Companies Act Section 140

Companies Act Section 140- Removal, Resignation of Auditor, and Giving of Special Notice

1. Removal of Auditor Before Expiry of Term

As per Section 140(1) of the Companies Act, if a company wishes to remove an auditor before the expiry of the auditor’s term, this can only be done by passing a special resolution at a general meeting of the company. However, such removal can only proceed after obtaining prior approval from the Central Government.

The company must follow the prescribed procedure laid down by the Central Government when seeking such approval.

Further, before the removal process is initiated, the concerned auditor must be given a reasonable opportunity to present his case and be heard. This is a mandatory requirement to ensure fairness.

2. Resignation of Auditor and Mandatory Filing of Statement

If an auditor resigns from his position, they have certain legal obligations to fulfill under Section 140(2). Specifically:

Within 30 days from the date of resignation, the auditor must file a statement with:
The company itself.

The Registrar of Companies (ROC).

In case of a Government company or a company controlled by the Central or State Government (as defined in Section 139(5)), the statement must also be filed with the Comptroller and Auditor-General of India (C&AG).

This statement must contain:
The reasons for resignation.

Any relevant facts or circumstances the auditor considers important regarding their resignation.

3. Penalty for Non-Compliance by Resigning Auditor

Under Section 140(3), if the auditor fails to comply with the above requirement of filing the statement within the prescribed 30-day period, they become liable for financial penalties, which are as follows:

Penalty Amount: The auditor will be fined fifty thousand rupees or an amount equal to the auditor’s remuneration, whichever is lower.

Continuing Failure: If the failure continues beyond the initial period, there will be an additional penalty of five hundred rupees for each day of further delay, subject to a maximum cap of two lakh rupees.

4. Special Notice Requirement for Appointment or Non-Reappointment of Auditor

Section 140(4) lays down specific requirements for special notices in the following cases:

Case 1: Appointment of a New Auditor

If the company plans to appoint a new auditor (other than the retiring auditor) at the annual general meeting (AGM), a special notice is required.

Case 2: Decision Not to Reappoint the Retiring Auditor

If the company decides not to reappoint the retiring auditor at the AGM (except where the retiring auditor has already served their full allowable term under Section 139(2)), a special notice must be given.

Process After Receipt of Special Notice

Once the company receives such a special notice, the following steps must be followed:

The company must immediately send a copy of the notice to the retiring auditor.

If the retiring auditor submits a written representation to the company, explaining their viewpoint and requesting that this representation be circulated to members, the company must:

1. Mention in the notice sent to members that the representation has been received.

2. Send a copy of the representation to all members who receive notice of the meeting.

If the Representation is Received Too Late

If the retiring auditor’s representation arrives too late to be sent out with the meeting notice, or if the company fails to send it, the retiring auditor can demand that the representation be read aloud at the AGM.

Filing with the Registrar

If the representation is not sent to members, the auditor is still entitled to file a copy of it with the Registrar of Companies.

Exception: Misuse of Rights

If the Tribunal is satisfied (based on an application by the company or any aggrieved party) that the auditor is abusing these rights by making irrelevant, defamatory, or malicious representations, the Tribunal may order that the representation need not be circulated to members and need not be read at the AGM.

5. Tribunal’s Power to Remove Auditor for Fraudulent Conduct

Under Section 140(5), the Tribunal has significant powers to step in and order the removal and replacement of an auditor if it is found that:

The auditor has directly or indirectly acted in a fraudulent manner.

Or the auditor has aided, abetted, or colluded in any fraud committed by the company, its directors, or its officers.

This power can be exercised either:

Suo motu by the Tribunal itself.

Or upon receiving an application from:

1. The Central Government.

2. Any concerned party (such as shareholders or creditors).

When Central Government Applies for Removal

If the Central Government applies, and the Tribunal finds merit in the application, the Tribunal must pass its final order within 15 days. The order will:

Remove the auditor.

Direct that the auditor shall cease functioning as auditor immediately.

Allow the Central Government to appoint a new auditor in their place.

Consequences for the Removed Auditor

An auditor (whether an individual or a firm) against whom such a final removal order is passed will face the following restrictions:

Cannot be appointed as auditor for any company for 5 years from the date of the Tribunal’s order.

Will also be subject to prosecution and penalties under Section 447, which deals with fraudulent conduct.

Explanation Regarding Firm Liability

If the fraudulent conduct is linked to an audit firm, the liability applies:

To the firm as a whole.

And individually to every partner who was directly involved in the fraudulent act or collusion.

Definition of Auditor

For this section, the term “auditor” explicitly includes a firm of auditors.