Wednesday, August 22, 2012

LAW AND PROCEDURE OF REMOVAL OF AUDITOR(S) BEFORE EXPIRY OF HIS TERM


Law and Procedure of removal of auditor(s) before expiry of his term under Companies Act 1956


Appointment, duration and removal of the auditors are governed by Section 224 of the (Indian) Companies Act, 1956 (the “Act”).

      Section 224(1) provides that every company is required to appoint an auditor or auditors at each annual general meeting (“AGM”) who shall hold office till the conclusion of the next AGM. Section 224(1) of the Act reads as under:

     “Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed

        Provided that before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re- appointment, if made, will be in accordance with the limits specified in sub- section (1B).”


      In terms of Section 224(7) of the Act, an auditor appointed in an AGM may be removed from the office before the expiry of his term by the company only in general meeting after obtaining the previous approval of the Central Government in this behalf except as provided in proviso to section 224(5).

Section 224(7) of the Act reads as under:

       “Except as provided in the proviso to sub- section (5), any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf.”

Section 224(5) of the Act reads as under:

      “The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting: Provided that-

(a)     the company may, at a general meeting, remove any such auditor or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting; and

(b)    if the Board falls to exercise its powers under this sub- section, the company in   general meeting may appoint the first auditor or auditors.”


      In the light of the aforesaid, an auditor(s) may be removed before the expiry of his/their term i.e. before the conclusion of the next AGM who has been appointed in the preceding AGM by the members/shareholders;

(i)     only in the general meeting of the company; and

(ii)   after obtaining the previous approval from the Central Government.

        Further, Section 225 of the Act provides that a special notice shall be required for a resolution at an extra ordinary general meeting (“EGM”) and/or AGM appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed.

Section 225 of the Act reads as under:

“(1)  Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed.

(2)     On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

(3)    Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,—

(a)    in any notice of the resolution given to members of the company, state the fact of the representations having been made; and

(b)    send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company,

      and if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting

    Provided that copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Central Government is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the Central Government may order the company's costs on such an application to be paid it in whole or in art by the auditor, notwithstanding that he is not a party to the application.

(4)    Sub-sections (2) and (3) shall apply to a resolution to remove the first auditors or any of them under sub-section (5) of section 224 or to the removal of any auditor or auditors under sub-section (7) of that section, as they apply in relation to a resolution that a retiring auditor shall not be re-appointed.”

        In addition to the aforesaid, a special notice is required to be given in terms of Section 190 of the Act, which reads as under:

“(1)  Where, by any provision contained in this Act or in the articles, special notice is required of any resolution, notice of the intention to move the resolution shall be given to the company not less than fourteen days before the meeting at which it is to be moved, exclusive of the day on which the notice is served or deemed to be served and the day of the meeting.

(2)    The company shall immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles, not less than seven days before the meeting.”

         In the light of the above discussions, the procedure to remove the Auditor before the expiration of its term can be summarized as hereunder:

(i)      a special notice under Section 190 is required to be given to the Company by a member/shareholder;

(ii)           an extra ordinary general meeting of the members/shareholders (“EGM”) is required to be held in which the resolutions related to the removal of the Auditor will be passed by the members of the company; and

(iii)     an application is to be made to the Central Government (in the present case, the Regional Director) with concrete reasons explaining the facts and circumstances of seeking the removal of the Auditor before expiration of the term of its office.  

        Once the Central Government approval is obtained, the present auditor is deemed to have been removed from the office.

The brief step plan for removal of an auditor before the expiry of his term is as follows:


Step I:

      A special notice of not less than 14 days is to be given by a shareholder to the Company for removal of the Auditor and appointment of new auditor subsequent to the removal of Auditor

Step II

        Obtaining a certificate in writing from the new auditor to the effect of his eligibility to act as auditor, if appointed;

Step III

Holding a board meeting of the Company to pass the necessary resolutions to:


(i)             consider the special notice for removal of Auditor given by the shareholder and to decide the day, time and place[1] for calling the EGM;

(ii)               to approve the draft notice of EGM and explanatory statement thereof and to authorize the company secretary or director of the Company to issue the notice;

(iii)             to authorise the director or manager of the Company to make an  application to the Central Government under Section 224(7) for removal of the Auditor; and

(iv)          to authorise the company secretary or director of the Company ndia to inform the Auditor of the decision of the board of his removal.


Step IV

         Intimate the Auditor of his removal in writing along with a copy of the special notice as given by the Shareholder.

Step V

Holding of EGM to pass the necessary resolutions to:

(i)                 approve removal of the Auditor from the office of statutory auditors of the Company;

(ii)               appointment of new auditors subject to approval of regional director to hold office until the conclusion of next AGM;

(iii)             to authorise the director, company secretary or manager of the Company to intimate the new auditor of his appointment; and

(iv)             to authorise the director or manager of the Company to make an application to the Central Government (Regional Director) under Section 224(7) of the Act for removal of the Auditor.

Step VI

     Making application to the Regional Director (Central Government) in whose jurisdiction the registered office of the Company ndia falls in e-Form No. 24A along with the following documents:

-           Copy of ordinary resolution;
-           Copy of special notice under section 224(7) of the Act;
-           Copy of the representation, if any, made by the Auditor. and
-           Grounds of making application for removal of Auditor.

Step VII

      Upon receipt of approval from regional director intimate the new auditor of his appointment as an auditor of the Company to hold the office until the conclusion of next Annual General Meeting.



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1 comments:

Sanjay Vijay said...

Would the same process (in specific the RD Approval) be applicable if the existing auditor is to be replaced with a new auditor in the next AGM i.e. upon completion of the term of the existing auditor.
Please clarify!