Introduction:
A director holds a crucial part of the company and must always act in the company’s best interests. He should not take advantage of his position as the company’s “director.” He should not benefit in any way that isn’t open to the public. Certain tasks have been assigned to him in order to guarantee that he does not abuse his position.
Every director of a company who is concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into by the company in any way, whether directly or indirectly, must disclose the nature of his concern or interest at the Board meeting in which the contract or arrangement is discussed.
A director’s declaration of interests is a legal requirement deriving from his unique position. There is considerable uncertainty in such a stance. It’s conceivable that even a director won’t be able to offer a clear answer regarding his legal standing in the first place. Moreover, it is a director’s responsibility to declare personal interests to the company and to ensure that his personal interests as an agent of the company do not conflict with the interests of the company as the principal.[1]
The phrase “interested director” was specified in Section 2(49) of the Companies Act, 2013, and was in effect until September 2, 2018. This definition has been removed as of February 2018 because it was too broad. As a result, the phrase “interested director” is now used in the context of:
- contracts or arrangements as defined in section 184(2) of the Companies Act, i.e. greater than 2% shareholding or CEO of a body corporate or company where the director is a partner, owner, or member.
- loans in which a director has a financial interest, as defined by section 185(2) of the Companies Act, 2018.
- Related party transactions, as defined by section 188 of the Companies Act, 2013.[2]
Disclosure of Interest by the director is dealt with under Section 184 Companies Act, 2013, which corresponds with Section 299 and 305 of Companies Act, 1956.
Analysis
The purpose of Section 184 is to call the directors’ attention to any conflict of interest or obligation that any of their colleagues on the Board may have. The provisions are based on the principle that a director is prohibited from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest that conflicts, or may conflict, with the interests of those whom he is obligated to protect under the fiduciary duty.[3]
It is critical that a director be disinterested in the company’s transactions in order to ensure effective functioning; otherwise, his personal interests are likely to take precedence.[4] The director’s declaration of interest is the first stage in this process. In the case of Coltness Iron Co, Re,[5], it was held that the interest to be disclosed is that which could be regarded as influencing judgement in a business sense; the essence of the matter being that any kind of personal interest that is material in the sense of not being insignificant must be disclosed.
It was decided in the case of Public Prosecutor v. T P Khaitan,[6] that the arrangement covered by sections is one in which the director’s personal interests clash with his obligations to the firm, and does not include any scenario where there is no personal interest. In another instance, it was also decided that the term “interest” may refer to something other than personal interest and was not limited to monetary gain.[7]
In the case of Mukkattukara Catholic Company Ltd v. M V. Thomas,[8] it was decided that the term “interest” refers to personal interest rather than official or other interest under sections 299 and 300 of the former Companies Act 1956. However, it is not restricted to financial interests and may develop as a result of fiduciary responsibilities or a close connection.
Timing of Disclosure
Section 184, subsection 1, deals with the director’s need to disclose any conflicts of interest. Every director is required to disclose his or her: (a) concern or; (b) interest.
The disclosure must be made in accordance with the Central Government’s instructions. Rule 9 of the Companies (Meetings of Board & its Powers) Rules 2014 already stipulates this. The date of the disclosure, on the other hand, is specified in the subsection. As a result, the information must be disclosed:
- At the first Board of Directors meeting at which he participates as a director, and
- Following that, during the first meeting of the Board of Directors conducted each financial year, or
- Whenever there is a change to the previously disclosed information, the first Board meeting after the change is convened.[9]
The first and most important condition is that the director has an interest or concern in one or more of the businesses, which he must declare only at the board meetings as specified. It is important to note that simply disclosing an interest is insufficient; the nature of the concern or interest must also be revealed. This will sufficiently reveal when a director’s personal interests clash with his fiduciary responsibility as a director, as well as safeguard the firm from such conflicts.[10]
Direct/Indirect Interest
Subsection 2 of Section 184 states that any director who is directly or indirectly connected or interested in any of the following: – (a) contract or agreement, or b) a proposal for a contract or agreement. One must disclose the nature of his interest. The phrases “in any manner,” “directly or indirectly,” and “in any way” are used in the subsection in accordance with section 299 of the former Companies Act 1956, and imply broad scope in all areas. The phrases “concerned” and “interested” have comparable meanings.[11]
Furthermore, it is apparent that not only completed contracts or arrangements are protected, but also those that are being considered. It further states that during the meeting of the Board of Directors where the contract or arrangement is considered, the director must declare the nature of his concern or interest. He is not, however, authorised to attend such a conference.
As a result, he is unable to vote, ensuring that he will not be able to influence and sway the board’s decision-making process in his favour. It’s worth mentioning that, under Rule 152 of the Companies Meetings of Board and its Powers Rules 2014, if the transaction is with a connected party, he is not permitted to attend the Board meeting.
Given that the transactions contemplated in this section would almost always involve related parties, it is illogical to restrict a director from participating in the meeting if he is unable to attend. Furthermore, he will be an interested director under section 174(3) of the Companies Act 2013, and his attendance will not be considered for a quorum. But, if he is unable to attend the meeting in accordance with Rule 152 because of his related party transaction, what is the necessity to guarantee that he is not counted for quorum.[12]
It also includes a proviso that any director who is not concerned or interested at the time of entering into such a contract or arrangement, but later becomes concerned or interested after the contract or arrangement is entered into, must disclose his concern or interest to the company as soon as he becomes concerned or interested.[13]
Can Company Declare it Void?
At an event in which the interested director fails to comply with Subsection 2 regarding the disclosure or participates in the contract or arrangement in which he is interested, it is stipulated that a contract or agreement entered into by the company with such non-compliance is voidable at the company’s discretion. In such a case, the corporation has the choice of either avoiding the contract or confirming and validating it.[14]
Penalty
If any director contravenes with subsections 1 and 2 of Section 184, he shall be sentenced to one-year imprisonment or to a fine to the tune of Rs. 50,000 not being more than Rs. 1,00,000.[15] The director bears the responsibility for ensuring compliance, and he is personally accountable for any violations.
There is no liability for the firm, and it has the option to verify the offending contract or arrangement in accordance with subsection 3. If it does not validate the contract or agreement, it will become invalid and cannot be carried out.[16]
It should be emphasised that nothing in Section 184 should be construed as precluding the application of any rule of law prohibiting a director of a corporation from being involved in any transaction or agreement with the corporation.
It is worth noting that a violation might result in the office of the concerned director being vacant.[17]
Exemption
Nothing in this Section applies to any contract or arrangement entered into or to be entered into between two firms, according to Clause b: –
- Any of the directors of a single company or two or more of them combined.
- has less than 2% of the paid-up share capital of the other firm.
This exception serves as a litmus test for whether or not Section 184 applies. However, this is restricted to a contract or agreement between two businesses, and only the directors’ shareholdings are considered, not the shareholdings of their families or other organisations.
This might be a loophole that allows for unintentional exemptions when the shareholdings of the concerned directors are below the threshold limit but their relatives’/ entities’ shareholdings are above the limit.
Conclusion
Section 184 is based on the principle that a director is prohibited from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest that conflicts, or may conflict, with those whose interests he is obligated to protect under fiduciary duty.
Disclosure of interests by directors is the most important step in the process of their carrying out their statutory obligations, as it helps to establish corporate governance by preventing conflicts of interest. It should be followed to the word and spirit by all directors at all times.
References:
[1]Walchandnagar Industries v Ratanchand, (1953)Bom 285.
[2]Sushil Kumar Antal, August 2020, Disclosure of Interest by Director under Companies Act, 2013, TaxGuru.
[3]PalakDheer, May 2020, Section 184: Disclosure of Interest by Directors, Company Ninja.
[4] Jackson, The Wisdom of Supreme Court, (1962) 417 -18.
[5] 1951, SC 476 Scotland.
[6] AIR 1957 Mad 4.
[7]Fateh Chand Kad v. Hindsons Ltd., (1957) Com Case 340.
[8] (1995) 6 SCL 135.
[9]Avtar Singh, Company Law, Seventeenth Edition, EBC.
[10] Turnbull v. West Riding Athletics Club Leeds Ltd., (1894) WN4.
[11] Synthetics & Chemicals Ltd. v. Firestone Tyre & Rubber Co.Ltd., 1970 2 Comp LJ 200.
[12]AmitavGanguly, Duties and Disclosure of Interest by Directors, Companies Act.in
[13]Ibid.
[14] Amritsar Rayon & Silk Mills Ltd v. AmirchandSaideh {1988} 64 Comp cases 762.
[15] Section 184(4) Companies Act, 2013.
[16]Supra Note 9.
[17] Section 167(1)(c) Companies Act, 2013.
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