(12.12.2) Appointment of Auditors

It is compulsory for every company to appoint qualified auditors to do the audit of the accounts maintained by the company. The first auditors(s) can be appointed by the Board of Directors within one month of the date of the incorporation of the company. The first auditors hold office until the conclusion of the first AGM of the company. However, they can be removed by members at their meeting held before the first AGM by giving a special notice of an intention to remove them. Also, if the Board of Directors do not appoint the first auditors, then the company in general meeting may do so.

The Board of Directors is also authorised to fill casual vacancies arising for reasons other than by the resignation of an auditor, which can only be filled up by the company in general meeting. The duration of the auditor, so appointed in casual vacancy shall be upto the conclusion of the next AGM.

Every company must appoint at each AGM to hold office from the conclusion of the AGM until the conclusion of the next AGM. The company has to inform, within seven days the appointment, the auditor so appointed, unless he is a retiring auditor (s.244). The company, however must obtain a certificate from the auditor to the effect that the appointment or re-appointment is within limits of the number of audits which can be undertaken by a auditor. No company or its Board of Directors shall appoint or reappoint any person who is full time employment elsewhere; or firm as its auditor, if such person or firm is at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. However, in the case of a firm of auditors. “specified number of companies” shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere. The specified number means (a) in the case of a person or firm holding appointment as auditor of number of companies each of which has paid up share capital of less than 25 lakhs, 20 such companies; (b) in any other case, 20 companies, out of which not more than 10 shall be companies each of which has a paid-up share capital of Rs 25 lakhs or more. where a firm is appointed as auditors, the ceiling of twenty will be per partner. However, when any partner of a firm or auditors is also a partner in any other firm or firms of auditors, the overall ceiling in relation to such partner will also be twenty.

The private companies are not to be taken into account for calculating the number of companies which an auditor can audit.

A person will not be eligible for appointment as an auditor of a company if be, after a period of one year from the commencement of the Amendment Act is holding any security in that company.

Every auditors so appointed, must within thirty days of the receipt from the company of the intimation of his appointment, inform the registrar in writing that he has accepted the appointment or has refused the same.

Appointment of auditor by special resolution only (s.224-A)

            (1)  In the case of a company in which not less than 25 per cent of the subscribed share capital is held, whether singly or in any combination, by: (a) a public financial institution or a Government Company or Central Government or any State Government, or (b) any financial or other institution established by any Provincial or State Act, in which a State Government holds not less than 51 per cent of the subscribed share capital, or (c) a nationalized bank or an Insurance Company carrying on general insurance business, the appointment or re-appointment at each AGM of an auditor or auditors shall be made by a special resolution.

            (2) In case any company referred to in (1) above omits or fails to appoint an

auditor or auditors in the manner as aforesaid, it shall be deemed that no auditors or auditors had been appointed by the company at its AGM and thereupon the Central Government shall be empowered to fill the vacancy.

Certain typical issues

            1. with reference to the provisions of s.224A(as discussed above), whether the material date of shareholding shall be the date of the notice of the meeting or the date of passing the special resolution?

The Department of Company of Company Affairs vide Circular No. 2/76, dt.5.6.1976 clarified that the material date is the date of the AGM at which the special resolution is required to be passed. However, where a change in the shareholding pattern in the company has taken place, between the date of issue of notice of the general meeting and the date of actual passing of this resolution regarding appointment of auditor, the company may either:

            (i) adjourn the meeting to another date and later issue the required notice in accordance with law and thereafter pass the special resolution required to be passed under s.224A, or

            (ii) omit or pass over the item on the agenda regarding appointment of auditor.

            2.  In another Circular, (No. 18/74 dt.12.12.1974), the Department clarified that irrespective of the circumstances in which a nationalised bank is holding shares, if the name of the bank is entered in the register of members of the company as holder of shares, such holding of shares will have to be taken into account for purposes of s.224A.

Re-appointment of auditors. Section 224(2) provides for automatic reappointment of auditors. At every AGM, retiring auditor, by whatever authority appointed, is automatically reappointed, unless (i) he is not qualified for reappointment, or (ii) he has given a written notice to the company of his unwillingness to be re-appointed, or (iii) a resolution has been passed at that meeting appointing somebody instead of him, or providing expressly that he shall not be re-appointed, or (iv) where notice has been given of any intended resolution to appoint some person’s death, incapacity or disqualification, the resolution had to be dropped.

Section 224(3) empowers the Central Government to appoint an auditor, where no auditors are appointed at the AGM of a company. The company is under an obligation to inform the Central Government within one week of the holding of the AGM, where no auditors are appointed.