Effect of non – ratification of the appointment of the auditor was one of the wonders of the Companies Act, 2013. There were so many queries regarding effects of non – ratification of auditor and removal of an auditor. Now, all these long discussions came to end. The Companies Amendment Act, 2017 read with Notification S.O. 1833(E) dated 7th May 2018 deletes provision of annual ratification of the appointment of auditor.
Original Section 139(1) of the Companies Act, 2013 along with its now deleted first proviso read 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:
Now during a single term of 5 years, there shall be no requirement for ratification of the appointment of auditor. This is a big relief for companies, auditors and tribunals (Sorry, corporate lawyers).
A company sending notices for Annual General Meeting on or after 7th May 2018 is not required to include ratification of the auditor as its agenda item.
The Companies (Audit and Auditors) 2nd Amendment Rules, 2018
Correspondingly, the Companies (Audit and Auditors) (2nd) Amendment Rules, 2018 omit proviso to sub-rule (7) of Rule 3 and explanation of Rule 3 with effect from 7th May 2018.
Sub-rule (7) with now deleted explanation reads as under:
The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting:
Provided that such appointment shall be subject to ratification in every annual general meeting till the sixth such meeting by way of the passing of an ordinary resolution.]
Explanation.- For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.
These rules before the present amendment gave an impression that failure to ratification of appointment every year is a substitution of the removal process. Now, the sanctity of process prescribed for removal of an auditor has been restored. An ease of doing business and clarity on law indeed.