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2017 (4) TMI 674 - Tri - Companies LawRemoval of Petitioner firm as auditor of Respondent No.2 Company - Held that - Though the Petitioner was not ratified in AGM held on 26.09.2016, Principles of Natural Justice demands that he should have been provided with sufficient opportunity before his non-ratification. Auditor acts as a bridge between management and shareholders of the Company and is an important professional in the whole eco system of the corporate world. Therefore, removal/non-ratification of the Auditor without prior notice/seeking his comments would not be proper. Before getting into the merits/ rival contention of removal/non-ratification of the Petitioner firm, we are of the prima facie view that the Respondent No. 1 Company is not eligible to be appointed as Auditor of R2 Company as per Explanation 11(b) to Rule 6 to the Companies (Audit and Auditors) Rules, 2014. Therefore, we admit the present CP No. 21/140/HDB/2016 with following declarations/directions (1) The removal of petitioner firm as the auditor of R2 Company and the appointment of Rl Company as Auditor of R2 Company is improper. (2) We direct the R2 Company to continue the Petitioner firm as the Auditor of R2 Company till the next AGM and subsequently necessary course of action can be taken by R2 Company regarding the continuation of Petitioner firm, in accordance with law. (3) We further direct that R2 Company to take necessary steps to appoint the petitioners firm as Auditor of R2 Company. (4) We direct the Rl Company to submit all the records available in their possession, if any, and to cooperate with the Petitioner firm to conduct the audit of books of account of R2 Company.
Issues Involved:
1. Legality of the removal of the Petitioner firm as auditor of Respondent No.2 Company. 2. Legality of the appointment of Respondent No.1 firm as auditor of Respondent No.2 Company. 3. Compliance with Sections 140 and 134 of the Companies Act, 2013. 4. Validity of the non-ratification of the Petitioner firm’s appointment at the AGM. 5. Ethical and professional conduct of Respondent No.1 firm. 6. Validity of the audit fee increase proposed by the Petitioner firm. Issue-wise Detailed Analysis: 1. Legality of the Removal of the Petitioner Firm as Auditor of Respondent No.2 Company: The Petitioner firm was originally appointed as the auditor of Respondent No.2 Company for a five-year term starting from the 17th AGM held on 28.08.2015 until the AGM in 2020. The Petitioner argued that their removal was illegal as it violated Sections 140 and 134 of the Companies Act, 2013, and that no special resolution was passed nor was prior approval from the Central Government obtained. The Tribunal observed that the removal was done without justifiable grounds and without following the due process, thereby making it improper. 2. Legality of the Appointment of Respondent No.1 Firm as Auditor of Respondent No.2 Company: The Petitioner claimed that the appointment of Respondent No.1 firm was in violation of the Companies Act, 2013, and the Institute of Chartered Accountants of India Act, 1948. The Tribunal noted that Respondent No.1 firm was formed by former partners of the Petitioner firm and had only six months of experience. The Tribunal found that the appointment was improper as it did not comply with the statutory requirements and was done with mala fide intentions. 3. Compliance with Sections 140 and 134 of the Companies Act, 2013: The Petitioner alleged that Respondent No.2 Company, in collusion with Respondent No.1, violated Sections 140 and 134 of the Companies Act, 2013. The Tribunal found that the removal of the Petitioner firm and the appointment of Respondent No.1 firm did not comply with the statutory provisions, including the requirement for a special resolution and prior approval from the Central Government. 4. Validity of the Non-Ratification of the Petitioner Firm’s Appointment at the AGM: The Petitioner argued that their non-ratification at the AGM held on 26.09.2016 was illegal and done without valid reasons. The Tribunal observed that the non-ratification was primarily due to the Petitioner firm’s request for a 10% increase in audit fees, which was reasonable. The Tribunal held that the non-ratification was improper and lacked justifiable grounds. 5. Ethical and Professional Conduct of Respondent No.1 Firm: The Petitioner accused Respondent No.1 firm of unethical practices, including soliciting and poaching clients using confidential information. The Tribunal noted that Respondent No.1 firm’s partners had previously worked with the Petitioner firm and found that their conduct was unethical and violated professional standards. 6. Validity of the Audit Fee Increase Proposed by the Petitioner Firm: The Petitioner firm proposed a 10% increase in audit fees, which Respondent No.2 Company rejected. The Tribunal found that the proposed increase was reasonable and that Respondent No.2 Company did not provide any documentary evidence to prove that the audit fee was fixed for five years. The Tribunal held that the fee increase was not a valid reason for non-ratification. Tribunal’s Directions: 1. The removal of the Petitioner firm as the auditor of Respondent No.2 Company and the appointment of Respondent No.1 firm as auditor of Respondent No.2 Company is declared improper. 2. Respondent No.2 Company is directed to continue the Petitioner firm as the auditor until the next AGM, after which necessary actions can be taken in accordance with the law. 3. Respondent No.2 Company is directed to take necessary steps to appoint the Petitioner firm as the auditor. 4. Respondent No.1 firm is directed to submit all records in their possession and cooperate with the Petitioner firm for the audit of Respondent No.2 Company’s books of account.
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