DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW
2020-21

Corporate Law

Disclosure Requirements of Interest by under Companies Act 2013

SUBMITTED TO: - SUBMITTED BY:-

Dr. V Vishalakshi Tanurag Ghosh
Head of Department Enrolment no.- 180101147

RMLNLU Section B, B.A.LLB.(Hons)-2023

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 Table of Contents
ACKNOWLEDGEMENT..............................................................................................................3

INTRODUCTION...........................................................................................................................4

DUTY OF DICLOSURE OF INTEREST BY DIRECTOR...........................................................5

DISCLOSURE AND TIMING........................................................................................................8

DIRECTOR’S DIRECT/INDIRECT CONCERN OR INTEREST...............................................9

TRANSACTIONS WITH SPECIFIED ENTITIES I....................................................................................9

TRANSACTIONS WITH SPECIFIED ENTITIES II...............................................................................10
DISCLOSURE AT THE BOARD MEETING/ VOTING/ QUORUM...........................................................10
SUBSEQUENT CONCERN/INTEREST................................................................................................11

VOIDABLE AT OPTION OF COMPANY..................................................................................12

CONTRAVENTION.....................................................................................................................12

EXEMPTIONS..............................................................................................................................12

CONCLUSION.............................................................................................................................13

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 Acknowledgement
First, I would like to thank Dr. V Vishalakshi for giving me this opportunity to make the
project on such an interesting topic and all the support and guidance that I have received from
her without which, this project could not have turned into a reality. I would also like to thank
all my colleagues and seniors for providing me support, and material data related to this
topic. Last but not the least; I would like to thank my parents for providing me appropriate
guidance and support to prepare the project. All the aforementioned people whole-heartedly
helped me to compile this project in the present shape.

-Tanurag Ghosh

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 Introduction
A company under the companies’ jurisprudence is a legal and a juristic person, separate from
its members. A company has independent corporate existence, limited liability, perpetual
succession, common seal, capable of holding separate property in its own name, has
transferable shares and capacity to sue and being sued.

Once a company is validly constituted under the provisions of the company law, it becomes a
legal person separate from and capable of surviving beyond the lives of its members and it is
immaterial whether any member has a large or small proportion of the shares and whether he
holds those shares beneficially or as mere trustee.1

There is a need for directors in a company because a company is an artificial person, existing
only in contemplation of law and has no physical existence and cannot act in its own person.
A company has no mind or body of its own and therefore humans are required to run the
company.2 They are directors and collectively constitute the highest decision making body
under the Companies Act known as board of directors.

A director has been defined in Section 2(34). According to it, a director is a person appointed
to perform duties and functions of director of a company in accordance with the provisions of
the Companies Act 2013.3

The directors are therefore appointed in terms of the company law who collectively work
together as a Board through meetings, physically or through circulation or electronically.
They do not have individual authority unless delegated by the Board through resolutions in
terms of the company law. Or the director concerned is an executive director having powers
through law and also by delegation.
Among other duties conferred upon a director, it is the duty of the director to disclose interest
to the company and to ensure that his personal interest as an agent of the company and the
interest of the company in which he is the principal, do not conflict.4

1
Solomon v Solomon & Co. (1897) AC22
2
Lennard’s Carrying Co. v Asiatic Co. (1915) AC 705
3
Section 2(34), Companies Act 2013
4
Walchandnagar Industries v Ratanchand AIR 1953 Bom 285

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 Duty of Diclosure of Interest by Director
Under Section 184 of Companies Act, 2013, the duty of disclosure of interest has been
specified in the statute. According to the provision-

(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.
(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:
Provided that 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 held after he becomes so concerned or interested.5
(3) 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.

5
Section 184, Companies Act 2013.

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 (4) If a director of the company contravenes the provisions of sub-section (1) or
subsection (2), such director shall be punishable with imprisonment for a term which
may extend
to one year or with fine which shall not be less than fifty thousand rupees but which
may extend to one lakh rupees, or with both.
(5) Nothing in this section—
(a) shall 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;
(b) 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 two per cent. of the paid-
up share capital in the other company.

It is of prime importance that for ensuring proper functioning, a director should be

disinterested in the transactions of the company or otherwise it is natural that his personal
interest is likely to prevail6. The first step in this regard is the disclosure of interest by the
director. 

The interest is determined using the judgment in the case of Coltness iron Co. according to
which the interest to be disclosed is that which in business sense might be regarded as
influencing judgement; the essence of the matter being that any kind of personal interest
which is material in the sense of not be insignificant must be revealed.7

The arrangement hit by sections is one in which the director has a personal interest
conflicting with his duties towards the company and does not cover any case where there is
no personal interest involved.8 Interest could be other than personal interest and not
necessarily confined to pecuniary interest.9

It is interestingly noteworthy that in respect of sections 299 & 300 of the erstwhile
Companies Act 1956 that the word “interest” means personal interest and not official or other
interest. However it is also not limited to financial interest only and may arise out of fiduciary
duties or closeness of relationship10.

6
Jackson, The Wisdom of Supreme Court, Pg 417-18 (1962)
7
Coltness Iron Co, Re, 1971 SC 476 (Scotland)
8
Public Prosecutor v TP Khaitan AIR 1957 Mad 4
9
Re: Fateh Chand Kad v Hindsons (Patiala) Ltd. (1957)
10
Mukkattukara Catholic Company Ltd. V MV Thomas (1995) 6 SCL 135

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As a sound legal principle applies to the situation- Every agent occupies a fiduciary position
towards his principal. As such it is his duty to see that his personal interest and his duty to his
principal do not conflict. For the proper exercise of the functions of a director, it is essential
that he be disinterested i.e. be free from any conflicting interest.

Section 166(4) of Companies Act, 2013 lays down:

“ A director of a company shall not involve in a situation which he may have a direct or
indirect interest that conflicts, or possibly may conflict, with the interest of the company.”11

It is an over-riding principle of equity that a man must not be allowed to put himself in a
position in which his fiduciary duty and his interests conflict. Where a director has made a
profit as a result of having allowed his interests and duty to conflict, he will have to repay the
profit to the company.12

11
Section 166, Companies Act 2013
12
Industrial Development Consultants Ltd. v Cooley (1972) WLR 443

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 Disclosure and Timing
The sub section (1) of section 184 deals with the disclosure of interest to be made by the
director. It lays down that every director is under an obligation to make disclosure of his:- 

{a} concern, or 

{b} interest, 

in any of the following entities:- 

1. company or companies or 

2. bodies corporate, or 
3. firms, or 
4. other association of individuals. 
Pertinently the concern or interest shall also include his shareholding. 

The disclosure shall be made in such a manner as may be prescribed by the Central
Government. {Already prescribed under Rule 9 of the Companies (Meetings of Board & its
Powers) Rules 2014}

The timing of the disclosure, however, has been stipulated in the sub section itself. Thus the
disclosure shall be made:- 

1. at the first meeting of the Board of Directors in which he participates as a director,

and 
2. thereafter at the first meeting of the Board held in every financial year, or 
3. whenever there is any change in the disclosures already made, then at the first Board
meeting held after such change.
The first and foremost requirement is that the director should have concern or interest in any
one or more of the entities where-after he is to disclose only at the board meetings as have
been laid down. The terms “concern” or “interest” have not been defined although the term
“interested director” have been defined in Section 2 {49}. 

“Interested Director” means a director who is in any way whether by himself or through any
of his relatives or firm, body corporate or other association of individuals in which he or any
of his relatives, partner, director, or a member, interested in a contract or arrangement, or
proposed contract or arrangement, entered into by or on behalf of a company.13

Pertinently mere disclosure of interest is not sufficient but the nature of concern or interest
has to be disclosed.14 This will adequately bring to light where the director has a conflict of
his personal interest with that of his fiduciary duty as a director and protection of the
company against such conflict. 
13
Section 2(49), Companies Act 2013
14
Turnbull v West Riding Athletics Club Leeds Ltd. 1894 WN4

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 Director’s Direct/Indirect Concern or Interest
Sub section {2} of section 184 provides that every director who is in any way whether

{a} directly, or

{b} indirectly concerned or interested in the following:- 

1. a contract or arrangement, or 

2. a proposed contract or arrangement 
which are

{a} entered into, or

{b} to be entered into by his company with certain specified entities, shall disclose the nature
of his concern or interest at the Board meeting/s. 

The use of the terms “in any way” “directly or indirectly” in the sub section is in line with the
section 299 of the erstwhile Companies Act 1956, and denotes very wide coverage in all
aspects. The terms “concerned” or “interested” similarly have wide import.15 

Moreover, it is clear that not only concluded contract or arrangement is covered but also the
proposed ones.

The provisions of entering into contract / arrangement {transactions} with certain specified
entities and disclosure requirements have been discussed hereinafter.

Transactions with Specified entities I

(A) Contract/ arrangement with

{1} a body corporate in which that director or he in association with any other director holds
more than two per cent {2%} shareholding of that body corporate, or

{2} that director is a promoter, manager, Chief Executive Officer {CEO} of that body
corporate.

Interpretations

 The term “contract” would be governed by the Indian Contract Act 1872. The term
“arrangement” has not been defined. This however has been used in various places in
the Companies Act 2013. It appears here along with “contract” and in Chapter XV of
the Companies Act 2013 relating to compromises, arrangements and amalgamations
wherein arrangement includes a reorganisation of the company’s share capital. But
this does not help in interpretation in this provision. In any case “arrangement” should
be read in a wider context comparable to “contract” the effect of which is to give rise
to legal rights and liabilities. 

15
Firestone tyre & rubber Co. Ltd. V Synthetics & Chemicals Ltd.

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  The word contract or arrangement is intended to cover transactions in which a director
acquires some right or incurs some liability “qua” director, as a result of it.16 
 The term “association” has not been defined and should be understood in common
parlance to mean some controlling connections between the directors which could
arise out of blood relations or otherwise. Interestingly if a relative of a director or such
relative in association with any other director hold/s more than 2% shareholding, the
said director will not be covered herein. 
 The term “body corporate” has been used here instead of the term ‘company”. The
body corporate has been defined in Section 2(11) of the Companies Act 2013 to
include a company incorporated outside India, thereby widening the coverage of the
disclosure requirements. 
 The use of the term “shareholding” has widened the coverage to take into account
equity or preference shares. The word “share” has been defined in Section 2(84) to
mean a share in the share capital of the company and includes stock. Notably the term
“securities” in terms of section 2(81) has not been used here otherwise very wide
coverage would have happened as the definition of “securities” in section 2 (h) of the
Securities Contracts (Regulation})Act 1956 would have been invoked. 
 It may be significant to note here that if the concerned director of the company is a
promoter , manager or CEO of the other body corporate , then there is no need for
holding any shares in that body corporate to invoke these provisions . 

Transactions with Specified entities II

(B) Contract/Arrangement with a firm or other entity in which, such director is a partner,
owner or member, as the case may be. 

The term “firm” mentioned here ostensibly denotes a partnership firm under the Partnership
Act 1932, but the term “other entity” is meant to widen the coverage of this provision. Such
entities could be a Society, Hindu Undivided family or a sole propriety concern. Here only
the director is covered and not his relatives for invocation of these provisions. 

Disclosure at the Board meeting/ voting/ quorum

 This sub section {2} further mandates that the director shall disclose the nature of his
concern or interest at the meeting of the Board of Directors in which the contract or
arrangement is discussed. He is however, not permitted to participate in such meeting.
Consequently, he cannot vote which is to ensure that he will not be allowed to
influence and swing the decision process at the board proceedings in his favour. 
 It may be worth noting here that in case the transaction is with a related party he
cannot be present at the Board meeting in terms of Rule 15(2) of the Companies
(Meetings of Board and its Powers) Rules 2104. Since the transaction envisaged in
this section will generally constitute with related party it appears irrational that where
a director cannot be present in the meeting what is the further need to prohibit him to
participate in that meeting. Moreover, in terms of section 174(3) of the Companies
Act 2013 he shall be an interested director for which his presence shall not be counted
for quorum. But then, where he cannot be present in the meeting in terms of said Rule
16
Seth Mohanlal v Grain Chambers Ltd AIR 1959 All 276

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 15(2) for his related party transaction, what is the further need to provide that he is not
counted for quorum. 

Subsequent concern/interest
This sub section also stipulates by way of proviso that where any director who is not so
concerned or interested at the time of entering into such contract or arrangement, but
subsequently if he becomes concerned or interested after the contract or arrangement is
entered into, he is required to disclose his concern or interest, forthwith, when he becomes
concerned or interested, to the company. Alternatively, he needs to disclose at the first
meeting of the Board held after he becomes so concerned or interested.

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 VOIDABLE AT OPTION OF COMPANY
Where there is non-compliance of subsection (2) of Section 184with regard to disclosure by
the interested director or where there is participation by the interested director in the contract
or arrangement in which he is interested. It lays down that a contract or arrangement entered
into by the company with such non-compliance shall be voidable at the option of the
company. In such a situation, the company has the option to either avoid the said contract or
arrangement or confirm and validate it.17 

CONTRAVENTION
 This penultimate sub section (4) stipulates about contravention. If the director
contravenes the provisions of sub-section (1) or subsection (2), he shall be punishable
with imprisonment for a term which may extend to one year or with fine which shall
not be less than fifty thousand rupees but which may extend to one lakh rupees, or
with both. This sub section makes it clear that the onus of compliance is on the
director and for any contravention he is liable. As far as the company is concerned
there is no liability and it has the option to validate the offending contract or
arrangement in terms of sub section (3). In case it does not validate the same, the
contract or arrangement, becoming invalid thereby, cannot be proceeded with. 
 Noteworthy is the position that as per section 167(1)(c) of the new Act 2013 a
contravention shall result in office of the concerned director becoming vacant.

EXEMPTIONS
As per clause (a) of last sub section (5) of Section 184, no provision of this Section shall 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. Hence a
director cannot argue that by complying with this Section he can by-pass any other law which
also restricts him in this regard.

This clause (b) states that nothing in this Section shall apply to any contract or arrangement
entered into or to be entered into between two companies:- 

1. where any of the directors of the one company or two or more of them together 
2. hold/s not more than two per cent {2%} of the paid-up share capital in the other
company. 
This exemption is in line with section 299 {6} of the erstwhile Companies Act and is the
touch stone as to whether this Section 184 applies or not. 

But this is only limited to contract or arrangement between two companies only, and,
shareholdings of the directors are merely taken into account and not shareholding of their
relatives or other entities. This could be a loophole giving unintended exemptions where
although the shareholdings of concerned directors are below the threshold limit but their
relatives’/ entities’ shareholdings are beyond the said limit; still the exemption is available.
17
Amritsar Rayon & Silk Mills Ltd v Amirchand Sadesh (1988) 64 Comp cases 72 (Punjab and Haryana)

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 CONCLUSION

Disclosure of interest by directors can be termed as the most critical commencement of the
process of carrying out of statutory duties by them and goes a long way in establishing
corporate governance by avoiding conflict of interest. It should be followed by all directors at
all times in letter and spirit. Its scope and efficiency have been widened multi-fold with the
new regime implemented in 2013. The presence of important uncovered terms has made the
legislation easier to comprehend and implement with sections laying down proper procedure
and defining substantive rights largely.

Its scope has been the subject of debate multiple times before courts leading to a plethora of
Indian and international cases for substantive validity. Ultimately, the range has been
increased and continues to widen in order to accommodate the needs of the changing world
and contemporary society. However the fundamental principle remains a strong foundation or
bulwark for the validity of this duty of disclosure.

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