Disclosure of Director's Interest

Boards sanction to be required for certain contracts in which particular directors are interested

Except with the consent of the Board of directors, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company

In case of a company having paid up share capital of at least Rs. 1 crore, no such contract can be entered into by the company without the previous approval of the Central Government.

However, the above provision will not affect:-

1. the purchase of goods and materials from the company or the sale of goods and materials to the company by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices.
2. any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for the sale, purchase or supply of any goods, materials or services in which either the company, or the director, firm, partner of private company, as the case may be regularly, trades or does business, provided that such contract or contracts do not relate to goods and materials the value of which or services, the cost of which exceeds five thousand rupees in the aggregate in any calendar year comprised in the period of the contract or contracts
3. in the case or a banking or insurance company, any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company.

A director, relative, firm, partner or private company may enter into a contract with the company for the sale, purchase or supply of any goods, materials or services even if the value exceeds Rs. 5000/- and the approval of the Board is not obtained in cases of urgent necessity. However, approval of the Board must be obtained at a meeting within 3 months of the date on which the contract was entered into.

Every consent of the Board under these provisions must be by a resolution passed at a meeting of the Board and either before the contract was entered into, or within 3 months of the date on which it was entered into.

Where such consent is not accorded to the contract, the contract shall be voidable at the option of the Board.

Procedure, etc, where director interested Disclosure of interests by director

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, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.

In the case of a proposed contract or arrangement, the disclosure required to be made by a director shall be made at the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after he comes so concerned or interested.

In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.

A general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made.

Any such general notice shall expire at the end of the financial year in which it is give, but may be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire (Form 24 AA).

No such general notice, and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concerned takes reasonable steps to secure that it is brought up and read at the first meeting of the Board after it is given.

Every director who fails to comply with the aforesaid provisions shall be punishable with fine which may extend to five thousand rupees.

Nothing in these provisions shall be taken to prejudice or adversely affect the operation of any rule of law restricting a director of a company from having any concern or interest in any contracts or arrangements with the company.

Nothing in these provisions shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of one company or two or more of them together hold not more than 2 % of the paid up capital in the other company.

Interested director not to participate or vote in Boards proceedings

No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement.

Nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote and if he does vote, his vote shall be void.

The above provision shall not apply to :-

1. a private company which is neither a subsidiary not a holding company of a public company
2. a private company which is a subsidiary of a public company, in respect of any contract or arrangement entered into, or to be entered into, by the private company with the holding company thereof
3. any contract of indemnity against any loss which the directors, or any one or more of them, may suffer by reason of becoming or being sureties or a surety for the company
4. any contract or arrangement entered into or to be entered into with a public company, or a private company which is a subsidiary of a public company, in which the interest of the director aforesaid consists solely :-

1. in his being a director of such company and the holder of not more than the qualification shares
2. in his being a member holding not more than 2 % of its paid-up share capital
5. a public company, or a private company which is subsidiary of a public company, in respect of which a notification is issued, to the extent specified in the notification.

In the case of a public company or a private company which is a subsidiary of a public company, if the Central government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any or the prohibitions contained above to the company, the Central Government may, by notification in the Official Gazette, direct that the said provisions shall not apply to such company, or shall apply thereto subject to such exceptions, modifications and conditions as may be specified in the notification.

Every director who knowingly contravenes the provisions of this section shall be punishable with fine which may extend to five thousand rupees.

Registrar of contracts, companies and firms in which directors are interested

Every company shall keep a register in which all contracts or arrangements in which directors are interested are entered into giving detailed information on

1. the date of the contract or arrangement
2. the names of the parties thereto
3. the principal terms and conditions thereof
4. the date on which it was placed before the Board
5. the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.

Particulars of every such contract or arrangement shall be entered in the register aforesaid within

1. 7 days ( exclusive of public holidays ) of the meeting of the Board where approval of the board is required
2. 7 days of the receipt of the particulars of such contract or arrangement at the registered office of the company or within 30 days of the date of such other contract or arrangement, whichever is later.

The register must be placed before the next meeting of the Board and must then be signed by all the directors present at that meeting.

The register must also specify in relation to each director of the company, the names of the bodies corporate and firms of which notice has been given by him wherein he has interest.

The above provisions do not apply to :-

1. any contract or arrangement for the sale, purchase or supply of any goods, materials or services if the value does not exceed Rs. 1000/- per annum
2. Any contract or arrangement by a banking company for the collection of bills in the ordinary course of its business or to any transaction with the director, , relative, firm, partner or private company as aforesaid in the ordinary course of its business.

If default is made in complying with the aforesaid provisions, the company, and every officer of the company who is in default, shall, in respect of each default, be punishable with fine which may extend to five hundred rupees.

The register aforesaid shall be kept at the registered office of the company, and it shall be open to inspection at such office, and extracts may be taken therefrom and copies thereof may, be required, by any member of the company to the same extent, in the same manner, and on payment of the same fee, as in the case of the register of members of the company.

Disclosure to members of directors interest in contract appointing manager, managing director

Where a company :-

• enters into a contract for the appointment of a manager of the company, in which contract and director of the company is in any way, whether directly or indirectly, concerned or interested or
• varies any such contract already in existence and in which a director is concerned or interested as aforesaid

the company shall, within twenty-one days from the date of entering into the contract or of the varying of the contract, as the case may be, send to every member of the company as abstract of the terms of the contract of variation, together with a memorandum clearly specifying the nature of the concern or interest of the director in such contract or variation.

Where a company enters into a contract for the appointment of a managing director of the company, or varies any such contract which is already in existence, the company shall send an abstract of the terms of the contract or variation to every member of the company within within twenty-one days from such date and if any other director of the company is concerned or interested in the contract or variation, a memorandum clearly specifying the nature of the concern or interest of such other director in the contract or variation shall also be sent to every member of the company with the abstract aforesaid.

Where a director becomes concerned or interested as aforesaid in any such contract as is referred to above after it is made, the abstract and the memorandum, if any, referred to above shall be sent to every member of the company within twenty-one days from the date on which the director becomes so concerned or interested.

If default is made in complying with the foregoing provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.

All contracts entered into by a company for the appointment of a manager, or managing director, shall be kept at the registered office of the company; and shall be open to the inspection of any member of the company at such office; and extracts may be taken therefrom and copies thereof may be required by any such member, to the same extent, in the same manner and on payment of the same fee, as in the case of the registrar of members of the company.

The provisions of this section shall apply in relation to any resolution of the Board of directors of a company appointing a manager or a managing or whole-time director, or varying and previous contract or resolution of the company relating to the appointment of a manager or a managing or whole time director, as they apply in relation to any contract for the like purpose.

Register of Directors

Every company shall keep at its registered office a register of its directors, managing director, manager and secretary, containing with respect to each of them the following particulars, that is to say:

1. in the case of an individual, his present name and surname in full, any former name or surname in full, his father's name and surname in full or where the individual is a married woman, the husband's name and surname in full, his usual residential address; his nationality; and, if that nationality is not the nationality of origin, his nationality of origin; his business occupation, if any; if he holds the office of director, managing director, manager or secretary in any other body corporate, the particulars of each such office held by him; and except in the case of a private company which is not a subsidiary of a public company, the date of his birth
2. in the case of a body corporate, its corporate name and registered or principal official and the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the director is a married woman, the husband's name and surname in full of each of its directors; and if it holds the office of manger or secretary in any other body corporate, the particulars of each such office
3. in the case of a firm, the name of the firm, the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the partner is a married woman, the husband's name and surname in full of each partner; and the date on which each became a partner; and if the firm holds the office of manager or secretary in any other body corporate, the particulars of each such officer
4. if any director or directors have been nominated by a body corporate; its corporate name; all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (b) in respect of the body corporate
5. if any director or directors have been nominated by a firm, the name of the firm, all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (c) in respect of the firm

The company shall, within the prescribed periods send to the Registrar a return in duplicate in the prescribed form ( form 32 ) within 30 days of appointment containing the particulars specified in the said register and a notification in duplicate in the prescribed form within 30 days of any change among its directors, managing directors or in any of the particulars contained in the register, specifying the date of the change.

If default is made in complying, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

Inspection of the register

The register kept shall be open to the inspection of any member of the company without charge and of any other person on payment of one rupee for each inspection during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impost, so that not less than two hours in each day are allowed for inspection.

If any inspection is refused :-

1. the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees; and
2. the court may, by order, compel an immediate inspection of the register.

Duty of directors etc., to make disclosure

Every director, managing director, manager or secretary of any company, who is appointed to or relinquishes the office of director, managing director, manager of any other body corporate must within 20 days of his appointment or relinquishment, disclose to the company aforesaid the particulars relating to the office in the other body corporate and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees.

Register of Director's shareholdings

Every company shall keep a register showing, as respects each director of the company, the number, description and amount of any shares in, or debentures, of the company or any other body corporate, being the company's subsidiary or holding company, or a subsidiary of the company's holding company, which are held by him or in trust for him, or of which he has any right to become the holder whether on payment or not.

Where any shares or debentures have to be recorded in the said register or to be omitted therefrom, in relation to any director, by reason of a transaction entered into and while he is a director, the register shall also show the date of, and the price or other consideration for, the transaction.

However, where there is an interval between the agreement for any such transaction and the completion thereof, the date so shown shall be that of the agreement.

The nature and extent of any interest or right in or over any shares or debentures recorded in relation to a director in the said register shall, if he so requires, be indicated in the register.

The said register shall, subject to the provisions of this section, be kept at the registered office of the company, and shall be open to inspection during business hours (subject to such reasonable restrictions as the company may, by its articles or in general meeting, impost so that not less than two hours in each day are allowed for inspection) as follows:-

1. during the period beginning fourteen days before the date of the company's annual general meeting and ending three days after the date of its conclusion, it shall be open to the inspection of any member of holder of debentures, of the company; and
2. during that or any other period, it shall be open to the inspection of any person acting on behalf of the Central Government or of the Registrar.

In computing the fourteen days and the three days mentioned above, any day which is a Saturday, a Sunday or a public holiday shall be disregarded.

The Central Government or the Registrar may, at any time, require a copy of the said register, or any part thereof.

The said register shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

Duty of directors and persons deemed to be directors to make disclosure of shareholdings

Every director of a company, must give notice to the company of such matters relating to himself as may be necessary for the purpose of enabling the company to company with the aforesaid provisions.

Any such notice shall be given in writing, and if it is not given at a meeting of the Board, the person giving the notice shall take all reasonable steps to secure that it is brought up and read at the meeting of the Board next after it is given.

Any person who fails to comply with the above provisions shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both

Article is by one of the reputed lawyer in the field of company law.