The first proviso to this section provides that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting 1.1. Meaning of the word ‘Ratification’: According to Black’s Law Dictionary, the definition of Ratification means, ‘the formation of a previous act then either by the party himself or another, confirmation of voidable Act’. 1.2. While section 139 provides for the appointment of auditors, section 140 deals with the removal of the auditors. Sub-section (1) of Section 140 provides that 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. 1.3. Thus, for removal of the Statutory Auditor before the expiry of its term, the conditions stipulated in section 140(1) i.e. passing of special resolution and permission of Central Govt, be complied with. Apart from it, the outgoing Statutory Auditor be also given a reasonable opportunity of being heard. 1.4. Recently, a case titled as SPC & Associates, Chartered Accountants v. DVAK & Co.1 CP No. 21/140/ Hdb/2016, came up before the National Company Law Tribunal, Hyderabad Bench (NCLT) in which the NCLT observed that where a Chartered Accountant (CA) firm has been appointed as statutory auditor by the company for period of five years but did not ratify their appointment in its subsequent Annual General Meeting (AGM) and appointed another CA firm as its statutory auditor, opined vide order dated 17th March, 2017, that since the company did not obtained prior approval of central Government, the removal of petitioner CA firm was to be held illegal. The facts of the case are as under:

Removal of Statutory Auditor

Facts of the case

The Respondent No.2 Company originally appointed the Petitioner firm as an auditor of Respondent No.2 Company at the Extra-ordinary General Meeting held on 07.11.2014 for the financial year 2014-15 and filed notice of such appointment Form ADT-1 SRN S34241471 on 02.12.2014 with the RoC, Hyderabad.Further, the R2 Company appointed the Petitioner firm as an auditor of R2 Company for a period of 5 years starting from conclusion of 17th Annual General Meeting held on 28.08.2015 till the conclusion of Annual General Meeting to be held on 2020 of R2 Company and filed notice of such appointment form ADT-1 vide SRN S43477884 on 26.11.2015 with the RoC, Hyderabad.It is submitted that CA Dilli Kumar N and CA Vamsi Krishna Borra are partners of Rl firm, have worked with the Petitioner firm in the capacity of partners for a period of 3 years and quit the Petitioner firm on 31.01.2016. After departing from the Petitioner firm, CA Dilli Kumar N and CA Vamsi Krishna Borra established Rl firm and immediately started soliciting and poaching the clients of Petitioner firm with the acquaintance and relationship developed while working for Petitioner firm.Ms. Anu Kashyap Durr, one of the Directors of Respondent No.2 Company, in a reply email dated 27.05.2016, to an email forwarded by one of the partners of Petitioner firm dated 27.05.2016, stated that “your proposal to increase the audit fees comes to a complete surprise to us because at the time when we appointed SPCA as our auditors in August, 2014, we had a detailed discussion with Mr.Sesha Prasad and Mr.Vamshi that the audit fee will remain unchanged for a period of 5 years.”

In response to the above email, the Petitioner forwarded a reply substantisting the reasons and responsibilities associated with their professional services that warrant to enhance the audit fees.

Subsequently, on 21.09.2016, Ms Anu Kashyap Durr, sent an email dated 21.09.2016 stating that they have not been satisfied working with the Petitioner firm staff since 01.01.2016 and therefore, finalized on another auditor for all of their companies and requested for resignation letter from the Petitioner firm for all their companies at the earliest.In reply, the Petitioner firm stated that “Petitioner firm intimated about the implications and repurcussions in the light of appointment of Rl firm being in violation of the provisions of the Companies Act, 2013; the institute of Chartered Accountants of India Act, 1948 and the contractual obligations” and hence not resigned from R2 Company.It is further submitted that on 01.10.2016 received a letter dated 27.09.2016 from the Rl firm stating that they have been appointed as statutory auditor of R2 Company and sought ‘no objection’ from the Petitioner firm to enable them to accept the said appointment.It is submitted that Rl firm committed breach of trust, unethical professional practices by misusing the confidential information and taking undue advantage of relationships gained and developed with the clients of Petitioner firm while working for the Petitioner firm, clinchingly proves the mala fide intention and wilful default of violating the Section 140 of the Companies Act, 2013 and in collusion and connivance with R2 company, for illegal removal of Petitioner firm as auditor of R2 Company and appointment of Rl firm as auditor of R2 Company, even though seeking NOC from the existing auditors of R2 company.Some of the material submissions of the Petitioner firm are as follows: There is no special resolution passed by the R2 Company at the 18th Annual General Meeting of the Company held on 26.09.2016 for the removal of Petitioner firm. R2 Company has not obtained previous approval of the Central Government (Regional Director) for removal of Petitioner firm’s existing auditor of R2 company The R2 company approved at the Board Meeting held on 22.08.2016 which categorically contains ordinary business for ratification of appointment of Petitioner firm as auditor for the financial year 2016- 17. Therefore, the present petition is filed seeking the above reliefs before this Tribunal.

Issue involved in the case:

Whether the removal of petitioner firm as the auditor of R2 Company and the appointment of Rl Company as Auditor of R2 Company is improper?Whether R2 Company to continue the Petitioner firm as the Auditor of R2 Company till the next AGM?

Observations made by NCLT:

The NCLT observed that the R2 Company (NISC Export Services Pvt Ltd) appointed the Petitioner for a block of 5 years as Statutory Auditor in the 17th Annual General Meeting (AGM) held on 28.08.2015 till the conclusion of AGM in the year 2020. However, Respondent No.2 has in the meanwhile, appointed Rl Company for a period of five years from the 18th AGM till the conclusion of AGM in the year 2021.Both the counsels confirmed that though the Auditor is appointed for a block of five years under section 139(1) of the Companies Act, 2013, however, their appointment is to be ratified by Members at every AGM. The petitioner has also referred to black law dictionary for the definition of Ratification “the formation of a previous act then either by the party himself or another, confirmation of voidable Act” The Respondent also submitted that the petitioner was not ratified for the apparent reason for increase in audit fee.The Petitioner contended that in the AGM held on 26th September, 2016 R1 was illegally appointed as Statutory Auditor by Respondent No.2 with the consent of R1 dated 30.08.2016. Further, the petitioner submitted that consent is generally issued only upon its Boards recommendation. The Petitioner also referred to Hon’ble Delhi High Court Order in M.S. Kabli v. Union of India2 and he has referred to 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.When analysed the facts of R1 Company, it is observed that R1 Company is a new firm with just six months of experience. The partners namely Sri Vamshi Krishna Borra and Sri N. Dilli Kumar were earlier working with Petitioners’ firm and started a new firm in the name and style of DVAK & Co. whereas the petitioners’ firm had an experience of 27 years in the field with impeccable track record and no disciplinary action was taken against the petitioner by ICAI as per the information submitted in the Petition. From the records the reason for non-ratification/removal of the petitioners’ firm is apparently due to the fact that the petitioners sought for an increase of 10% of Audit fee.For removal of the petitioner U/s 140(5)(1) a special resolution has to be passed and previous approval of Central Government is required to be obtained. However, as contended by the petitioner in the present case central Government’s approval is not obtained. Respondent No.2 also in its communication has stated that as per their understanding audit fee is fixed for a tenure of five years and therefore seeking the increase of 10% is not accepted by R2. Even though the Respondent No.2 submitted that the petitioner was not removed but his appointment was not ratified as per provision under section 139(1), no justifiable grounds is provided for non-ratification of the petitioner.The R2 Company contended that the audit fee is fixed for a period of 5 years. Therefore, seeking increment of 10% is not agreeable for the Respondent No.2 Company and this was the main reason for the change of auditor. However, R2 Company did not submit any documentary evidence to prove the contentions that audit fee is fixed for a period of 5 years. Moreover, the Bench is of the view that 10% increase in fee sought by the Auditor is reasonable.If the contentions of R2 Company is accepted, there is no guarantee that even Rl Company will be the statutory auditor of the company for a block of 5 years. Further, frequent change of auditor is also not advisable for the effective auditing, preparation of financial statement, transparency in audit policies/procedures, etc. In addition, no plausible reason is apparently made out for non-ratification/removal of Petitioner firm, which would cause grave injury to a established firm with 27 years of experience.Though the Petitioner was not ratified in AGM held on 26.09.2016, 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.Before getting into the merits/ rival contention of removal/non-ratification of the Petitioner firm, NCLT opined prima facilely that the Respondent No. 1 Company is not eligible to be appointed as Auditor of R2 Company as per Explanation 11(b) to Rule 6 to the Companies (Audit and Auditors) Rules, 2014.

Decision

NCLT admitted the present CP No. 21/140/HDB/2016 with following declarations / directions:

The removal of petitioner firm as the auditor of R2 Company and the appointment of Rl Company as Auditor of R2 Company is improper.R2 Company to continue the Petitioner firm as the Auditor of R2 Company till the next AGM and subsequently necessary course of action can be taken by R2 Company regarding the continuation of Petitioner firm, in accordance with law.R2 Company to take necessary steps to appoint the petitioners’ firm as Auditor of R2 Company.Rl 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 R2 Company.

Summing up

The Board of Directors of a company have no powers to remove an auditor appointed by the company in General Meeting. The auditor can be removed only by the company in General Meeting, after receiving the previous approval of the Central Govt. Rule 7 of the Companies (Audit and Auditors) Rules, 2014 (read with section 140 of the Companies Act, 2013), deals with the removal of the Auditor before expiry of his term. It provides that 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. The application shall be made to the Central Government within thirty days of the resolution passed by the Board. The company shall hold the general meeting within sixty days of receipt of approval of the Central Government for passing the special resolution. Recommended Articles

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