Removal of Auditor before term under Companies Act, 2013

As per the Companies Act, 2013 and related rules and provisions, it is mandatory for every company to appoint an auditor from incorporation to their going out of business. Auditor is eligible person, who audits the financial part and working of company. Hence, every company needs to appoint auditor. Notably there are many times, when management is not satisfied with the services of auditor, this is when removal of auditor comes into picture.

There are appointed for a fixed term and for maximum five (5) years in a company for one term. However, sometimes due to any reason management of the Board can decide to remove the auditor before the end of his term. Let us discuss the same.

What is term of auditor in a company?

Term here means for how many years auditor is appointed by members of the company in Annual General Meeting. A company can appoint for a term of five (5) years maximum in one term. We can further divide this as follows:

1. A listed company and all unlisted public companies having paid up share capital of rupees ten crore or more and all private limited companies having paid up share capital of rupees fifty crore or more and all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more, will not appoint:-

2. an individual as auditor for more than one term of five consecutive years

3. an audit firm as auditor for more than two terms of five consecutive years:

Again note that once, terms are completed same individual and firm shall not appointed for a period of three (3) years in same company.

4. Companies other than above specified are free to appoint same auditor for “N” number of terms once their maximum term of five (5) years is expired.

For how many term/(s) an auditor can be appointed in a company?

As discussed above an auditor can appointed as follows:-

1. A listed company and all unlisted public companies having paid up share capital of rupees ten crore or more and all private limited companies having paid up share capital of rupees fifty crore or more and all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more, will not appoint:-

2. an individual as auditor for more than one term of five consecutive years

3. an audit firm as auditor for more than two terms of five consecutive years:

4. Companies other than above specified are free to appoint same auditor for “N” number of terms once their maximum term of five (5) years is expired.

What are provisions governing removal of Auditor before their term?

Section 140(1) of the Companies Act, 2013, 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.

As per Rule 7(1) of Companies (Audit and Auditors) Rules, 2014, the application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014. Also, as per Rule 7(2), the application shall be made to the Central Government (powers delegated to Regional Director) within thirty days of the resolution passed by the Board.

What is the procedure to remove the auditor?

If a Company is not satisfied with the services of the statutory auditor the company can start process for removal of auditor. The following process is required: –

1. Deciding the Board Meeting along with agenda to be discussed in meeting.

2. Auditor has to be given reasonable opportunity of being heard.

3. Drafting of petition to be made to Regional Director (deleted by Central government by MCA notification dated 21^st May, 2014)

4. Holding of Board meeting and considering the petition

5. Filing of petition to Regional Director in ADT-2 as an attachment to e-form RD-1 within thirty (30) days from the passing of Board resolution.

6. After getting approval from Regional Director fixing the Board meeting for taking the note of same and approving as well as fixing the Extra-ordinary General Meeting of members/ Annual General Meeting for removal of auditor before their term within sixty (60) days.

7. Holding of Extra-ordinary General Meeting of members/ Annual General Meeting and passing of special resolution for same.

8. Filling of MGt-14 once, the Special resolution is filled within thirty (30) days from the Special resolution.

What are forms involved in removal of auditor?

Not many forms are required in removal of auditor before their term, only following forms are required:-

• MGT-14
• ADT-2
• RD-1

What are documents required for filing RD-1?

As we already discussed that ADT-2 will be attached with e-form RD-1, following documents are required to be attached with e-form RD-1:-

• Ground of seeking removal of auditor
• Whether the accounts have been qualified during last three years
• Date of appointment of auditor and SRN of notice of such appointment
• Whether audit fee has been paid or not.
• Any other attachment/information as deem fit by Board of company.

Disclaimer: – The above article is prepared keeping in mind all the important and basic question while removing an auditor before their term under the Companies Act, 2013. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- [email protected] and Contact Number: 91-8178515005)