Section 184: Disclosure of Interest by Directors

Introduction to Section 184

Section 184 of Companies Act, 2013, part of chapter XII that broadly deals with meetings and powers of boards, primarily lays down the provision with respect requirement of disclosure of interest by directors. Every agent occupies a fiduciary position towards its principle. As such it is his duty that his personal interest and his duty to his principle do not conflict. For the purpose of proper exercise of the functions by the director, it is absolutely essential that he be disinterested, that is, he be free from any conflict of interest with the company [1]. If the director is an interested party it would be natural, he would favour his personal interest over the interest of the company, which would hinder the growth of the company. This analysis will look at this provision in depth, looking at various important judicial pronouncements and help one understand this section with clarity.

Purpose of Section 184

This section lays forth the requirement of disclosure of interest by the director’s thereby advancing India’s disclosure regime. The provision lays down following:

• This section casts a duty on directors to disclose their interest in a contract at the board meeting at which such contract is being discussed, to make sure there is no prejudice against the company.
• At first board meeting, this disclosure is required to be made by director who as a director in that meeting for the first time for that company and afterwards at the first board meeting in every financial year or whenever there is any change in the earlier disclosures, the director has to make disclosures about their concern or interest in companies or other bodies corporates, which have to be included in the shareholding in form no. MBP-1 as notice, so that the company is kept duly informed.
• It is a duty of every director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice [2]. All notices shall be kept at the registered office and such notices need to be preserved for eight years from the end of the financial year to which it relates and must be kept in the custody of the company secretary of the company or any such other person authorized by the board[3].
• Every directory has to disclose his interest or concern at the meeting of the board in which the contract in question will be discussed in which the director is interested, and the director should not according to this section, participate in such a meeting. The proviso here provides an addition, stating that when the director is not interested in the beginning, but in the course, he becomes interested in such a contract he has to disclose to the board after he becomes interested.
• If a director still participates and does not disclose his interest to the company at the meeting, then the contract or arrangement so entered will be voidable at the option of the company.
• If a director fails to disclose his interest in contract at a board meeting or participates in the meeting of the Board where he has disclosed his interest shall be punishable with imprisonment or with fine or with both as per this section.
• Nothing in this section has to be read in prejudice to the operation of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company and this section must not apply to any contract or arrangement entered into between two companies or between one or more companies and one or more bodies corporate or two or more of them together holds not more than two percent of the paid up share capital in the other company or body corporate.
• Section 2(49) of the act, 2013 defines who is an ‘interested director’. The director is said to be an interested director if the director himself, the Director’s Relatives, the Director’s Firm, the Director’s Body corporate, 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.
• The interest must be such which conflicts with the director’s duties towards the company. For example, where the director took part and voted in the meeting of the board, which granted debentures to them, then such resolution was held to be bad by the court [4].

Section 184(2) provides that the directors of a private company must refrain from participating in a board meeting where a matter in which they are interested is to be discussed. This created a practical problem in the case of private companies which did not have any disinterested director on a matter under consideration. Accordingly, private companies have been exempted from the provisions of section 184(2) implying thereby that the interested director of the private companies can take part in the meetings of the Board after disclosing their interest. However, there is an anomaly. Though such an interested director may participate in a Board meeting of a private company, he cannot be counted for the purposes of quorum under section 174(3) which provides that directors who are not interested and present at the meeting shall be the quorum[5].

According to Justice Issac of The Kerala High Court the consequences of default under this section are: (1) liability to be prosecuted under section 184(4), (2) cessation of directorship under section 167(1)(d), (3) liability to be prosecuted under section 283(2) for acting as director after incurring a disqualification and (4) liability to refund remuneration[6].

Situation Before Enactment of Section 188

The old act of 1956 also had similar provisions as section 184 of the act, 2013 in form of section 299, 300 and 305. Section 299 laid down the requirement of disclosure by an interested director. Section 300 laid down the provision for non-participation of interested directors and no vote for them in board meetings. Section 305 laid down the duty of directors with respect to disclosures. The old act, 1956 provided that the director liable to fine of maximum Rs. 50,000 when he knowingly contravenes the provisions of the Section. Whereas, the new act, 2013 increases the punishment for every director with imprisonment for a term which may extend to one year or with fine which shall be minimum Rs. 50,000 and maximum Rs. 1,00,000, or with both. Now by the amendment of 2017 the minimum required is omitted.

The previous act provides that the director shall not participate in the discussions or vote on any contract or arrangement if he is interested in any contract or arrangement in any way, while under the New Act a director shall not participate in the meeting. The exceptions given under Section 300 of the Old Act have also been removed for a private company now. An interested director cannot vote or take part in the discussion relating to any matter in which such director is interested as per the section (exception for private companies is later created by MCA notification).

Application of Section 184

This section basically lays down the duty of directors to disclose his/her conflict of interest, and thus this section becomes applicable in every transaction of the company.  If the directors don’t disclose their interest, then that will contravene the act attracting punishment. Moreover, the growth of the company will suffer too.

Amendment

This section has been amended in 2017, by Companies (Amendment) act, 2017 after its incorporation in the act, 2013. The minimum fine of rupees 50,000 was omitted by this amendment under clause 184(4). Only the maximum limit is prescribed by this section after the amendment. Under sub section (5) of this section, a body corporate is also included in addition to companies, widening the scope of this clause.

Cases at a Glance

• Firestone Tyre and Rubber co. v. Synthetics and Chemicals Ltd. [7]: It is an important case, as it clarified the position of this section. The court held in this case that the interest or concern as under this section, include both direct and indirect interest or concern.
• Needle Industries (India) Ltd. v. Needle Industries Newey Holding Ltd. [8]: This is another important case, making the object of the section clearer. The court in this case held that a relationship of friendliness with directors who are ‘interested’ in contract or arrangement will not make a person an interested director. The interest or concern cannot be merely a sentimental interest or ideological concern [9].
• Pydah Venkatachalapathi v. Guntur Cotton Mills Co. Ltd. [10]: In this case a mortgage of Rs. 1,23,354 was created over the mill property of a company. The wife of a director advanced the loan. Thus, he was considered an interested party to the transaction, but what one needs to note here is that he neither disclosed his interest nor abstained from voting on this transaction. In an action by the company to have the mortgage set aside, it was held that as the fact was already known to the directors voting on this transaction. Therefore, there was no necessity of a formal disclosure. The court agreed with the company’s argument that an interested director not declaring his interest would be liable to account for secret profit made by him in the transaction, but in the present case no secret profits were revealed and further the mortgage was found to be in the interest of the company. There was no mala fide intention and purpose behind the act of the director.
• Aberdenn Railway Ltd. v. Blaikie Bros. [11]: This case established the principle of disclosure of conflict of interest by directors. Here, the court held that Mr. Blaikie had a conflict of interest as director and chairman of the company and managing partner of a firm, which supplied office furniture to the company. Mr. Blaikie here had an interest as a partner in the firm to sell as high as possible but at the same time had a duty as director and chairman of the company to purchase at as low as possible the price of the furniture. Here the court held the fairness or otherwise of the price is irrelevant, the court considered this situation to have the possibility of unfairness and thus the contract between the firm and the company was set aside.
• V Ramaswami Iyer v. Madras Times Printing and Publishing co. [12]: Under the company’s articles two directors constituted a quorum for a meeting of the board. Two were present and they appointed one of themselves as managing director and co-editor of the publication run by the company. The appointments were held to be invalid as when the vote of the interested director was excluded there was no quorum to make the appointment in each case.

Concluding Summary

This puts forth the disclosure regime of India for corporate governance. Further this section makes sure that the personal interests of directors don’t hinder the process and growth of the company. This provision is based on the sound principle that the company is entitled to the unbiased advice of every director upon matters which are brought before the board. The judicial pronouncements have helped one grasp a better understanding and application of this section, as shown in this analysis. This section is of paramount importance for proper working of a company.

References:

[1] Jackson, THE WISDOM OF THE SUPREME COURT (1962) 417-418.

[2] Companies (Meetings of board and its power) Rules, 2014, r. 9 (MCA).

[3] Id

[4] North Eastern Insurance Co. Ltd.,re (1991) 1 Ch 198.

[5] MCA Notification G.S.R 463 (E) dated 5th June 2015.

[6] MO Vergese v. Thomas Stephen and Co. Ltd. (1970) 40 Comp Cas 399.

[7] Firestone Tyre and Rubber co. v. Synthetics and Chemicals Ltd. (1971) 41 Comp Cas 377 (Bom.).

[8] Needle Industuries (India) Ltd. v. Needle Industries Newey Holding Ltd. (1981) 51 Comp Cas 743 (SC).

[9] Id.

[10] Pydah Venkatachalapathi v. Guntur Cotton Mills Co. Ltd. AIR (1929) Mad. 353.

[11] Aberdenn Railway Ltd. v. Blaikie Bros (1854) 1 Macq 461 (HL).

[12] V Ramaswami Iyer v. Madras Times Printing and Publishing co. AIR 1915 Mad 1179.