Companies Act Section 184

Companies Act Section 184: Disclosure of Interest by Directors 

1. Introduction

In order to maintain corporate integrity and prevent conflicts of interest, Section 184 of the Companies Act lays down specific provisions that require directors to disclose their financial interests in other companies, firms, or associations.

Since directors hold positions of trust and are responsible for making decisions that affect the financial health and governance of a company, it is essential that their personal or financial interests do not interfere with their duties towards the company. To ensure transparency and prevent any potential misuse of power, the law mandates directors to disclose their direct and indirect interests in contracts, shareholdings, and managerial positions in other entities.

The objectives of Section 184 are:

To prevent conflicts of interest that may compromise a director’s decision-making.
To ensure transparency in transactions involving directors and related entities.
To protect the interests of shareholders and stakeholders by ensuring fair corporate governance.
To make directors accountable by enforcing penalties for non-compliance.
The disclosure requirements under this section apply to all directors of a company and must be made at specified times and under prescribed circumstances, ensuring full visibility of their interests in other corporate bodies or business entities.

2. Mandatory Disclosure of Interest by Directors

2.1 When Must a Director Disclose His Interest?

As per Section 184(1), every director of a company is required to disclose their financial and managerial interests in other entities at the following instances:

1. At the first meeting of the Board in which they participate as a director: A newly appointed director must disclose any financial or managerial interests in other companies, firms, or associations at the very first Board meeting they attend.
2. At the first meeting of the Board in every financial year: Every director must reiterate their disclosures at the beginning of each financial year.
3. Whenever there is any change in the previously disclosed interests: If there is any modification in a director’s financial holdings, managerial role, or any other material interest in any company, body corporate, or firm, the director must disclose the change at the first Board meeting held after such a change occurs.
2.2 Manner of Disclosure

The disclosure must include:

Any financial interest or shareholding in companies, bodies corporate, firms, or associations of individuals.
Any position held as a promoter, manager, Chief Executive Officer (CEO), or other controlling role in any corporate entity.
Any contractual or business relationship that may create a conflict of interest with the company.
The disclosure must be made in the manner prescribed by applicable regulations, ensuring it is formally recorded in company documentation.

3. Disclosure of Interest in Specific Contracts or Arrangements

3.1 Requirement to Disclose Interest in Contracts or Arrangements

Under Section 184(2), any director who has a direct or indirect interest in a contract, arrangement, or proposed contract or arrangement that the company is entering into must make an explicit disclosure.

This applies in the following situations:

1. Contracts with a body corporate where the director:
Holds more than 2% of the shareholding in that body corporate, either alone or in association with another director.
Is a promoter, manager, or Chief Executive Officer (CEO) of that body corporate.
2. Contracts with a firm or other entity where the director:
Is a partner, owner, or member of that firm or entity.
In such cases, the director must:

Disclose the nature and extent of their interest at the Board meeting where the contract or arrangement is discussed.
Refrain from participating in discussions and voting on the contract or arrangement.
This rule prevents biased decision-making and ensures that directors do not misuse their positions for personal gain.

3.2 Disclosure for Interests Arising After Contract Approval

There may be situations where a director is not initially concerned or interested in a contract or arrangement at the time it is approved. However, if they later acquire an interest in the contract, they must:

Immediately disclose their interest once they become concerned or interested.
Make a formal disclosure at the first Board meeting held after they acquire such interest.
This ensures that any new conflicts of interest are promptly disclosed and addressed by the Board.

4. Legal Consequences of Non-Disclosure

4.1 Contracts Entered Without Proper Disclosure

If a company enters into a contract or arrangement without the required disclosure of interest by a director, or if a director participates in the decision-making process despite having a conflict of interest, then:

The contract or arrangement shall be voidable at the option of the company.
The company can choose to cancel the contract, protecting itself from potential conflicts or unfair dealings.
This ensures that directors cannot secretly benefit from undisclosed transactions and prevents any unfair advantage from being taken at the expense of the company.

4.2 Penalties for Non-Compliance

If a director fails to disclose their interest as required under Section 184(1) or 184(2), they shall be liable to a financial penalty of one lakh rupees (?1,00,000).

This penalty serves as a deterrent against non-compliance and reinforces the importance of transparent corporate governance.

5. Exceptions and Limitations of Section 184

5.1 Non-Prejudice to General Corporate Governance Rules

As per Section 184(5)(a), this provision does not override any existing laws or corporate governance principles that prohibit directors from having an interest in contracts or arrangements with the company.

This means that if any other legal provisions further restrict directors from engaging in conflicts of interest, those provisions will continue to apply.

5.2 Exemption for Small Shareholdings in Other Companies

Under Section 184(5)(b), the disclosure requirements do not apply if:

The contract or arrangement is between two companies or between a company and a body corporate.
The concerned director (or multiple directors together) hold 2% or less of the paid-up share capital of the other company or body corporate.
This exemption ensures that minor shareholding interests do not create unnecessary administrative burdens and disclosures.