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Saturday, May 10, 2014

Appointment and Removal of Company's Auditor

Appointment of a Company Auditor (Section 224)

According to Section 224 of the Companies Act, every company whether private or public must appoint an Auditor or auditors to audit the final accounts. The provisions relating to the appointment of auditor are as follows:

a)      Appointment by Board of Directors:
The first auditor of the company is to be appointed by BOD within 30 days from the date of incorporation of company. Note here that this is not from the date of commencement of business. First auditor shall hold office upto the conclusion of first AGM. If BOD fails to appoint the first auditor, the auditor can be appointed in first general meeting. If no auditor is appointed in general meeting, the CG will appoint the first auditor.

The directors are also empowered to fill a casual vacancy of an auditor if it is not caused by resignation. The auditor so appointed shall hold office till the conclusion of the next annual general meeting. But in case, if the vacancy is caused by the resignation of an auditor, it shall only be filled by the company in its annual general meeting.


b)      Appointment in Annual General Meeting:
The auditor or auditors are appointed in the annual general meeting under the following circumstances:
1)      If the board of directors fails to appoint an auditor, the shareholders shall make an appointment in the annual general meeting.
2)      Every company shall at each annual general meeting appoint an auditor to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting.
3)      The company has to give intimation to the auditor so appointed within seven days of his appointment.
4)      The auditor so appointed shall within 30days of the receipt of intimation from the company regarding his appointment, has to inform the registrar of the company in writing whether he has accepted or refused the appointment.
In every annual general meeting the appointment of the company’s auditor is made by the simple majority of votes by the present members.

c)       Appointment by Central Government:
According to section 224 (3), if the auditor has not been appointed in the annual general meeting, the company has to inform within seven days to the Regional Director to whom the Central Government’s power to appoint an auditor in such an event has been delegated under section 637.

The said application must disclose in sufficient detail the reasons why the company could not appoint the auditor at its general meeting. In the case of default, the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs.500 as per section 224(4).

d)      Appointment of Auditor by Special Resolution.
In 1974, Companies Act 1974 was amended by adding sub section A to section 224. After that, in some cases, the appointment of auditors or auditor requires special resolution. That is in case of a company, in which not less than 25% of the subscribed share capital is singly or jointly held by.
1)      A public financial institution or a government company or the central government or any state government or
2)      Any financial or other institution established by any provincial or state Act in which a state government holds not less than 51% of the subscribed share capital or
3)      A nationalized bank or an insurance company carrying on general insurance business.
In the above mentioned circumstances, the appointment of an auditor shall me made by passing a special resolution (that is 75% or more of the members present should agree for the resolution). If not, it shall be deemed that the appointment has not been made and the central government will get the right under section 224(3) of the Companies Act to make an appointment.

e)      Compulsory Reappointment.
Section 619 of the Companies Act specifies that in the case of government companies, the appointment or reappointment of an auditor by the central government can be made only on the advice of the comptroller and Auditor General of India.
In other cases, that is, whether auditors are appointed by the board of directors in the annual general meeting or by the central government, the retiring auditors are compulsorily reappointed, unless
1)      He is not qualified for reappointment.
2)      He has given a notice in writing to the company of his unwillingness, to be reappointed
3)      Where a notice has been given or an intended resolution to appoint some other person in the place of the retiring auditor and by reason of death, in capacity or disqualification of that person or of all the persons as the case may be, the resolution cannot be proceeded with or
4)      A resolution has been passed at that meeting, appointing somebody instead of providing expressly that he shall not be reappointed. This is as per section 224(2) of the Companies Act.

f)       Filling of Casual Vacancies [Section 224(6)]
1.       A vacancy caused by the resignation of an auditor shall only be filled by the members in the annual general meeting.
2.       If a casual arises for any other reason (that is, death, insanity or insolvency) it can only be filled by the board of directors.
3.       An auditor appointed to fill up the casual vacancy shall hold office until the conclusion of the next annual general meeting of the company.

Removal of Company Auditor
The removal of auditor shall be authorized only by the shareholders in the General Meeting (GM). Ordinary resolution is sufficient to remove an auditor. The removal may be of the following types:

a)      Removal of first auditor
b)      Removal of regular auditor other than the first auditor
In case of removal of auditor of first auditor, there is no need for central govt’s prior permission.

The removal of auditor other than first auditor can be further classified as:
1)      Before the expiry of term of office
2)      On the expiry of term of office

Where the Co. wishes to remove the auditor before the expiry of term of office the following procedure shall be followed:
a.       The co. shall receive a notice from any member proposing to remove the auditor.
b.      The notice shall be considered as a special notice for 14 days and circulated to all the shareholders to consider the removal in the ensuring GM.
c.       On receipt of the copy of the notice, the outgoing auditor shall have right of submitting a written representation mentioning therein reasons as to why he should not be removed.
d.      The representation shall be submitted at least 7 days prior to the date of GM.
e.      In case representation is received too late by co., the auditor may request to get it read in the Annual General Meeting (AGM)
f.        The outgoing auditor should not make any derogatory remarks about the directors.
g.       It is left to the shareholders whether the auditor should be removed or reappointed.


In the case of removal on term of expiry of office, it shall arise when outgoing auditor vacates his office and is not reappointed. In such case also, all the above procedure shall apply except the prior permission of central Govt. is not required.