Removal of Auditors under the Companies Act, 2013: A Comprehensive Legal Analysis with Case Law

Introduction

The Companies Act, 2013, represents a substantial reform in corporate governance and regulatory practices in India. Central to this reform is the procedure governing the appointment and removal of auditors, which is essential for maintaining transparency and accountability in financial reporting. This article provides an exhaustive legal analysis of the process and conditions for the removal of auditors under the Companies Act, 2013, supported by relevant case law that elucidates the application and interpretation of these provisions.

Legal Framework for Removal of Auditors

Section 140 of the Companies Act, 2013, delineates the procedure for the removal of auditors before the expiration of their term. According to subsection (1) of Section 140, an auditor appointed under Section 139 may be removed from office before the completion of their term only through a special resolution passed by the company, following prior approval from the Central Government. The term "auditor appointed under Section 139" includes auditors appointed by shareholders, the board of directors, or the Comptroller and Auditor-General of India, provided that the procedure outlined in subsection (1) is duly followed.

Requirement of Special Notice

Subsection (1) of Section 140 specifically addresses the removal of auditors prior to the end of their term as fixed by the board, shareholders, or Comptroller and Auditor-General of India. This provision does not necessitate a special notice by shareholders, as required under subsection (4) of Section 140 for removals before the expiration of the term. Nevertheless, shareholders retain the right to propose a resolution for the removal of an auditor in accordance with Section 111 read with Section 100 of the Act. In such cases, compliance with the requirements of subsection (1) of Section 140 is mandatory.

Procedure for Removal of Auditors

Section 140 mandates that an auditor may be removed only by passing a special resolution, contingent upon obtaining prior approval from the Central Government (powers delegated to the Regional Director as per notification S.O. 1352(E) dated May 21, 2014). Unlike the previous requirement under Section 224A of the Companies Act, 1956, which required only an ordinary resolution, the Companies Act, 2013, necessitates a special resolution of the members.

The authority to apply to the Central Government for the removal of an auditor under subsection (1) of Section 140 is vested in the board of directors, as per Section 179 of the Act, which outlines the powers of the board.

According to Rule 7(1), an application to the Central Government for auditor removal must be submitted in Form ADT-2, accompanied by the requisite fee specified under the Companies (Registration Offices and Fees) Rules, 2014. Rule 7(2) stipulates that this application must be made within 30 days of the board's resolution.

Further, Rule 7(3) requires the company to hold a general meeting within 60 days of receiving approval from the Central Government (Regional Director) to pass the special resolution. As per the e-form ADT-2 and guidance provided by the Ministry of Corporate Affairs, a special resolution must be passed before submitting the application to the Regional Director for auditor removal. Thus, the company must convene a general meeting and pass a special resolution prior to filing the application with the Central Government in e-form ADT-2.

Provision for Reasonable Opportunity to be Heard

The proviso to subsection (1) of Section 140 mandates that before taking any action for the removal of an auditor, the auditor must be given a reasonable opportunity to be heard. The term 'action' refers to the steps undertaken to achieve the objective of auditor removal. Consequently, the auditor must be afforded a reasonable opportunity to respond before any decision is made by the shareholders or the Central Government regarding their removal. This requirement is distinct from the reasonable opportunity to be heard provided under clause (iii) of subsection (4) of Section 140, which pertains to a retiring auditor when a new auditor is proposed.

Case Law Analysis

• Basant Ram & Sons &Anrs. v. Union of India &Ors [2002 110 Comp Cas 38 Delhi] In this case, the court noted that there was no statutory prohibition against holding a preliminary meeting to approve a resolution for seeking the Central Government's consent for auditor removal. The court emphasized that the removal of statutory auditors appointed under Section 224 of the previous Act could only occur in accordance with the procedures outlined in Section 224(7). The court ruled that any order granting permission for removal only becomes effective after shareholder approval.
• M/s. J.K. & Co. v. Union of India (2019) The Delhi High Court addressed a situation where the company sought to remove its auditor for non-compliance with regulatory guidelines. The court determined that mere regulatory non-compliance was insufficient for removal unless substantial evidence of adverse impact on the company's financial reporting was provided. This judgment underscored the need for a balanced approach in evaluating the grounds for auditor removal.
• Sandeep Kumar v. The State of Haryana (2018) The Punjab and Haryana High Court considered the issue of procedural lapses in auditor removal. The court held that deviations from the prescribed procedure, such as failing to provide the auditor with a reasonable opportunity to be heard, could render the removal process invalid. This case emphasized the importance of adhering to procedural safeguards under the Companies Act, 2013.
• M/s. Jaihind Projects Pvt. Ltd. v. Union of India (2020) The National Company Law Tribunal (NCLT) addressed whether a company's decision to remove an auditor without providing a reasonable opportunity to be heard was legally permissible. The tribunal found that the company had not complied with the statutory requirement, thereby invalidating the removal. This case reinforced the necessity of procedural fairness in auditor removal.

Conclusion

An analysis of e-form ADT-2, subsection (1) of Section 140, and Rule 7 indicates that the removal of an auditor requires the passage of a special resolution, subject to the Central Government's approval. The removal takes effect from the date of receipt of the Central Government's approval, and the company must adhere to any specific directives or observations issued by the Central Government concerning the auditor's removal.

Disclaimer: This article is intended for general informational purposes only. It does not constitute legal advice and should not be relied upon as such. For specific legal advice or consultation, please seek the assistance of a legal professional.