Ratification of auditor in 2018

One of the frequently asked questions these days is, should a company need to ratify the appointment of an auditor in the Annual General Meeting 2018. Should I explain my affirmative reply?

We need to examine the overall legal position? What impact the amendment made to this overall legal position?

There is no doubt about the deletion of the first proviso to section 139(1) of the Companies Act, 2013. We earlier here discussed the change of law governing ratification of the appointment of an auditor. The deletion of the said proviso is prospective in nature and applicable to all cases of fresh appointment of auditor. Its application to all existing appointments is under debate.

A company is governed by the Companies Act, 2013 and rules made thereunder, Articles of Association, and Resolution passed by members and directors.

In the present case, the resolution governing the terms of appointment of auditor remains there in the minute book of a company and still have force. These resolutions presently have a condition of annual ratification of the appointment of an auditor as such. Therefore, irrespective of the amendment of law governing the ratification, the existing resolution requires the ratification. An amendment in the law does not nullify an operating decision of members of a company. Present resolution is not against the law but in compliance with the law existing as on the date of passing of such resolution and still has the possible harmonious construction with the amended law.

In the case of five-year terms of an auditor (which is mandated by law), shareholders are still free to have requirement of ratification in their resolution but without any compulsion as earlier.

Without a doubt, ratification of the appointment of an auditor is required at least in the first AGM to be held after the deletion of the first proviso of Section 139(1).

However, there may be some different drafting with the requirement of the company and in the interest of corporate governance and democracy. All of them have different pro and cons.

OPTION 1: Keep the ratification as part of the resolution for coming years

This may be a good option. However, it may be a futile exercise. The question of the validity of shareholders decision against ratification of the appointment of an auditor shall be as questionable all these years it was. Will decision against ratification of the appointment of auditor result in removal of the auditor? Will it replace provision related to removal of an auditor?

In case a company opt for this option, any decision against ratification of an auditor shall not result in removal of an auditor but to initiate the process of removal of the auditor. It may cause confusion.

OPTION 2: No ratification

This may be a wrong option. This may go against the earlier resolution of the company. In case of company do not propose any resolution of ratification of appointment, appointment effectively ceased in legal terms. However, without completing the procedure of removal of the auditor, the present auditor shall practically continue.

Option 3: Amendment in earlier resolution of ratification

This may be a good option. Pass a resolution in a general meeting as the special business to amend earlier resolution passed in last annual general meeting deleting ratification provision with effect from the date of such amendment resolution.

Option 4: A final ratification

This is the best option in my view. In view of last resolution, a company should opt for final ratification of the appointment of the auditor of the company till his remaining term of appointment.


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