Analysis of Section 184: Disclosure of Interest by Director- Part 1

In today's article let us analyse the Section 184 of Companies Act, 2013. We will analyse and discuss in detail the fundamentals of this section, and also the practical situations related to this section. 

1. What is the basic idea or purpose of section 184? 

The fundamental philosophy is to ensure that the Directors ensures fair transparency by disclosing all the relevant details of their interests in other entities and that entity; and accordingly exclude themselves from the decision making in the matter of such contracts or arrangements wherein there is a personal interest involved.

2. There are two separate disclosure requirements in sec 184 – sec 184(1) and sec 184(2). What is the respective scheme of these two? 

Disclosure u/s 184(1) is a general notice of disclosure given by every director about his concern or interest in any company(ies), bodies corporate, firms or other association of individuals, along with shareholding.This is required to be given on 3 occasions mentioned in details under question 3: 

Disclosure u/s 184(2) is a specific disclosure given 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 in which such director has interest in the manner/ to the extent specified therein.

Examples on sec 184(2): 

Company's Name: Google (India) Pvt. Ltd.

Director: Larry Page, Sergey Brin

CEO: Sundar Pichai

A. In the Board Meeting Google decides to purchase some land from M/s. YMCA Ltd. 

Now, Mr. Larry Page is a shareholder in YMCA holding more than 2% - 184(2) applies.

Now, Mr. Larry Page is a shareholder in YMCA holding less than 2% - 184(2) do not applies. 

Now, Mr. Larry Page is a shareholder in YMCA holding exactly 2% - 184(2) do not applies

Now, Mr. Larry Page is a Director in YMCA  - 184(2) do not applies.

Now, Mr. Larry Page is a Promoter in YMCA  - 184(2) applies.

Now, Mr. Larry Page is a Manager in YMCA  - 184(2) applies.

Now, Mr. Larry Page is a CEO in YMCA  - 184(2) applies.

B. In the Board Meeting Google decides to acquire some services from a firm M/s. MICY associates. 

Now, Mr. Larry Page is a Partner in MICY  - 184(2) applies.

Now, Mr. Larry Page is a Owner in MICY  - 184(2) applies.

Now, Mr. Larry Page is a Member in MICY  - 184(2) applies.

Now, Mr. Larry Page is a Executive or KMP in MICY  - 184(2) do not applies.

C. In the Board Meeting Google decides to acquire some services from any other type of entity named M/s. MICY associates. 

All the cases discussed in point B, applies in C also.

3. How often is the disclosure required under section 184(1)?

Disclosure u/s 184(1) is required to be given by every director on 3 occasions 

 At the first Board Meeting in which he participates as a Director post appointment; 

 At the first Board Meeting held in every financial year; 

 At the first Board Meeting held after any change in the interest or concern in the disclosures already made earlier. 

(This means that the concerned director needs to evaluate the position from the last disclosure given and accordingly if there is any change the same has to be disclosed at the ensuing Board Meeting).

4. Which people are covered for the disclosure requirement under section 184(1)?

All Directors of a Company are covered under the Disclosure requirement u/s 184(1).

5. Which people are covered for the disclosure requirement under section 184(2)?

Disclosure u/s 184 (2) is a specific disclosure which is to be given only when the Company enters/ proposes to enter into a contract with an entity. 

Following directors are covered under the same in case of contract/ arrangement with a body corporate:

 Director who individually or in association with another director holds a shareholding of that body corporate of more than 2%. 

 Director who is a promoter/manager/ CEO of the other body corporate. 

Following directors are covered under the same in case of contract/ arrangement with a firm or other entity: 

 Director who is partner/ owner or member of the firm/ other entity.

6. What is the manner of disclosure? 

Format for Disclosure u/s 184 (1) have been specified in the Rules. As per Rule 9(1) of the Companies (Meetings of Board and its powers) Rules, 2014 the prescribed format for such disclosure is form MBP-1.

For giving disclosure u/s 184(2), No such format has been specified in the act or the rules. So the directors are free to choose their own method for giving the disclosure. The act is just intending the requirement to disclose by any means. The only requirement is that the disclosure should be made at a Board Meeting.

7. Is it necessary for a director to give disclosure of his shareholdings in companies, irrespective of how much shareholding he has?
 

In the case of Disclosure u/s 184 (1): Yes, irrespective of any shareholdings, any quantum. the disclosure will have to be given.

In the case of Disclosure u/s 184 (2): No, in the case of body corporate, there is a minimum criteria of shareholdings of two percent has been specified. for less than two pc. shareholdings disclosure u/s 184(2) would not be trigerred.

8. What is the time period of disclosure u/s 184(2)? 

Disclosure u/s 184 (2) is to be made 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 in which such director has interest in the manner/ to the extent specified therein. 

If in case the Director becomes concerned or interested subsequently after the contract or arrangement is entered into, such disclosure is required to be made forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes concerned or interested. 

9. In the case of subsequent interested director as specified u/s 184(2), by which mode he will intimate to the Board forthwith about his interest or concern? 

The proviso to sub section 2 of section 184 prescribes for forthwith or immediate disclosure by the interested director in the case of subsequent interest or concern aroused. But the act or rules no where specified any particular mode/format/manner for giving the disclosure.

But, for giving immediate disclosure, the mail by the interested director to other directors of the Board can be given. 

in case, the director unable to intimate on immediate basis, then he may give such disclosure at the very first board meeting held after his acquisition of interest or concern.

9. Is the disclosure as specified u/s 184(2) alone is sufficient?

No, the section 184(2) also provides for one more condition other than the disclosure part. It provides that after giving the disclosure of his interest or concern, a director should also not participate in such meeting.

However, in the case of private companies, vide the MCA notification dated 5th June, 2015 , the interested director may participate in the meeting after giving the disclosure of his interest. 

10. What happens when a Company enters into any contract without disclosure u/s 184(2)?

No, the section 184(2) also provides for one more condition other than the disclosure part. It provides that after giving the disclosure of his interest or concern, a director should also not participate in such