This article has been written by Ms. Sheereen Iqbal, a student of South Calcutta College of Law, Calcutta.
INTRODUCTION
To start with this topic we will first discuss about the meaning of a director. A director of a company is also known as the officer of the company, who is a person appointed to give directions to the company. According to section 2(34) of Companies Act,2013 a director is a person appointed to the board of a company . There are many types of director which are, residential director, independent director, small shareholder directors, women director, additional director, alternate director, nominee director, executive director, non-executive director, managing director. Directors are mainly appointed for multiple roles in a company, they are responsible for managing, regulating and directing the company about its daily affairs.
Section 164(1)
clause (a) of companies act 2013 specifies that a person is ineligible to become a director of a company if he is of unsound mind.
Clause (b) of the same specifies that he is not eligible to become a director if he is an undischarged insolvent.
Clause (c) of the same says that if a person is adjudicated to be insolvent and his application is pending then he is ineligible to become a director.
Clause (d) says that if he is convicted by a court in any offence then he is ineligible to be a director.
According to clause (e) if an order is passed by the court to or the tribunal for disqualifying him, he becomes ineligible to to become a director.
According to clause (f) if he has not paid any calls in respect of any shares of the company and six months have passed from such date of call then he becomes ineligible for becoming a director.
Clause (g) further specifies that if he is convicted with the offence dealing with party transactions then he is ineligible to become a director of a company.
INTERESTED DIRECTOR
According to section 1(49) of companies act,2013 an “interested director” is a director who has an interest in a contract or arrangement, or a proposed contract or arrangement, entered into by or on behalf of a company, either directly or through one or more of his or her relatives, or a firm, body corporate, or other association of individuals in which he or any of his relatives is a partner, director, or member. A director is said to be an interested director, if a director’s personal interests collide with the interests of the firm, that director may be said to be involved. Even if a director does not find himself to be interested, his family may find him to be interested. Additionally, the interest does not always have to be financial .However a director who is interested in a particular issue is prohibited from voting on that issue. However, during discussions of such topics, the interested director may be present in the meeting.
DISCLOSURE OF INTEREST
Disclosure of interest mainly specifies disclosure by any director about his concern or interest or nature of such interest in any company or corporate body. According to section 184(1) of Companies Act,2013 every director must disclose his interests or concerns in any business, firm, body corporate, or association of individuals at the first board meeting or if there is a change in the directors’ interests.
Section 184(2) of companies act,2013 specifies that if any corporate director who is directly or indirectly involved in, or interested in, a prospective contract or agreement that has been entered into or is about to be entered into—
(a) with a corporation in which the director, individually or jointly with another director, owns more than 2%. is a promoter, manager, or the chief executive officer of that corporation, or has shares of that corporation,
(b) with a company or other entity where the director is a member, owner, or partner, as applicable , at the Board meeting where the contract or agreement is addressed, shall declare the nature of his concern or interest. The purpose of these provisions is to notify the Board of the extent of any director’s interest, whether direct or indirect, in any contract that the company proposes to execute.
Section 184(3) specifies that if a contract entered into by the company without disclosure or with the participation of the director who is concerned or interested in any way, shall be voidable at the option of the company.
According to Section 184(4) if a director of the company contravenes with the provisions of sub-section (1) or sub-section (2) shall be punishable with imprisonment which may extend till one year or fine or both. There are basically two types of disclosure, general disclosure and special disclosure. General disclosures should be made at the first board meeting when the director participates as a director or at the very first board meeting held in a fiscal year or at the first meeting after any modification or alteration is introduced in the previous disclosure. In case of special disclosures the disclosure should be made by the director where the contract is discussed in which the director is interested or in cases where the director is interested after the contract is entered. Further In accordance with Section 189 (2)’s regulations, KMPs (Key Managerial Personnel) must also inform the firm of the information listed in Section 184 (1) within 30 days of their appointment or resignation from their position. As in Smt. Sandeep Kaur Ahluwalia v. Mukat Pipes Ltd. &Ors., where it was decided that the section speaking about disclosures cannot be used if there is absence of personal interest on the side of the director, subsequent cases applied the sound reasoning in this case.
The flexibility of this provision was explored in Shailesh Harilal Shah &Ors. v. Matushree Textiles Ltd. &Ors, where it was determined that interest and duty are distinct and the section can only be utilised where a conflict has occurred. A firm enters into agreements and contracts in order to expand and develop its business. These choices are made by the directors, who have a fiduciary responsibility to act in the company’s best interest. It is important and difficult to know the nature of interest of the director, if it is a personal interest then there is a requirement of interplay of various factors. The court observed in Foster v. Foster, that a director can come in a contract or in an arrangement with a company but he must be prevented from voting in respect of the contract in which he is interested.
In accordance with Section 189 (2)’s regulations, KMPs (Key Managerial Personnel) must also inform the firm of the information listed in Section 184 (1) within 30 days of their appointment or resignation from their position.
OBJECTIVE BEHIND DISCLOSURE OF INTEREST
Now we will discuss the main purpose and object behind the disclosure of interest. The purpose of Section 184 of the Companies Act 2013, is to notify the directors of any conflicts between their duties and any board colleagues. The regulations are based on the idea that a director is prohibited from dealing with himself on behalf of the company and from engaging in transactions where his personal interests clash with or may potentially conflict with those of those he has a fiduciary obligation to safeguard.
CONCLUSION
Companies Act,2013 are having few objectives like, protecting interests of the of the investors, promoting transparency of corporate governance, restricting conflicts of interest, ensuring full disclosure of interests and daily affairs, to improve standard of corporate laws in the country and also to ensure clean and neat regulation of the company. All these objectives seems to get fulfilled by the sections introduced in the act regarding interested directors. This not only promotes transparency and clean communication but also restricts conflict of interest. As discussed above the judgements of decided cases have also helped to improve standards of corporate society.
SOURCES
1.Companies Act,2013
2. https://vinodkothari.com/wp-content/uploads/2017/03/FAQs_on_Section_184.pdf
3. https://taxguru.in/company-law/disclosure-interest-director-companies-act-2013.html
4. https://cleartax.in/s/directorships-section-165-companies-act-2013
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