Compliance Management, Audit and Due Diligence · Due Diligence

Due Diligence and Directors' Duties under Section 166

Updated 11 October 2026 · Fact-checked

Due diligence is the careful checking of facts, records and compliance before a decision is taken. Section 166 requires every director to act with due and reasonable care, skill and diligence and independent judgment. You answer exam questions by stating the duty, applying it to the facts, and concluding on liability and the company secretary's role.

Understand Due Diligence Under Companies Act, 2013 and Directors' Duties

Due diligence means checking facts before you act. A director who approves a deal, a loan or a filing without checking the underlying records may fail the standard the law sets.

Section 166 lists the duties of a director. A director must act in accordance with the articles, act in good faith to promote the objects of the company for the benefit of members as a whole, and also have regard to employees, shareholders, the community and the environment. A director must exercise due and reasonable care, skill and diligence and independent judgment.

Two more duties protect against self-interest. A director must not be in a situation where a direct or indirect interest conflicts, or may conflict, with the company's interest. A director must not make or attempt to make undue gain or advantage for himself or his relatives, partners or associates. If found guilty of undue gain, he must pay an amount equal to that gain to the company. A director cannot assign his office, and any assignment is void.

Due diligence is how a director proves care and diligence in practice. Asking for documents, questioning management, taking professional advice and recording the reasons in the minutes all show that the duty was exercised.

The company secretary supports this. Under section 205, the functions of the company secretary include reporting to the Board on compliance with the Act, the rules and other applicable laws, and ensuring compliance with applicable secretarial standards. This does not reduce the duties of the Board, the chairperson, the managing director or a whole-time director. Responsibility stays with the directors.

Key rules to remember

Duty to act per articles (s.166(1)): Director acts in accordance with the articles, subject to the Act; The articles guide the action. The Act prevails over them.
Good faith duty (s.166(2)): Good faith → promote objects → benefit of members as a whole + best interests of company, employees, shareholders, community, environment; Not only shareholder interest.
Care, skill, diligence and independent judgment (s.166(3)): Due and reasonable care + skill + diligence + independent judgment; This is the link to due diligence.
Conflict of interest (s.166(4)): No situation of direct or indirect interest that conflicts, or possibly may conflict, with the company's interest; Even a possible conflict is covered.
Undue gain (s.166(5)): Liability = amount equal to the undue gain, payable to the company; Applies to gain for himself or his relatives, partners or associates.
No assignment of office (s.166(6)): Assignment of office by director = void; A director cannot delegate the office itself.
Penalty for contravention (s.166(7)): Fine: minimum ₹1,00,000, maximum ₹5,00,000; Applies to the director who contravenes the section.
Functions of company secretary (s.205(1)): Report to Board on compliance + ensure compliance with secretarial standards + other prescribed duties; Section 205(2): does not affect duties of the Board, chairperson, MD or WTD.

How to solve Due Diligence Under Companies Act, 2013 and Directors' Duties questions

Use this order for any case question linking due diligence, directors' duties and the company secretary.

1Read the facts and list who acted (director, Board, CS) and what they did or failed to check.
2Identify the duty breached or relied on: articles, good faith, care and skill, independent judgment, conflict, undue gain or assignment.
3State the provision of section 166 in plain words, with the sub-section if you are sure.
4Apply it: what due diligence was reasonable here, and was it done (documents checked, questions asked, advice taken, minutes recorded)?
5Bring in the company secretary: reporting of compliance to the Board under section 205, and that Board duties remain with the directors.
6Conclude on liability: fine of ₹1,00,000 to ₹5,00,000 under section 166(7), and repayment of any undue gain to the company.
7Add practical points: record reasons in minutes, keep the due diligence file, and disclose any interest.

Quickest way: Duty-Facts-Consequence in three lines

When to use it: When time is short and the question asks for a brief opinion.

Name the sub-section duty that matches the facts (for example 166(3) for failure to check).
Link the facts to it in two sentences: what was not checked or what interest was hidden.
Conclude with the consequence (fine of ₹1,00,000 to ₹5,00,000; undue gain repayable) and note the CS's reporting role under section 205.

Common mistakes in Due Diligence Under Companies Act, 2013 and Directors' Duties

Saying the company secretary is liable instead of the directors for failing to exercise care.
Students assume the CS carries all compliance responsibility.
Fix: State that section 205(2) leaves the duties of the Board and directors unaffected. The CS reports and advises; the directors decide.
Writing that directors only owe duties to shareholders.
Older notions of shareholder primacy.
Fix: Quote section 166(2): members as a whole, and the best interests of the company, employees, shareholders, community and environment.
Stating the wrong fine under section 166(7).
Confusing it with other penalty provisions.
Fix: Remember: not less than ₹1,00,000, may extend to ₹5,00,000.
Ignoring possible conflicts and treating only actual conflicts as a breach.
Skipping the words 'possibly may conflict'.
Fix: Section 166(4) covers a situation where an interest conflicts or possibly may conflict.
Missing the remedy for undue gain.
Focusing only on the fine.
Fix: Add that a director guilty of undue gain must pay an amount equal to that gain to the company under section 166(5), besides the fine.
Writing a theory answer with no application to the facts.
Memorised text is easier than analysis.
Fix: Follow provision, analysis, conclusion. Tie each sentence to a fact in the question.

Worked examples

Example 1

The Board of Sundaram Textiles Ltd approved the purchase of a factory from a firm for ₹12,00,00,000 on the managing director's recommendation. Director Mr. Rao did not ask for title documents or any valuation and signed the resolution. Later the price was found to be inflated. Advise on Mr. Rao's position.

Show the solution

Duty: section 166(3) requires due and reasonable care, skill and diligence and independent judgment.
Application: Mr. Rao relied only on the managing director's recommendation. He did not seek title documents or a valuation, so he did not exercise independent judgment or reasonable diligence.
Due diligence that was expected: checking title and encumbrances, obtaining an independent valuation, questioning the price and recording reasons in the minutes.
Consequence: contravention of section 166 attracts a fine of not less than ₹1,00,000 and up to ₹5,00,000 under section 166(7).
Company secretary: the CS should report compliance matters to the Board under section 205, but this does not relieve directors of their own duties.

Answer: Mr. Rao breached the duty of due and reasonable care, skill and diligence and independent judgment under section 166(3). He is liable to a fine of ₹1,00,000 to ₹5,00,000 under section 166(7). The CS's reporting role does not reduce his responsibility.

Example 2

Mr. Iyer, a director of Kaveri Foods Ltd, knew that the company was about to buy raw material from a firm owned by his brother. He did not disclose this and the firm earned a profit of ₹8,00,000 above the market rate on the deal. Examine the position.

Show the solution

Conflict: section 166(4) bars a situation in which a director has a direct or indirect interest that conflicts, or possibly may conflict, with the company's interest. His brother's firm creates such a situation.
Undue gain: section 166(5) bars undue gain or advantage to himself or his relatives, partners or associates. The brother is a relative, and the excess profit was gained through the deal.
Remedy: if Mr. Iyer is found guilty of making undue gain, he must pay an amount equal to that gain to the company.
Fine: section 166(7) provides a fine of ₹1,00,000 to ₹5,00,000 for contravention.
Practical point: the company secretary should have flagged the interest to the Board and ensured disclosure and recording in the minutes.

Answer: Mr. Iyer contravened section 166(4) and 166(5). If found guilty of undue gain, he must pay an amount equal to the gain to the company, and he is liable to a fine of ₹1,00,000 to ₹5,00,000 under section 166(7).

Exam tips

Quote section 166(3) words exactly: due and reasonable care, skill and diligence, and independent judgment.
Always add the fine range of ₹1,00,000 to ₹5,00,000 in the conclusion.
In case questions, show what due diligence a prudent director would have done before saying the duty was breached.
Mention section 205 whenever the CS appears in the facts, with the point that directors' duties remain unaffected.
Use short headings in your answer: provision, analysis, conclusion, practical points.

Practice questions from Due Diligence

Due Diligence Under Companies Act, 2013 and Directors' Duties in other exams

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

Due Diligence Under Companies Act, 2013 and Directors' Duties: frequently asked questions

What does section 166 of the Companies Act, 2013 deal with?

It sets out the duties of directors. These include acting per the articles, acting in good faith, exercising care, skill, diligence and independent judgment, avoiding conflicts, not seeking undue gain, and not assigning the office.

How is due diligence linked to a director's duty of care?

Section 166(3) requires due and reasonable care, skill and diligence. Due diligence, such as checking documents and taking advice, is how a director shows that the duty was met.

What is the penalty for breach of section 166?

Under section 166(7), the director is punishable with a fine of not less than ₹1,00,000 and up to ₹5,00,000. Undue gain must also be paid to the company under section 166(5).

What is the role of the company secretary in due diligence?

Under section 205, the CS reports to the Board on compliance with the Act, the rules and other applicable laws, and ensures compliance with applicable secretarial standards. The CS supports directors but does not replace their duties.