REMOVAL AND RESIGNATION OF AUDITOR UNDER NEW COMPANIES ACT

[Dr. Sanjiv Agarwal]

Statutory Provisions (Section 140)

This section corresponds to Section 225 of the Companies Act. The Section seeks to provide for the provisions for removal of auditor before the expiry of his term. It provides that the auditor concerned shall be given a reasonable opportunity of being heard. The Section provides for the provisions for resignation by auditor. It further provides that special notice shall be required for appointing a person as auditor other than a retiring auditor. The Tribunal is empowered to change the auditor of a Company in case of in any fraudulent activities by auditor.

The significant changes are as under:

a)    the Tribunal can suo moto or on an application from Central Government / any other person concerned, direct the company to change the Auditor if it is satisfied that the Auditor of a Company has, whether directly or indirectly, acted on a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the Company or its directors or officers.

b)    no Auditor shall be eligible for appointment as an Auditor of any Company for a period of 5 years from the date of order against whom order has been passed by Tribunal for his or its removal from any Company as an auditor and he shall also liable for action under section  447.

c)    an auditor for the purpose of this section  shall also include the firm of Auditors which also includes limited liability partnership.

d)    in case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers.

e)    copy of auditor's representation, if any shall have to be filed with Registrar, if not circulated to the members, as required.

f)     permission of shareholders by way of special resolution is also required for removal of auditor, besides approval of Central Government.

g)    no special notice is required where a retiring auditor is being removed on completion of a 5 or 10 year term.

h)    resigning auditor is required to file a statement within 30 days with the company and registrar or CAG, as the case may be.

Removal of Auditor

The auditor appointed under section 139 may be removed from his office before the expiry of the term only by –

(i)    a special resolution of the company, and

(ii)   obtaining the prior approval of the Central Government in that behalf in the prescribed manner.

(iii)  the auditor concerned shall be given a reasonable opportunity of being heard, as stipulated .

Resignation by Auditor

The auditor who has resigned from the company shall have to file a statement indicating the reasons and other facts as may be relevant with regard to his resignation as follows:

(i)      In case of other than Government Company, the auditor shall within 30 days from the date of resignation, file such statement to the company and the registrar.

(ii)     In case of Government Company or government controlled company, the auditor appointment under sub-section (5) of section 139, shall within 30 days from the resignation, file such statement to the company and the Registrar and also file the statement with the Comptroller and Auditor General of India (CAG).

The form and content of the statement to be filed by the retiring auditor shall be prescribed by way of rules. The onus to file such statement containing relevant facts and reasons for resignation is on the resigning auditor and any contravention of sub section  (2) is punishable with monetary fine which could be minimum Rs. 50,000 and maximum Rs. 5 lakh.

Appointment of Auditor in place of retiring auditor by Special Notice

As per provisions of sub-section (4), special notice is required from members proposing to move a resolution at the next annual general meeting to appoint a person other than the retiring auditor or to provide that the retiring auditor shall not be re-appointed.

Such special notice shall not be required in case where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139.

Following points are relevant for the purpose of special notice and need to be complied with:

a)      Company, on receipt of such special notice for removing auditor, should forthwith send a copy of the same to the concerned auditor.

b)      If the auditor makes a representation in writing to the company and requests for its notification to the members, the company shall

(i)      state the fact of representation in any notice of resolution , and

(ii)     send copy of representation to members to whom notice of meeting is sent, whether  before or after the receipt of representation by the company.

(iii)     if the copy of representation is not so sent,  copy thereof should be filed with the Registrar.

c)       such representation should be of a reasonable length and not too long.

d)       For circulation to members, it should not be received by the company too late.

e)    Auditor may require the company to read out the representation in the meeting if it is not so notified to members because it was too late or because of company's default.               

Notice to retiring Auditor

As per provisions of sub-section (4), company is required to send a copy of the special notice of the resolution to remove auditor to the retiring auditor. The mode of service of special notice has not been specified in the Act. The ICAI has no control over companies and therefore cannot compel the company to issue notice by registered post. [Refer Ajit Kumar Iddya v. ICAI 1993 (8) TMI 223 - HIGH COURT KARNATAKA]. The Act also does not provide for any specific mode of communication.

Auditors representation

Sub-section (4) (iii) gives right to the retiring auditor to make a representation to the  company in writing  (not exceeding a reasonable length) and also request its notification to members of the company. In case auditor does not request the company to notify the representation made by him to the members, the company is not bound to do so. If the company receives the representation within reasonable time, and if requested by the auditor, the company will have to state in the notice to the members that such a representation has been made and send a copy of the representation to the members. In case representation cannot be circulated because it was received too late or due to default of the company, the auditor may require that the representation be read out at the meeting and can also claim to be heard orally at the general meeting as provided in sub-section  (1).

He has a right to reasonable opportunity of being heard.  Proviso to sub-section (4) provides that in case copy of representation is not sent due to late reciept or default of the company, a copy thereof shall be filed with the Registrar. However, no time has been prescribed.

It should be noted that if auditor is found to be abusing the right of representation, the company or any other aggrieved person shall make an application to the Tribunal and if Tribunal is satisfied with the application, then, the copy of the representation may not be send and the representation need not be read out at the meeting. It is to be noted that the requirement of intimating the members about the representation having been made in the notice sent to members and right of auditor of being heard orally at the meeting cannot be dispensed with.

Rights of a retiring auditor (Notes)

A retiring auditor shall have the following rights -  

• Right to receive a copy of special notice
• Right to make representation in writing and request its notification to members
• Unless the representation received is too late by company, the right to get it circulated among members.
• Right  to get his representation read out at the meeting, if not circulated by the company
• Right to be heard orally at the meeting
  

Powers of Tribunal

A new provision has been introduced whereby Tribunal can either –

(i)    suo moto or

(ii)   on an application from Central Government, or

(iii)  on an application from person concerned,

can direct the company to change the auditor if it is 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.

In the case of application being made by the Central Government and the Tribunal being satisfied that change of auditor is required, it shall within 15 days of the receipt of such application, make an order that the Auditor shall not function as an auditor of the company and the Central Government may appoint another auditor in his place.

This will happen only when an application is made by the Central Government and not  by any other person.

Where the auditor, whether individual or firm, against whom the final order as aforementioned is passed by the Tribunal under this section , he shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of such order. Further, the auditor shall also be liable for action under Section 447 which provides for punishments for frauds.

It has been clarified by way of explanation that in case a firm is appointed as auditor of the company, the liability shall be of the firm and every partner or partners who acted in fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers shall be liable and not be eligible to be appointed as auditor of any company for a period of 5 years.

Relevant Rules

Following rules have been prescribed separately, on enactment of Companies Act, 2013:

(a)   Manner, in which the previous approval of the Central Government may be sought, in case of removal of Auditor before the expiry of term.

(b)   Form, in which a statement indicating the reasons and other material facts of resignation by auditor are to be made by the resigning Auditor.