A Comprehend on Disclosure of interest by Directors -BY CS Annu Sharma

Dear Professionals.

Hoping you all are well there!!!

In this write up I am going to share the quick review of a Compliance which is generally neglected by majority of the companies as the form is not deployed as E-form on MCA portal therefore many companies forget to keep the record of MBP-1 form specially in case of private companies.

Many of them do this compliance at the time of appointment of the director but later on couldn’t continue this on annual basis which results in heavy penalty as per Section 184 (4) i.e. Min. 50,000 and maximum upto 1 lac along with imprisonment upto 1 year or both. Let’s just understand the importance of compliance under section 184 of Companies Act, 2013.

This write up 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.      What Section 184 describes?

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.

Section 184 Says every director after his appointment should disclose about his material interest he has in any body corporate, firm, company or any other entity in Form MBP-1 in his first board meeting which he attends after appointment and in the first board meeting of every financial year. Apart from this any time during the financial year he finds the change in interest, he should disclose about the change in interest in immediately succeeding board meeting.

IN CASE DIRECTOR IS INTERESTED IN ANY CONTRACT OR ARRANGEMENT ENTERED BY THE COMPANY

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.

A contract or arrangement entered into by the company without disclosure under Aforementioned Paragraphs 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.

PLACE OF MAINTENANCE OF THE NOTICES

All notices shall be kept at the registered office of the company. 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 authorized by the Board of Directors for the purpose. If there is any other person authorized 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).

PENALTY UNDER COMPANIES ACT, 2013 AS PER SETION 184 (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.

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 5-6-2015].

In case of Section 8 companies (company registered under the Companies Act, 2013 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 5-6-2015]. I

n 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, 2005 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 4-1-2017]. 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.

OVERRIDING ASPECTS OF THIS SECTION

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.

DRAFT FORMAT OF MBP-1

FORM MBP – 1

Notice of interest by director

[Pursuant to section 184 (1) and rule 9(1)]

To

The Board of Directors

………………… Limited

Dear Sir(s)

I, …………. , son/daughter/spouse of……………… , resident of……… , being a director in the company hereby give notice of my interest or concern in the following company or companies, bodies corporate, firms or other association of individuals:-

Sl No.	Names of the Companies /bodies corporate/ firms/ association of individuals	Nature of interest or concern / Change in interest or concern	Shareholding	Date on which interest or concern arose / changed

Place:
Date:

Signature:
MD/Director/Secretary/Whole time Director

CONLUDING NOTE:

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.

The Author is a Company Secretary based at Jaipur, Rajasthan and can be reached at csannusharma123@gmail.com and also can be contacted at 7021848742.