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

Director Mr. Iyer of Lotus Foods Ltd approved a large related-party purchase after glancing at a one-page note, without asking for supporting quotes or checking the counterparty. Later the company suffered loss. Under section 166 of the Companies Act, 2013, which duty is most directly implicated, and what is the minimum fine on contravention?

The duty under section 166(3) to exercise due and reasonable care, skill and diligence and independent judgment is implicated. Contravention attracts a fine of not less than Rs 1 lakh, extending up to Rs 5 lakh, under section 166(7).

  1. ADuty not to assign office; fine not less than Rs 25,000
  2. BDuty of due and reasonable care, skill and diligence with independent judgment; fine not less than Rs 1 lakhCorrect
  3. CDuty to act per articles only; fine not less than Rs 5 lakh
  4. DDuty to avoid conflict of interest; fine not less than Rs 10,000

Explanation

Section 166(3) requires a director to exercise duties with due and reasonable care, skill and diligence and independent judgment. Section 166(7) fixes the fine at not less than Rs 1 lakh, extendable to Rs 5 lakh. Rs 5 lakh is the maximum, not the minimum.

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