Corporate and Other Laws · Management & Administration

Related Party Transactions and Director Interests (Sections 184, 185 and 188)

Updated 4 October 2026 · Fact-checked

Section 184 makes directors disclose their interests. Section 188 needs Board consent, and above prescribed limits shareholder approval, for contracts with related parties. Section 185 bars loans to directors and their relatives, with narrow exceptions. Solve by naming the section, checking its conditions, then stating the consequence.

Understand Related Party Transactions and Director Interests

A director holds a position of trust. If the company deals with the director, or with a firm or company the director is linked to, the director may favour himself over the company. The Companies Act, 2013 handles this risk in three layers: disclosure, approval and prohibition.

Section 184 (disclosure). Every director must disclose his concern or interest in other companies, bodies corporate, firms or associations, including shareholding. He does this at the first Board meeting in which he participates, at the first Board meeting of every financial year, and at the first Board meeting after any change in what he disclosed. Separately, if a director is interested in a contract with a body corporate where he (alone or with another director) holds more than 2% shareholding, or is a promoter, manager or CEO, or with a firm or entity where he is a partner, owner or member, he must disclose the nature of his interest at the Board meeting where the contract is discussed and must not participate in that meeting.

Section 188 (approval). A company cannot enter into a contract with a related party for the listed matters without Board consent given by a resolution at a Board meeting. The listed matters are: sale, purchase or supply of goods or materials; sale or purchase of property; leasing of property; availing or rendering of services; appointing an agent for purchase or sale; the related party's appointment to an office or place of profit; and underwriting the company's securities. Where the prescribed limits are crossed, prior approval of the company by a resolution (an ordinary resolution since 2015) is also needed. The related-party members cannot vote on it. The limits are set in the Rules, so do not quote figures unless the question gives them.

Section 185 (prohibition). A company cannot, directly or indirectly, give a loan (including a loan shown as a book debt), a guarantee or security for a loan to any director of the company or of its holding company, to a partner or relative of such a director, or to a firm in which such a director or relative is a partner. Loans to a person in whom a director is interested are allowed only with a special resolution, and the borrower must use the money for its principal business activities. Section 186 separately governs loans and investments by a company generally, and sets limits that need Board or special resolution approval. Do not confuse it with section 185.

Key rules to remember

Section 184(1): general disclosure: Disclose at: first Board meeting as director + first Board meeting of every financial year + first Board meeting after any change; Covers concern or interest in companies, bodies corporate, firms or associations, including shareholding.
Section 184(2): interested in a contract: Interest > 2% shareholding, held alone or in association with any other director (or promoter/manager/CEO), of a body corporate, or partner/owner/member of a firm → disclose at the Board meeting + do not participate; If he becomes interested after the contract is entered into, he discloses forthwith or at the first Board meeting after that. Holdings of directors in association are added together for the 2% test.
Section 184(3), (4) and (5)(b): consequences and exemption: Contract without disclosure or with participation = voidable at the option of the company; director's penalty = ₹1 lakh; Section 184 does not apply between two companies (or bodies corporate) where the directors of one, individually or together, hold not more than 2% of the paid-up share capital of the other.
Section 188(1): Board consent: Related party contract on the 7 listed matters → Board resolution at a meeting; above prescribed limits → also prior company resolution; Related-party members cannot vote on the company resolution. The vote bar does not apply where 90% or more of members are relatives of promoters or related parties.
Section 188 exemptions: No approval resolution needed for (a) ordinary course of business at arm's length; (b) holding company and wholly owned subsidiary whose accounts are consolidated and placed before shareholders; Ordinary course alone is not enough. A transaction not on an arm's length basis is not exempt.
Section 188(3): ratification: Contract without consent or approval → ratify within 3 months, else voidable at the option of the Board or shareholders; If the contract is with a related party to any director, or authorised by any other director, the directors concerned indemnify the company against loss.
Section 188(5): penalty: Listed company: ₹25 lakh. Any other company: ₹5 lakh. Imposed on the director or employee who entered into or authorised the contract; Section 188(2) also requires the contract to be referred to in the Board's report with the justification.
Section 185(1) and (2): Loan/guarantee/security to director, partner or relative, or a firm in which they are partners = prohibited. To a person in whom a director is interested = special resolution + use for principal business activities; Interested persons include a private company where the director is a director or member, and a body corporate where he controls 25% or more of the voting power.
Section 185(4): penalty: Company: fine ₹5 lakh to ₹25 lakh. Officer in default: up to 6 months' imprisonment or fine ₹5 lakh to ₹25 lakh. Borrowing director/person: up to 6 months' imprisonment or fine ₹5 lakh to ₹25 lakh, or both; Penalties are on the company, the officer in default, and the person who got the loan.

How to solve Related Party Transactions and Director Interests questions

Most questions give a short fact pattern and ask whether an action is valid and what follows. Use the same order every time.

1Identify the nature of the act. Is it a director's disclosure of interest (section 184), a contract with a related party (section 188), or a loan, guarantee or security (section 185)?
2Mark the parties. Is the other side a director, relative, firm, private company or body corporate? Note shareholding percentages, partnership status and whether the company is listed.
3Apply the section's test. For 184, check the more than 2% test (adding the holdings of directors in association) or the partner/owner/member test. For 188, check whether it is one of the seven listed matters. For 185, check who the borrower is.
4Check exemptions. For 184, the 2% inter-company exemption. For 188, ordinary course at arm's length, and holding-wholly owned subsidiary. For 185, loans to a managing or whole-time director under service conditions, and loans to a wholly owned subsidiary.
5Check the procedure. Was there disclosure and non-participation? Board resolution at a meeting? Company resolution where limits are crossed? Special resolution under 185(2)? Were related-party members kept out of voting?
6State the consequence: voidable contract, ratification within three months, indemnity, penalty amount, or fine and imprisonment.
7Write in provision-facts-conclusion format: state the rule, apply it to the facts, and give a clear final answer.

Quickest way: Three-question filter for MCQs and short answers

When to use it: Use for MCQs (30 marks, no negative marking, so always attempt) and for the first two lines of any written answer.

Ask 1: Is it a disclosure? Think section 184, the more than 2% test, and no participation.
Ask 2: Is it a contract with a related party? Think section 188, Board consent, then company resolution above the prescribed limits.
Ask 3: Is it money going out (loan, guarantee, security)? Think section 185, which is prohibited for directors and relatives and needs a special resolution for interested persons.
For MCQs, eliminate options with wrong numbers first: 2%, 25%, 3 months, ₹1 lakh, ₹5 lakh, ₹25 lakh. Then check which option mixes up sections.
In written answers, use this format: Provision (section and rule), Facts (apply with numbers), Conclusion (valid or voidable, and the penalty). This earns step marks even if the final conclusion is off.

Common mistakes in Related Party Transactions and Director Interests

Saying section 188 needs a special resolution.
Older material and section 185 both use a special resolution.
Fix: Under the present text, the section 188 approval is by a resolution (earlier 'special resolution' was replaced in 2015). A special resolution is for section 185(2).
Treating every ordinary-course transaction as exempt from section 188.
Students remember 'ordinary course of business' and stop reading.
Fix: The exemption covers ordinary course transactions, but the proviso excludes transactions that are not on an arm's length basis. Check both conditions.
Applying section 184(2) when the director holds exactly 2%, or testing each director's holding in isolation.
The words 'more than two per cent' are missed, and so is the limb 'in association with any other director'.
Fix: Section 184(2)(a) needs more than 2%, held by the director or by the director in association with any other director. Add the holdings of the directors together. Section 184(5)(b) exempts a contract between companies or bodies corporate only where the directors of one, individually or together, hold not more than 2% of the paid-up share capital of the other. A director with 2% or less, who is not associated with other directors whose combined holding exceeds 2%, is not caught under 184(2)(a).
Saying the interested director may attend the meeting and vote.
Students remember only the disclosure duty.
Fix: Under 184(2) the director must disclose his interest at the meeting and must not participate. Participation makes the contract voidable at the option of the company.
Mixing up who is penalised and how much under sections 184, 185 and 188.
All three have lakh-rupee penalties.
Fix: Learn: 184 = ₹1 lakh on the director. 188 = ₹25 lakh (listed) or ₹5 lakh (other) on the director or employee. 185 = fine ₹5 lakh to ₹25 lakh, plus imprisonment up to 6 months for officers in default and borrowers.
Treating a contract made without approval as automatically void.
'Void' and 'voidable' sound alike.
Fix: Under 184(3) and 188(3) the contract is voidable at the option of the company (or Board or shareholders), not void. Under 188(3), ratification within three months can save it.

Worked examples

Example 1

A Ltd's Board discusses a supply contract with B Ltd. Director Ravi holds 3% of B Ltd's shares and did not disclose his interest. He took part in the meeting and voted. Another director, Sunil, holds 1.5% of B Ltd and is also interested in the contract. Sunil too did not disclose his interest and took part in the discussion. Advise on the position of both and the consequences.

Show the solution

Provision: Under section 184(2)(a), a director interested in a contract with a body corporate in which he, or he in association with any other director, holds more than 2% shareholding must disclose the nature of his interest at the Board meeting and must not participate.
Ravi: His 3% alone is more than 2%, so section 184(2) applies. He neither disclosed nor stayed out, so he breached the section.
Sunil: His 1.5% alone does not exceed 2%. But section 184(2)(a) also covers a director who holds more than 2% in association with any other director. Applying that limb, the holdings of Ravi and Sunil are taken together: 3% + 1.5% = 4.5%, which is more than 2%. So Sunil is also within section 184(2)(a). Because he is interested in the contract, he had to disclose the nature of his interest and not participate in the meeting. On the facts he did neither, so he too contravened the section.
Exemption check: Section 184(5)(b) exempts a contract between two companies only where the directors of one, individually or together, hold not more than 2% of the other. Here Ravi and Sunil together hold 4.5% of B Ltd, so the exemption is not available.
Consequence for the contract: Under 184(3), a contract entered into without disclosure, or with participation by an interested director, is voidable at the option of the company.
Consequence for the directors: Under 184(4) a director who contravenes section 184(2) is liable to a penalty of ₹1 lakh. Ravi and Sunil both contravened it, so each is liable to ₹1 lakh. Had the facts shown that Sunil disclosed his interest and stayed out of the meeting, he would not be liable under 184(2). Both also had a general duty under 184(1) to disclose their shareholding at the first Board meeting of each financial year.

Answer: Ravi has contravened section 184(2) on his own 3% holding. Sunil is also within section 184(2)(a) because, in association with Ravi, the directors hold 4.5%, which is more than 2%, and he neither disclosed nor stayed out. The section 184(5)(b) exemption does not apply. The contract is voidable at A Ltd's option, and each of Ravi and Sunil is liable to a ₹1 lakh penalty.

Example 2

X Ltd (an unlisted company) entered into a contract to lease a building from the spouse of its director, a related party. Neither Board consent nor any required company approval was obtained. After 5 months the Board wants to know the legal position. Advise.

Show the solution

Provision: Leasing of property of any kind is one of the matters listed in section 188(1)(c). Board consent by resolution at a meeting is needed, and prior company approval by resolution if the prescribed limits are crossed.
Exemption check first: Section 188 does not apply to a transaction in the ordinary course of business, unless it is not on an arm's length basis. The facts do not say the lease is an ordinary-course transaction at arm's length, so we proceed on the basis that the exemption is not shown to apply.
Facts: The counterparty is a related party. No Board consent and no approval was obtained. The contract has also not been ratified, and five months have passed.
Ratification window: Under 188(3), the contract must be ratified by the Board or shareholders within three months from the date it was entered into. That period has expired.
Consequence for the contract: Under 188(3) it is voidable at the option of the Board or, as the case may be, of the shareholders. It is not void.
Indemnity under 188(3): Because the contract is with a related party to a director, the directors concerned must indemnify the company against any loss it incurs.
Recovery under 188(4): Separately, and without prejudice to 188(3), the company may proceed against the director or other employee who entered into the contract in contravention of the section, to recover any loss it sustained.
Penalty: Under 188(5)(ii), for a company that is not listed, the director or employee who entered into or authorised it is liable to a penalty of ₹5 lakh.

Answer: Assuming the lease is not an arm's length ordinary-course transaction, it is voidable at the option of the Board or shareholders, as ratification was not done within three months. Under section 188(3) the directors concerned must indemnify X Ltd for any loss. Under 188(4) the company may also proceed against the director or employee who entered into the contract to recover its loss. The person who entered into or authorised it faces a penalty of ₹5 lakh, since X Ltd is unlisted.

Exam tips

Learn the numbers as a set: 2% (section 184), 25% voting power (section 185 interested person), 3 months (section 188 ratification), ₹1 lakh (184), ₹5 lakh and ₹25 lakh (188 and 185).
In case studies, underline percentages and relationships first. Add the holdings of directors who act together before applying the 2% test. Then decide which of 184, 185 or 188 applies before writing anything.
Always write the consequence: voidable, ratification, indemnity or penalty. Many students identify the section but lose marks by omitting the outcome.
For section 185 questions, split the answer: prohibited persons under 185(1), and the special resolution route for interested persons under 185(2), with the principal business activities condition.
Do not quote threshold amounts for section 188 approvals unless the question supplies them, since these come from the Rules.

Practice questions from Management & Administration

Related Party Transactions and Director Interests in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Related Party Transactions and Director Interests: frequently asked questions

What is the difference between section 184 and section 188?

Section 184 is about the director's own duty to disclose his interest and stay out of the discussion. Section 188 is about the company's duty to get Board consent, and sometimes shareholder approval, before contracting with a related party on the listed matters. Section 184 protects the process, and section 188 controls the transaction.

Can a company ever give a loan to a director under section 185?

Not as a general rule, because section 185(1) prohibits loans, guarantees and security to directors, their partners and relatives, and to firms where they are partners. Section 185(3) gives exceptions, for example a loan to a managing or whole-time director as part of service conditions applicable to all employees or under a scheme approved by a special resolution. Loans between a holding company and its wholly owned subsidiary are also exempt, if used for the subsidiary's principal business activities.

Does a related party have to abstain from voting under section 188?

Yes. Where a company resolution is needed, no member who is a related party can vote to approve the contract. The exception is a company where 90% or more of the members, in number, are relatives of promoters or are related parties.

How is section 186 different from section 185?

Section 185 deals with loans, guarantees and security involving directors and persons connected to them. Section 186 deals with loans and investments made by a company generally, subject to limits and approval requirements. Read the question to see who the recipient is, then pick the right section.