Appointment and Removal of Statutory Auditors under the Companies Act, 2013
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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.
CS. Jeevika Poddar. Practicing Company Secretary, Chennai
************************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.
In the current scenario (listed company), auditor has completed 10 years as on 31st March 14, can we take up the reappointment for 3 more years and ratify it in yearly basis?
ReplyDeleteVery good work..Thanks Ms.Jeevika
ReplyDeleteit ws a nice article..thank u
ReplyDeleteNice article. Good Presentation.
ReplyDeleteRegards,
M.Sundar
Reply to the query raised by Mr Manikandan.
ReplyDelete3 years period is only a transition period for appointing a new auditor in the place of the existing auditor whose term has been completed. However, a company can still avail the services of the existing auditor during the said transition period. But the point to be noted is that earnest efforts should have been made for appointing a new auditor within the said period. If the company take steps only from the beginning of the 4th year, then it is violation of the section.
Virtually by the end of the 2nd year, the company should have identified the new auditor and effected his appointment.