangement, that would necessitate disclosure.
The necessary disclosure is a specified disclosure during a board meeting. This provision imposes a duty on a director to disclose, but it also imposes a duty on company management to bring every contract or arrangement that would entice the provision before the board, and it would not be justified to claim that a contract or arrangement was not brought before the board (because it was not required to be placed under the law, the company’s articles of association, or its policy). If any director is in any way, whether directly or indirectly, involved or interested in such contract or agreement, the company’s management must bring it to the board for approval.
The Director shall be subject to the following penalties:
1.What is Section 184 of Companies Act, 2013?
(1) Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in writing in Form MBP 1.
2.What is disclosure of interest?
Disclosure of Interest means disclosure by any director or KMP or SMP of his/ her concern or interest in any company or companies or bodies corporate, firms, or other association of individuals including shareholding, if any.
3.What is disclosure of interest by director?
Provided that 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 .
4.What are the three types of disclosure?
Confidential Disclosure Agreements come in three types: Incoming, Outgoing, and Mutual.
5.Is Section 184 applicable on private companies?
Section 184 (2) shall apply to a private company with the exception that the interested director may participate in such meeting after disclosure of his interest as amended vide Notification No.
6.Why is disclosure of interest important?
It’s important to disclose both potentially perceived and actual conflicts of interest to allow others to evaluate the matter and make the decision, rather than keep it to oneself and then create an ethical or legal situation.
7. What is the inherent philosophy of section 184?
The inherent philosophy is to ensure that the Directors never compromise on the fiduciary position that they occupy in relation to a Company and accordingly exclude themselves from the decision making in the matter of such contracts or arrangements wherein there is a personal interest involved.
8. There are two separate disclosure requirements in sec 184 – sec 184 (1) and sec 184 (2). What is the respective scheme of these two?
Disclosure u/s 184 (1) is a general notice of disclosure given by every director about his concern or interest in any company (ies), bodies corporate, firms or other association of individuals, along with shareholding. This is required to be given on 3 occasions mentioned under answer to Query 4:
Disclosure u/s 184 (2) is a specific disclosure given by the director at the meeting of the Board in which a contract or arrangement is discussed and entered into/proposed to be entered into with any entity in which such director has interest in the manner/ to the extent specified therein.
9. Who all are covered by the disclosure requirements?
All directors of a Company are covered under the disclosure requirement given u/s
Disclosure u/s 184 (2) is a specific disclosure which is to be given when the Company enters/ proposes to enter into a contract with an entity.
Following directors are covered under the same in case of contract/ arrangement with a body corporate:
Disclosure u/s 184 (1) is required to be given by every director on 3 occasions:
10. Is it necessary for a director to give disclosure of his shareholdings in companies, irrespective of shareholding he has?
Yes, it is necessary for a director to give disclosure. The exemption stated in section 184 (5) (b) becomes applicable at the time of entering contract or arrangement. However, there is no exemption from the compliance of provisions of section 184 (1). In order to ascertain whether any of the directors hold 2%, either individually or together with other directors, of the paid up share capital in any other company, it is essential to have details of shareholding held by each director in such entities.
Section 184 (2) not only stipulates disclosure requirement by the interested director but also mandates to ensure that the interested Director does not participate in the Board proceedings at such meeting.
11. Section 189 requires not just the disclosures at the time of taking up an office, but also relinquishment of the office. Is this sensible?
This requirement is the similar to the requirement u/s 305 of the Companies Act, 1956.
It is necessary in order to ensure that the register maintained is up-to –date and accordingly it may be determined whether provisions of section 188 become applicable in future while transacting with such company.
Further, subsequent to relinquishment of office if the director also transfers the shares held in such company then any contract or arrangement with such company shall not attract provisions of Section 184 (2).
Thus, disclosure of relinquishment and change in director’s shareholding in any of the companies is essential to determine applicability of provisions of Section 184 and 188.
12. Sec 189 seems to require the entering of the general disclosure u/s 184 (1) also in the register of contracts. Is that true?
Yes, Part B of form MBP-4 requires entering every detail obtained from director in the form of general disclosure of interest u/s 184 (1) in form MBP.1 in the register of contracts.
13. Who all have the right to inspect the register of contracts?
As per section 189 (3) read with Rule 16 (4) of the Companies (Meetings of Board and its Power) Rules, 2014, any member of the company has the right to inspect the register of contracts and the extracts from the register maintained may be furnished to any member.
14. What is the effect of non-compliance of the provisions pertaining to disclosure?
By virtue of provisions of Section 184 , if a director contravenes the provisions of subsection
(i) imprisonment for a term which may extend to 1 year;
(ii) With fine which shall not be less than Rs. 50,000 but may extend to Rs. 1,00,000; Or