Disclosure of Interest by a Director (S. 184)

Disclosure of interest by a director is governed by section 184 of the Companies Act, 2013, and it covers two different obligations that are easy to run together. The first is a standing, calendar driven disclosure of everything the director is connected to. The second is a transaction specific disclosure that has to be made in the meeting where a particular contract is discussed, and that comes with a bar on taking part in that meeting at all. Getting the second one wrong does not only attract a penalty. It can vacate the office. This is not investment advice.

What does disclosure of interest by a director cover under 184(1)?

Section 184(1) fixes three moments at which a director discloses:

• the first meeting of the Board in which he participates as a director
• thereafter, the first meeting of the Board in every financial year
• whenever there is any change in the disclosures already made, at the first Board meeting held after that change

What has to be disclosed is his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals. The sub-section then adds a phrase that does real work: the disclosure shall include the shareholding. So this is not a bare statement that a connection exists. The manner is left to be prescribed by rules.

There is no materiality threshold in sub-section (1). The two per cent test people quote belongs to sub-section (2), and it is a different test for a different purpose.

The 184(2) transaction disclosure, and the two per cent test

Sub-section (2) applies to a director who is in any way, directly or indirectly, concerned or interested in a contract or arrangement, or a proposed contract or arrangement, entered into or to be entered into:

• (a) with a body corporate in which such director, or such director in association with any other director, holds more than two per cent shareholding of that body corporate, or is a promoter, manager or Chief Executive Officer of that body corporate; or
• (b) with a firm or other entity in which such director is a partner, owner or member

Note the shape of clause (a). The two per cent can be reached by the director alone or by that director in association with any other director, which is why a board with several small holders in the same counterparty can be inside the clause when no single director is. Note also that clause (a) has a second, holding independent route in: being the promoter, manager or CEO of the body corporate catches a director with no shares at all. Clause (b) has no percentage at all.

The obligation is precise about timing and conduct. The director shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed, and shall not participate in such meeting.

The proviso covers the director who was clean when the contract was signed. If he becomes concerned or interested after the contract or arrangement is entered into, he discloses forthwith when he becomes so, or at the first Board meeting held after he becomes so.

What happens to the contract itself

Section 184(3) is short and it is the commercial consequence. A contract or arrangement entered into by the company without disclosure under sub-section (2), or with participation by a director who is concerned or interested in any way, directly or indirectly, is voidable at the option of the company.

Two independent defects, one remedy. The option belongs to the company, not to the director and not to the counterparty.

The two consequences for the director, the second reachable two ways

There are two consequences, a penalty and a vacation of office, and the vacation is reachable by either of two independent clauses of section 167(1). The penalty is the smaller of the two consequences.

The one lakh rupee figure in sub-section (4) was substituted by Act 29 of 2020, section 37, with effect from 21 December 2020.

Section 167 carries two separate clauses pointing back at section 184, and they are not duplicates. Clause (c) is about acting in contravention, which reaches the director who took part in the meeting. Clause (d) is about failing to disclose. A director can fall into either without falling into both. Director disqualification under section 164 covers the other route by which a directorship ends, and the two mechanisms are distinct: section 164 is a disqualification, section 167 is a vacation of an office already held.

What section 184 does not apply to

Sub-section (5) carries two carve outs.

Clause (a) preserves any rule of law that restricts a director from having any concern or interest in a contract with the company. Section 184 does not licence what other law forbids.

Clause (b), as substituted by Act 1 of 2018, section 60, with effect from 9 February 2018, takes the section off contracts between two companies, or between one or more companies and one or more bodies corporate, where any of the directors of the one company or body corporate, or two or more of them together, hold not more than two per cent of the paid up share capital in the other company or body corporate.

The two per cent appears in both sub-section (2)(a) and sub-section (5)(b), pointing in opposite directions: above it the disclosure duty bites, at or below it the section steps back for company to company contracts. Read them together rather than in isolation.

Where an outside reader actually meets this

The section 184 disclosure itself is a Board level record, so it is not something a shareholder reads directly. What reaches the public record is what sits downstream of it: the related party disclosures, the corporate governance report, and the explanatory statement attached to a notice when a transaction needs member approval.

• What is a related party transaction covers the section 188 and LODR regime that most section 184 counterparties also fall inside.
• How to check related party transactions is the practical route to finding them in a company's filings.
• Section 185 loan to directors covers the flat bar on financing a director, where interest is not curable by disclosure at all.
• What are minutes of a general meeting covers the record that carries the names of dissenting directors at a Board meeting.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.