The NCLT Mumbai Bench’s Ruling in Diven Dembla v. Precision Rubber Industries (2025)
Reasoning and Doctrinal Soundness
The Tribunal based its conclusion on a chain of authorities, citing: A. Sivasailam, Suryakant Gupta and Ravi Raj Gupta as aligning with the principle that Section 299 (and by parallel Section 184) is not infringed if “other members of the board must have had knowledge”. In Dembla, the bench expressly followed the “latest decision” of Ravi Raj, to hold that knowledge by the board satisfied disclosure, discarding T.K. Bose. Thus, on the surface, the Dembla Tribunal believed it was applying settled law that endorses substantial compliance.
However, this reasoning invites critique on both statutory and fiduciary grounds. Statutorily, Section 184’s phrasing is mandatory and personal: “Every director shall, disclose his concern or interest, to the board.” There is no express proviso carving out a “knowledge” exception, nor any clause authorizing passive compliance. A contrary interpretation arguably undercuts the statute’s design. Section 184(4) makes contravention of these very provisions punishable; section 167 automatically penalizes a director for not making the disclosure himself. If a director could simply rely on others’ awareness, the deterrent character of these sanctions is weakened. From a rule-of-law perspective, this risks uncertainty: directors cannot readily predict when silence is excusable. Indeed, the plain language suggests a clear duty on each director, as pointed out by T.K. Bose and by the Tribunal itself, which cited that case. The Dembla judgment arguably reads into the statute what is nowhere written.
On the other hand, fiduciary considerations underlie the knowledge doctrine: the law’s goal is to protect the company against undeclared conflicts. If a director’s interest is common knowledge among the decision-makers, one may ask what real harm is done by a missed formal announcement. The Dembla bench emphasized this pragmatic view: all contracts with Aarya were at arm’s length and ordinary course, with Dembla directors openly aware; no actual detriment was alleged. In that sense, the ruling stressed substance over form, echoing the idea that Section 184’s purpose is to flag conflicts, not to entrap.
But fiduciary duty normally demands strict compliance with conflict-of-interest protocols as a matter of principle. Courts often compare a director to a trustee – a fiduciary who must avoid all shadow of secret profits. Avanthi Explosives stated that a director’s disclosure duty is akin to that of a trustee of the shareholders. Under that view, even harmless non-disclosure could be a breach of duty. The Dembla ruling sidelines this strictness by treating knowledge as enough. One could argue that this softening undermines the fiduciary’s accountability: it relies on insiders policing themselves, which may fail if disputes later arise. The dissenting view is that boards should keep clean records to reassure outsiders, that even family affairs are above board.
In terms of statutory construction, Dembla follows the purposive trend in previous tribunals, but it arguably conflicts with the plain reading. Legal interpretation ordinarily disfavors reading in omissions. If Parliament had intended an “others’ knowledge” carve-out, it could have said so, as it did explicitly in limited exemption clauses, e.g. Section 184(5)(b) for minimal shareholdings. Instead, Section 184(2) is couched in mandatory terms, with no knowledge exception. An appellate court might find Dembla’s interpretation a bridge too far under principles like Ejusdem Generis (limiting broad reading of lists) or expressio unius. That said, tribunals are not bound by the literal rule to the extent it thwarts perceived corporate equity. Dembla effectively invokes noscitur a sociis (context suggests board consensus matters) and the mischief rule (aim to prevent undisclosed interest harming the company) to sanction its outcome.
Implications for Corporate Governance
The Dembla ruling has significant practical implications and iff accepted, it means boards may become complacent about formal disclosures where members are closely acquainted. On the positive side, it could reduce burdensome formalism in small companies or family firms, where everyone already knows who owns what. It aligns Section 184 with ground realities in such firms. However, this could be a double-edged sword. For larger or less transparent companies, it potentially opens a loophole: a director could skirt the disclosure obligation simply by trusting that someone else “knows.” The accountability built into corporate governance depends on clear record-keeping. The Dembla approach blurs lines of personal responsibility.
Moreover, the policy of periodic MBP-1 filings and well-documented board minutes is partly to protect the company and outsiders from allegations of secret deals. If those safeguards are deemed unnecessary because directors in fact knew, it could embolden lax record-keeping. Creditors, investors and minority shareholders rely on statutory registers and annual filings to audit compliance. The knowledge-doctrine leaves them without evidence in writing of disclosures, undermining transparency.
Finally, consider the rule of law and equality. If Dembla is taken broadly, who decides when knowledge suffices? The same members who could benefit from nondisclosure might claim “we all know.” This may lead to inconsistent outcomes: one Tribunal or Court could accept knowledge evidence, another may insist on precise compliance. This patchwork approach could undermine uniform corporate governance practices.
Critical Appraisal and Doctrinal Soundness
Whether Dembla’s reasoning is sound depends on one’s weightings of legislative text versus context. The Tribunal courageously applied the “latest and highest” precedents of Delhi HC over older CLB decisions, which reflects a respect for hierarchical authority. From a purposive standpoint, one might sympathize: why penalize a director who has openly run transparent transactions, simply because he omitted a formality when his partners already knew the facts? Yet, legal consistency demands caution. Dembla effectively held that the knowledge of co-directors cleanses the error of the non-interested director. If this principle is taken literally, it arguably transforms Section 184 into a conditional duty enforceable or not depending on board composition. That creates a doctrinal instability: was Section 184 intended to hinge on subjective awareness rather than objective proof? The text offers no mechanism for proving “board awareness,” making enforcement haphazard.
From a rule-of-law perspective, Dembla is disquieting. Statutes should be general and clear. By reading in this “group knowledge” exception, the Tribunal may have strayed beyond its interpretive bounds into policy-making. One might call this judicial activism: the court is effectively legislating an exception that Parliament did not explicitly authorize. On the other hand, tribunals are known to fill gaps in company law to do equity. Dembla is certainly in the mold of doing “complete justice,” but at a price of possible legal uncertainty.
In terms of fiduciary duty, one could argue that Dembla undermines the spirit of “no conflict” that underpins corporate ethics. If directors can rely on collective awareness, then a rogue director might clandestinely engage in related-party deals as long as one other director is in the know. That dilutes individual responsibility. Conversely, in a collegial board, penalizing an honest mistake by one director when others were vigilant might seem harsh. The nuance is that fiduciary duty is personal: each director must account for his stewardship of the company’s interests. The disclosure obligation is one manifestation of that duty. So even if one director is lenient or forgetful, another director’s vigilance should not fully absolve the lapse. The law traditionally treats disclosure as a non-delegable self-reporting duty.
Statutory construction norms like expressio unius, caution that one should not read words into an Act without textual support. Dembla risks doing exactly that. One could say that the Tribunal should have confined itself to relief on merits (declaring no prejudice, refusing compensation) and simply avoided disqualifying Niraj. That might have achieved justice without broadly endorsing the “knowledge sufficiency” doctrine in principle. Instead, the Tribunal went further by pronouncing what constitutes compliance.
Given that Dembla is a NCLT bench decision (not a final appellate court), its precedent value is limited until NCLAT or Supreme Court weighs in. But it will be cited in similar cases. It may embolden other tribunals to take a more commercial approach to technical infractions. This could pressure regulators (The Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC)) to tighten compliance checks or issue clarifications. It might also spur boards to double down on formal disclosures in their by-laws or codes of conduct, to avoid any ambiguity.
Way Forward: Clarifications, Reforms and Legislative Fixes
The Dembla controversy highlights a tension best settled by higher authority or legislative intent. A clear Supreme Court ruling or NCLAT decision on this point would greatly aid uniformity. The NCLT’s approach could be limited by a definitive judgment that either confirms the knowledge exception narrowly, e.g. applying only to genuine family firms, or reaffirms strict compliance. Until then, boards should heed both possibilities.
Regulatory steps are also possible. The Ministry of Corporate Affairs could issue guidance or amend the 2014 Board Meeting Rules to emphasize the necessity of formal disclosure, regardless of familiarity. For example, a clarification might state that MBP-1 is mandatory and cannot be waived by acquiescence. MCA might also require companies to keep in minutes a remark that “all directors are aware of [X]’s interest,” creating a hybrid solution if knowledge is to suffice. Clarifying FAQs could highlight that Section 184’s penal wording was deliberately made stringent in 2013.
Legislatively, if the policy view favors Dembla’s flexibility, then an amendment could legitimize it: for instance, by explicitly allowing that prior board notice, in written form or past minutes, counts as disclosure under Section 184(1) or (2). The Companies (Amendment) Bill could insert a proviso mirroring Section 299(3) of 1956 act, which had allowed a general notice to a board as disclosure. Conversely, if strictness prevail, Parliament could tighten the language to say that only the director with interest may satisfy the duty, and no implied consent or awareness by others will suffice. That would cement the literal rule.
In terms of corporate governance, companies might voluntarily adopt best practices: for example, always calling for an explicit interest note from each board member on every agenda, or keeping a register of known conflicts that is formally circulated each time. Such internal reforms could neutralize any ambiguity. Governance codes, as for listed companies, emphasize independent verification of disclosures; the Securities and Exchange Board of India could remind listed firms that reliance on informal awareness is unacceptable.
Ultimately, resolution requires balancing objectives. The legislature’s stance as reflected in Section 184’s text and stiff penalties, leans toward explicit compliance for the sake of rule-of-law and shareholder protection. The corporate reality of closely-knit boards leans the other way. A durable solution will likely be to reaffirm formal disclosure as the norm, while perhaps recognizing an evidentiary point: if challenged, a director might show that earlier no-objection minutes or personal communications put the board on notice. But even that could be enshrined more concretely in law or regulation.
Conclusion
The evolving jurisprudence on directors’ disclosure duties shows a pendulum swing, between formalism and pragmatism, over time. Diven Dembla v. Precision Rubber Industries represents the latest turn, effectively extending the duty to cover all directors having the “Knowledge” of a colleague’s interest. While this may solve some practical deadlocks, it raises serious concerns about statutory fidelity, fiduciary responsibility and governance clarity. The tribunal’s reasoning follows a pro-business spirit, but its doctrinal departure from Section 184’s clear wording cannot be lightly glossed over. At a minimum, companies and their counsel must now tread carefully and ensure written disclosure whenever doubt exists. More broadly, the law itself, whether through judicial review or legislative amendment, needs to articulate definitively whether knowledge alone is enough. A strong statement one way or the other would uphold the rule of law by putting directors on notice of their obligations. Pending that, the Dembla decision serves as a cautionary tale: even seemingly minor lapses in board procedures can have far-reaching implications for corporate governance and the balance between letter and spirit of the law.
(This post has been co-authored by Abd
CITE AS: Abd
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