Introduction:
Under the Companies Act 2013 (the Act), the role of a ‘director’ of a Company is a fiduciary role and various duties of directors are prescribed in section 166. One such duty prescribed in section 166(4)[i] is that the directors of the company should not have any such interest which shall conflict with that of the Company. Similarly, section 184 of the Act also requires the directors to disclose any direct or indirect interest to the board of directors of the Company, so that the board can take an informed decision while dealing with parties where one of the directors have direct or indirect interest.
Sub-section (1[ii]) of section184 requires the directors to disclose generally their direct or indirect concern or interest in any other company, body corporate or association of individuals, irrespective of whether the Company is dealing with that party or not. Whereas the sub-section (2)[iii] requires disclosure of interest in case of any particular contract or arrangement to be entered by the company and being placed before the board of directors for its approval. Section 184 and rule 9 of Companies Meetings of Board and its Powers Rules 2014 also prescribe for other procedural requirements in this regard.
However, there arises a question that, if all other directors are already aware about the interest of any one director in any entity and that director does not specifically disclose his interest at the board meeting where the Company is entering into a contract or arrangement with that entity, then will such awareness can be said to be substantial compliance of section 184 (even if director has not specifically disclosed it again) ? For example, Mr. R, director of PQR Limited, has a majority shareholding in ABC Limited and all other directors of PQR Limited are aware about such interest of Mr. R due to their close relationship with Mr. R and the board of directors of PQR Limited is proposing to deliberate upon and enter into an agreement with ABC Limited at a forthcoming board meeting, then in such a case, if Mr R. does not disclose his interest in ABC Limited again at the Board meeting, will it be still considered as substantial compliance of section 184?
In this article, we shall try to find an answer to this question. This particular question highlighting the classic conflict between substance and procedure of law, arises in case of closely held companies or by family owned and managed companies.
Compliance requirements under section 184:
As per subsection (1) of section 184, the director is required to disclose to the board, about his concerns or interests in other companies, body corporates or associations of individuals including shareholding. Such disclosure must be given at the,
- First board meeting in which he participates after becoming director,
- First board meeting of every financial year and
- First board meeting after any change in concern or interest already disclosed.
This disclosure must be given in form MBP-1, and it is the duty of the director giving the disclosure, to cause it to be disclosed at the next board meeting. Also, such disclosure given in form MBP-1 should be preserved for 8 years in the safe custody of the company secretary of the Company.
Other than this, the sub-section (2) prescribes that, if any director is interested in any particular contract or arrangement being entered in to by the company with firm or an entity where the director is partner, owner or member, or with a body corporate wherein the director (alone or with some other director) holds 2% or more shareholding or is its promoter, manager or chief executive Officer, then the director should disclose his interest in that firm/entity/body corporate and such director should not participate in the board meeting wherein such contract or arrangement is being discussed [iv]
Purpose of section 184:
Section 184 corresponds to section 299 of the Companies Act 1956. This section aims at facilitating transparency when the Board is taking any decision on behalf of the Company. This section does not prohibit having concern or interest in other entity but simply requires the disclosure of such interest. The purpose of section 299 of 1956 Act which corresponds to section 184, was highlighted by the Company law Board in the matter of A. Sivasailam v. Registrar of Companies[v] in following words.
“The disclosure of interest by a director has been provided for in Section 299 only with a view to ensure that a director who occupies a fiduciary position in the company should disclose his interest in any arrangement or contract either directly or indirectly so that the company is in a position to know whether he is acting in any way prejudicial to the interest of the company or for his own benefit. This section further lays down that such a disclosure should be in the meeting of a board. The object of the provision in the section is not that a director should not have any personal interest in a contract or arrangement but only stipulates that the same should be disclosed.”
Meaning of substantial compliance:
The Black’s law dictionary defines the concept of ‘substantial compliance’ as, “if a good faith attempts to perform does not precisely meet the terms of an agreement or statutory requirements, the performance will still be considered complete if the essential purpose is accomplished.”
As discussed above, the essential purpose of section 184 is to make the board members aware about the concerns or interests held by each director to facilitate transparency. As per the definition given by the Black’s law dictionary, if the other directors are already aware about the concern or interest of any one director, then the essential purpose of section 184 is met even without specifically disclosing the concern or interest again. Therefore, one view which can emerge is that the awareness of all other directors about the interest of one director may be considered as substantial compliance of section 184.
Judicial view:
The question that, whether a particular action can be considered as substantial compliance of any law or not is an interpretation issue taking into account various factors pertaining to that provision of law. Therefore, the opinion of the judicial authority in this regard, is of paramount importance. Hence to determine, whether knowledge of other directors about concern or interest of one director can be considered as substantial compliance of section 184 in absence of specific disclosure by such director, reference will have to be made to judicial pronouncements.
Recently, a similar question was for discussion before National Company Law Tribunal (NCLT) Mumbai bench in the matter of Mr. Diven Dembla versus Precision Rubber Industries Private limited.[vi] In this case relating to operation and mismanagement, there was an allegation that, even though all other directors were aware about one director’s interest in one LLP with whom company had contracted, since the director had not submitted form MBP-1, it was violation of section 184. The NCLT held in this regard that,
“The proposition that when the board is aware of the interest of a director in a particular transaction it would not be necessary for such A director to formally disclose his interest in the board has been propounded by the High Court of Mysore in Ramakrishna Rao v. Bangalore Race Club[1970] 40 Comp Cas 674
we are of the considered view that the knowledge of the Dembla family of the relatedness of Niraj Thakkar with Aarya Machines LLP constitutes sufficient disclosure,
the provisions of Section 184 have been met in substance, though there is still violation in filing form MBP-1 during the relevant time.”
Similar view was taken by the Delhi bench of Appellate Tribunal (NCLAT) in the matter of Solar Industries India Ltd V. KailashChandra Nuwal and Ors. In this case the NCLAT held that,
“It is not a case of the Appellant that K C Nuwal has not disclosed his interest in AGT. But admittedly, Appellant’s case is that the disclosure is not made in the prescribed format. even if the discloser of shareholding/directorship in Form MBP 1 is not provided, it may only result in violation of Section 184(1) and not Section 184(2) of the Act.
Section 184(2) mandates disclosure of interest by a director in the board meeting where an agreement is being entered into with an entity in which the director has an interest. The disclosure can be oral and/or in writing. Accordingly, the Section 184(2) to stands substantially complied with.”
Both these judicial pronouncements highlight that if all other directors are aware about the interest of one director in any other entity or any specific contract or arrangement, then the section 184(2) is considered to be substantially complied, even if the written disclosure in form MBP-1 is not given which will lead to a violation or non-compliance of section 184(1) on the part of that director.
Consequence of not giving MBP-1:
As far as submission of form MBP-1 to the company is concerned, non-submission of form MBP-1 is a procedural non-compliance and hence is subject to in-house adjudication process of Registrar of Companies (‘ROC’). Sub-section (4)[vii] of section 184 prescribes the penalty for non-compliance of sub-sections 1 and 2. Therefore, if the director does not submit form MBP-1 for the reason that all other directors are already aware of the relevant concern or interest, then it will be considered as procedural non-compliance and the director in question shall be liable to penal provisions for violation of section 184(1).
Conclusion:
Conjoint reading of all the relevant provisions and judicial pronouncements highlights that, if all the directors of the company are aware about the concern or interest held by one of them in any other entity, then such awareness may be considered as substantial compliance of section 184(2) even in absence of written declaration in form MBP-1 from the concerned director under section 184(1) or specific disclosure (oral or in writing) from the concerned at the board meeting where any contract or arrangement to be entered into with such firm / entity / body corporate where such director has concern / interest is being considered by the Board of directors. This situation is seen in case of closely held companies or family-owned companies where directors share a close relationship with each other and have knowledge about each other’s interests in other companies.
[i] (4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
[ii] 184. (1) 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.
[iii] (2) Every director of a company 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—
(a) 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) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,
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:
[iv] as per exemption notification dated 5th June 2015 sub-section (2) of section 184- Shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest.
[v] A. Sivasailam v. Registrar of Companies 1994 SCC Online CLB 14,
[vi] Mr. Diven Dembla versus Precision Rubber Industries Private limited NCLT Mumbai bench C.P. No. 206 of 2022
[vii] (4) If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be 6[liable to a penalty of one lakh rupees]
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