Legal Aspects for Appointment of subsequent Statutory Auditors and filling of Casual Vacancy in a Private Limited Company and Procedure

Introduction

This article is in continuation to my previous article titled as Legal Aspects for Appointment of First Statutory Auditors in a Private Company and Procedure

In this article we will walk through the legal provisions of the Companies Act, 2013 (Act) and practical aspects to be taken care of in the process of appointment of subsequent Statutory Auditors and filling casual vacancy in a Private Limited Company to ascertain that the financial statements are free from material mis-statements and present a true and fair view of the Company's financial position to various stakeholders like shareholders, creditors, government authorities, vendors, suppliers, loyal customers etc.

Subsequent Auditor

"Subsequent Auditor" means an auditor who is recommended by Board of Directors of the Company for appointment and approved by the members at the first AGM of the Company as subsequent statutory auditor of the Company. This auditor will hold office from the conclusion of first AGM till the conclusion of sixth AGM.

Statutory Framework Governing Appointment of Auditors under the Companies Act, 2013

Section 139 of the Companies Act, 2013 deals with the appointment of statutory auditors of a Company. In this regard, there are three types of auditors to be appointed in a Company which are as under:

(i) Appointment of first auditors of the Company;
(ii) Appointment of subsequent auditors of the Company; and
(iii) Appointment of auditors in case of causal vacancy due to resignation of existing auditors.

In this article we will discuss the legal provisions and practicalities involved in the appointment of subsequent Statutory Auditors and filling of casual vacancy in a Private Limited Company and its procedure.

Distinction between First Statutory Auditor and Subsequent Statutory Auditor

Statutory Provisions Governing Appointment of Subsequent Statutory Auditors of the Company

Section 139(1) of the Companies Act, 2013 provides that every Company shall at the first AGM of the Company appoint an individual or a firm as an auditor who shall hold office from the conclusion of that AGM till the conclusion of its sixth AGM.

Provided that before making such an appointment at an AGM, proposed auditor or auditor's firm must provide a written consent along with eligibility certificate which shall be in accordance with the provisions of Section 141 of the Companies Act, 2013 and in compliance of conditions stipulated in Rule 4 of Companies (Audit & Auditors) Rules, 2014.

Provided further that the Company must inform the auditor or auditor's firm of his/her/its appointment and shall file Form ADT-01 on a mandatory basis with concerned ROC within 15 days of the meeting in which auditor or auditor's firm is so appointed. [Fourth proviso to Section 139(1) of the Companies Act, 2013 read with Rule 4(2) of Companies (Audit & Auditors) Rule, 2014.]

Mandatory Rotation of Auditors

Section 139(2) of the Companies Act, 2013 introduces a provision as to rotation of auditors on a mandatory basis for listed companies and such other Companies as stipulated in Rule 5 of Companies (Audit & Auditors) Rules, 2014.

Rule 5(b) & (c) of Companies (Audit & Auditors) Rules, 2014 stipulates that a Private Company having:

(i) paid up share capital of rupees fifty crores or more;
(ii) public borrowings from financial institution, banks or public deposits of rupees fifty crores or more

Shall not appoint or re-appoint an individual as an auditor of the Company who has completed his/her full term of five years as an auditor in that Company.

Similarly, an audit firm which has completed two consecutive terms of five years shall not be appointed or re-appointed as an auditor of that Company.

Provided that on the date of appointment no audit firm having a common partner or partner to the other firm whose tenure has expired in a Company immediately preceding the financial year, can be appointed as auditor of the same Company for a period of 5 years. [Second proviso to Section 139(2) of the Companies Act, 2013]

It is pertinent to note here that:

• Provisions of mandatory rotation of auditors contained in Section 139(2) of the Act shall not be applicable on One Person Company and Small Company as defined under the Act;
• The Company has the right to remove an auditor before the completion of his/her/its term and auditor has the right to resign as an auditor before the expiry of his term. This section does not affect the rights of the Company and auditor to remove or resign.

Procedure for Appointment of Subsequent Statutory Auditor in a Private Limited Company

(1) The Board of Directors of the Company shall send a request letter to the proposed Auditor, in case the first statutory auditor is to be appointed as subsequent statutory auditor of the Company. The request letter to the auditor shall cover following aspects:

• Informing about the expiry of his/her/its tenure as the first statutory auditor of the Company;
• Management of the Company, if satisfied with the work of the proposed auditor (First Statutory Auditor), informing an auditor or auditor's firm about his/her/its name being proposed or recommended as subsequent statutory auditor at an ensuing AGM of the Company before the members of the Company.
• Requesting them to give consent for proposing or recommending their name for appointment as subsequent statutory auditor of the Company at the ensuing AGM of the Company;
• If yes, then request them to share consent letter and eligibility certificate for proposing or recommending their name before the members of the Company for appointing them as subsequent Statutory Auditor of the Company.

In case Board of Directors of the Company wants to recommend name of auditor other than first auditor of the Company then they will send a proposal letter to the proposed new auditor.

(2) Obtain consent letter and eligibility certificate from the proposed subsequent auditor /auditor's firm stating that auditor satisfies the criteria provided under Section 141 of the Companies Act, 2013. The eligibility certificate given by auditor shall state:

• He/She/It, as the case may be, is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules made thereunder;
• The proposed appointment is as per the term provided under the Act;
• The proposed appointment is within the limits laid down by or under the authority of the Act;
• The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

(3) Issue Notice for holding Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 clear days before the date of Board Meeting.[Section 173 of Companies Act, 2013 and SS-1 to be adhered]

Provided that if Board Meeting is called at a shorter notice then shorter notice consent letters shall be signed by all the Board of Directors of the Company.

(4) Attach agenda, notes to agenda and draft resolution with the notice of Board Meeting.

(5) Hold the meeting of Board of Directors of the Company on the day, date, time & venue stipulated in the notice and pass the necessary Board Resolution in respect of the following:

• To recommend the appointment/re-appointment and fixation of remuneration of the Subsequent Statutory Auditor of the Company for a period of 5 years;
• To approve the draft notice of Annual General Meeting along with explanatory statement attached to the notice (if any) and considers issuance of notice for calling 1st Annual General Meeting.

(6) Draft minutes of the board meeting shall be circulated to all the directors within 15 days from the date of conclusion of the meeting by hand delivery or by registered post or by speed post or by courier or by email or by any other recognised electronic means. [Section 118(1) of the Companies Act, 2013 read with Clause 7.4 of Secretarial Standard on Board Meeting-1 promulgated by the Institute of Company Secretaries of India].

(7) Send notice of Annual General Meeting to all the members, directors of the Company and proposed auditors at least 21 clears days before the date of meeting. [Section 101(1) of Companies Act, 2013]

Provided that an Annual General Meeting can also be called at a shorter notice, by obtaining shorter notice consent letters from at least 95% of the members who are entitled to vote thereat. [Clause (i) of First Proviso to Section 101(1) of Companies Act, 2013]

(8) Hold the Annual General Meeting on scheduled date, time & venue and pass the ordinary resolution for appointment of subsequent auditor of the Company from the conclusion of first Annual General Meeting till the conclusion of sixth Annual General Meeting and approve & fix the remuneration to be paid to him/it as recommended by the Board of Directors.

(9) Draft minutes of the general meeting of members shall be prepared and signed by the Chairman of the meeting within 30 days of the conclusion of the meeting. [Section 118(1) of Companies Act, 2013 read with Clause 17.4 and 17.5 of Secretarial Standard on General Meeting-2 promulgated by the Institute of Company Secretaries of India]

(10) Issue a letter of appointment after conclusion of Annual General Meeting along with certified true copy of board resolution and ordinary resolution for appointment of the auditors.

(11) File Form ADT-01 with the concerned ROC within 15 days from the date of the Annual General Meeting in which auditors so appointed.

To read the full article, find the enclosed attachment