Companies Act Section 140 — Removal, resignation of auditor and giving of special notice
CHAPTER X AUDIT AND AUDITORS
Commercial / Corporate
Summary
Sub-section (1) allows a company to remove an auditor appointed under section 139 before the end of their term, but only by passing a special resolution and only after getting the Central Government's prior approval in the prescribed manner. Before any such removal action is taken, the auditor must be given a reasonable chance to be heard.
Sub-section (2) requires an auditor who resigns from the company to file a statement in the prescribed form with both the company and the Registrar within thirty days from the date of resignation. For companies covered under sub-section (5) of section 139, the auditor must also file this statement with the Comptroller and Auditor-General of India. The statement must indicate the reasons and other relevant facts regarding the resignation.
Sub-section (3) states that if an auditor fails to comply with the requirements of sub-section (2), the auditor is liable to a penalty of fifty thousand rupees or an amount equal to the auditor's remuneration, whichever is less. If the failure continues, there is an additional penalty of five hundred rupees for each day after the first day of continuing failure, up to a maximum of two lakh rupees.
Sub-section (4) has three parts. Under clause (i), special notice is required for a resolution at an annual general meeting that appoints a person other than the retiring auditor as auditor, or that expressly states the retiring auditor shall not be re-appointed. This requirement does not apply when the retiring auditor has completed a consecutive tenure of five years or ten years, as provided under sub-section (2) of section 139. Under clause (ii), once the company receives notice of such a resolution, it must immediately send a copy of that notice to the retiring auditor. Under clause (iii), if such a notice is given and the retiring auditor makes a written representation to the company (of reasonable length) and asks that it be notified to the members, the company must, unless the representation arrives too late, state the fact of the representation in any notice of the resolution given to members, and send a copy of the representation to every member who is sent notice of the meeting. If a copy is not sent because it was received too late or due to the company's default, the auditor may require that the representation be read out at the meeting, without losing the right to be heard orally. The first proviso says that if a copy of the representation is not sent as described, a copy must be filed with the Registrar. The second proviso says that if the Tribunal is satisfied, on an application by the company or any other aggrieved person, that the auditor is abusing these rights, the copy of the representation need not be sent and it need not be read out at the meeting.
Sub-section (5) allows the Tribunal, on its own motion or on an application by the Central Government or any person concerned, to order a company to change its auditors if the Tribunal is satisfied that the auditor has, directly or indirectly, acted fraudulently or abetted or colluded in any fraud by or in relation to the company or its directors or officers. This is without prejudice to any action under this Act or any other law. The first proviso states that if the application is made by the Central Government and the Tribunal is satisfied that a change of auditor is required, the Tribunal must, within fifteen days of receiving the application, make an order that the auditor shall not function as an auditor, and the Central Government may appoint another auditor in the auditor's place. The second proviso states that an auditor, whether an individual or a firm, against whom a final order has been passed by the Tribunal under this section is not eligible to be appointed as an auditor of any company for five years from the date of the order, and the auditor is also liable for action under section 447. Explanation I clarifies that in the case of a firm, the liability applies to the firm and to every partner who acted fraudulently or abetted or colluded in any fraud by or in relation to the company or its directors or officers. Explanation II clarifies that for the purposes of this Chapter, the word auditor includes a firm of auditors.
Official Text
(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. 1[
(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 1[two 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 in directly, 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.