Amended and updated notes on section 140 of Companies Act 2013. Detail discussion on provisions and rules related to removal, resignation of auditor and giving of special notice.
Chapter X (Sections 139–148) of the Companies Act, 2013 (CA 2013) deals with the provisions related to audit and auditors. Section 140 of CA 2013 provides for removal, resignation of auditor and giving of special notice.
Recently, we have discussed in detail section 139 (Appointment of auditors) of CA 2013. Today, we learn the provisions of section 140 of Companies Act 2013.
The provisions of section 140 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27.03.2014. In this article, you will learn detail of the provisions of section 140 of the Companies Act 2013 read with the Companies (Audit and Auditors) Rules, 2014.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | X |
| Chapter Name | Audit and Auditors |
| Section No. | 140 |
| Section Name | Removal, resignation of auditor and giving of special notice |
| Monthly Updated Edition | Company Law PDF |
Procedure for Removal of Auditor before expiry of term [Section 140(1)]
As per sub-section (1) of section 140 of the CA 2013, the auditor appointed under section 139 may be removed from his office before expiry of his term. Since the long relationship has built with auditors for 5 years or, as the case may be, 10 years, the strict formalities should be followed to remove auditors before expiry of term.
In compliance with the provisions of section 140(1) read with Rule 7 of the Companies (Audit and Auditors) Rules, 2014, following procedure should be followed to remove the auditor of company from office before expiry of his term:
1) Pass BR at BM:
Pass a Board Resolution (BR) at Board Meeting (BM) of company.
2) Obtain CG Approval:
File an application in eForm ADT-2 (Form 24A) for obtaining the prior approval of the Central Government (CG) in that behalf. Note that the application to CG shall be made within 30 days of the resolution passed by the Board.
In other words, the Form No. ADT-2 (Attached in GNL-1 for applications made to the Registrar) shall be filed by the company seeking approval from the Regional Director (RD)/ Registrar of Companies for removal of auditor from the office before the expiry of the term of office.
Such application shall be accompanied with the prescribed fees for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.
3) Pass SR in GM:
After obtaining the previous approval of the Central Government, a Special Resolution (SR) must be passed by the company for removal of auditors before expiry of term of office.
To pass such special resolution, the company shall hold the annual/extraordinary General Meeting (GM) within 60 days of receipt of approval from the Central Government. Note that such special resolution will be considered as special business as per the provisions of section 102(2)(b) of CA 2013.
Thus, the permission of the shareholders by way of special resolution is also required along with the approval of CG under the new CA 2013 for the removal of auditor before expiry of term.
4) Give Opportunity of being heard:
Before taking any action for removal of auditor before the expiry of his term, the auditor concerned shall be given a reasonable opportunity of being heard.
Compliance by Auditor after Resignation from office [Section 140(2) & (3)]
As per section 140(2) of the Companies Act, 2013, if the Auditor has resigned from the company, a statement in prescribed form shall be filed by him indicating the reasons and other facts as may be relevant with regard to his resignation.
Accordingly, the resigned auditor of company shall file such statement in Form No. ADT-3 (Attached in Form GNL-2 for submission of documents with the Registrar) with the company and the Registrar within a period of 30 days from the date of resignation.
However, the auditor shall also have to file such statement with the Comptroller and Auditor-General (CAG) of India along with company and the Registrar in case of companies referred to in sub-section (5) of section 139 i.e. Government Companies or Company controlled by Central Government or State Government.
In accordance with Section 140(3) of CA 2013, if the auditor does not comply with Section 140(2) i.e. aforesaid provision, he or it shall be punishable with fine which shall not be less than ₹50,000 but which may extend to ₹5,00,000.
Appointment of Auditor other than the Retiring Auditor [Section 140(4)]
Special Notice required for Resolution:
If the retiring auditor has not completed a consecutive tenure of 5 years or, as the case may be, 10 years, special notice shall be required for a resolution at an Annual General Meeting (AGM):
- i) appointing as auditor a person other than a retiring auditor, or
- ii) providing expressly that a retiring auditor shall not be re-appointed.
The tenure of auditors of companies has been prescribed in sub-section (2) of section 139 of the Companies Act, 2013.
Copy of Special Notice to Retiring Auditor:
On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
Representation made by Retiring Auditor: Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is 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 representation having been made; and
- b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company.
If a copy of representation by retiring auditor has not been send to members, then:
i) Read the Representation in meeting: If a copy of the representation is not sent as aforesaid because it was 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 representation shall be read out at the meeting.
ii) File the Representation with Registrar: If a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar.
No need to send or read out the Retiring Auditor’s Representation:
If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.
Section 140 of Companies Act 2013: Removal, resignation of auditor and giving of special notice
Section 140 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014 except second proviso to sub-section (4) and sub-section (5) which shall come into force on 1st June, 2016 vide Notification No. S.O. 1934(E) issued dated 01.06.2016.
(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.
(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.
(3) If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees.
(4) (i) 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, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139.
(ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
(iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is 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 representation having been made; and
- (b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company,
- and if a copy of the representation is not sent as aforesaid because it was 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 representation shall be read out at the meeting:
Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar:
Provided further that if the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.
(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is 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, it may, by order, direct the company to change its auditors:
Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place:
Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.
Explanation I: It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.
Explanation II: For the purposes of this Chapter the word “auditor” includes a firm of auditors.
Exception/ Modification/ Adaptation:
1) In sub-section (1) of section 140, after the proviso, the following proviso shall be inserted, namely: –
“Provided further that in case of a Specified IFSC public company, where, within a period of sixty days from the date of submission of the application to the Central Government under this sub-section, no decision is communicated by the Central Government to the company, it would be deemed that the Central Government has approved the application and the company shall appoint new auditor at a general meeting convened within three months from the date of expiry of sixty days period.”.-Notification No. G.S.R. 08(E) dated 4th January, 2017.
2) In sub-section (1) of section 140, after the proviso, the following proviso shall be inserted, namely: –
“Provided further that in case of a Specified IFSC private company, where, within a period of sixty days from the date of submission of the application to the Central Government under this sub-section, no decision is communicated by the Central Government to the company, it would be deemed that the Central Government has approved the application and the company shall appoint new auditor at a general meeting convened within three months from the date of expiry of sixty days period.”. –Notification No. G.S.R. 09(E) dated 4th January, 2017.