Appointment and Removal of Statutory Auditors under the Companies Act, 2013

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 5^th AGM and similarly at every subsequent AGM after the 6^th AGM till the 10^th AGM and so on.

§  Explanation: Suppose an Auditor is appointed at the 1^st AGM to hold office till the conclusion of the 6^th 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 2^nd, 3^rd, 4^th and 5^th AGM. In the 6^th 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 11^th 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 7^th AGM till the 10^th 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 1^st/6^th/ 11^th 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.

Voting Through Postal Ballot – The new rules under the Companies Act, 2013

---

Section 2(65) of the Companies Act, 2013 defines the term “Postal Ballot” as voting by post or through any electronic mode. This method of voting, used in respect of shareholders’ resolutions, gives an opportunity to the company’s members residing outside the local limits of its registered office, to exercise their voting rights, which would otherwise had not been possible in case of physical voting process.

Section 110 of Companies Act, 2013, which deals with voting by means of postal ballot, has brought about certain changes in the existing provisions relating to the passing of resolutions by postal ballot contained under Section 192A of the Companies Act, 1956 and the Companies (Passing of the resolution by postal ballot) Rules, 2011. It is pertinent to note here that Section 110 of the Companies Act, 201 has not yet come into effect.

Comparison of postal ballot provisions under the new and the old Companies Act

	Companies Act, 1956	Companies Act, 2013
Governing sections & Rules	Section 192A & Companies (Passing of the resolution by postal ballot) Rules, 2011	Section 110 & Chapter VII of the Draft Rules
Applicability	Listed public companies	All companies, whether public or private, having more than 50 members (One Person Company also exempted)
List of business notified by CG	9 items of business notified under the existing Rules.	Total 10 items of business notified under the draft rules. New item of business Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised under section 13(8) of Cos. Act, 2013.
Mode of posting notice	Registered Post Acknowledgement Due Other secured mode of posting provided by DOP  Electronic mail	Registered Post Acknowledgement Due Speed Post Electronic means
Newspaper advertisement	Certain matters specified.	Along with the matters already specified, contact details for redressal of grievances connected with postal ballot must also be included in the advertisement.
Scrutinizer’s Report	As soon as possible after the last date of receipt of the postal ballot.	As soon as possible but not later than 7 days from the last date of receipt of postal ballot.
Placing notice/ results of postal ballot on website	Not specifically mentioned	Required to be placed on the website

Lists of specified business to be transacted only through postal ballot process:-

1)  Alteration of the objects clause/ main objects (in the case of company in existence immediately before the commencement of new Act) of the memorandum;

2)   Alteration of articles of association in relation to insertion or removal of provisions which, under Section 2(68), are required to be included in the articles of a company in order to constitute it a private company;

3)   Change in place of registered office outside the local limits of any city, town or village as specified in Section 12(5);

4)     Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised under Section 13(8);

5)   Issue of shares with differential rights as to voting or dividend or otherwise under Section 43(a)(ii);

6)   Variation in the rights attached to a class of shares or debentures or other securities as specified under section 48;

7)     Buy-back of shares by a company under Section 68(1);

8)     Election of a director under section 151 of the Act;

9)   Sale of the whole or substantially the whole of an undertaking of a company as specified under Section 180(1)(a);

10) Giving loans or extending guarantee or providing security in excess of the limit prescribed under Section 186(3).

Items of business that cannot be transacted through postal ballot

Apart from the above, a company may, at its discretion, transact any other item of business also through voting by postal ballot instead of transacting it at a general meeting, except the following businesses:

(i) four ordinary items of business which could be transacted only at an Annual General meeting (Accounts approval, Dividend declaration, director appointment and auditor appointment); and

(ii) any business in respect of which directors or auditors have a right to be heard at any meeting.

Procedure for conducting voting through postal ballot in a nutshell

A. Steps to be taken by the Company Secretary in Employment

1. Prepare draft of Board resolution, postal ballot notice along with explanatory statement and postal ballot form. 
2. Obtain consent of the Scrutinizer to act as such. 
3. Convene Board meeting to approve the draft documents, appoint Scrutinizer, authorise WTD/ CS to oversee the entire postal ballot process, calendar of events.
4. Arrange for printing of address slips, notice, postal ballot forms and self-addressed postage pre-paid envelope (with Scrutinizer’s name and address).
5. File the board resolution along with the ’Calendar of events” with ROC within 7 days of passing Board resolution.
6. Despatch notices to shareholders whose names appear in the Register of members as on particular date as decided by the Board.
7. Place postal ballot notice on the company’s website. 
8. Immediately publish newspaper advertisement at least once in a vernacular newspaper in the principal vernacular language and at least once in English language in an English newspaper about the date of completion of dispatch of ballot papers and other specified matters.
9. Declaration of postal ballot results by the Chairman on receipt of the Scrutinizer’s Report. 
10. Place the results of the postal ballot on the company’s website along with the Scrutinizer’s Report and also display on the notice board.
11. File Form 23 with the Registrar of Companies in case of special resolution.
12. Prepare the minutes and obtain Chairman’s signature on it.
13. The company shall safely preserve the ballot papers and other related papers/register received from the Scrutinizer.

B. Steps to be taken by the Company Secretary in Practice (Acting as Scrutinizer)

1. Give his consent in writing, to the Board of Directors, to act as the Scrutinizer for conducting postal ballot.
2. After the dispatch of postal ballot notice is completed, receive the duly filled in and signed postal ballot forms sent by the shareholders and put receipt stamps on the envelopes as and when they are received.
3. To keep in safe custody all the postal ballot forms till the last date for receiving the postal ballot forms,
4. The scrutinizer shall maintain a register either manually or electronically and record daily assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot forms which are invalid.
5. After the last date for receiving the postal ballot forms is over, prepare Scrutinizer’s report and submit the same to the Chairman of the company within 7 days of the last date of the receipt of postal ballot forms.
6. After the Chairman considers, approves and signs the minutes, the scrutinizer shall return the ballot papers and other related papers/register to the company.

The provisions relating to voting by means of postal ballot are not new to the Company Secretaries as it was already applicable to the listed companies. Now the recent Companies Act has also brought unlisted companies having more than 50 members under the purview of postal ballot provisions. Though on one hand, this change will bring about more responsibility on the Company Secretary professionals, on the other hand, it will also widen the scope for Company Secretaries in practice. 

 

P.S. The Draft Rules under Chapter VII of the Companies Act, 2013 (yet to be notified) have been referred to in writing the above article. In case, the Rules are subsequently modified on its notification, then the article must be read keeping in mind such modifications/ amendments.