1.0 Under the Companies Act, 2013 ('Act, 2013'), the provisions w.r.t. appointment of auditors had undergone a paradigm shift in comparison with the erstwhile provisions of the Companies Act, 1956. One of the major changes which was introduced w.r.t. auditors was the bar on re-appointment of auditors in certain class of companies specified under Section 139(2) of the Act, 2013, if he had already held: (a) one term of 5 years in case of an individual; or (b) two consecutive terms of 5 years in case of a firm. Once the bar on reappointment applies, there is a mandatory cooling-off period of 5 years.
To comply with the above provision, transition period of 3 years was provided from the date of the commencement of the Act, 2013, i.e., companies shall appoint another auditor till April 01, 2017 which at the first blush would mean that at the upcoming AGM for the FY ended 2016, new auditor needs to be appointed.
However, the auditors are appointed at the AGM of the company and hold office till the conclusion of the next AGM. Therefore, to comply with the 3 years provision, the new auditor must have been appointed in the AGM for FY ended 2017. Hence, there was chaos among the corporates and auditors regarding the contradictory provisions in relation to effective date for appointment of new auditor. In order to clarify this position which was subject to interpretation, the Ministry of Corporate Affairs (MCA) has issued a Companies (Removal of Difficulties) Third Order, 2016, dated June 30, 2016 (hereinafter referred to as "Order").
Amendment via removal of difficulty order
2.0 MCA has amended transition provisions w.r.t. applicability of provisions of Section 139(2) of the Act, 2013 and provided as under:
Provided also that every company, existing on or before commencement of this Act which is required to comply with the provisions of this sub-section, shall comply with requirements of this sub-section within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of section 96 after three years of commencement of this Act.
With this amendment, it is clarified that the existing auditor who has served for the tenure of 5 or 10 years may continue in the office till the conclusion of the AGM held for the FY ended March 31, 2017 and the Company shall appoint new auditor in the same AGM. Since the clarification clearly provides that AGM (pursuant to section 96 will be the upper time-limit) held within 3 years of commencement of the Act, April 01, 2014, which means that AGM 2017 is the time period within which the companies must appoint the new auditor. Accordingly, the said auditor shall be appointed for a term of five years, subject to ratification in every AGM, in accordance with the provision of section 139(1) of the Act.
To clarify the above amendment, let us assume following scenarios:
Mr. X was appointed as an auditor of ABC Limited in the AGM held on September 30, 2009. Whether Mr. X is eligible for appointment as auditor for the FY 2016-17 in accordance with the proposed amendment?
2.1 In this case, Mr. X has already held a term of 5 years upto April 01, 2014, i.e., the date of enforcement of section 139. Transition period of 3 years provided to the ABC Limited to comply with the provisions of Section 139(2) of the Act, 2013 will expire in the AGM to be held for FY ended March 31, 2017. Hence, Mr. X can be appointed as an auditor for FY 2016-17.
M/s XYZ Limited was appointed as an auditor of ABC Limited in the AGM held on September 30, 2007. Whether M/s XYZ Limited can continue his appointment for the FY 2016-17 in accordance with the proposed amendment?
2.2 In this case, M/s XYZ Limited can hold the office for a period of maximum 10 years (including transition period) which will expire in the AGM to be held for FY ended March 31, 2017. As the appointment of an auditor is from AGM to AGM, hence, M/s XYZ Limited can be appointed as an auditor for FY 2016-17.
Limited Review reporting
3.0 Questions may also arise as to who will be providing the limited review report for the period between April 01, 2017-the date of AGM of 2017. The requirement of providing of limited review report does not arise from the Act but from the Listing Regulations. Considering the fact that the new auditor will have to be appointed only at the AGM and the office of the existing auditor is from AGM to AGM, thus, the existing auditor of the Company must issue the limited review report to the Company.
4.0 With the issue of the order a confusion with respect to compliance with section 139(2) seems to have come to a halt, though the position was clear even prior to that also. Only thing was that the provision was subject to interpretations. Now the order clarifies the position specifically.