Is Non Ratification of a Statutory Auditor same as Removal of Auditor?

Is Non Ratification of a Statutory Auditor

same as Removal of Auditor?

Introduction

Under the Provision of section 139 & 140 of Companies Act, 2013, tenure of appointment of auditor shall be 5years/ 10years and subject to ratification of auditor by shareholders in every  Annual   General  Meeting  till the 6th AGM.  By provision of Companies Act, 2013 and Rules notified their under and other applicable provision, Did it mean that Non Ratification of a Statutory Auditor-is it the same as Removal?

Provision under Companies Act, 2013

Appointment of Auditors  

As per Section  139(1):

·         Subject  to the provisions  of this   Chapter,   every   company   shall,   at   the   first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion  of every  sixth  meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed(Rule 3 of Chapter X The Companies (Audit and Auditors) Rules, 2014- Manner and Procedure of Selection and Appointment of Auditor):

Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.

&

Removal, Resignation of Auditor and Giving of Special Notice

As per Section 140.(1)

·         The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner.

Provided  that  before  taking  any  action  under  this sub-section,  the auditor  concerned  shall be given a reasonable opportunity of being heard.

Now the Question is that “Is Non Ratification of a Statutory Auditor same as Removal of Auditor?”

Is company need to follow the provision of Sec -140 of  Companies Act, 2013  for Change of auditor before expiry of its term/ removal  of auditor  in case of non-ratification  of auditor u/s 139.

As Per Sec 139  give power to shareholder only in regard to ratification of auditor in every general meeting of the existing auditor.

Did it mean that if non-ratification of auditor by shareholder in general meeting and appoint another auditor in the same meeting will amount to removal auditor.

In this regard Order passed by NCLT bench of Heydrabad on 17^th March, 2017

NCLT,  Hyderabad  Bench  ('the  Bench')  thereof passed   an   order   on   17th   March,   2017  on   the question whether “Company could remove its statutory  auditor  without  prior  approval  from Central Government”.

The case  is between SPC & Associates, Chartered Accountants & DVAK & Co. The petition filed by SPC & Associates under Section 140 of the Companies Act, 2013 read  with Rule 78 of NCLT Rules, 2016.

NISC   Export   Services   Pvt   Ltd   (refer as “Company”) appointed SPC & associates as its Statutory  Auditor  for period  of five years  but did  not  ratify  their  appointment  in  its  subsequent AGM and appointed another CA firm as its statutory auditor, since company did not obtain prior approval of central Government,  removal  of petitioner  was to be  held   illegal   or   not?’  

Whether as Principle of natural justice auditor should be provided sufficient opportunity  of  being  heard  before  his  non- ratification  or  not.  Here, after  analyzing  the provisions of the Companies Act, 2013, Upon perusal of all the materials, submissions made by all the parties, The NCLT Bench has held that:

•    The Petitioner  was not ratified in AGM held on 26.09.2016, as 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.

·         The    NCLT    Bench    decided    the    case    CP no. 21/140/HDB/2016 with following declarations/ directions:

1.       The  removal  of  petitioner  firm  as  the auditor of the Company and the appointment of a new auditor of the Company is improper.

2.       We direct the company to continue the Petitioner  firm  as  the  Auditor  of Company till the next AGM and subsequently necessary course of action can be taken by Company regarding the continuation of Petitioner firm, in accordance with law

3.       We further direct that Company to take necessary steps to re-appoint the petitioners' firm as Auditor of the Company.

4.       We   direct   the   new   auditors   firm   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 the Company.

Conclusion

Hence, As per above judgment and considering  the provision of Companies Act,2013 the intention of law is that auditor should be given suitable opportunity  of being  heard  as principle  of natural justice and company  shall  follow provisions  of the act for prior approval of Central Government for removal of the Auditor.

Hence,   where   company   appointed   petitioner-CA firm  as  its  Statutory  Auditor  for  a  period  of  five years but did not ratify their appointment in its subsequent  AGM and appointed another CA firm as its statutory auditor, since company did not obtain prior approval of central Government, removal of petitioner was to be held illegal.

Hence one can opine that, Company couldn't remove its statutory auditor without giving opportunity to being heard and without prior approval      from      the     Central      Government.

Click here to Download the Order

Author

Qualified Company Secretary

Vikram Grover

Vgrover44@gmail.com

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