Introduction
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.
Concluding
Remark
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.
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