DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA, SABBAVARAM, VISAKHAPATNAM, ANDHRA

PRADESH- 531o35
Topic: Conflicts of Interest of Directors: A Critical Study
SUBMITTED TO: Dayananda Murthy
SUBMITTED BY:
Gongati Venkata Manish Kumar
2018029
7th SEMESTER
 Table of Contents

 Introduction
 The Companies (Meetings of Board and its Powers) Rules, 2o14.
 Additional Disclosure
 Few illustrations to get insight of Section 184
 Liability of directors and prescribed officers
 Remuneration
 Conclusion
Introduction

Section 184 of the Companies Act, 2o13 (the Act) relates to “Disclosure of interest by
directors”. The object of Section 184 of the Act is to bring to the notice of the directors the
conflict of interest and duty of any of their colleagues on the Board. The provisions are
founded on the principle that a director is precluded from dealing on behalf of the company
with himself and from entering into engagements in which he has a personal interest
conflicting, or which possibly may conflict, with the interest of those to whom he is bound by
fiduciary duty to protect. Section 184 of the Act does not prohibit such engagements or
contracts or arrangements, but it requires disclosure by the directors of their interests therein
to their co-directors.

This article is a compilation and analysis of the relevant provisions relating to the disclosure
of the interest of directors. There is also a reference to the exemptions to certain classes of
companies.

1. General Disclosure by Directors—Every director of the company shall

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 a prescribed manner (i.e. Form MBP 1). Such disclosure of
his concern or interest shall be made by the director of the company at all the
3 occasions:
(i) at the first meeting of the board of directors in which he participates as a director of the
company;

(ii) at the first meeting of the Board in every financial year (generally in the month of April or
May, if the financial year is April 1 to March 31, or generally in the month of January or
February, if the financial year is January 1 to December 31); and

(iii) whenever there is any change in the disclosures already made, then at the first Board
meeting held after such change.1

2. Specific Disclosure by Directors—This disclosure is a transaction-specific

disclosure. The compliance checklist is as follows:
(i) 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 certain parties (discussed later) shall disclose the nature of his concern or
1
Riya Dani, Sec 14:Disclosure of interest by Director https://taxguru.in/company-law/section-184-disclosure-
interest-director.html (1 Dec 2021 at 2:25 PM)
interest at the meeting of the Board of Directors in which the contract or arrangement is
discussed.

(ii) Such disclosure of concern or interest by the director in a contract or arrangement by the
company shall be in relation to the given parties: (a) with a body corporate in which such
director or such director in association with any other director, holds more than 2%
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.

(iii) It shall be the duty of the director giving notice of interest to cause it to be disclosed at
the meeting held immediately after the date of the notice. At this stage, it is desirable that this
action is noted in the minutes of the meeting of the Board of Directors.

(iv) Such director shall not participate in such a meeting. At this stage, it is desirable that this
action is noted in the minutes of the meeting of the Board of Directors.

(v) Where any director who is not so concerned or interested at the time of entering into such
contract or arrangement, he shall, if he becomes concerned or interested after the contract or
arrangement is entered into, disclose his concern or interest forthwith when he becomes
concerned or interested or at the first meeting of the Board of Directors held after he becomes
so concerned or interested. At this stage, it is desirable that the date of transaction and date of
disclosure is noted in the minutes of the meeting of the Board of Directors.2

(vi) Section 189 of the Act relates to “Register of contracts or arrangements in which
directors are interested”. According to the provisions, every company shall keep one or more
registers giving separately the particulars of all contracts or arrangements to which sub-
section (2) of Section 184 or Section 188 applies, in such manner and containing such
particulars as may be prescribed. After the necessary entry is made in the register(s), such
register(s) shall be placed before the next meeting of the Board of Directors and signed by all
the directors present at the meeting. In case of specific disclosure by directors (i.e. under
Section 184(2) of the Act), the company shall comply with the provisions of Section 189 of
the Act.

3. Place of Maintenance of the Notices—All notices shall be kept at the

registered office of the company.

2
Riya Dani, Sec 14:Disclosure of interest by Director https://taxguru.in/company-law/section-184-disclosure-
interest-director.html (1 Dec 2021 at 2:25 PM)
 4. Record keeping and Safe Custody—Such notices shall be preserved for a
period of 8 years from the end of the financial year to which it relates and
shall be kept in the custody of the Company Secretary of the company or any
other person authorised by the Board of Directors for the purpose. If there is
any other person authorised by the Board of Directors for the said purpose
then such resolution shall be passed by the directors of the company (either in
Board meeting or by circular resolution).
5. Limited Applicability of Section 184(2) of the Act (in Certain Cases)—
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 [MCA Notification No. G.S.R. 464(E)
dated 5-6-2o15]. In case of Section 8 companies (company registered under
the Companies Act, 2o13 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 [MCA Notification No. G.S.R. 466(E) dated 5-6-2o15]. 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, 2oo5 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. [Notification No. G.S.R. 8(E) dated 4-1-2o17].
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.3
6. Contract Entered into by the Company with Disclosure of Interest—
Contract or arrangement entered into by the company without disclosure
under sub-section (2) of Section 184 of the Act or with participation by a

3
Riya Dani, Sec 14:Disclosure of interest by Director https://taxguru.in/company-law/section-184-disclosure-
interest-director.html (1 Dec 2021 at 2:25 PM)
 director who is concerned or interested in anyway, directly or indirectly, in
the contract or arrangement, shall be voidable at the option of the company.
According to Section 167 of the Act, the office of the director shall become vacant if he acts
in contravention of the provisions of Section 184 of the Act or if the director 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 of the Act. Therefore, the compliance of the
said provisions is very important from the perspective of director’s fiduciary duties and the
consequences if not complied with.

Further, by making the necessary disclosure of concern or interest, the directors not only
comply with the provisions of Section 184 of the Act but also with Section 166 of the Act
(relating to “duties of directors”). According to Section 166(4) of the Act, a director 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.

According to the above provisions of Section 184(1) and 184(2) of the New Act, there are
two types of discourse by Director –

 General Disclosure;
 Specific Disclosure.
General Disclosure by Directors u/s 184(1) of the New Act: Disclosure u/s 184(1) is a
general notice of disclosure given by every director about his concern or interest in any
company (ies), bodies corporate, firms or other association of individuals, along with
shareholding. This is required to be given on 3 occasions mentioned above.

Specific Disclosure by Directors u/s 184(2) of the New Act: Disclosure u/s 184(2) is a
specific disclosure given by the director at the meeting of the Board in which a contract or
arrangement is discussed and entered into/proposed to be entered into with any entity in
which such director has interest in the manner/ to the extent specified therein.

Exemption from applicability of the Section 184 of the New Act.

As per Section 184(5) of the New Act- nothing in this section shall apply to any contract or
arrangement entered into or to be entered into between two companies where any of the
directors of the one company or two or more of them together holds or hold not more than
2% of the paid up share capital in the other company. (Only for any contract or
arrangement under section 184(2) above).
Now question arises that is it necessary for a director to give disclosure of his shareholdings
in companies, irrespective of how much shareholding he has?

Yes, it is necessary for a director to give disclosure of any of his shareholdings in companies
while giving the general disclosure of interest on each of the 3 occasions stated above.
However, there is no exemption from the compliance of provisions of section 184(1) of the
New Act.

Please note that the exemption stated in section 184(5)(b) of the New Act becomes
applicable at the time of entering contract or arrangement i.e. in case of Specific disclosure
by Directors u/s 184(2) of the New Act and not in case of general disclosure.

In order to ascertain whether any of the directors hold 2%, either individually or together with
other directors, of the paid-up share capital in any other company, it is essential to have
details of shareholding held by each director in such entities. Disclosure of information in
Form MBP-1 obtained from such directors will form the basis to decide the same.

Impact on contract or arrangement in which interest of director is not disclosed.

A contract or arrangement entered into by the company without disclosure 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. [Section
184(3) of the New Act]

Punishment in case of contravention of the provisions:

The punishment in case any director who fails to give the mandatory disclosure of interest as
required under this section has been and shall be punishable with imprisonments for a term
which may extend to one year or with fine which may extend to Rs. 1,oo,ooo or with both.

The Companies (Meetings of Board and its Powers) Rules, 2o14.

1. Rule 9 provides that every director shall disclose his concern or interest in any company or
companies or bodies corporate (including shareholding interest), firms or other association of
individuals, by giving a ‘Notice’ in writing in Form MBP 1.

It shall be the duty of the director giving notice of interest to cause it to be disclosed at the
meeting held immediately after the date of the notice.
2. All notices shall be kept at the registered office and such notices shall be preserved for a
period of eight years from the end of the financial year to which it relates and shall be kept in
the custody of the company secretary of the company or any other person authorized by the
Board for the purpose.4

Note: There are no provisions u/s 184 of the New Act to maintain the “register of
contract”. But the “register of contract” shall be maintained pursuant to the provisions
of Section 189 of the New Act. Moreover, under 184 of the New Act and rule thereof, Notice
of Disclosure by Director (i.e. Form MBP-1) shall be kept at the registered office of the
company and preserved for a period of eight years from the end of the financial year to
which it relates.

Additional Disclosure-

Every director or KMP shall within 3o days of his appointment/relinquishment of

office disclose to the company the particulars specified in sub-section 1 of Section 184
relating to his concern or interest in any company or body corporate, firms or individuals
including his share holding and also contracts or arrangements in which he is directly or
indirectly interested. [Section 189(2) of the New Act]

It is important to note that Section 189(2) of the New Act requires not just the disclosures at
the time of taking up an office, but also relinquishment of the office. This requirement is the
similar to the requirement under Section 3o5 of the Old Act. It is necessary in order to ensure
that the register maintained is up to date and accordingly it may be determined whether
provisions of section 188 become applicable in future while transacting with such company.

Further, subsequent to relinquishment of office, if the director also transfers the shares held in
such company then any contract or arrangement with such company shall not attract
provisions of Section 184(2) of the New Act. Thus, disclosure of relinquishment and change
in director’s shareholding in any of the companies is essential to determine applicability of
provisions of Section 184 and 188.

What is the fiduciary duty of directors?

A fiduciary duty is a legal duty to act solely in another party's interests. Parties owing this
duty are called fiduciaries. The individuals to whom they owe a duty are called principals.
Fiduciaries may not profit from their relationship with their principals unless they have the

4
https://www.taxmanagementindia.com/visitor/acts_rules_provisions.asp?ID=583
principal’s express informed consent. They also have a duty to avoid any conflicts of interest
between themselves and their principals or between their principals and the fiduciaries' other
clients. Examples of fiduciary relationships include those between a lawyer and his client, a
guardian and his ward, and a company and its directors. In the past, the principle of fiduciary
duty of directors has been recognized in the case of Shri Rajeev Kapur v. Grentex& Company
Private Limitedwherein Bombay High Court has stated that a director shall be deemed to
have breached their fiduciary duty if they commence a competing business with that of a
company while they are holding the directorship in the company.Further, in the case Foster v.
Bryant, 200EWCA Civ. 2007 , it was held that a Director has a fiduciary duty towards the
Company and he must act with loyalty and in good faith and avoid any kind of conflict of
duty and self-interest.

Few illustrations to get insight of Section 184:

Case-1 Suppose our company (XYZ Ltd) is entering into contract with ABC Ltd and two of
our directors B1 holding 1% and B2 holding 2% share capital of ABC Ltd – Now in above
case both B1 and B2 Shall disclose their interest under 184(1) and under (2) and both B1 and
B2 cannot participate in such BM neither in discussion nor in voting in such contract, and
will not be counted in quorum for such contract, but can sit in such Board meeting.

Case-2 Suppose in above case such contract is RPT contract i.e. it satisfies the requirement of
section 188 – then in such case disclosure under section 188 shall also be given by such
director along with section 184(1) and (2) and above directors cannot be present in Board
Meeting neither in discussion nor in voting and will not be counted under quorum for such
contract, but for other businesses they can sit in Board Meeting.

Case -3 Our company (XYZ Ltd ) is entering into contract with ABC Ltd and two of our
directors B1 and B2 holding 1% each in ABC Ltd, however relative of D1 also hold 1o% in
ABC Ltd – Now in this case both B1 and B2 Shall disclose their interest in MBP-1, moreover
B1 shall disclose their interest under 184(2) and cannot participate in such BM neither in
discussion nor in voting in such contract, and will not be counted in quorum for such
contract, but can sit in such Board meeting, However B2 need not to disclose his interest and
can participate in meeting and will be counted in quorum.

Liability of directors and prescribed officers

The Companies Act makes it clear that a person is not, solely by reason of being an
incorporator, shareholder or director of a company, liable for any liabilities or obligations of
the company, unless where the Companies Act or the company’s Memorandum of
Incorporation provides otherwise. The directors and prescribed officers of a company may
only incur liability in specific instances. In terms of the Companies Act a director or
prescribed officer of a company may be held liable for any loss, damages or costs sustained
by the company as a consequence of any breach by him or her of a duty contemplated in the
standard of directors conduct, failure to disclose a personal financial interest in a particular
matter, or any breach by the director or prescribed officer of a provision of the Companies
Act or the company’s Memorandum of Incorporation. In addition, the Companies Act
determines that a director of a company is liable for any loss, damages or costs sustained by
the company as a direct or indirect consequence of the director having—

 Acted in the name of the company, signed anything on behalf of the company, or purported
to bind 7 the company or authorise the taking of any action by or on behalf of the company,
despite knowing that the he or she had no authority to do so.

 Persisted and went along with any action or decision despite knowing that it amounts to
reckless trading.5

 Been a party to any action or failure to act despite knowing that the act or omission was
calculated to defraud a creditor, employee or shareholder of the company.

 Signed, consented to, or authorised the publication of any financial statements that were
false or misleading, or a prospectus that contained false or misleading information, or

 Been present at a meeting, or participated in the making of a decision, and failed to vote
against a decision to issue any unauthorised shares or securities, to issue options for
unauthorised shares or securities, to provide financial assistance to a director or any person
without complying with the requirements of the Companies Act and the Memorandum of
Incorporation, to approve a distribution that was contrary to the requirements of the
Companies Act, or for the company to acquire any of its own shares, or the shares of its

5
Dr. Johan Erasmus, Implications for directors and prescribed officers
https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/
ZA_DirectorsandPrescribedOfficers_16042014.pdf ( 2 Dec 2021 at 3:50 PM)
holding company, or make an allotment despite knowing that the acquisition or allotment was
contrary to the requirements of the Companies Act.6

The Companies Act makes it clear that a director or prescribed officer is jointly and severally
liable with any other person who is or may be held liable for the same act. Also, any claim for
loss, damages or costs for which a person is or may be held liable in terms of the Companies
Act prescribes after three years after the act or omission that gave rise to that liability.
Remuneration

The definition of “remuneration” as per the new Companies Act includes:

 Fees paid to directors for services rendered by them to or on behalf of the company,
including any amount paid to a person in respect of the persons accepting the office of
director

 Salary, bonuses and performance-related payments

 Expense allowances, to the extent that the director is not required to account for the
allowance  Contributions paid under any pension scheme

 The value of any option or right given directly or indirectly to a director, past director or
future director, or person related to any of them

 Financial assistance to a director, past director or future director, or person related to any of
them, for the subscription of shares

 Any loan or other financial assistance by the company to a director, past director or future
director, or a person related to any of them, or any loan made by a third party to a director,
past director or future director, or a person related to any of them.

Conclusion:

Conflicts of interest can undermine the trustworthiness of a director and also compromise the

director’s independence, credibility and his or her effectiveness.  It is essential that directors

are aware of the extent of their duties to avoid conflicts, are familiar with the company’s

constitution and with those policies and procedures of the company in respect of avoiding or

6
Dr. Johan Erasmus, Implications for directors and prescribed officers
https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/
ZA_DirectorsandPrescribedOfficers_16042014.pdf ( 2 Dec 2021 at 3:50 PM)
managing directors’ conflicts.

Directors have a fiduciary responsibility to disclose conflicts of interest and to act with

unfettered discretion. The good governance practices in this regard extend beyond what is

contained in the Act and should be considered in all instances where a conflict of interest is

considered. Where directors breach this duty they stand to attract civil and criminal sanction.

Conflicts of interest have the potential to damage the company as any board decision taken in

which a director has an undisclosed personal financial interest is void.

Good governance starts with the integrity and ethics of every director on every board. Board

directors have a moral obligation not to take advantage of the company, but to be loyal to the

company, make wise decisions, neutralize conflicts among stakeholders, and act in a socially

responsible way. An ethical board sets the purpose of the company, which in turn influences

all dealings with stakeholders. The four-tier pyramid summarizing the different levels of

conflict of interest can help board directors anticipate and identify potential conflicts, deal

with conflicts and make sensible decisions to chart a course for the future of the company.