A company under the companies Act is a legal and juristic person, separate from its members.
A company has independent corporate existence, limited liability, perpetual succession, common seal, capable of holding separate property in its own name, has transferable shares and capacity to sue and be sued. As the directors are the persons who manages the company on its behalf and take decisions, they need to be independent as well not to act for making personal gain.
To ensure that , the Act stipulates for disclosure by directors of their interest when the company is entering into any contracts or agreements.
Section 184 of the Companies Act 2013 says that every director of the company shall disclose his interest by giving a written notice. As mentioned above, this is a statutory duty of the director, as he is in a fiduciary relationship with the company.
This disclosure will ensure that the directors will never misuse the position they hold in the company for personal gains.
Disclosure under section 184 of Companies Act applied only to any contract of arrangement entered into or to be entered into body corporate if such a director himself or is in association with any director and holds more than 2% shareholding of the body corporate or is a promoter, manager, chief executive officer o that body corporate or firm of other entity where such director is partner, owner or member.
Where any director who is not so concerned or interested at the time of entering into such contract or arrangement, but he becomes concerned or interested after the contract or arrangement is entered into then he will disclose his concern or interest whenever he becomes concerned or interested or at the first meeting of the Board held after he becomes concerned or interested.
Whenever any director get interested into any contract, then he should disclose their interest or concern by giving a notice in Form MBP 1. The section clearly says that such an interested director shall not participate in the Board Meeting in which such a contract or arrangement is discussed in which the director is interested. Section 184 also says that if any director is interested have not disclosed his interest or concern and participated in the discussion, then such contract or arrangement, shall be voidable at the option of the company.
Section 184 of the Companies act says that
- The director should disclose his interest or concern in the first board meeting after he become so interested or concerned,
- Also in the first board meeting of every financial year.
- If there is any change in the disclosure already made, then at the first Board Meeting held after such change, disclose his concern or interest.
Director should ensure that if he give notice, it should be disclosed at the meeting held immediately after the date of the notice.
The company should ensure that such notices given by the directors be kept for a period of 8 years at the Registered office, and the company secretary or any other person authorised by the board should see that it is kept accordingly.
The provisions of Section 184(2) of the Act shall have a limited application in certain cases. In case of private companies, Section 184(2) of the Act shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest In case of Section 8 companies (company registered under the Companies Act, 2013 for charitable or not-for-profit purposes), Section 184(2) of the Act shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs 1 lakh. In case of an unlisted public company which is licensed to operate by Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA) from the International Financial Services Centre located in an approved multi-services Special Economic Zones (SEZ) set-up under the Special Economic Zones Act, 2005 sub-section (2) of Section 184 of the Act shall apply with the exception that the interested director may participate in such meeting provided, the disclosure of his interest is made by the director concerned either prior or at the meeting. In all the cases, it is desirable that the limited applicability and necessary action taken is noted in the minutes of the meeting of the Board of Directors.
It is also very important to note that the office of director shall become vacant if he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested.