Appointment/Re-appointment of Auditors under the Companies Act, 2013

Appointment/Re-appointment of
Auditor(s) under the Companies Act,
2013
_______________________________________________________________
Selected Critical Issues
&
Interpretation thereof
March 12, 2016
Manoj Singh Bisht, Company Secretary

APPOINTMENT OF AUDITORS – SECTION 139(1) Contd…
139. (1) Reproduced
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:
Provided further that before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with
the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141:
Provided also that the company shall inform the auditor concerned of his or its appointment, and also
file a notice of such appointment with the Registrar within fifteen days of the meeting in which the
auditor is appointed.
Explanation.—For the purposes of this Chapter, “appointment” includes reappointment.
Deciphering the Companies Act, 2013 – MSB. Personal Views. ©

DISCUSSION ON SECTION139(1)
CRUX
o Sub-Section (1) of Section 139 is subject to provisions of this Chapter (Chapter X). That means, it is
in fact, subject to other provisions of section 139 as well.
o Appoint at AGM. Valid from conclusion of the AGM till conclusion of the 6th AGM.
o Ratification is must, at every AGM.
o Written consent is a compulsory requirement. No appointment can be made without consent. Law
of contract comes into play as well. (whether stated or not)
o Certificate from the individual or audit firm is a must. Whether appointed by Shareholders or the
Board or Govt. (Refer Rules)
o Informing the auditor about his appointment is must.
o Notice of appointment to be filed with ROC vide FORM ADT 1 in all cases. – Reasons discussed in
subsequent slides. (We must go by legal interpretation)

HOW TO INTERPRET A PROVISO OF A SUB-SECTION
 The general object of a proviso is to except something from the main clause or to qualify or
restrain its generality and prevent mis-interpretation. The object of the proviso being to carve out
from a main section a class or category to the main section which does not apply, though in
exceptional cases, the proviso may be substantive provision itself.
 It is a fundamental rule of construction that a proper canon of construing a section, is to read the
section and the proviso as a whole and give a meaning to the whole of the section along with the
proviso which has comprehensive and logical meaning.
 KareemVs.State of Kerala (2001) (Kerala High Court) - It is settled law that the proviso of the main
part of the Rule are to be harmoniously read to and interpreted to give effect to the object of the
provision.
 Saradambal v. Seethalakshmi MANU/TN/0197/1962, A.I.R. 1962 Mad 108 - the Madras High Court
while interpreting Section 69 of the Madras Court Fees and Suits Valuation Act, considering a
similar question has held that the proviso to Schedule II Article 11(k) governs not only Clause (2)
but also Clause (1) of that Article. It was held that in the absence of a special indication to show
that the proviso to a section is limited to one part of it normally, the proviso governs the entire
section and further that it is not necessary for the purpose of making a proviso applicable to the
entire section to repeat it under each Sub-section.

APPOINTMENT OF FIRST AUDITOR OF A NON-GOVT. COMPANY
 First Auditor of a Non –Govt. company to be appointed by the BOD within 30 days of Registration.
 If Board doesn’t appoint, members to appoint within 90 days.
 90 days to trigger from which date ?
 Concept of obligation.
 Reproduced 139(6)
“139(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other
than a Government company, shall be appointed by the Board of Directors within 30 days from the
date of registration of the company and in the case of failure of the Board to appoint such auditor, it
shall inform the members of the company, who shall within 90 days at an extraordinary general
meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual
general meeting.”
o Read the words “from the date of registration” – appears only in connection with 30 days.
o Next – read - “it shall inform the members of the company,” – Board to inform. Obligation of the Board to
either appoint or inform !
o Next – read - “within 90 days at an extraordinary general meeting” – it is not qualified with the words
“from the date of registration”
o Directors and shareholders are the same persons? 90 days ?

APPOINTMENT OF FIRST AUDITOR OF A GOVT. COMPANY
 First Auditor of a Govt. company to be appointed by the BOD within 30 days of Registration.
 If Board doesn’t appoint, members to appoint within 90 days.
 90 days to trigger from which date ?
 Reproduced 139(7) : Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the
Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of
India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such
auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure
of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within
the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.
o Read the words “within sixty days from the date of registration”
o Next – read the words - “ does not appoint the auditor within the said period” – here , it is specific. But onus is not
on the C&AG to inform the Board !. Art of reading and harmonious reading.
o Next – read the words - “ BOD shall appoint such auditor within the next 30 days” – “next” appears before the
words “thirty days” and hence, time starts immediately on expiry of 60 days from the date of registration.
o Next -Read the words – “it shall inform the members” – obligation of the Board
o Next – Read the words – “within the 60 days at an EGM” { Under 139(6) – it was 90 days.}

HOW TO INTERPRET “NOTWITHSTANDING ANYTHING
CONTAINED IN SUB-SECTION (1)” (SECTION 139(6)
 It is well settled that the expression ‘notwithstanding’ is in contradistinction to the phrase
'subject to', to the latter conveying the idea of a provision yielding place to another provision
or other provisions to which it is made subject.
 The Apex Court has held in CM. Kokil and Ors. case that a non obstante clause is a legislative
device which is usually employed to give overriding effect to certain provisions over some
other contrary provisions that may be found either in the same enactment or some other
enactment and to avoid the operation and effect of all contrary provisions.
REPRODUCED - “139(6) Notwithstanding anything contained in sub-section (1), the first auditor
of a company, other than a Government company, shall be appointed by the Board of Directors
within 30 days from the date of registration of the company and in the case of failure of the
Board to appoint such auditor, it shall inform the members of the company, who shall within 90
days at an extraordinary general meeting appoint such auditor and such auditor shall hold
office till the conclusion of the first annual general meeting.”

CASUAL VACANCY
 Casual vacancy is not defined under the Companies Act, 2013.
 As per blacks law dictionary seventh edition, “Casual” means not expected, foreseen, or planned.
 Further, as per the same dictionary, the word “vacancy” means
1. The state or fact of a lack of occupancy in an office, post, or piece of property.
2. The time during which an office, post, or piece of property ; an empty place. Although the term
sometimes refers to an office or post that is temporarily filled, the more usual reference is to an office
or post that is unfilled even on a temporary basis. An officer’s misconduct does not create a vacancy
even if a suspension occurs; a vacancy, properly speaking, does not occur until the officer is officially
removed.
Therefore, in this context, Casual vacancy may arise out of death, disqualification, resignation or removal etc.
of the auditor or non-ratification of appointment by the shareholders as per 1st proviso to sub-section (1) of
Section 139.
 Further, Explanation to Rule 3 states as under:
For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of
the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after
following the procedure laid down in this behalf under the Act.

FILLING OF CASUAL VACANCY IN CASE OF A GOVERNMENT
COMPANY
 Any casual vacancy in the office of an auditor shall, in the case of a company whose accounts are
subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled
by the Comptroller and Auditor-General of India within 30 days:
 However, in case the C& AG does not fill the vacancy within the said period, the Board of Directors
shall fill the vacancy within next 30 days.

FILLING OF CASUAL VACANCY IN CASE OF A NON-
GOVERNMENT COMPANY
 be filled by the Board of Directors within 30 days.
 However, if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be
approved by the company at a general meeting convened within 3 months of the recommendation of the Board
and he shall hold the office till the conclusion of the next annual general meeting.
 Reproduced relevant extract from139(8)(i):
“in the case of a company……………………………..but if such casual vacancy is as a result of the resignation of an auditor,
such appointment shall also be approved by the company at a general meeting convened within three months
of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general
meeting”
o Read the words “ as a result of resignation”
o Again “ such appointment shall also be approved by the Company at a general meeting”
o Again “within 3 months of the recommendation of the Board”
o Approved by Board but such approval is in the form of Recommendation?
o Practical scenario. How matters to be taken up at the GM are approved in the Meeting of the BODs ?
o Recommendation means the act of saying that someone or something is good and deserves to be chosen.

ROTATION OF AUDITORS (SECTION 139(2)
 you can not appoint an Individual as auditor for more than 1 term of 5 consecutive years.
 You can not appoint an Audit Firm as auditor for more than 2 terms of 5 consecutive years.
Therefore, 5 years at a time.
 However, sub-section (1) of section 139 is subject to this provision.
 After completion of term of 5 consecutive years/ 10 consecutive years, as the case may be,
Individual/ audit firm wont be eligible for re-appointment/fresh appointment for next 5
years.
 Proviso 1 and 3 – etc etc.
 2ND Proviso – comply with sub-section (2) of Section 139 within 3 years i.e. by 31/03/2017.
This is to be read in context of AGM and not otherwise.
 This exemption under 2nd proviso was for companies existing on or before the
commencement of this Act and not for companies formed under the New Companies Act,
2013.

RE-APPOINTMENT OF FIRST AUDITOR
CASE
 Eg. :After commencement of the new Act, first auditor of a Non-Govt. Companies has been
appointed by the BOD on say 10th April 2014.
 Sub-section (6) has a non-obstante clause (discussed earlier)
 Auditor completed audit for a financial year as First Auditor.
 What if the said company Is covered under section 139(2)
 In my view, term of 5 years would cover both i.e. appointment as First Auditor + appointment
by members in AGM)
 Sub-section (1) is subject to the provisions of this Chapter and hence, subject to sub-section
(2)/(6) {(6) additionally, has a non-obstante clause, which was not required however, inserted}
 Therefore, since sub-section (1) is subject to sub-section (2) and (6), the appointment till 6th AGM
is subject to the condition of 5 year term stipulated in sub-section (2).
 HENCE, IF such a Company falls under provisions of sub-section (2) of section 139, re-
appointment of first auditor as Auditor at the First AGM shall be for 4 years i.e. Till conclusion of
5th AGM and NOT 6th AGM
 Similar issues under casual vacancy as well.

RE-APPOINTMENT OF RETIRING AUDITOR {139(9) }
 Reproduced 139(9):
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may
be re-appointed at an annual general meeting, if—
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and
(c) a special resolution has not been passed at that meeting appointing some other auditor or
providing expressly that he shall not be re-appointed.
o A challenge worth exploring !
o Sub-section (9) starts with the words “subject to the provisions of sub-section (1) and the rules made
thereunder” , and hence, sub-section (1), which also starts with the words “subject to the provisions
of this chapter” would prevail over sub-section(9).
o use of the words “may be” in sub-section (9) clearly indicates that it is not mandatory to reappoint
the retiring auditor even if 3 things stipulated in sub-section (9) are not attracted. The erstwhile
provisions of the Act had used the words “shall be” which in fact made it mandatory to appoint a
retiring auditor except in case 4 things given in section 224 were satisfied.

RE-APPOINTMENT OF RETIRING AUDITOR {139(9) } Contd…
 As per black’s law dictionary (eighth edition), disqualification means:
o something that makes one ineligible; esp., a bias or conflict of interest that prevents a judge or a
juror from impartially hearing a case, or that prevents a lawyer from representing a party.
o The act of making ineligible; the fact or condition of being ineligible.
 Therefore, ineligibility results in disqualification. Primarily, the provisions related to disqualification
of auditors has been dealt with under sub-section (3) of Section 141 of the Act read with
Companies (Audit and Auditors) Rules, 2014.
 However, it is correct to say that the disqualification is also covered under 1st proviso to sub-
section (2) of Section 139 of the Act (though not applicable right now due to transition period).
One of the key disqualification which debars an auditor from getting re-appointed is dealt with
under 1st proviso to sub-section (2) of Section 139.

Relevant extract of 139(2) is reproduced:
No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint
or re-appoint--
 an individual as auditor for more than one term of five consecutive years; and
 an audit firm as auditor for more than two terms of five consecutive years:
“Provided that--
a) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of his term;
b) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in
the same company for five years from the completion of such term”
o Shall not be eligible i.e. ineligible and hence, disqualified for the purpose of re-appointment.
o disqualification under 141(3) and 139(2) stand on the same footing in context of sub-section (9) of section 139.
o However, principally, there is a difference between the two.
o Vacation of office happens only when you are holding an office. Hence, it is possible only in case of matters falling
under 141(3).
o Vacation of office under section 141(4) - Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) of Section 141, after his appointment, he shall vacate his office as
such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

Reproduced 139(10) :
(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing
auditor shall continue to be the auditor of the company.
o Use of the word “shall”. It is not his right but it is infact, his obligation.
o Hence, it is clear that the retiring (existing) auditor even if not re-appointed, may still
automatically stand appointed if the Company fails to appoint an Auditor in place of the
existing/retiring auditor.
o Purpose of sub-section (9) and (10) of Section 139 is that the Company must have an Auditor
in all circumstances within time period as stipulated by the legislature, wherever felt
necessary.
o Option to resign is always available to him !
o Such appointment is by virtue of legal obligation and hence, in my opinion, valid till next AGM
(possibility of Casual Vacancy, Removal is possible)
o However, remuneration to be decided by the members !

ARE THEIR ANY EXCEPTION TO THE CONDITION THAT A SPECIAL RESOLUTION IS REQUIRED
FOR APPOINTING NEW AUDITOR IN PLACE OF THE RETIRING AUDITOR ?
 Yes. Do you agree ?
 Redrafted version of 139(9) (for ease of reference)- A retiring auditor shall be re-appointed if he
fulfills following conditions :
o he is qualified;
o he is willing and
o members do not pass a special resolution appointing some other auditor in his place or providing
expressly that he shall not be re-appointed.
o How to interpret the word “AND”
o AND doesn’t necessarily mean “compliance compulsion”. Interpretation of every word used by the
legislature is important. Words can not be interpreted in isolation.
1. If he is not qualified, the question of re-appointment doesn’t arise. Do you agree?
2. Similarly, if he is unwilling, then also, the question of re-appointment doesn’t arise at all. Do
you agree ?
o And if both 1 and 2 doesn’t apply, then why would be there a need of a special resolution for
appointing some other auditor in his place or providing expressly that he shall not be re-appointed.

ARE THEIR ANY EXCEPTION TO THE CONDITION THAT A SPECIAL RESOLUTION IS REQUIRED
FOR APPOINTING NEW AUDITOR IN PLACE OF THE RETIRING AUDITOR ? CONTD…
FOR CLARITY - Clause (i) of Section 140(4) states that :
“the 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.”
o It is obvious to say that the question of special notice does not arise at all in case of appointment of new
auditor in place of the existing auditor due to rotation criteria stipulated in section 139(2) read with rules
made thereunder.
o Combined reading of Section 139(9) and section 140(4) leads to a conclusion that the Special resolution
is not required to be passed if the existing auditor is disqualified to be re-appointed as per provisions of
section 139(2).
o It is also pertinent to note that the provision of section 139(9) are subject to provisions of section 139(1)
and rules made thereunder.
o Therefore, in such cases where existing auditor is not eligible to be re-appointed as per provisions of
section 139(2), section 139(1) shall prevail over section 139(9).
o Section 139(1) stipulates passing of an ordinary resolution only.

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