Director is a person who stands in a fiduciary relationship with a company who suppose to act bonafide, and should not misuse his vast powers under the Companies Act 2013.
A Director can be considered as interested when, his personal interest conflict with the interest of the company either through himself or through his relatives. The interest, usually understood as pecuniary interest, but it is not in this case, it can be non pecuniary interest also.
Section 184 read with Rule 9 of Companies ( Meetings of Board and its Powers)Rules, 2014.
Every director shall at the first meeting of the Board in which he participates 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, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate , firms, or other association of individuals which shall include the shareholding, by giving a notice in writing in Form MBP-1 to the company.
Duty of 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.
AD HOC Disclosure of interest
Section 184(2) 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.
(NOTE- In case of private companies, an interested director can participate in Board meeting after disclosing his interest)
Timing of Disclosure under 184(2)
If the director is interested from the very beginning, then he shall disclose his interest in Board Meeting in which such contract or arrangement is considered and cannot participate in such BOARD MEETING neither in discussion nor in voting in such contract, and will not be counted in quorum for such contract, but can sit in such BOARD MEETING.
If the director becomes interested after the contract or arrangement is entered into, then He shall disclose his interest or concern immediately when he becomes so interested or at the meeting of the Board held after he becomes so concerned or interested.
Preservation of Notices of Disclosure and Register:
Rule 9 of Companies (Meeting of Board and its Powers) Rules 2014 All notices of disclosures 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.
As per Section 189 of Companies Act read with Rule 16 of Companies (Meetings of Board and its Powers) Rules, 2014, The details to be entered into the register of contracts u/s 189 (MBP-4) is divided into three parts viz. Part 1 which pertains to names of bodies corporate, forms or other association of individuals in which any director is having any concern and accordingly has given disclosure u/s 184(1), Part 2 which pertains to details of contracts or arrangements mentioned u/s 184(2) and Part 3 containing details of contracts or arrangements with any related parties u/s 188.
Proviso to Rule 16 (1) of the Companies (Meetings of Board and its Power) Rules 2014 states that the particulars of the Company or companies or bodies corporate in which a director himself or together with any other director holds less than or equal to 2% of the paid up share capital would not be required to be entered in the register.
The register shall be kept at the registered office of the company and shall be kept permanently in the custody of the company secretary of the company or such other persons authorized by the board and shall be open for inspection during the business hours and extracts can be taken therefrom.
Validity of such contracts :
Any contract or arrangement entered into by the Company without disclosure of interest 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.
Consequences of contravention:
In case of contravention under 184(1) then 184(4) provides for imprisonment upto 1 year or Fine maximum 1,00,000 or Both. And in case such imprisonment is 6 months or more, then such director vacate office under section 167(1)(f)
In case of contravention under 184(2) then 184(4) provides for imprisonment upto 1 year or Fine maximum 1,00,000 or Both. Also office of the director is deemed to be vacated under 167(1)(c),(d). Not only this such contract or arrangement is voidable at the option of Board of Directors.
In case of section 8 companies, prohibition to participate in BOARD MEETING shall apply only if the transaction with reference to 188 exceeds 1,00,000 rupees.
In case of specified IFSC public company, interested director may participate in Board Meeting provided the disclosure of his interest is made by the concerned director either prior or at the meeting.