Appointment and Removal of Statutory
Auditors under the Companies Act, 2013
The
provisions relating to the appointment and removal of statutory auditor as
contained under the Old Companies Act have undergone changes under the new Companies
Act, 2013. These modified provisions
have been discussed hereunder with references to the changes that have taken
place. In this Article, the word
“auditor” also includes audit firm.
I. Appointment of Auditor under the
Companies Act 2013 (other than Government Companies)
1. Appointment of
First Auditor [Section 139(6)]
§ By Whom : The
First Auditor of a company shall be appointed by the Board of Directors.
§ Time Period : The
Board of Directors shall appoint the First Auditor within 30 days from the date
of registration of the company.
§ Period of Auditor’s office : The
First Auditor so appointed shall hold office up to the date/ till conclusion of
the first Annual General Meeting (AGM).
§ On Board’s failure to appoint the
First Auditor within the above time : The Board shall
inform the members of the company, who shall within 90 days, at an
Extraordinary General Meeting, appoint the First Auditor of the company.
What has changed : (i) Section 224(5) of the Companies Act, 1965
provided that the First Auditor shall be appointed within 1 month from the date of registration of the company which has now
been replaced with 30 days under the
Companies Act, 2013.
(ii) On Board’s failure to appoint the
First Auditor within the prescribed time period, Section 224(5)(b) of the
Companies Act, 1956 also gave the power to the company to appoint the First
Auditor in the general meeting, however no
time limit was provided for such appointment. Under the Companies Act, 2013
the company shall exercise its power to appoint the First Auditor within 90 days from the date of registration
of the Company.
2. Appointment of
Auditor at the First AGM [Section 139(1)]
§ By whom:
The shareholders of the company shall appoint the auditor at the first AGM by
way of ordinary resolution.
§ Time Period
: The appointment shall be made at the First AGM.
§ Period of Auditor’s office:
The auditor appointed at the First AGM shall hold office from the conclusion of
the 1st AGM till the conclusion of the 6th AGM and thereafter till the
conclusion of the every sixth meeting .i.e. the Auditor shall be appointed for a continuous period of 5 years at a
time.
If, for any reason, there arises a
vacancy in the office of the auditor before the expiry of continuous period of
5 years, then another auditor shall be appointed in his place and the AGM where
the appointment of such another auditor is made shall be counted as the first
meeting for the purpose of calculating his 5 consecutive years.
What has changed :
Under
section 224(1) of the Companies Act, 1956 an Auditor appointed at an AGM was to
hold office from the conclusion of that meeting until the conclusion of the
next AGM .i.e. the Auditor was appointed for a period of 1 year at a time and
again in the subsequent AGM, either the retiring auditor was reappointed or a
new auditor was appointed in his place, as the case may be.
But under the Companies Act, 2013, the
procedure in respect of appointment of auditors has been modified and the
shareholders have been empowered to appoint auditors for straight five years,
instead of on year to year basis. It has been done with a view to ensure that
promoter/company/ management does not change auditor who is doing good job,
pre-maturely. Further, if required, Auditor‘s early resignation and removal
have been made possible under other provisions of the Act.
3. Ratification of Appointment of retiring Auditor by members at every subsequent AGM [First proviso
to Section 139(1)]
Based on the recommendation of Standing Committee of
Finance (2011-12), this provision has been included in the Companies Act, 2013 to
ensure that while the appointment of an Auditor may be for five years, the AGM
may take note of its continuance annually on the belief that the well-established principle of
shareholders’ democracy represented by the Annual General Meeting of the company
should be preserved, while seeking to provide stability of tenure to auditors.
§ By whom:
The shareholders of the company shall ratify the appointment of auditor on an
annual basis by way of ordinary resolution
§ Time Period
: The resolution for ratification of auditor’s appointment shall be passed at every
subsequent AGM after the First AGM till the 5th AGM and similarly at
every subsequent AGM after the 6th AGM till the 10th AGM
and so on.
§ Explanation:
Suppose an Auditor is appointed at the 1st AGM to hold office till
the conclusion of the 6th AGM. In such a case, a resolution for
ratification of his appointment under first proviso to Section 139(1) of the
Companies Act, 2013 should be passed in the 2nd, 3rd, 4th
and 5th AGM. In the 6th AGM, either the retiring auditor
shall be re-appointed (where the provision for rotation of auditor does not
apply) for a further period of five consecutive years (.i.e. till the 11th
AGM) or a new auditor may be appointed in his place for the next term of 5
years. Then the process of ratification of auditor’s appointment will again
follow from the 7th AGM till the 10th AGM and so on.
What has changed :
The
Companies Act, 1956 provided for appointment of an Auditor on year to year
basis with the approval of the shareholders at every AGM.
However, under the Companies Act,
2013, the shareholders have been empowered to appoint auditors for straight
five years at the 1st/6th/ 11th AGM and so on,
instead of on year to year basis, which shall be subject to ratification by
members at every subsequent AGM.
4. Appointment of
Auditor in Casual Vacancy caused other than by resignation [Section 139(8)(i)]
§ By whom: The casual vacancy in the office of auditor (caused
other than by resignation) shall be filled up by the Board of Directors in the
Board Meeting.
§ Time period: The vacancy caused in the office of auditor must be
filled within 30 days from the date of occurring of casual vacancy.
§ Period of office: An auditor appointed in casual vacancy shall hold office
upto the date of next AGM.
What has changed :
With
regard to filing of casual vacancy in the office of auditor by Board of
Directors, no time period was
specified under the Companies Act, 1956. Now, the Companies Act, 2013 has
specified that such casual vacancy caused in the auditor’s office must be
filled by the Board of Directors within a period of 30 days.
5. Appointment of
Auditor in Casual Vacancy caused by resignation [Section 139(8)(i) & Section
140(2)]
§ By whom: The Board of Directors shall consider and recommend the
appointment of the auditor to the members and within 3 months of such
recommendation, convene a general
meeting of the members who shall approve the appointment of the auditor in
casual vacancy by way of ordinary resolution as recommended by the Board.
§ Period of office: An auditor appointed in casual vacancy shall hold office upto
the date of next AGM.
§ Reporting
requirements: The auditor who has resigned
from the company shall file, within a period of 30 days from the date of his
resignation, a statement in the prescribed Form
ADT-3 with the company and the Registrar, failing which he shall be punishable
with fine which shall not be less than Rs.50,000/- but which may extend to
Rs.5,00,000/-.
What has changed :
(i) Though the Companies Act, 1956 provided that
the casual vacancy in the office of auditor caused
due to resignation, could be filled only by the members of the company in the
general meeting, it did not specify any time period within which such
appointment was to be made. The Companies Act, 2013 has now provided the above
time frame for making such appointment.
(ii) The Companies Act, 2013 has put an
additional responsibility on the resigning auditor to file a statement of his
resignation (in the prescribed form) both with the company and the ROC.
6. Appointment of auditor other than the retiring auditor
at the AGM (except where the
retiring auditor has completed a consecutive tenure of five years or, as the
case may be, ten years) [Section 140(4)]
·
By
whom: Shareholders at the AGM
·
Requirement
of special notice: Special notice shall be required for
a resolution at an annual general meeting for appointing as auditor a person
other than a retiring auditor or providing expressly that a retiring auditor
shall not be re-appointed.
Such
special notice shall be signed, either individually or collectively by such
number of members holding not less than one percent of total voting power or
holding shares on which aggregate sum of not less than Rs.5,00,000/- has been
paid-up on the date of notice.
What has changed :
The
provisions relating to special notice
have been
modified under the Companies Act, 2013 and such modified provisions shall be
applicable in this case also.
7. When no auditor is appointed or re-appointed at the AGM
[Section 139(10)]
The existing auditor shall continue to
be the auditor of the company. However, in case of non-ratification of
auditor’s appointment by the members of the company at any AGM (pursuant to the
first proviso to Section 139(1)), the Board of Directors shall appoint another
auditor after following the procedure laid down under the Act.
What has changed :
Under
Section 224(3) of the Companies Act,
1956, the Central Government was given the power to appoint an auditor when no auditor was appointed or re-appointed at the AGM. This power of
Central Government has been done away with under the Companies Act, 2013.
8. Appointment of
Auditor by Central Government [First proviso to Section 140(5)]
Where
the Central Government makes an application to the Tribunal for removal of an
auditor who has, whether directly or indirectly, acted in a fraudulent manner
or abetted or colluded in any fraud and the Tribunal is satisfied that any
change of the auditor is required, then the Central Government may appoint
another auditor in his place.
II. Removal of Auditor
under the Companies Act 2013 (Section 140)
9. Removal of
auditor from his office before the expiry of his term [Section 140(1)]
·
By whom: An auditor may be
removed from this office before the expiry of his term only by shareholders’
approval by way of special resolution with the previous approval
of the Central Government. An application in Form ADT-2 shall be made to the Central Government within 30 days
from the date of passing of Board resolution and within 60 days of receipt of
Central Government approval, the special resolution must be passed in the general
meeting.
·
Requirement of special notice: Under Section 225(4)
of the Companies Act, 1956, a special notice was mandatorily required for
removal of auditor before the expiry of his office term. However, the Companies Act, 2013 does not
speak about any special notice for removal of auditor before his term expiry.
According to the author’s
understanding, under the new Act, an auditor may be removed from his office before
the expiry of term without special notice at the prerogative of the company’s
Board of Directors where the auditor must be given an opportunity of being
heard. In case, the removal of auditor is being sought by the company’s
members, then the requirement of special notice must be satisfied in accordance
with Section 115 of the Companies Act, 2013 and the procedure in case of a
special notice must be followed.
What has changed: (i)
An
ordinary resolution was sufficient under the Companies Act, 1965 for removal of
an auditor before the expiry of his term. But now the Companies Act, 2013 has
stipulated that special resolution is necessary for such removal.
(ii) A period of 30 days has been
specified for making application to the Central Government after the passing of
the Board resolution for removal of auditor before expiry of his term.
10. Removal of auditor who acted in fraudulent manner or
abetted or colluded in any fraud [Section 140(5)]
The Tribunal has the power to direct
the company to change its auditors on being satisfied that the auditor of a
company has, whether directly or indirectly, acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to, the company or its
directors or officers. Such an order may be made by the Tribunal either:
(i) suo motu, or
(ii) on
an application made to it by the Central Government, or
(iii) by any person concerned.
What has changed: This provision has been newly inserted under the Companies Act,
2013 and was not there under the old Act.
