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CMA Final · Cost and Management Audit · Internal Control and Internal Audit

Under Section 177(4) of the Companies Act, 2013, a transaction not exceeding one crore rupees is entered into by an officer without Audit Committee approval and is not ratified within three months. A director authorised it for a related party of another director. What is the consequence?

The transaction is voidable at the option of the Audit Committee, and the director concerned must indemnify the company for any loss. It is not automatically void, does not become valid by lapse of time, and the statutory auditor has no power to ratify it.

  1. AThe transaction is voidable at the Audit Committee's option, and the concerned director must indemnify the company against any lossCorrect
  2. BThe transaction is automatically void and no person bears any liability
  3. CThe transaction becomes valid by lapse of time and needs no further action
  4. DThe transaction must be ratified by the statutory auditor within a further three months

Explanation

The proviso states that unratified transactions up to one crore within three months are voidable at the Audit Committee's option. Where the transaction is with a director's related party or authorised by another director, that director indemnifies the company for loss. It is voidable, not automatically void, and the auditor has no ratifying role.

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