Expert Advisory Committee

1.1 Query

Appointment of auditors in an adjourned annual general meeting

1.A private limited company issued notice on 1^st March, 1984 for calling its 3rd Annual General Meeting to be held on 28^th March, 1984 with following business on the agenda:

(i) To receive, consider and adopt the audited Balance Sheet for the period ended on 30^th September, 1983 and the report of the auditors and Directors thereon.

(ii) To appoint auditors and fix their remuneration.

2.In the Director’s Report of the company, dated 1^st March, 1984, the name of the querists-who were the retiring auditors- was proposed for re-appointment.

3. The accounts of the company for the year ended 30^th September, 1983 could not be finalised upto 28^th March, 1984-the date of the holding of the said AGM. The same were finalised and signed by the auditors on 15^th February, 1985. Accordingly, the whole of the business on Agenda notice could not be taken and the meeting was adjourned. The auditors had given a qualified opinion in their report.

4.On 27^th February, 1985, the company sent to the querists a copy of the notice received by it from one of its members proposing the name of another firm of chartered accountants, M/s XYZ, at the next Annual General Meeting. The same letter informed that the next AGM had been fixed on 25^th March, 1985. The text of the letter is reproduced below:

27.2.85

“Dear Sirs,

We have received notice u/s 225 of the Companies Act, 1959, from one member of the company to propose the following resolution as an ordinary resolution at the coming Annual General Meeting of the company.

‘That M/s. X Y Z, Chartered Accountants, be and hereby appointed auditors of the company in place of retiring auditors M/s. ABC, Chartered Accountants, to hold office until the conclusion of the next General Meeting at a remuneration, as may be decided by the Board of Directors.’

The date of the coming Annual General Meeting has been fixed on 25^th March, 1985 at 11 A.M.

Please send us your report for the year ended 30.9.83.”

5.M/s. XYZ, vide their letter dated 27^th March, 1985, informed the querists that the company had appointed them as auditors for the year ended on 30^th September, 1984, and wanted to be informed whether the querists had any professional or other reasons to object.

6.The querists requested M/s. XYZ to inform them of the AGM in which the latter were appointed and the date of holding of the same. The querists expressed their view that the 3^rd AGM was not concluded on 28^th March, 1984 for want of accounts, that the accounts were finalised only on 25^th February, 1985 and that, in view of these facts, the said AGM was the 3^rd AGM. The querists also objected that they had not received any notice of the said AGM for which they were entitled u/s 231 of the Companies Act, 1956.

7.M/s. XYZ informed the querists that they were appointed as auditors in 3^rd Annual General Meeting held on 25^th March, 1985.

8. The querists objected to this on the ground that since the meeting held on 25^th March, 1985 was the 3rd adjourned AGM and no resolution for the change was moved in that meeting, the appointment of M/s. XYZ was not valid in law and they should not have accepted the same. In response to this M/s. XYZ informed the querists that their appointment was made in the AGM, i.e.,that dated 25^th March, 1985 and since the querists had failed to conduct the audit for the year ending 30^th September, 1984, which related to the period of M/s. XYZ’s appointment, the latter’s appointment was valid.

9.In the context of above facts, the querists have sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the failure on the part of the company to send the notice of the AGM dated 25^th March, 1985 to the querists, invalidates the appointment of M/s. XYZ?

(ii) Whether the AGM dated 25^th March, 1985 can be concluded without adopting the accounts for the year ended 30^th September, 1984 and the audit report thereon?

(iii) Whether the next Annual General Meeting could be concluded without concluding the immediately preceding AGM?

(iv) Whether the querists are still holding and will continue to hold office till the conclusion of the 3^rd AGM since the said AGM has not been concluded inspite of the claim that 4^th AGM has concluded?

(v) Whether under these circumstances, the appointment of M/s. XYZ in the AGM held on 25^th March, 1985 for the year ending 30^th September, 1984 is valid in law?

(vi) Whether the letter reproduced in para 4 above is a valid notice for calling AGM?

Opinion November 21,1985

The Committee notes that the issues raised in para 9 above involve interpretation of the relevant provisions of the Companies Act, 1956. Since the Committee is prohibited to do so as per Rule 2 of Advisory Service Rules,*, it has decided not to offer any opinion on the said issues. The Committee however wishes to draw the attention of the querists to Guidance Note No LVI on Clause 9 of Part I of the First Schedule to Chartered Accountants Act, 1949 issued by the Council of the Institute and which is published in March 1981 issue of the Journal “The Chartered Account”. The Guidance Note was subsequently amended in certain respects, which was published in the September 1982 issue of the Journal. The said Guidance Note which deals with, in general, the issues raised by the querists is reproduced below:

Guidance Note

(Clause 9 of Part I of the First Schedule to Chartered Accountants Act, 1949).

1.Clause 9 of Part I of the First Schedule to Chartered Accountants Act, 1949, provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Sections 224 and 225 of the Companies Act, 1956, in respect of such appointment have been duly complied with. Under this clause it is obligatory on the incoming auditor to ascertain from the company that the appropriate procedure in the matter of his appointment has been duly complied with so that no shareholder or retiring auditor may, at a later date, challenge the validity of such appointment.

2.A question arises as to what is the duty of the incoming auditor under this clause and what steps he should take in order to ascertain whether the company has complied with the provisions of Sections 224 and 225 of the Companies Act. This guidance note is being issued by the Council of the Institute in order to assist the member in practice to ensure that the provisions of clause 9 are duly complied with.

3.It may be clarified that although clause 9 refers to compliance with Sections 224 and 225 of the Companies Act, it is also necessary to ascertain that the provisions of Section 224A are duly complied with by the company. Section 224A was inserted by the Companies (Amendment) Act, 1974. This section which was introduced later deals with special provisions relating to appointment of auditors by certain companies and they have necessarily to be considered by the incoming auditor before he accepts his assignment.

4.This guidance note deals with the steps to be taken by an auditor of a company who is appointed in the following circumstances: -

(i)When the auditor appointed is the first auditor of the company.

(ii)When the auditor is appointed in place of an existing auditor who has resigned or has been removed or has ceased to hold office for any other reason.

(iii)When the auditor or auditors appointed by the company were holding this office jointly with others and one or more of such joint auditors are not reappointed.

(iv)When one or more of the auditors appointed by the company was not holding this office earlier.

For the purpose of this guidance note, the newly appointed auditor in the above circumstances is referred to as an “incoming auditor”.

5.The procedure to be followed by a company for appointment of an auditor is laid down in Section 224 of the Companies Act, 1956. The relevant provisions of the Section are summarised below:

5.1 The first auditor can be appointed by the Board of Directors within one month of the date of registration of the company. The auditor so appointed will hold office up to the conclusion of the first Annual General Meeting.

5.2 If the Board of Directors do not make such appointment, the company can make the appointment of first auditor at any General Meeting.

5.3 The first auditor appointed by the Board of Directors can be removed at any General Meeting and any other auditor can be appointed at such meeting if any member gives due notice of such resolution and such notice is sent to all the members of the company at least fourteen days before the date of the meeting. The notice of such a resolution will have to be dealt with as provided in Section 225(2) and 225(3). In this connection, the procedure discussed in paras 7.4 to 7.7 below will have to be followed before any resolution for removal of the first auditor is passed at the General Meeting. For the removal of the first auditor of a Company approval of the Central Government as mentioned in Para 5.14 below is not necessary.

5.4 Subsequent appointment of the auditor is to be made at each Annual General Meeting of the company.

5.5 Before making appointment or reappointment of an auditor the company has to obtain a written certificate from the auditor proposed to be appointed that such appointment or reappointment will be in accordance with the limits in respect of maximum number of audits which he can accept under the provisions of Section 224(1B).

5.6 The auditor so appointed will hold his office from the conclusion of the meeting at which he is appointed to the conclusion of the next Annual General Meeting.

5.7 The company has to give intimation of the appointment to the auditor within seven days of his appointment.

5.8 If the retiring auditor has given a notice in writing of his unwillingness to be reappointed, the company can appoint any other auditor.

5.9 The members of the company can pass a resolution at the Annual General Meeting to the effect that the retiring auditor shall not be reappointed. They can also pass a resolution at that meeting to appoint someone else in place of the retiring auditor. Where a notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor but such a resolution cannot be proceeded with in view of the fact that the person or persons proposed to be appointed has incurred an incapacity or disqualification or has died, the retiring auditor shall not be re-appointed. For this purpose the procedure laid down in Section 225 is to be complied with.

5.10 Except in the circumstances mentioned in 5.8 and 5.9 above, a retiring auditor shall be reappointed if he is otherwise qualified for such reappointment.

5.11 If the company fails to appoint an auditor at the Annual General Meeting, such appointment will be made by the Central Government. The company has to give intimation to the Central Government within seven days about the fact that no such appointment has been made.

5.12 The Board of Directors, except for the situation covered by 5.13 below, can fill any casual vacancy in the office of the auditor. Until this appointment is made the remaining auditor, in case there are joint auditors, can function as auditor of the company.

5.13 If the casual vacancy is caused by the resignation of an auditor, such vacancy can only be filled by the company in any General Meeting. The auditor appointed to fill any casual vacancy shall hold office until the conclusion of the next Annual General Meeting.

5.14 The company can remove the auditor before the expiry of his term of office by a resolution passed at any General Meeting and after obtaining previous approval of the Central Government.

6.Section 224A of the Companies Act lays down the procedure for appointment of auditor by a company in which 25% or more of the subscribed capital is held, whether singly or in combination, by the following institutions: -

(i) A public financial institution.

(ii) Any financial or other institution established under a State Act in which the State Government holds 51% or more of the subscribed share capital.

(iii) Government Company, Central Government or any State Government.

(iv) A Nationalised Bank or an Insurance Company.

The procedure to be followed by the company is as under:

6.1 The appointment or reappointment of auditor at each Annual General Meeting shall be made by a special resolution.

6.2 If the company fails to make such appointment or reappointment of auditor, the Central Government will have to make the appointment of auditor as provided in Section 224(3).

6.3 The provisions relating to appointment of first auditor, filling of casual vacancy, removal of auditor etc. which are contained in Section 224 will apply to the company specified in Section 224A.

7. Section 225 of the Companies Act lays down the procedure for appointment of auditor other than the retiring auditor and for removal of existing auditor. The procedure for giving special notice as contained in Section 225(1) does not apply to the removal of the first auditor appointed by the Board of Directors, because separate provision as stated in Para 5.3 above is made for this purpose. The procedure to be followed by the Company, is as under:

7.1 If a member of the company wants that the retiring auditor should not be reappointed or that an auditor other than the retiring auditor should be appointed, he has to give a special notice to the company and specify the resolution which he proposes to move at the Annual General Meeting for this purpose.

7.2 Such special notice is required to be given if a member of the company wants to remove the auditor before the expiry of his term of office.

7.3 The special notice should be given at least 14 days before the date of the General Meeting when the question of appointment or reappointment of the auditor is to be considered.

7.4 On receipt of the special notice of such a resolution, the company has to send a copy of the same to the retiring auditor forthwith.

7.5 The company is also required to send the special notice to the members of the company at least seven days before the meeting as per the provisions of Section 190(2) read with Section 172(2) and 53(1) to 53(4) of the Companies Act. According to these provisions the notice should be sent by post or if that is not practicable it should be given either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the Articles of Association of the company.

7.6 After receipt of the above notice, the retiring auditor can submit his representation to the members of the company. Such representation on receipt by the company is required to be sent to its members as required under Section 225(3) of the Companies Act.

7.7 The representation received from the retiring auditor will have to be considered at the General Meeting of the company before the resolution proposed by the concerned member can be passed only in accordance with the provisions of Section 189 of the Companies Act.

8.Under Clause 9 of Part I of the First Schedule to the Chartered Accountants Act, 1949, the incoming auditor has to ascertain whether the company has complied with the provisions of the above sections. The word “ascertain” means “to find out for certain”. This would mean that the incoming auditor should find out for certain as to whether the Company has complied with the provisions of Sections 224, 224A and 225 of the Companies Act. In this respect, it would not be sufficient for the incoming auditor to accept a certificate from the Management of the Company that the provisions of the above sections have been complied with. It is necessary for the incoming auditor to verify the relevant records of the Company and ascertain as to whether the company has, in fact, complied with the provisions of the above sections.

If the company is not willing to allow the incoming auditor to verify the relevant records in order to enable him to ascertain as to whether the provisions of the above sections have been complied with, the incoming auditor should not accept the audit assignment.

9.It is suggested that the incoming auditor should verify the following records of the company: -

9.1 If the appointment of the auditor is being made for the first time after incorporation of the Company, the auditor should verify as to whether the Board of Directors have passed the resolution for his appointment within one month of the date of registration of the company.

9.2 If the Board of Directors have not appointed the first auditor but the appointment is being made by a general meeting of the company, the auditor should verify as to whether a proper notice convening the general meeting has been issued by the company and whether the resolution has been validly passed at the general meeting of the company.

9.3 If the appointment is being made to fill a casual vacancy the incoming auditor should verify as to whether the Board of Directors have powers to fill the casual vacancy and whether the Board of Directors have passed the resolution filling the casual vacancy.

9.4 If the vacancy has arisen due to resignation of the auditor, the incoming auditor should see as to whether a proper resolution filling the vacancy has been passed at the General Meeting of the company.

9.5 If the vacancy has arisen as a result of removal of the auditor before the expiry of his term of office, the incoming auditor should see that proper resolution has been passed at the General Meeting of the company and that the previous approval of the Central Government, has been obtained by the company.

9.6 If the provisions of Sections 224A apply to the company, the incoming auditor should verify as to whether a special resolution as required under the said Section has been duly passed.

9.7 Where the auditor other than the retiring auditor is proposed to be appointed, the incoming auditor should ascertain whether the provisions of Sections 225 have been complied with. These provisions equally apply where an auditor who was jointly holding office with an other auditor or auditors and any one or more of such joint auditors has not been reappointed.

9.8 For the purpose of ascertaining whether the company has complied with the provisions of Sections 225 of the Companies Act, the incoming auditor should verify the records of the company in respect of the following matters: -

(i) Whether a member of the company has given special notice of the resolutions as required under Sections 225(1) at least 14 days before the date of the General Meeting. A true copy of this notice should be obtained by the incoming auditor.

(ii) Whether this special notice has been sent to all the members of the Company as required under Section 190 (2) at least 7 days before the date of the General Meeting.

(iii) Whether this special notice has been sent to the retiring auditor forthwith as required under Section 225 (2).

(iv) Whether the representation received from the retiring auditor has been sent to the members of the company as required under Section 225(3).

(v) Whether the representation received from the retiring auditor has been considered at the general meeting and the resolution proposed by the special notice has been properly passed at the general meeting.

9.9 (a) As regards the mode of sending the notice of the resolution to the members of the Company as provided in Sections 224 & 225, it should be noted that there is no provision that the notice should necessarily be sent by registered post. The notice can be sent by the Company in accordance with the provisions contained in Section 53. The relevant provisions of this Section can be briefly summarised as under: -

(i) The notice can be sent by ordinary post by preparing and posting the letter after putting proper address of the person concerned.

(ii) If the member or the person concerned has given specific direction to the Company that the notice should be sent to him under certificate of posting or by registered post, with or without acknowledgement due, and has deposited with the Company the sum sufficient to defray the expenses for this purpose, the notice should be sent in such specified manner.

(iii) When there are joint holders of shares in a Company, the notice is to be sent to the joint holder whose name appears first in the register of members.

(b) If it is not practicable to send the notice of the resolution to the members by post, such a notice can be given either by advertisement in a newspaper having a appropriate circulation or in any other mode allowed by the Articles of Association of the Company.

(c) In order to ascertain whether notice of the resolution has been sent to the members, the incoming auditor should ascertain whether there is sufficient evidence with the Company to indicate that the notice has been sent by any of the modes stated in (a) or (b) above. The despatch register, postage register, postal certificate (if notice is sent under postal certificate) or such other satisfactory evidence available with the Company should be verified.

(d) As regards the mode of sending the notice of the resolution to the retiring auditor as provided in Sections 224 & 225, attention is invited to the Department of Company Affairs circular dated 17.10.1981 issued to all Chambers of Commerce, which is reproduced below:

“I am directed to say that it has been reported by the Institute of Chartered Accountants of India that difficulties are being experienced by retiring auditors in the operation of the provisions of Section 225 of the Companies Act, 1956 whenever any appointment of a new auditor takes place. Such difficulties arise because of that fact that the copy of the special notice required to be served u/s 225(2) of the Act on the retiring auditors are not effectively served and proof of such service is not available. To obviate such difficulties, therefore, it is advisable that the copy of the special notice u/s 225 (2) of the Act should be sent to the retiring auditors by the Registered A/D Post.”

(e) Accordingly, it is necessary for the incoming auditor to satisfy himself that the notice provided for in Sections 224 and 225 has been effectively served on the outgoing auditor (e.g. by seeing that the notice has been duly served through personal delivery or by Regd. Post with A.D.). In particular, production of a certificate of posting by the Company would not be adequate for the purpose of the incoming auditor satisfying himself about compliance with Section 224/225. Acknowledgement received from the outgoing auditor would be, one of the forms in which such satisfaction can be obtained.

9.10 A copy of the relevant minutes of the general meeting, where the above resolution is passed duly certified by the chairman of the meeting should also be obtained by the incoming auditor for his records.

10.1 Sometimes the annual general meeting is adjourned without conducting any business or after conducting business in respect of some of the items on the agenda. The items in respect of which the business is conducted may or may not include the item relating to appointment of auditors. Under Section 224(1) the retiring auditor holds office till the conclusion of the annual general meeting. Therefore, when the annual general meeting is adjourned in the circumstances stated above, the retiring auditor will continue to hold the office of auditor till the adjourned meeting is held and the business listed in the agenda of the meeting is concluded. In case a new auditor is appointed at the original meeting (which is adjourned) such auditor can assume office only after the holding and concluding of the adjourned meeting.

10.2 If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company, since in terms of Section 190(1) of the Companies Act, special notice should be given to the company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in Section 190(1) undoubtedly is the original meeting.

11. If the incoming auditor is satisfied that the company has complied with the provisions of Sections 224, 224A and 225 of the Companies Act, he should first communicate with the outgoing auditor in writing as provided in clause(8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 before accepting the audit assignment.”

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* See Appendix ‘A’