Interested Director

Companies Act, 2013 defines a director as someone who is appointed to be a director on the board of directors.[i] Directors are supposed to act in a bona fide manner towards the company, as they are the agents of the company and thus have a fiduciary relationship with it. Directors are responsible for taking decisions on behalf of the company. However, if the board of directors of the company are to die at the same time, the company will continue to operate the same, and a new board will be appointed.[ii] A private limited company needs to have a minimum of 2 directors and a maximum of 15 directors and a public company needs to have a minimum of 3 directors and a maximum of 15 directors; the maximum limit of directors can be changed in both companies by passing a special resolution.[iii] There needs to be at least one woman director in this count of directors.[iv] This paper will analyze who an interested director is.

The interested director has been defined as a director who is by himself or because of his relatives or body corporate, firm, or any other association of individuals in which he or his relatives is a partner, member or director, and is interested in an arrangement or contract, or has proposed an arrangement or contract with the company. He is someone who has any personal interest in the business of the company, either due to his interests or because of his relative’s interests, this need not be a pecuniary interest. All directors making the board of directors can be an interested director, depending on their interests. If the director is interested in the matter himself, then it is a direct interest. If the director’s relative is interested in the matter, it is an indirect interest. A relative is someone who is related to another because they are members of a Hindu Undivided Family; they are husband and wife; or in any other prescribed manner.[v]

Section 184 of the Companies Act, 2013 lays down the necessity of disclosure of interest by any director. A director, in the first meeting where they participate as a director, and after that first meeting held for every financial year or whenever there is a change in their interests as a director, will make such disclosures as is necessary and make changes if there are any changes to the disclosure then it is their responsibility to disclose their concern or interest in any companies, body corporates, firms, or any other associations of individuals, including any shareholding they have.[vi] It is the duty of the director to make this disclosure of interest in whatever entity, in the immediate meeting held after such notice of interest was taken by them. If a director is interested in the contract or arrangement being discussed in the meeting, then his presence will not count towards the quorum of the meeting.[vii]

If a director is interested directly or indirectly in a transaction being entered into by the company and a body corporate,[viii] whether through an arrangement entered into or about to be entered into, or proposed contract or contract already entered into, and they hold more than 2% shareholding in this body corporate, or are a promoter Chief Executive Officer or manager of that corporate then they shall disclose the nature of their interest and concern at the meeting immediately after such interested is brought to their notice, and sit outside of the board meeting discussing the matter. If a director is interested, directly or indirectly, in a contract whether proposed or entered into, or arrangement which has been proposed or entered into, between the company and the firm or any other entity,[ix] and is a partner, member, or owner of the entity, then he has to disclose his interest in the immediate meeting after such interest is brought to his notice.

If the director is aware of his interest from the beginning, then he is responsible for informing the board of directors of the same, in the first board meeting discussing the contract or arrangement. The director cannot participate in the discussion of the board meeting or voting, but he can sit in the meeting. If he becomes interested after the contract or arrangement has already been entered into, then the disclosure should be made immediately to the company or at the board meeting held after he becomes of his interest.

There is no form prescribed under section 184(2) of the Companies Act, 2013 for the director to disclose his interest. Therefore, he should make the disclosure on plain paper. The disclosure under section 184(2) needs to be made again, even if the director has previously made the disclosure under section 184(1) of the Companies Act, 2013. If it is a private company, the director can participate in the board meeting and vote on a matter he is interested in. if the director holds less than 2% shareholding in the body corporate the company is entering into an arrangement or contract with, then the director is not responsible for disclosing his interest and can participate in the board meeting.[x]

If the director fulfils the conditions under section 188 of the Companies Act, 2013, of a related party transaction, then he shall make the disclosure under section 184 of an interested director as well as under section 188 of the act. A related party[xi] in reference to a company is a director or his relative; key managerial personnel or his relative; a firm in which a director; manager or his member is a relative; a public company where a relative or he himself holds more than 2% of paid-up share capital; or any person on whose advice director or managers are accustomed to acting; any holding, subsidiary or associate of such company.

If the country enters into a contract, without notice of disclosure of a director who was interested in the matter, and the director participated in the contract or arrangement, then the same is voidable at the option of the company.[xii] The director who has contravened his duty of disclosing his interest in any matter may be punished with a fine of Rs. 50 thousand extending to Rs. 1 lakh or imprisonment for a term which may extend to a year,[xiii] depending on how serious the issue is.

All disclosures made by directors will be kept at the registered office and all notices will be preserved for 8 years from the end of the financial year in which the disclosure was made.[xiv] This will be kept in the custody of the company secretary or any other authorized person. The disclosure will contain the names of entities with respect to which the director has any concern, all relations to the contracts and arrangements, and details of contracts or arrangements if the interest is due to related parties.[xv] The director does not need to disclose their interest if the holding is less than 2% of paid-up share capital.

If it is a section 8 company under the Companies Act, 2013 the provisions do not apply in the same manner. The sections will only apply if the transaction with another company is exceeding 1 lakh rupees.  In an IFSC company the interested director can participate in the meeting if he makes the disclosure before the meeting. These provisions of interested directors are very important to ensure that the directors do not gain profit from taking advantage of their positions.[xvi]

[i] Companies Act, 2013, Section 2(34).

[ii] K/9 Meat Suppliers Guildford Ltd., (1996) 3 All ER 320.

[iii] Companies Act, 2013, Section 149(1).

[iv] Ibid.

[v] Companies Act, 2013, Section 2(77).

[vi] Companies Act, 2013, Section 184(1).

[vii] Narayandas Shreeram Somani v. Sangli Bank Ltd., 1996 AIR 710, 1965 SCR3) 777.

[viii] Companies Act, 2013, Section 184(2)(a).

[ix] Companies Act, 2013, Section 184(2)(b).

[x] Companies Act, 2013, Section 184(5).

[xi] Companies Act, 2013, Section 2(76).

[xii] Companies Act, 2013, Section 184(3).

[xiii] Companies Act, 2013, Section 184(4).

[xiv] Companies (Meeting of Board and its Powers) Rules, 2014, Rule 9.

[xv] Companies Act, 2013, Section 189.

[xvi] Nutton v. Wilson, (1889) L.R. 22 QBD 744.

Aishwarya Says:

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