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

During due diligence on a target, Lakshmi Foods Ltd, the acquirer finds a director of the target who steered a contract to a firm owned by his brother and earned undue gain of Rs 8 lakh for the brother. Under section 166 of the Companies Act, 2013, what is the consequence for the director regarding the gain?

The director is liable to pay an amount equal to the undue gain to the company. Section 166(5) of the Companies Act, 2013 prohibits undue gain for himself or his relatives, partners or associates, and a guilty director must pay that amount back to the company.

  1. AHe is liable to pay an amount equal to the gain to the company if found guilty of making undue gainCorrect
  2. BHe must pay double the gain to the shareholders
  3. CHe is liable only if the gain exceeds Rs 10 lakh
  4. DHe faces no liability because the gain went to a relative

Explanation

Section 166(5) bars a director from achieving or attempting undue gain for himself or relatives, partners or associates. If found guilty, he must pay an amount equal to that gain to the company. Gain to a relative is covered, so the no-liability option is wrong, and no threshold or double payment is stated.

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