CS Divesh Goyal
In this Flash editorial, the author begins by referring the provisions of Section 139 & 140 of Companies Act, 2013 relating to ratification of Auditor in every Annual General Meeting & Removal of auditor. The main thrust of the article, however, is upon the “indirectly removal of Auditor through Non Ratification of Auditor” and most recent case laws decided by the Hyderabad Bench of National Company Law Tribunal in the case of SPC & Associates, Chartered Accountants and DVAK & Co.. Questions arise whether principally it is natural justice to remove the statutory auditor during his term by non-ratification in Annual General Meeting.
Three year has passed since various provisions of Companies Act, 2013 came into effect and section 139 & 140 are two of them. As per the provisions under Companies Act, 2013, tenure of appointment of auditor shall be 5 years and in every Annual General Meeting shareholders will rectify the continuation of appointment of auditor. Due to implementations of new sections and rules of Companies Act, 2013 if in any AGM, auditor is not ratified then it will be considered as removal of auditor.
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:
Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.
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.
Question for discussion in this editorial is “Whether Company simultaneously needs to follow provisions of section 140(1) for removal of auditor in case of non ratification of auditor u/s 139. As the Section 139 exclusively give the power to shareholders for ratification of continuance of auditor so in case shareholders are not contented with the auditor they can pass resolution for non-ratification of auditor and such auditor shall dis- continue as auditor of the Company.
Rulling by NCLT:
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”.
This case involved SPC & Associates, Chartered Accountants & DVAK & Co. Hence, the question was ‘where NISC Export Services Pvt Ltd (here after referred as “Company”) appointed petitioner-CA firm 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, the NCLT held:
Principle of Natural Justice:
In The Constitution of India, nowhere the expression Natural Justice is used. However, golden thread of natural justice sagaciously passed through the body of Indian constitution. Preamble of the constitution includes the words, ‘Justice Social, Economic and political’ liberty of thought, belief, worship… And equality of status and of opportunity, which not only ensures fairness in social and economical activities of the people but also acts as shield to individuals liberty against the arbitrary action which is the base for principles of Natural Justice.
In India, the principles of natural justice are firmly grounded in Article 14 & 21 of the Constitution. With the introduction of concept of substantive and procedural due process in Article 21, all that fairness which is included in the principles of natural justice can be read into Art. 21. The violation of principles of natural justice results in arbitrariness; therefore, violation of natural justice is a violation of Equality clause of Art. 14.
In broad-spectrum, The Principles of Natural Justice have come out from the need of man to protect himself from the excesses of organized power man has always appealed to someone beyond his own creation. Such someone is the God and His laws, divine law or natural law, to which all temporal laws and actions must confirm.
Natural Law is of the ‘higher law of nature’ or ‘natural law’. Exp: Natural Law does not mean the law of the nature or jungle where lion eats the lamb and tiger eats the antelope but a law in which the lion and lamb lie down together and the tiger frisks the antelope.
Natural Law is another name for common-sense justice. Natural Laws are not codified and are based on natural ideals and values which are universal. In the absence of any other law, the Principles of Natural Justice are followed.
Decision of the NCLT Bench: Upon perusal of all the materials, submissions made by all the parties, The NCLT Bench has held that:
i. The removal of petitioner firm as the auditor of Company and the appointment of new auditor of Company is improper.
ii. 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
iii. We further direct that Company to take necessary steps to re-appoint the petitioners’ firm as Auditor of the Company.
iv. 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 Company.
The provisions of Companies (Amendment) Bill, 2016 introduced in the Lok Sabha on 15.03.2016 which seeks “to amend Section 139 of the Act to do away with the requirements of the annual ratification by members with respect to appointment of Auditors”
The Hon’ble High Court has observed that the provisions of the Companies Act, 1956 underscore that statutory auditor cannot lightly be removed and the statutory procedure has to be followed to the provisions recognized that Auditors are expected to function as independent professionals and not simply toe the line of the management of a company. The Central government will have to be satisfied that the reasons are genuine keeping in view the best interest of the company and consistent with the need to ensure professional autonomy to its auditors. The 3 tier statutory protection is given to Auditors.
After study the provisions of Companies Amendment Bill, 2016 and the observation of High Court it can be interpreted that auditor is appointed for 5 year under Companies Act, 2013 but the powers are given to shareholder to check yearly whether auditor is qualify to continue or not by ratification in every AGM. Due to bring to an end exploitation of provision of ratification and safeguarding of the freedom of professional it is recommended in Companies Amendment Bill, 2016 to remove the provisions of ratification of Auditor.
Further, Principles of Natural Justice demands that auditor should have been provided with sufficient opportunity of being heard 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.
Further, frequent change of auditor is not advisable for the effective auditing, preparation of financial statement, transparency in audit policies/procedures, etc. Therefore, Companies Act, 2013 added the provisions for tenure of Auditor as 5 years.
Hence, considering the intention of the statute one can opine 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 Auditor.
Hence, where company appointed petitioner-CA firm 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 AGM.
Hence one can opine that, Company couldn’t remove its statutory auditor without prior approval from Central Government.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at email@example.com)