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CS Professional · Compliance Management, Audit and Due Diligence · Due Diligence

Director Mr. Arvind Rao of Kaveri Foods Ltd arranges for the company to buy raw material from a firm in which his brother is a partner, at a price above market, and the brother earns an extra profit. During due diligence, which statement about the consequence under section 166 is correct?

He must pay the company an amount equal to the undue gain if found guilty. Section 166(5) covers undue gain or advantage to the director or his relatives, partners or associates, so the gain accruing to his brother does not protect him from liability.

  1. AHe is liable to pay to the company an amount equal to the undue gain if found guilty of making itCorrect
  2. BHe is liable only if the board had not approved the purchase
  3. CHe is liable only to a fine of Rs 1,000 per day
  4. DHe is not liable as the gain accrued to his relative, not to him

Explanation

Section 166(5) bars a director from achieving or attempting to achieve undue gain for himself or his relatives, partners or associates. If found guilty of making undue gain, he must pay an amount equal to that gain to the company. Gain going to a relative does not escape the provision.

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