WHO IS AN INTERESTED DIRECTOR?

Due to the fact that the directors of a business are its representatives and are obligated to behave in good faith, the Companies Act of 2013 established stringent rules including Section 184 to guard against the abuse of authority by the directors. In order to prevent a director from voting or participating in discussions regarding any contract or arrangement in which he has a direct or indirect interest, these provisions are intended to notify the Board of the extent of the director’s interest in any contract that the company is considering executing.

Meaning

If a director’s personal interests collide with the interests of the firm, that director may be said to be involved. Even if a director does not find himself to be interested, his family may find him to be interested. Additionally, the interest does not always have to be financial.

Section 184(1) General Director Disclosure of Interest

Every director is required to disclose his concern or interest in any company or companies at the first meeting of the Board in which he participates as a director and thereafter at the first Board meeting in each financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, in accordance with Section 184(1) of the Companies Act 2013 read with Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014.

Duty of a Director

The role of the director disclosing their interest is to ensure that it is declared at the meeting that is convened as soon as possible after the date of the notice.

AD HOC Interest Disclosure

Every director of a corporation who is involved or interested in a contract or agreement that has been entered into or that is about to be entered into, whether directly or indirectly, is subject to the provisions of Section 184(2):

  • In the case of a body corporate

(i) If such director or such director in association with any other director holds more than two percent shareholding of that body corporate; or

(ii) If such director is a promoter, director, Chief Executive Officer, of that body corporate.

  • In case of a firm or other entity

(i) If such director is a partner, owner, or member, as the case may be.

(NOTE- A director with an interest may participate in BM after revealing it if the company is a private one).

Timing of disclosure under section 184(2)

If the director has an interest from the beginning, he must disclose it in the BM when the contract or arrangement is being discussed. He is then not permitted to participate in the BM for the discussion or voting of the contract and is not included in the calculation of the quorum for the contract, but he is permitted to sit in the BM.

If the director develops an interest after the agreement or contract is signed, he or she must declare it at the board meeting that is called as soon as possible after the interest or concern is discovered.

Important points

  • Since there is no specific form required for declaration of interests under Section 184(2), the director must report interests on plain paper.
  • When used in 184(2), the word “indirectly” refers to family members as well. In other words, a director must abide by the legal requirements of 184 if he owns shares in a corporation with relatives.
  • Additionally, in accordance with Section 188 read in conjunction with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, if such contract or arrangement is an RPT contract, in other words, it satisfies the requirement of Section 188, then disclosure under Section 188 shall also be given, and such director cannot be present in Board Meetings nor participate in discussion or voting or be counted as a quorum for such contract, but he can sit in board meetings.
  • Even though he has already disclosed his interest for that corporation or partnership company under 184(1), the director is still required to do so under 184(2). 
  • In the case of a private corporation, this director will be included in the quorum and can participate in discussions and voting.
  • If the conditions in (2) are not met (let’s say the director has a shareholding of 2% or less), then he is not required to disclose his interest and can attend board meetings and be included in the quorum.

Validity of such contracts

Any agreement or contract made by the Company without disclosure of interests or with the participation of a director who has a stake in the agreement or contract in any way, whether directly or indirectly, shall be voidable at the Company’s discretion.

Consequences of contravention

A violation of section 184(1) is punishable by up to a year in prison, a fine of up to one million dollars, or both. And under section 167(1), the director must resign if the sentence is six months or more (f).

If 184(2) is violated, then 184(4) provides for either up to a year in prison or a fine up to one million dollars, or both. Additionally, Article 167(1)(c), the director’s office is regarded to be deserted (d). Additionally, the Board of Directors may decide to have such a contract or agreement voided.

Exceptions:

The section 8 company’s inability to participate in BM is only prohibited if the transaction in question exceeds 1,00,000 rupees. In the case of a specific IFSC public business, an interested director may attend board meetings under the condition that he discloses his interest either before or during the meeting.

Case laws-

  • In T.R. Pratt (Bombay) Limited vs. M.T. Limited AIR 1936 Bom 62, Bombay High Court Sir George Rankin observed that the Section is a concise statement of the general rule of equity explained in the Transvaal Lands Company case, 1941-2 Ch 488, and he pointed out that the impugned transactions on which the interested Directors had voted, were voidable by the official liquidator of the Company. The voting by the interested director, of itself, does not invalidate the contract. The effect of Section 91-B is that the vote of the interested Director must be excluded, and if as a result of such exclusion there is no quorum, the resolution sanctioning the contract is irregular and the contract is liable to be avoided by the company against the Directors and any other contracting party having notice of the irregularity.
  • In Rodemadan India Limited vs International Trade Expo Centre, Arbitration Petition 25 of 2005 the Supreme Court of India stated that the management contract was null and void because an interested Director had voted thereupon.

References-

  1. T.R. Pratt (Bombay) Limited vs. M.T. Limited AIR 1936 Bom 62
  2. Rodemadan India Limited vs International Trade Expo Centre, Arbitration Petition 25 of 2005
  3. https://taxguru.in/company-law/interested-director-companies-act-2013.html
  4. Companies act 2013
  5. Dr. Avtar Singh, “Company Law”, 7 th Edition (2016), Eastern Book Company Publications.
  6. N. D. Kapoor, “Elements of Company Law”, 30 th Edition (2016), Sultan Chand & Sons. Publications

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