Summary: Section 184 of the Companies Act, 2013, governs a director’s duty to disclose his interest in contracts entered into by his company. While it broadly replaced Section 299 of the Companies Act, 1956, Section 184 introduces a notable narrowing of disclosure obligations and, more critically, an internal contradiction. The two per cent shareholding exemption in Section 184(5)(b) is drawn almost verbatim from the 1956 Act, yet it now collides with a status-based test introduced for the first time in Section 184(2)(a), which deems a director interested by virtue of being a promoter, manager or chief executive officer of the counterparty body corporate, irrespective of his shareholding. This blog examines that contradiction, traces it to its legislative origins, and argues that harmonious construction requires status-based obligation to prevail.

Introduction

A director is dutybound to disclose his interests in a company’s contracts. It is among the oldest safeguards in company law, representing the intersection between a director’s fiduciary duty and his personal stake elsewhere. When the Companies Act, 2013 (“2013 Act”), replaced Section 299 of the Companies Act, 1956 (“1956 Act”), Section 184 of the 2013 Act assumed this function. While Section 184 is a close successor of Section 299, it narrows the range of interests that a director must disclose, and within its own provisions, pits the test that creates disclosure obligation against the exemption that removes it.

The Legislative Shift

Section 299(1) of the 1956 Act applied to every director who was “in any way, whether directly or indirectly, concerned or interested” in the company’s contract. The phrase was deliberately wide as it relied on no shareholding threshold or no particular office requirement. Due to its wide nature[1], any real interest, however remote, had to be disclosed. The duty was tempered by a general-notice mechanism under Sections 299(2) and (3), and by an exemption under Section 299(6) for contracts between two companies where the directors held not more than two per cent of the other.

Section 184 of the 2013 Act operates on two levels. Section 184(1) mandates standing, periodic disclosure of a director’s interests in any company, body corporate, firm, or association—including shareholdings—at their first Board meeting, at the first meeting of each financial year, and upon any subsequent changes. These disclosures must be filed using Form MBP-1. Section 184(2) is a transaction-specific duty, and it is here that drafting becomes consequential. It opens with the familiar phrase “directly or indirectly… concerned or interested”, but then channels that interest through two specific gateways: first, a contract with a body corporate in which the director, alone or together with another director, holds more than two per cent of the body corporate, or of which he is a promoter, manager or chief executive officer (“CEO”); and second, a contract with a firm or entity in which he is a partner, owner or member. A director falling within either gateway must disclose his interest and shall not participate in the relevant Board meeting. The consequences under the 2013 Act are more stringent than under the 1956 Act: the contract is voidable at the company’s option under Section 184(3), a penalty follows under Section 184(4), and the director may vacate office under Section 167(1)(c) and (d). Further, Section 174(3) bars such interested directors from being considered for computation of valid quorum. Section 184(5) then carves out exemptions to Section 184(2) and exempts any contract between companies or bodies corporate where the directors hold not more than two per cent of the other.

A Narrower Gateway

The first change under Section 184(2) is easy to miss, because the provision retains the words “directly or indirectly”. However, these words are less impactful under the 2013 Act than under the 1956 Act. Under Section 299 of the 1956 Act, any contract in which a director was directly or indirectly interested triggered disclosure, whatever the counterparty and whatever the source of interest. Under Section 184(2) of the 2013 Act, that residual interest must flow through the closed list in clauses (a) and (b). An interest arising otherwise, even if it is via an economic stake not reflected in a shareholding above the threshold, may fall entirely outside the provision. The contract-specific duty to disclose and abstain is thus confined in a way as compared to Section 299. Standing disclosure under Section 184(1), the related-party transaction regime under Section 188, and the fiduciary duties under Section 166 of the 2013 Act continue to apply in parallel and provide some measure of residual protection.

The Two Per Cent Line Contradiction

The fundamental problem is within Section 184 itself. Section 184(2)(a) deems a director interested in a body corporate only if: the director, alone or together with other directors, holds more than two per cent of the body corporate, called as the shareholding test; and second is a status test, under which the director is a promoter, manager or CEO of the body corporate, irrespective of his shareholding.

Section 184(5)(b), however, frames its exemption solely based on shareholding. It excludes from the section’s effect any contract between companies or bodies corporate where the directors hold not more than two per cent of the other entity. Notably, it is silent on status.

On shareholding limb, the two provisions are complementary and not conflicting. Section 184(2)(a) applies to cases exceeding the two per cent threshold, whereas Section 184(5)(b) provides an exemption for instances at or below this limit. The real contradiction appears in the status limb. For example, a director serving as CEO, manager or promoter of the counterparty body corporate who holds two per cent or less of its shares—a scenario often encountered, given that CEOs may not hold any shares and promoters may substantially reduce their holdings over multiple funding rounds—falls within the scope of Section 184(2)(a) under the status limb. Such a director is required to disclose their interest and abstain from participating in relevant decisions. Yet, on a plain reading of Section 184(5)(b), the same contract is excluded from the scope of this section, since the shareholding does not exceed two per cent. The provision that creates the duty and the one that withdraws it apply to identical facts and arrive at opposite conclusions. The following table illustrates the conflict:

	Holds more than 2% of the body corporate	Holds 2% or less of the body corporate
Not a promoter/ manager/ CEO	Interested under s. 184(2)(a) (shareholding limb); not exempt. Consistent—disclose and abstain.	Not interested under s. 184(2)(a); exempt under s. 184(5)(b). Consistent—no obligation.
Is a promoter/ manager/ CEO	Interested under s. 184(2)(a) (both limbs); not exempt. Consistent—disclose and abstain.	Interested under s. 184(2)(a) (status limb), yet exempt under s. 184(5)(b). Contradiction.

Subsections of Section 184 contradict each other only in the red shaded cell, i.e., a promoter, manager or CEO holding two per cent or less. The likely cause is legislative layering. The two per cent exemption is carried over almost verbatim from Section 299(6) of the 1956 Act, where it made sense because the 1956 Act had no office-based or status test. The status test is new to Section 184(2)(a). A new, office-based trigger was added to an old, shareholding-based exemption, and the two were never reconciled.

Reconciling the Provisions

A court will not lightly hold either provision a nullity, and settled canons of statutory interpretation consistently support a singularapproach. The presumption against surplusage warns against a reading that reduces a provision to a dead letter: if Section 184(5)(b) disapplied the whole section whenever shareholding is two per cent or less, the status limb of Section 184(2)(a) would be largely otiose, defeating the very case it was designed to address. The principle of harmonious construction requires both provisions to be given effect wherever possible. Accordingly, Section 184(5)(b) ought to be confined to interests arising solely from a sub-threshold shareholding, leaving the status limb intact. A purposive reading and the rule against absurdity both point the same way. The object of Section 184 is to reveal conflicts of interest, and a promoter or CEO of the counterparty body corporate has a conflict regardless of the number of shares he owns. To exempt such a director merely because his shareholding is small would defeat the very purpose of the provision.

Why This Matters, and What Follows

The contradiction in the wordings of this section has huge practical ramifications. Given the consequences outlined above, a director who relies on the literal words of Section 184(5)(b), by neither disclosing his interest nor abstaining from the Board vote, takes a real legal risk, as courts may later prefer a harmonious reading of the section. The prudent course would be to treat the status limb as paramount. Therefore, a promoter, manager or CEO of the counterparty body corporate should consistently disclose any interest and abstain from participation, regardless of his shareholding. Section 184(5)(b) should be invoked only if the interest is genuinely passive and limited to a shareholding below the specified threshold. For listed companies, the point is sharper still, since Section 188 of the 2013 Act and Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, impose their own stricter compliance requirements, in which the two per cent exemption affords no shelter whatsoever.

The better fix is a clarificatory amendment confining Section 184(5)(b) to interests arising only from a sub-threshold shareholding, and expressly preserving the operation of the status limb in all cases. Until such an amendment is made, the contradiction is best resolved by harmonious construction in favour of disclosure.

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[1] Fire Stone Tyre and Rubber Co. Ltd. v Synthetics & Chemicals Ltd., (1970) 2 Comp LJ 200