Chapter XII of Companies Act – Meeting of Board of Directors and its Powers

184 to 185

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 Companies Act 2013 -> Section 184 – Disclosure of Interest by Director

Disclosure of Interest by Director

Ram

Director

Ram is a shareholder in company B or has Company A

such relation that he can benefit from
company B

Ram would be interested in company B

Company B
 Companies Act 2013 -> Section 184 (1) – Disclosure of Interest by Director

Disclosure of Interest by Director

Director should disclose his interest in any company or association at the following times by giving a notice in
FORM MBP1

1. In the first meeting of Board of directors after his appointment as director

2. In first meeting of board of directors each financial year
3. Whenever there is a change in disclosure already made like increase in shareholding from 3 %to 5%

All Such notices given by directors disclosing his interest shall kept for a period of eight years from the
end of the financial year

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 Companies Act 2013 -> Section 184 (2) – Disclosure of Interest by Director

Disclosure of Interest by Director

Ram
Director

Ram alone or together with

other director holds > 2%
shareholding in Company B
or Company A
is partner, owner, promoter
or CEO in Firm B Company or Firm B

In a meeting in which such contract is being discussed by directors of company A, such a director or directors shall disclose
their interest and should not participate in that meeting (except in case of private company where director can participate in
a meeting after disclosing his interest )

If a director is not interested in company at the time when contract was entered into but became interested later, then he
should disclose his interest in the immediate next meeting of Board of Directors

Exception: In case of section 8 company this subsection is only valid if transaction size exceeds 1 lakh rupees
 Companies Act 2013 -> Section 184 (3) – Disclosure of Interest by Director

Disclosure of Interest by Director – Cancellation of Contract

If a contract is entered by violating these conditions

like interested director not disclosing his interest or
participating in a meeting in which the contract was
discussed, then

1. Contract can become void if company wants to

cancel the contract

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 Companies Act 2013 -> Section 184 (4) – Disclosure of Interest by Director

Penalty for Non-Disclosure of Interest by Director

If director violates either of the conditions discussed in subsection 184(1) and 184 (2), director shall be punishable with
I. Imprisonment for a term which may extend to one year or
II. with fine which may extend to one lakh rupees or
III. with both.

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 Concept check

The notice given by director disclosing his interest in certain company shall be preserved by company for how many years
1. 3
2. 5
3. 8
4. 10
Ans Option 3

In Case of section 8 company what is the transaction size for stopping a director to participate in the meeting in which that
transaction with a company in which a director is interested is being discussed? More than1 lakh

What is maximum fine if the director does not disclose his interest in any other company or participates in a meeting in
which a transaction with that company in which a director has interest is being discussed? 1 lakh

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 Companies Act 2013 -> Section 185 (1) – Loans to Directors

Loans to Directors

Any Director of the company or holding

company

Shall not advance any loan or Any relative or partner of director

give guarantee or security for
Company any loan taken by
Any other firm or company in which director or
relative of director is partner

As per this clause can a company A give a loan to other company B in which director of Company A is a director?

Yes because as per this clause only the company in which director of company A is partner is prohibited from
being given a loan

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 Companies Act 2013 -> Section 185 (2) – Loans to Directors

Loans to Interested Parties with Directors

Any Party with whom the director is interested in

Can advance loan or give Subject to Following Conditions

guarantee or security for any
loan taken by A special resolution is passed by the company in
general meeting
Company
The loans are utilized by the borrowing company for its
Meaning of Any party with whom director is interested in principal business activities (Principal Activity means
the main activity the company is operating in)

1. Any private company of which any such director is a director or member or

2. Any company where not less than twenty-five per cent. of the total voting power may be exercised or controlled by any
such director, or by two or more such directors, together

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 Companies Act 2013 -> Section 185 (3) – Loans to Directors

Three Exceptions in case Loans to Directors

Loan can be given to a managing or whole-time director (whole-time director” includes a director in the whole-time
employment of the company) when
1. That is being given as part of scheme introduced for the employees of the company
2. As part of any scheme passed by special resolution

A company which usually is in the business of giving loans or security towards any loans can give loans without any
restrictions mentioned in this section provided they charge rate not less than the rate of prevailing rate of government
securities of the same duration.

Example: if loan is being provided for 5 years and rate of 5 years of Government bonds is 5% then rate of interest on loan
shall not be less than 5%

Loan given by Holding company to its subsidiary company or security or guarantee given by holding company for loan
taken by subsidiary company shall be exempted from all such restrictions provided these loans are used by subsidiary
company for principal activities

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 Quick questions

If Ram is director in Company A and Sham who is relative of Ram is a partner in company B then can company A provide loan
to company B? No

Company B is subsidiary of Company A. If Ram is director in Company A and Sham who is relative of Ram is a partner in
company B then can company A provide loan to company B? yes

Can loan be provided to whole time directors because of his position even if there is no policy to give such loans to the
employees of the company? No

Can loan be provided to independent directors provide there is a policy to give such loans to the employees of the company
who are associated with the company? No

The loan can be given to company in which a director is interested by passing a ordinary resolution? No
 Companies Act 2013 -> Section 185 (4) – Loans to Directors

Punishment in case violation of 185

To the Company:
Fine which shall not be less than five lakh rupees, but which may extend to twenty-five lakh rupees

To the Officer of the company who is in default

I. Imprisonment for a term which may extend to six months or
II. with fine which shall not be less than five lakh rupees, but which may extend to twenty-five lakh rupees

To the Director the director or the other person to whom any loan is advanced or guarantee or security is given
I. Imprisonment which may extend to six months or
II. with fine which shall not be less than five lakh rupees, but which may extend to twenty-five lakh rupees, or
III. with both

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 Concept check

The company can give loan to which of the following?

1. Any director of the company
2. Relative or partner of the director of the company
3. Any firm in which director or his relative is partner
4. Any firm in which relative of director is director
Ans Option 4
The loan given by company to interested party needs to be passed in
1. Special Resolution in general meeting of the company
2. Ordinary resolution in general meeting of company
3. Special resolution in meeting of board of directors
4. Ordinary resolution in meeting of board of directors
Ans Option 1

The penalty to the officer or the company who is default : Fine up to maximum of
1. 5 lakh
2. 10 lakh
3. 15 lakh
4. 25 lakh
Ans Option 4

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 Thanks

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