When Must a Director Declare an Interest? Annual Disclosures, Contract Bars and Voidable Deals Under Section 184

Every related-party deal starts one step earlier, with the director's own disclosure. Section 184 of the Companies Act, 2013 imposes two separate duties on every director. The first is a standing disclosure of the director's interests, made at the first board meeting he attends, again at the first board meeting of every financial year, and again after any change. The second is a transactional duty: when the board discusses a contract in which the director is interested, he must disclose the nature of that interest at that meeting and must not take part in it.

Getting this wrong has three consequences. The contract is voidable at the company's option, the director is liable to a penalty of one lakh rupees, and his office can become vacant under section 167. A well-run board therefore treats section 184 as the gate that every conflict has to pass through before the board votes.

Legal basis: Section 184, Companies Act, 2013; Rule 9, Companies (Meetings of Board and its Powers) Rules, 2014; section 167(1)(c)-(d) and section 189, Companies Act, 2013.

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The standing duty: three disclosure moments

Section 184(1) says that every director shall, "at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or 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" (s.184(1), Companies Act 2013).

That gives three moments:

Entry. The first board meeting in which the person participates as a director.
Annual refresh. The first board meeting in every financial year, even where nothing has changed.
Change. The first board meeting held after any change in what was disclosed earlier.

The scope is portfolio-wide. The director discloses his concern or interest in companies, bodies corporate, firms and other associations of individuals, and the disclosure must include shareholding. It is not limited to the contracts on the day's agenda.

The prescribed manner: Form MBP-1

The manner is prescribed by rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014. A director discloses his concern or interest, including shareholding interest, "by giving a notice in writing in Form MBP 1" (rule 9(1), Meetings of Board Rules 2014). The rule then adds three practical points:

The director must cause the notice to be disclosed at the board meeting held immediately after the date of the notice (rule 9(2)).
All notices are kept at the registered office and preserved for eight years from the end of the financial year to which they relate (rule 9(3)).
The notices stay in the custody of the company secretary or any other person the Board authorises for the purpose (rule 9(3)).

In a company with no company secretary, someone should be named in a board resolution. Otherwise nobody is responsible for the file.

The 30-day disclosure to the company

Section 189(2) adds a separate timed duty. Every director or key managerial personnel must, "within a period of thirty days of his appointment, or relinquishment of his office, as the case may be", disclose to the company the particulars of his concern or interest in other associations that the register has to hold (s.189(2), Companies Act 2013). A new director's first MBP-1 is therefore not a formality to be picked up at leisure. The thirty days run from appointment.

The transactional duty: declare at the meeting, then do not participate

Section 184(2) catches a director who is "in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into" in either of two situations:

(a) the contract is "with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate"; or
(b) the contract is "with a firm or other entity in which, such director is a partner, owner or member, as the case may be".

In either case the director "shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting" (s.184(2), Companies Act 2013).

Three points follow from the wording.

The test is the counterparty, not the contract's size. For a body corporate, a holding of more than two per cent, alone or together with another director, is enough. So is holding the office of promoter, manager or Chief Executive Officer. For a firm or other entity, the test is being a partner, owner or member. The statute gives no percentage threshold for partners or members.

Disclosure comes at the meeting where the contract is discussed. The disclosure is not left to the annual MBP-1. The standing MBP-1 and the meeting-level declaration are separate duties, and having filed one does not discharge the other.

"Shall not participate in such meeting" is broader than "shall not vote". The statutory words bar participation in the meeting. A careful board therefore records the director leaving for that item and does not count him in the quorum for it. That quorum point is a practice recommendation and is not spelled out in the section.

Interest that arises after signing

The proviso to section 184(2) deals with a director who was not interested when the contract was entered into but later becomes so. He must disclose his concern or interest "forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested" (proviso to s.184(2), Companies Act 2013). The wording allows either of the two timings, but the safer course is not to wait for the next scheduled meeting where a live contract is affected.

The price of silence

The contract becomes voidable

Section 184(3) provides that "a contract or arrangement entered into by the company without disclosure under sub-section (2) or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company" (s.184(3), Companies Act 2013).

There are two independent triggers: no disclosure, or participation by an interested director. Either one makes the contract voidable. The option belongs to the company. The company may therefore affirm a contract that suits it or unwind one that does not.

A penalty of one lakh rupees

Section 184(4) says that a director who contravenes sub-section (1) or sub-section (2) "shall be liable to a penalty of one lakh rupees" (s.184(4), Companies Act 2013). The penalty is on the director personally. It applies to a failure of the standing disclosure under sub-section (1) as much as to a failure at the meeting under sub-section (2).

The office may be vacated

Under section 167(1), the office of a director becomes vacant if he "acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested" (s.167(1)(c), Companies Act 2013). It also becomes vacant if he "fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184" (s.167(1)(d), Companies Act 2013). The director can lose the seat, which is a heavier consequence than the money.

What section 184 does not do

Section 184(5) carves out two things.

Nothing in the section is to "be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company" (s.184(5)(a), Companies Act 2013). Compliance with section 184 does not cure a restriction that exists elsewhere in law.
The section does not apply to a contract or arrangement between two companies, or between one or more companies and one or more bodies corporate, where any of the directors of the one company or body corporate, or two or more of them together, hold "not more than two per cent. of the paid-up share capital in the other company or the body corporate" (s.184(5)(b), Companies Act 2013).

The second exclusion works on a shareholding of two per cent or less in the other company. It is not a general threshold for every type of interest. A director who is a partner in a firm counterparty has no percentage-based exclusion available under section 184(5)(b), which speaks of companies and bodies corporate.

How section 184 connects to the registers

Section 189(1) requires every company to keep registers "giving separately the particulars of all contracts or arrangements to which sub-section (2) of section 184 or section 188 applies". After the particulars are entered, the register must be placed before the next meeting of the Board and signed by all the directors present (s.189(1), Companies Act 2013). The register is kept at the registered office, is open to inspection, and must be produced at the start of every annual general meeting (s.189(3) and s.189(4), Companies Act 2013).

Section 188(1) separately requires the consent of the Board, given by a resolution at a meeting, before a company enters into specified kinds of contract with a related party (s.188(1), Companies Act 2013). A director's section 184 declaration and the related-party consent are therefore two different records about the same contract, and they should name the same counterparty and describe the same transaction. If the director's own interest is the reason the counterparty is a related party, the minute for the section 188 item should show that he declared and stepped out.

A worked scenario

Take a director who holds three per cent of a supplier company and is also its manager. She is also a partner in a logistics firm that the company proposes to appoint for deliveries.

The supplier contract. Section 184(2)(a) is triggered twice over. She holds more than two per cent, and she is the manager. The two-per-cent exclusion in section 184(5)(b) does not help, because the interest is not limited to a small shareholding.
The logistics contract. Section 184(2)(b) is triggered because she is a partner in the firm. No percentage exclusion is available.

At the board meeting where each contract is discussed, she declares the nature of her interest in each: the three per cent holding, the managerial role, and the partnership. She then does not take part in the item. Both contracts may be discussed at the same meeting, but each is its own item with its own declaration.

Had she held one per cent of the supplier with no role, section 184(2)(a) would not have been triggered by her interest in the supplier, since neither limb of that clause would be met. The partnership contract would still need the full declare-and-step-out routine.

How the minute should read

The statute does not prescribe minute wording, so this is practice. For each conflicted item, record the director's name, the contract, the nature of the interest declared, that he did not participate, and the decision of the remaining directors. Keep the minute, the MBP-1, the section 189 register entry and any section 188 consent consistent on counterparty name, value and date.

What to do now

Next step. Collect a current MBP-1 from every director before the first board meeting of the financial year, and check that each director's notice covers every company, body corporate, firm and association, including shareholding (s.184(1); rule 9(1), Meetings of Board Rules 2014).
Deadline. The notice is due for the first board meeting of every financial year, and the first board meeting after any change. A new director's first notice is due for the first meeting he participates in, and his section 189(2) particulars are due within thirty days of appointment (s.184(1); s.189(2)).
Consequence of missing it. The director is liable to a penalty of one lakh rupees (s.184(4)); an affected contract is voidable at the company's option (s.184(3)); and the director's office can become vacant (s.167(1)(c)-(d)).

Have a CA review your facts before you act or file.

FAQ

When must a director disclose interests?
At the first board meeting in which he participates as a director, at the first board meeting in every financial year, and at the first board meeting after any change in what he disclosed earlier. The disclosure covers companies, bodies corporate, firms and other associations of individuals, and includes shareholding (s.184(1), Companies Act 2013).

How is the disclosure made?
By a notice in writing in Form MBP 1, which the director must cause to be disclosed at the board meeting held immediately after the notice date. The company preserves the notices for eight years from the end of the financial year to which they relate (rule 9, Meetings of Board Rules 2014).

What happens at the meeting that discusses a contract where the director is interested?
The director discloses the nature of his concern or interest at that meeting and does not participate in it. The duty applies where he holds more than two per cent of a body corporate counterparty or is its promoter, manager or Chief Executive Officer, or where he is a partner, owner or member of a firm or other entity counterparty (s.184(2), Companies Act 2013).

What if the interest arises after the contract is signed?
He discloses it forthwith when he becomes concerned or interested, or at the first board meeting held after that (proviso to s.184(2), Companies Act 2013).

What does non-disclosure cost?
The contract is voidable at the option of the company (s.184(3)), the director is liable to a penalty of one lakh rupees (s.184(4)), and his office can become vacant (s.167(1)(c)-(d)).

Is there a safe harbour?
Section 184 does not apply to a contract between two companies, or between companies and bodies corporate, where the directors concerned hold not more than two per cent of the paid-up share capital in the other company or body corporate (s.184(5)(b), Companies Act 2013). Any rule of law restricting a director's interest in a contract with the company continues to apply (s.184(5)(a)).

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