1.19     Query

Appointment of an employee of a firm of Chartered Accountants as an auditor of a private

limited company, one of the directors of which is a partner of the firm

1. Mr. ‘A’ a chartered accountant, holding a certificate of practice, is also an employee of a firm of chartered accountants with the permission of the Council of the Institute of Chartered Accountants of India.

2. Mr. ‘A’ has been offered appointment as the statutory auditor of a private limited company (with less than Rs. 25 lakhs paid up capital) in which one of the partners of the employer firm is a director who is also a shareholder of the company in his individual name. However, his shareholding is not substantial.

3.Mr. ‘A’ is of the view that his appointment is not hit by the provision of section 226 (3) (C) of the Companies Act, 1956, since the shares are in the individual name of the said partner and not in the name of the employer firm.

4.The querist has sought the opinion of the Expert Advisory Committee whether Mr. ‘A’ can validly accept the assignment.

                                                                 Opinion                                               September 9, 1985

1.The Committee notes that according to Section 226 (3) (C) of the Companies Act, 1956, “a person who is a partner, or who is in the employment, of an officer or employee of the company” is disqualified for appointment as auditor of the company It may be noted that the clause does not contemplate that the officer/employee shall have substantial interest in the shareholdings of the company.

2.The Committee further notes that section 2 (30) of the Act includes ‘director’ in the definition of the term ‘officer’.

3.The Committee also notes that in India, a partnership firm is not a legal entity and therefore it cannot be distinguished from its partners. The rights and obligations of a firm are really the rights and obligations of the partners who comprise the firm. Thus, an employee of a partnership firm is the employee of its partners jointly and severally.

4.On the basis of the above, the Committee is of the opinion that the employee of the firm of chartered accountants cannot be appointed validly as an auditor of the private limited company, one of the directors of which is a partner of the firm.

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