Disclosure of Interest to be made by the Directors

Section 299 of the 1956 Act provided for a disclosure of interest to be made by the directors. It also provided for a general notice of interest to be directors every year. The duty to disclose interest of directors applied to the entire private companies as well as public companies. It covered all kinds of contracts and arrangements and proposed contracts and arrangements as the term ‘arrangement’ has a wide connotation. But section 299 of the 1956 Act only dealt with contracts and arrangements of the company in which the only directors and not their relatives, partners etc., were interested unless the directors themselves were directly or indirectly concerned or interested in such contracts of the relatives, partners, etc.

When there were one or more common directors who individually or collectively held, in either of the two public companies, more than 2% of the paid up capital of the company only then was section 299 of the 1956 Act a contract or an arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together held not more than two percent of the paid-up share capital in the other company. Later the Companies (Amendment) Act, 2000, enhanced the penalty amount from five thousand rupees under sub-section (4) of section 299 of the 1956 Act. Section 300 of the 1956 Act corresponded to section 91B of the 1913 Act. As per section 300 of the 1956 Act an interested director was required to abstain from voting on any matter in which he is any way interested, either directly or indirectly. The Companies (Amendment) Act, 1960, modified section 300(2) (d) of the 1956 Act. The Companies (Amendment) Act, 2000, later enhanced the penalty under section 300(4) of the 1956 Act to fifty thousand rupees. Section 305 of the 1956 Act cast an obligation on the directors to intimate the company of changes in his directorship or interest in other entities. The Companies (Amendment) Act, 1960, made it obligatory for directors, managing directors, etc., of a company to notify to it particulars relating to any offices held by them on other bodies corporate not only on their appointment to, but also on relinquishment of, such offices. The Companies (Amendment) Act, 2000 made the following two changes in section 305 of the 1956 Act:

• Omitted the words “managing agents, secretaries and treasures” from sub-section (1). The amendment was of a consequential nature;
• Enhanced the penalty under sub-section (1) to five thousand rupees.

Companies Act, 2013: Section 184

Section 184 of the 2013 Act was notified and has been in effect from 01-04-2014. Section 184 of the 2013 Act is akin to sections 299, 300 and 305 of the 1956 Act. Every shall to the first meeting of the Board in which he participates as directors and thereafter at the first meeting of the Board in every financial year disclose his concern, interest in any company or companies or bodies corporate, firms or other association of individuals which shall include the shareholding in such manner as may be prescribed. In case of change in interest or concern of such director, the same shall be disclosed at the first meeting of Board held after such change. The provision of disclosure is applicable to private and public companies.

The person shall be said to be concerned or interested in the contract or arrangement or proposed contract or arrangement entered into or to be entered into if the director or such director in association with any other director, holds more than two percent of the shareholding of that body corporate or is a promoter, manager, chief executing officer of that body corporate. In case of firm or other entity a director shall be considered to be interested or concerned if such director is a partner, owner or member. The words ‘concern’ and ‘interest’ have been used in very wide sense. The concern or interest can be direct or indirect. Though section 184 of the 2013 Act uses the words ‘direct or indirect’, ‘concern or interest’, it does not provide for interest or concern through the relative of such director. Whether the words ‘indirect interest’ covers within its fold a relative of a director or has it been specifically excluded is not clear. Since section 184 of the 2013 Act uses the words “direct or indirect, concern or interest” and any interest whether in any firm entity as member of or owner, it is not clear whether the section intended to include the interest of relative of a director. The term “director in association with any other director” has not been defined in the 2013 Act. Further whether this would include association with a person who is director in the contracting party to the contract is a subject matter of interpretation. As the terms ‘concern and interest’ are used in the context of concern or interest of a director in another contracting party, usage of words ‘association with a person who is a director’, would mean reference to a person who is a director in the company in which concerned or interested director is a director. In case the director is interested, the director shall disclose his interest in such contract or arrangement and shall not participate in a meeting where such contract is under discussion. The provision relating to participation of director in the meeting shall be applicable to private and public companies unlike the 1956 Act where the provision was applicable to public companies alone. Under section 184 of the 2013 Act, a director is required to disclose his interest in contract or arrangement, if such contract or arrangement is placed for discussed and approval at the Board Meeting. Section 179 of the 2013 Act provides for items which are required to be placed before the Board of the company and such contracts in which directors are interested is not part of the mandatory list required to be placed for consideration of the Board. Where such contract or arrangement is not placed for the consideration of the Board and is part of normal business of the company, provisions of sub-section (2) of section 184 may not be applicable. Where the director becomes concerned or interested after contract or arrangement is entered into, the director has disclose the concern or interest forthwith at the first meeting of Board held after he become so concerned or interested. Any contract entered without disclosure of concern or interest by the director shall make the contract voidable at the option of the company. In case of any contravention, the director shall be punishable with imprisonment for a term with penalty which shall not be less than Rs. 50,000/- and may extend to Rs. 1,00,000/-. As per section 167(1)(d) of the 2013 Act failure to disclose interest shall result in vacation of office. Section 167(1)(c) of the 2013 Act provides for vacation of office by a director for entering into contracts or arrangements in contravention of section 184 of the 2013 Act.

Disclosure of interest

A director is required to disclose his interest on three occasions;

• At the first Board meeting that he participates in as a director
• At the first Board meeting of every financial year
• At the first Board meeting held after any changes in the disclosure made by him.

Section 189(2) of the 2013 Act mandates a disclosure of interest occasioned by appointment or relinquishment of office in any other entity by a director of a company. This will enable the company to make note of his interest. While disclosure of interest is required to take into account both direct and indirect interest, intimation of change in indirect interest of a director is not clearly mandated under 2013 Act as section 189(2) of the 2013 Act would only be restricted to direct interest of the director. In several well managed companies the practice is that at each meeting of the Board, the Chairman invites the attention of the directors to the requirements of section 184 of the 2013 Act and requests them to disclose their concern or interest in any contract or other transaction listed in the agenda of the meeting. The procedure may well be adopted by all companies. It is also advisable for every director to make it a point to give written notice to the Board at the Board meeting, mentioning the companies and firms in which he is interested, and do this at regular intervals so that he may guard himself against contravening section 184 of the 2013 Act as the consequences of contravention are serious. Every director will be well advised to review his own private interests whenever the company enters into any contract or arrangement in order to see whether there is anything therein requiring disclosure on his part. When general notice is given to the Board as regards the interest of a director in any contract or arrangement, it is not effective, unless the director concerned either gives it at a meeting of the Board after it is given. The notice then gets entered in the minutes of the Board meeting at which it is given or read.  The notice is also required to be given afresh year after year, so that new directors who may be coming into the Board may be made aware of interest of that particular director. Such a general notice expires at the end of the financial year and a fresh notice must be given by the director concerned. A doubt arises where a director gives a general notice without specifying the financial year to which it relates and such a notice is given in the last month of the current financial year. It is submitted that it will not operate in respect of the succeeding financial year because a general notice given by the director expires with the end of financial year. An interested director is required to give a general notice to the Board of Directors stating the names of the companies and firms in which he is interested. In case a director is neither a director nor a member of the contractee company or a partner of the contractee firm, even then he will be required to give a general notice of interest.

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