Is section 184 applicable to Private Companies ?

Introduction

Section 184 of the Companies Act enumerates provisions regarding ‘Disclosure of interest by directors’. The doctrine behind Section 184 is to ensure that the Directors abstain themselves from making a decision in relation to contracts or agreement wherein there exists or may possibly exist, a personal interest which will consequently lead to compromising on the fiduciary position occupied by them in a Company. This section aims to bring to the notice of the directors the conflict of interest of their colleagues on the Board. Section 184 of the Act does not prohibit such engagements or contracts or arrangements, but it mandates the disclosure by the directors of their interests therein to their co-directors.

According to Section 184(1) of the Act – Every director shall

• At the first board meeting wherein, he participates as a director post his appointment;

• at the first board meeting held every financial year; or

• at the first meeting, whenever there is any change in the disclosures already made earlier,

disclose his concern or interest (including shareholding) in any Company or Companies, Bodies Corporate, Firms and other Association of Individuals as specified under Rule 9(1) of Companies (Meetings of Board and its Power) Rules, 2014; according to which, the same has to be provided by the Director via Form MBP-1.

Further, as per Section 184(2) of the Act –

Any director of a company who in any way, whether directly or indirectly, happens to concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into-

i. with a body corporate –

• in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate; or

• is a Promoter, Manager, CEO of that Body corporate.

ii. any a firm or any other entity where, such director is an owner, partner, or member, as the case may be.

is obligated to disclose the nature of his concern or interest at the Board Meeting in which the contract or arrangement is discussed and shall be debarred from participating in that meeting. Provided that in case any director who is not concerned or interested at the time of entering into such contract or arrangement, subsequently becomes concerned or interested after the entering into contract or arrangement, he must disclose his concern or interest as soon as he becomes concerned or interested or at the first meeting of the Board of Directors held after he becomes concerned or interested.

Section 184(2) is further applicable to private companies, with the exception that that the interested director may participate in the meeting subject to prior disclosure of his interest. For companies formed under Section 8, Section 184(2) of the Act is attracted only if the transaction with reference to Section 188 of the Act, on the basis of terms and conditions of the contract or arrangement go beyond Rs 1 lakh.

In case of an unlisted public company that is licensed to operate by the Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA) from the International Financial Services Centre located in an approved multi-services Special Economic Zones (SEZ) set-up under the Special Economic Zones Act, 2005 Section 184(2) of the Act shall apply with the exception that the interested director may participate in such meeting provided, the disclosure of his interest is made by the concerned director either prior or at the meeting.

On a perusal of the above provisions of the Act, disclosure can be segregated into:

• General Disclosure;

• Specific Disclosure.

General Disclosure by Directors u/s 184(1) Act: Disclosure u/s 184(1) can be regarded as a general notice of disclosure required to be served by every director about his interest or concern in any company, firm, body corporate, or other association of individuals, along with shareholding, required to be given on the three abovementioned occasions.

Specific Disclosure by Directors u/s 184(2) Act: Disclosure u/s 184(2) can be regarded as the specific disclosure provided 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 where the director has an interest in the manner/ to the extent specified therein.

Exemption from the applicability of Section 184 

As per Section 184(5) of the Act- Nothing contained in this section shall apply to any contract or arrangement entered into or to be entered into between two companies where the share-holding of any of the directors of the one company or two or more of them together in the other company does not exceed 2% of the paid-up share capital in that company.  (This exemption is only applicable for any contract or arrangement under section 184(2) stated above).

It is mandatory for a director to provide disclosure of any of his shareholdings in companies while giving the general disclosure of interest on each of the three aforementioned occasions. However, no exemption is applicable to the compliance of provisions of section 184(1) of the Act.

In order to ascertain the shareholding, (whether any of the directors hold 2%, either individually or together with other directors, of the paid-up share capital in any other company), the disclosure of information obtained in Form MBP-1 from such directors is imperative.

What is the Impact of non-disclosed interest on a contract or arrangement?

As per Section 184(3) of the Act, any contract or arrangement entered into by the company without disclosure or with participation by a concerned or interested director, whether directly or indirectly, in the contract or arrangement will be voidable at the discretion of the company.

Rules Applicable Under The Companies (Meetings of Board and its Powers) Rules, 2014.

• Rule 9 of The Companies (Meetings of Board and its Powers) Rules, 2014 puts an obligation on every director to disclose his interest or concern or in any company or body corporate (along with their shareholding interest), firms or other association of individuals, by giving a ‘Notice’ by way of Form MBP 1. It is the responsibility of the director to give notice of interest and cause it to be disclosed at the meeting held immediately after the date of the notice.
• These notices have to be preserved at the registered office 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 subject to the authorization by the Board in this behalf.

Additional Disclosure Requirements

Every director or Key Managerial Person is obligated to disclose particulars specified in Section 184(1) relating to his concern or interest in any company or body corporate, firms or individuals including his shareholding and also contracts or arrangements in which he is directly or indirectly interested to the company within 30 days of his appointment or relinquishment of office [Section 189(2) of the Act]

It is pertinent to note that Section 189(2) of the Act requires not just the disclosures at the time of taking up an office, but also after relinquishment of the office. It is necessary in order to ensure the register maintained is updated and correspondingly, the applicability of the provisions under section 188 of the Act in future transactions of the company may be determined. Further, subsequent to the relinquishment of office, if the director transfers the shares held in such company then any contract or arrangement with such company Section 184(2) of the Act will not be attracted.

Manner of disclosure:

1. As per Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014, the director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals, including his shareholding, if any, by giving a notice in writing in Form MBP-1. The director cannot participate at the Board meeting wherein such a contract or arrangement in which the director is interested is discussed.

2. Further, as per Rule 16 of Companies (Meetings of Board and its Powers) Rules, 2014, every Company shall maintain one or more registers in Form MBP-4 furnishing particulars of company or firms or bodies corporate, or other association of individuals in which the director is, directly or indirectly, interested.

Any contract or arrangement entered into by the Company without disclosure 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. Any director who is not so concerned or interested at the time of entering into such contract or arrangement, and becomes concerned or interested after the contract or arrangement is entered into, shall disclose his concern or interest when he becomes concerned or interested at the first meeting of the Board held after he becomes so concerned or interested.

Time for Disclosure of Interest:    

It shall be the responsibility of the director giving notice of interest to make sure that the same is disclosed at the meeting held immediately after the date of the notice, at the first meeting of the Board in which he participates as the director and thereafter at the first meeting of the Board in every financial year. Further, whenever there is any change in the disclosures already made, then the same shall be intimated at the first Board meeting held after such change.