Chaos in appointment of auditors under CA,2013

Section 139(1) relating to appointment of auditor is widely misunderstood.

After coming into force of the Companies Act,2013, many companies including big listed companies and many auditors and Company Secretaries have started to follow the provisions of section 139(1) for appointment of auditors irrespective of companies being new or existing. Thus for the sake of compliance with above sub- section the companies have started to appoint their auditor for 5 years, provisions of ratification is followed and Form ADT-1 is insisted to be filed every year.  The above practice seems to be wrong. How the practice is wrong is explained here in this article by analyzing the provisions of section 139. Let us analyse sub-section 1 of  section139 first, relevant part of which reads as under:

“ 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…….

Provided also that……

Provided also that the company shall inform the auditor concerned of his or its appointment, also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.”

 Now  have a look at the first and foremost requirement of this section which is the base on which entire edifice of  section 139(1) stands i.e  every company must appoint auditor in its “ the first annual general meeting.” The widespread misunderstanding is in understanding the meaning of the above phrase “the first annual general meeting.” This phrase has been misunderstood to mean “the first annual general meeting of every company after coming into force of the Companies Act,2013” which is wrong.  The meaning of the first annual general meeting is “the very first annual general meeting of a company after its incorporation.” The correct position of law as to the meaning of “the first annual general meeting” is “the very first annual general meeting after its incorporation” is clearly indicated in sub-section 6 of section 139, itself which reads as under:

“ Not withstanding 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 thirty 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 ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.”

In view of fact that sub-section 6 starts with the phrase “Not withstanding anything contained in sub-section(1)” and ends with “ first annual general meeting” it is beyond any doubt that meaning of the phrase “ the first annual general meeting” is “ the very first annual general meeting after its incorporation.” It is needless to state that sub-section 6 speaks of appointment of first auditor after incorporation of a company.

In view of the correct position of law that the first annual general meeting means the very first annual general meeting after its incorporation how can existing companies whose the very first AGM has happened before commencement of 2013 Act be covered under section 139(1)? Answer is that existing companies whose the first AGM has happened before the commencement of 2013 Act are not at all covered u/s 139(1) and consequently other provisions such as appointment for 5 years, ratification and ADT-1 etc are not at all applicable to these companies. Section 139(1) is applicable only to companies whose first AGM falls on or after the commencement of 2013 Act. It is pertinent to mention here that as per section 139(1) an auditor has to be appointed only once in the First AGM. Once such appointment is done, the auditor shall hold office till he resigns or dies or removed, in view of the wordings “…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.”

Now the question remains that then which provisions are applicable to existing companies as to appointment and re-appointment of auditors? The answer lies in sub-section 10 and 9 of section 139,  provisions of which are reproduced here as under:

Sub-section 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.”  As per this sub-section 10, two things are implied:- (1) that appointment and reappointment of auditor is still an annual feature as against the common belief that now auditor has to be appointed for at least 5 years. (2) if an auditor is neither appointed nor reappointed the existing auditor shall continue.

Sub-section 9-“ Subject to the provisions of sub-section 1 and rules made thereunder, a retiring  auditor may be re-appointed at an annual general meeting, if-…..”  As per the provisions of sub-section 9 read with sub-section 10, all existing companies whose first AGM has happened before 2013 Act need to re-appoint auditor every year as their auditors were retiring auditors in view of relevant provisions of 1956 Act. In view of the phrase “ Subject to the provisions of sub-section 1 and rules made thereunder”, in sub-section 9, there may be argument that at the time of re-appointment of auditor by existing companies sub-section(1) of 139 has to be complied. But this argument shall not hold as because, to comply with the requirement of section 139(1) there has to be the very first AGM after incorporation of a company in which only either the appointment or re-appointment has to be made. An existing company whose first AGM has happened years before cannot call back and hold its first AGM again to comply with 139(1). Yet the question remains is that then what this phrase “Subject to the provisions of sub-section 1 and rules made thereunder” is doing in sub-section 9 which relates to re-appointment of retiring auditors? Answer is  that this phrase is again for the companies whose first AGM falls after the coming into force of the 2013 Act.  We all know that first auditor has to be appointed within 30 days of incorporation. This first auditor be retiring in the first AGM in terms of section 139(6). When this retiring auditor is reappointed by a company whose first AGM is after 2013 Act, the company will have to re-appoint the existing auditor in compliance with sub-section 1 of section 139 in its very first AGM.

Before concluding, it will be useful to state that some of the rules made u/s 139(1) are made in complete misunderstanding of section 139 and are therefore in contradiction of section 139. Thus the rules have no legal force at all. Same is the case with the Form ADT-1.  

CS Anmol Jha