This article has been written by Anlyn E S a student of Government Law College, Thrissur

Who is Director?

Before going to the details of interested director, let us take a look on the basics of a director. Since a company is an artificial person having no mind or body of its own, it can act only through human agents. Because of its artificial nature, its business is required to be entrusted to certain human agents known as Directors. They are the key persons who control the structure of the company. In the words of Neuile. J., “The Board of Directors are the brains, the only brain of the company which is body, and the company can and does act only through them”. Section 2(34) of the Company’s Act defines Director as “director‖ means a director appointed to the Board of a company”. 

The term ‘Interest’

Section 2(49) of the 2013 Act, states that “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 is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company”. In simple words, interest must be conflicting with the duties of the director towards the company. A formal disclosure is not necessary when the whole body is aware of the facts. Supreme Court once stated, there is no ban on a contract in which a director is interested, only that should be disclosed. Even when the interest is not disclosed the transaction is only voidable against the interested director and not void.

Disclosure of interest of Director

A director occupies a fiduciary position towards the company. Therefore, he should not make a profit from his position to except with the consent of the company to which he owes the duty of disclosure. A director is required to disclose his interest in three occasions: 

1. At the first Board meeting that he/she participates as a director 
2. At the first Board meeting of every financial year
3. At the first Board meeting held after any change in the disclosure made by him/her.

In many companies, at each meeting of the board the chairman requests the directors to disclose their interest in any contract or transaction listed in the agenda of the meeting. It is good for every director to give a written notice to the board at the Board meeting, by mentioning the companies /firms in which he is interested. It is better to review the director’s private interest whenever the company enters into any contract or agreement in order to see whether there is anything requiring his/her disclosure. 

Notice 

Where general notice is given to the Board as regarding the interest of the director in any contract or arrangement, it is not effective, unless the director concerned either gives it at a meeting of the board or take reasonable steps to secure that it is brought up and read at the next meeting of the board after it is given. Then the notice gets entered into the minutes of the board meeting at which it is given or read. The notice is also required to be given afresh year after year, so that new directors who may be coming into the board gets aware of the interest of that particular director. 

This general notice expires at the end of the financial year and a fresh notice is given by the director concerned. An interested director is required to give a general notice to the board of directors by stating the names of firms/companies in which he is interested. In case of a director is neither a director nor a member of the contractee company or a partner of the contractee firm, even then he will be required to give a general notice of interest. Once a director has given a general notice of interest it is not necessary for him to once again disclose his interest when the matter comes up before the board.

Accountability for profit 

In the case, Guinness plc v. Saunders, the court held that, ‘the director who is responsible is bound to handover the benefits, that he may have got under transaction and cannot ask for set-off for any claim that he may have against the company. A director should not hold an office of profit under the company. If this offence is committed, it is not necessary to take consent of the central government for the prosecution of the that director. The period which is spend on obtaining permission is not to be extended from the period of limitation. 

Liabilities of a Nominee Director

A nominee director should not be in charge of the Company’s affairs. He/she is not liable for the failures of the company. The nominee director’s duty is to watch the interest of the institution. They suffer from a conflict of duty and interest. He/she owes a duty to the nominator but he/she is sitting in the Board of denominator. A holding company nominate majority of directors in the subsidiary company’s Board who remained docile and because of their inaction, the holding company suppressed the business of the subsidiary. Here the court allowed the alternative relief of compelling the holding company to refund the minority investment in the subsidiary taken at a value before repressive policy began. The court observed that the nominee directors cannot consider themselves as merely the watchdog of the nominators interest. No problem arises so long as the interests of both the companies are in harmony. But when their interest is at a conflict, the nominees would be placed in an impossible position, [Scottish Coop Wholesale Society v. Meyer, 1959 AC 324: (1958)3 WLR 404 (HL).

In another case the nominator company and the nominees were sued by those who lost their investment because of acting upon financial statements issued by the nominees on behalf of the denominator company, the statements being false. They were held not liable because shareholders or investors who appoint or nominate directors owe no duty to anybody about their illegal functioning unless there is some impropriety in the conduct of the nominator. But the judges were agreed that the nominee directors are in the same position as other directors and owe the same duties. [Selangor United Rubber Estates Ltd v Cradock (No 3), (1968) 1 WLR 1555: (1968) 2 AII ER 1073]

Contract without disclosure voidable

According to section 184 (3) of the 2013 Companies Act, the company shall be entitled to avoid a contract which is entered into by the company:

1. Without disclosure under section 184 (2)
2. With participation of the director who is concerned directly or indirectly in the contract.

Consequences of non-disclosure 

Failure to comply with the requirements of section 184 of the 2013 Act will cause vacation of the office of the director under section 167(1)(c) and (d) of the 2013 Act and will also subject the concerned director to the penalty prescribed under sub-section (4) of section 184 of the 2013 Act.

Every director who fails to comply with section 184 of the 2013 Act with respect to his disclosure of his interest in the company will be punishable with imprisonment which may extend to one year or with fine of minimum amount of RS. 50,000 which may extend to Rs. 1,00,000 or with both.

References

1. Company Law, A. Ramaiya
2. Company Law, N.C. Jain
3. Company Law, Avatar Singh

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