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CA Final · Advanced Auditing, Assurance and Professional Ethics · Internal Audit

The internal auditor of Orion Steels Ltd., a listed public company, finds that a director approved a related party transaction of Rs 80 lakh without Audit Committee approval, and the Audit Committee has not ratified it. Three months have passed from the date of the transaction. The transaction is with a relative of that director and is not between a holding company and its wholly owned subsidiary. What is the correct conclusion under Section 177?

The transaction is voidable at the Audit Committee's option, not automatically void. Because it is under Rs 1 crore, unapproved and unratified within three months, Section 177(4)(iv) lets the Committee avoid it, and the director concerned must indemnify the company for any loss incurred.

  1. AThe transaction is void automatically
  2. BThe transaction is voidable at the option of the Audit Committee, and the director concerned must indemnify the company against any lossCorrect
  3. CThe transaction is valid because the amount is below Rs 1 crore
  4. DOnly the Board can avoid the transaction, and the director has no liability

Explanation

Under the proviso to Section 177(4)(iv), a transaction not exceeding Rs 1 crore entered into by a director without Audit Committee approval and not ratified within three months is voidable at the Audit Committee's option. If it is with a related party of a director or authorised by another director, the director concerned indemnifies the company for loss. Being below Rs 1 crore brings the proviso into play rather than validating the transaction; it is not automatically void.

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