Expert Advisory Committee

1.35 Query:

Reappointment of the existing auditors, where the

new auditors’ appointment not as per the law.

1.The querists’ firm was the previous auditor of a private limited company. The said company at its annual general meeting held on 28.9.1991, had appointed another firm of chartered accountants as auditors of the company for the year 1991-92. However, as per the querists, since the appointment of the said new firm of auditors was not made in accordance with the provisions of section 225 of the Companies Act, 1956, it had refused to accept the appointment made by the company.

2.The querists have further stated that the company has not at all passed any resolution for their discontinuation or removal as auditors of the company for the year 1991-92, and they are not otherwise disqualified for the appointment or continuation as auditors of the above company. Therefore, the querists are of the view that they can continue as auditors of the said company for the year 1991-92. Subsequently, the company had sent a letter to the querists, on 14.9.1992, requesting them to take up the audit of the company for the year 1991-92.

3.The querists have sought the opinion of the Expert Advisory Committee that since no resolution was passed at the annual general meeting of the company for removal of querists’ firm as the auditors of the company, and they are not otherwise disqualified to be reappointed as such, whether they can continue as auditors of the said company for the year 1991-92?

Opinion February 8, 1995

1. The Committee notes sub-sections (1), (2), (3), and (4) of section 224 of the Companies Act, 1956, which, inter alia, read as follows:

“224(1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed:

Provided that before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re-appointment if made, will be in accordance with the limits specified in sub-section (1B).”

“(2) Subject to the provisions of sub-section (1B) and section 224 A, at any annual general meeting, retiring auditor, by whatsoever authority appointed, shall be re-appointed, unless-

(a) he is not qualified for re-appointment;

(b) he has given the company notice in writing of his unwillingness to be re-appointed;

(c) a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed;

(d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with.

(3) Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy.

(4) The company shall, within seven days of the Central Government’s power under sub-section (3), becoming exercisable, give notice of that fact to that Government, and, if a company fails to give such notice, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.”

2. The Committee also notes “The appointment/reappointment of auditors at the annual general meeting is one of the items of ordinary business to be transacted at such a meeting. As provided by section 224(2), at any annual general meeting a retiring auditor shall be reappointed except in four types of cases referred to therein. The expression “shall be reappointed” postulates some action on the part of the company resulting in the reappointment of the retiring auditor. The retiring auditor cannot be deemed to be reappointed or automatically reappointed at the annual general meeting. The passing of the resolution for the purpose at the annual general meeting seems essential for the reappointment of the retiring auditors who is still qualified and willing to act. [In this connection, the expression “shall be appointed without any resolution being passed”, used in the corresponding section 159(2) of the (English) Companies Act, 1948, may be noted by way of contract]. Till this is done, a retiring auditor cannot be said to have been reappointed as contemplated by the section. In this view, it is not correct to say that in the absence of the resolution to the effect that the retiring auditors shall not be reappointed, the retiring auditors shall stand reappointed as auditors of the company.

In view of section 225, special notice shall be required for a resolution appointing as an auditor a person other than the retiring auditor. Non-compliance with the provisions of the said section would render such a resolution illegal and ineffective.

Government’s power to appoint auditors under section 224(3) becomes available where at an annual general meeting no auditors are appointed or reappointed. Where auditors are not appointed or reappointed in accordance with the provisions of the Act including section 224(2), as read with sections 225 and 190, section 224(3) becomes attracted in the matter.”*

3. On the basis of the above, the Committee is of the opinion that since no resolution was passed at the annual general meeting of the said company for reappointment of the querists’ firm as auditors of the company, they cannot as such continue as auditors of the company for the year 1991-92.

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*Vide Circular 5 of 72, dated February 21, 1972, issued by the Department of Company Affairs, as reproduced in Taxmann’s Circulars and Clarifications on Company Law; 1990, pages 243-44