Disclosure of Director’s Interest: Section 184 Companies Act, 2013

Ever asked yourself how companies maintain fairness and transparency while making important decisions?  Disclosure of Director’s Interest The answer lies in Section 184 of the Companies Act 2013. This essential regulation deals with the disclosure of directors interest in contracts, transactions, and arrangements related to the company. By requiring directors to reveal their interests, this section ensures that potential conflicts of interest are handled transparently, promoting ethical conduct and bolstering stakeholder confidence. In this article, we will discuss section 184 of the Companies Act 2013.

What is Section 184 of the Companies Act 2013 All About?

Section 184 of the Companies Act 2013 is a crucial provision that addresses the Disclosure of Director’s Interest by directors in contracts, arrangements, or transactions involving the company. This section serves as a cornerstone of corporate governance by promoting transparency, accountability, and the mitigation of potential conflicts of interest. This section was introduced with the overarching objective of promoting transparency, mitigating the risk of self-dealing, and ensuring that directors act in the best interests of the company and its stakeholders.

Why is Section 184 of the Companies Act 2013 Necessary?

Key Pointer- Understanding Section 184 of the Companies Act 2013 

The following key pointers explain section 184 of the Companies Act 2013 in a detailed way-

• Mandatory Disclosure of Directors Interest: Section 184 establishes the fundamental requirement that every Disclosure of Director’s Interest director, irrespective of whether the company is public or private, must disclose their interests in any contract, arrangement, or transaction that is entered into or proposed to be entered into by the company. This disclosure aims to shed light on any situation where directors might have a vested interest that could influence their decision-making.
• Timely Disclosure Obligation: Directors are obligated to make the necessary disclosure at the earliest possible opportunity. Specifically, this disclosure should be made during the first meeting of the board of directors in which the director participates after they become aware of their interest in the particular contract, arrangement, or transaction. Should a director not be present at this meeting, they must disclose their interest at the subsequent board meeting they attend.
• Comprehensive Nature of Disclosure: The disclosure required under Section 184 goes beyond a mere formality. Directors Disclosure of Director’s Interest are expected to provide a comprehensive account of their interest, delving into the specifics of its nature, whether it is direct or indirect, and the extent of their involvement in the contract, arrangement, or transaction. Additionally, the director is obliged to reveal any benefits or advantages that might accrue due to their interest.
• Abstention from Voting and Discussions: A pivotal feature of Section 184 is that, once the directors disclosure of interest is done, they are typically precluded from participating in the discussions related to the contract, arrangement, or transaction. Moreover, they are prohibited from voting on any resolution concerning the matter. This safeguards the integrity of the decision-making process and reduces the potential for undue influence or biased judgments.
• Expansive Definition of “Interest”: The term “interest” within the context of Section 184 is expansive in its scope. It encompasses not only financial interests but also extends to situations where a director or their relatives possess direct or indirect interests in the contract, arrangement, or transaction. This covers director shareholding disclosure, relationships, and any other circumstances that could potentially affect the director’s impartiality.
• Board’s Evaluation and Decision: Upon the directors disclosure of interest, the responsibility shifts to the board of directors. It is incumbent upon the board to meticulously assess the disclosed interest and make a well-informed determination regarding the contract, arrangement, or transaction. The board’s decision should invariably prioritize the best interests of the company and its stakeholders.

Types of Disclosure of Directors’ Interest

Under Section 184 of the Companies Act, 2013, directors are required to make both general and specific disclosures of their interests in contracts, arrangements, or transactions involving the company. Let’s explore what these disclosures entail:

• General Disclosure: General disclosure involves the overall declaration of interests by directors in various contexts. It includes disclosing information about any interests the director holds, which might influence their decision-making or create conflicts of interest. This disclosure doesn’t necessarily pertain to a particular transaction but serves as a comprehensive overview of the director’s interests that could potentially impact the company.

For instance, if a director owns a significant number of shares in the company, this would be part of their general disclosure. Similarly, any director who has a financial interest in a competing company would also need to disclose this general interest.

• Specific Disclosure: Specific disclosure, on the other hand, pertains to the detailed declaration of interests related to a particular contract, arrangement, or transaction that the company is considering or entering into. This type of disclosure focuses on providing specific information about the director’s interests that are relevant to the decision at hand.

For example, if the company is planning to enter into a contract with a supplier, and a director’s relative is a key executive at that supplier’s company, the director would need to specifically disclose this relationship. This ensures that the board of directors and stakeholders have complete information about any potential conflicts of interest before making a decision.

Also read: An Insight into Section 164 of Companies Act, 2013: Disqualification of Directors

Penalty of Non-Compliance

If the director violates the procedure prescribed for disclosure, the director will be liable of:

• Imprisonment for a term which may extend to 1 year, or;
• Fine which may extend to 1000 rupees or with both.

Catalyst for Transparency and Trust

The introduction of Section 184 has far-reaching implications for corporate governance in India. By enforcing the director disclosure of interests, the provision fosters a culture of transparency, thereby enhancing the credibility of the corporate sector. Shareholders and stakeholders can trust that directors are held accountable for their actions and that potential conflicts are identified and managed effectively.

Also read: Procedure for Appointment and Resignation of the Directors as per Companies Act, 2013

Final Words

Section 184 of the Companies Act, 2013, serves as a cornerstone of good corporate governance in India. By mandating the disclosure of directors’ interests, the provision reinforces transparency, accountability, and ethical conduct within companies. Directors’ obligations to disclose their interests ensure that potential conflicts are identified and managed appropriately, thereby safeguarding the interests of all stakeholders and promoting the long-term sustainability of businesses. Compliance with Section 184 not only aligns with legal requirements but also contributes to building a stronger foundation for corporate success.

In case of any query regarding section 184 of the Companies Act 2013, a team of expert advisors from Legal Window is here to assist you at every step. Feel free to reach us at admin@legalwindow.in.