If you run a company in India, one professional you will regularly deal with is the auditor. An auditor checks the company’s financial records and ensures that accounts are presented honestly.
But sometimes situations change. A company may want to remove its auditor before the term ends. In other cases, the auditor may decide to resign.
This is where Section 140 of the Companies Act, 2013 becomes important. It explains how an auditor can be removed, how an auditor can resign, and what procedures must be followed so that everything remains legally valid.
Let’s understand this step-by-step.
Key Takeaways
- A company cannot remove an auditor before the term ends without government approval.
- The company must apply using Form ADT-2 and later pass a special resolution in a shareholder meeting.
- The auditor must be given a fair opportunity to explain before removal.
- If an auditor resigns, they must file Form ADT-3 within 30 days.
- Failure to follow resignation filing rules may result in penalties up to ₹2 lakh.
Removal of Auditor Before Completion of Term
Imagine a small company in Pune. The board had appointed an auditor for a term of five years.
After two years, the management observes that the company’s operations have changed significantly and there are frequent staff changes in the audit team, which affects the continuity and efficiency of the audit process.
In addition, the audit fees have become relatively high for the company’s current financial position. Because of these factors, the management begins to feel that the existing auditor may no longer be the most suitable choice for the company’s present needs.
Naturally, the company may think: “Can we replace the auditor immediately?”
Yes — but Indian company law does not allow a company to remove an auditor easily or casually. Certain procedures and approvals must be followed before removing an auditor before the expiry of the term.
This rule exists mainly to protect the independence of auditors.
What the Law Requires
If a company wants to remove an auditor before the auditor’s term ends, two important approvals are required:
- The shareholders of the company must agree through a special resolution.
- The company must first obtain approval from the Central Government.
In practice, this approval process is handled by the Regional Director (RD) under the Ministry of Corporate Affairs.
Step-by-Step Procedure for Removing an Auditor
Let me walk you through the usual process.
Step 1: Special Notice is Proposed
Someone in the company proposes that the auditor should be removed. This proposal is called a special notice, which means the company must formally inform shareholders that the removal of the auditor will be discussed.
Step 2: Board Meeting is Conducted
The Board of Directors meets to discuss the proposal. If the board agrees to move forward, they pass a board resolution to apply for approval from the Central Government.
Step 3: Application to Central Government (Form ADT-2)
After the board resolution, the company must submit an application in Form ADT-2.
This application asks the government for permission to remove the auditor before the term ends. The company must submit this form within 30 days from the date when the board passed the resolution
Step 4: Approval from Central Government
The government reviews the application.
Only after approval is granted can the company proceed with removing the auditor.
Step 5: Shareholders Meeting
Once approval is received, the company must call a general meeting of shareholders. The company must conduct this meeting within 60 days of receiving government approval.
During this meeting, shareholders vote on the proposal to remove the auditor. If enough shareholders agree, the special resolution is passed, and the auditor is officially removed.
Important Rule: Auditor Must Be Heard
Before removing the auditor, the law requires that the auditor be given a fair chance to present their side. So the auditor must be allowed to respond before the final decision is taken.
This protects fairness and prevents misuse of power.
Example
Let’s say XYZ Networks Limited appointed Mr. Kumar, a Chartered Accountant, as the first auditor. Later, the company holds a general meeting and decides to remove Mr. Kumar and appoint Mr. Tyagi . But the company did not take approval from the Central Government before removing the auditor.
In this case, the removal is not legally valid, because the company skipped a required legal step. Even if shareholders voted for removal, the decision still violates the Companies Act.
Resignation by Auditor
Now let’s look at the opposite situation.
Sometimes it is the auditor who wants to step down.
This may happen for many reasons such as:
- Professional conflicts
- Non-cooperation from management
- Personal or workload reasons
When an auditor resigns, the law still requires certain formalities.
Filing Resignation Statement (Form ADT-3)
When an auditor resigns, the auditor must file a formal statement using Form ADT-3. This statement must be submitted within 30 days from the date of resignation.
The auditor must submit this form to:
- The company
- The Registrar of Companies (ROC)
The form must clearly mention why the auditor is resigning and any important facts related to the resignation. This helps regulators understand if there are serious issues in the company.
Additional Requirement for Government Companies
If the auditor is auditing a Government company, the statement must also be sent to the Comptroller and Auditor General of India (CAG). So in such cases, the form must be filed with:
- The company
- Registrar of Companies
- CAG
Penalty if Auditor Does Not File Resignation Statement
The law expects auditors to follow the resignation procedure properly. If the auditor fails to file the required statement, a penalty of ₹50,000 or the auditor’s remuneration (whichever is lower) may be imposed.
If the delay continues, an additional penalty of ₹500 per day may apply. However, the total penalty cannot exceed ₹2,00,000.
Summarised Key Points: Removal of Auditor
| Situation | What Happens |
|---|---|
| Removing an auditor early | Company must get approval from Central Government and pass a special resolution. Company applies for Government approval using Form ADT-2 |
| Time limit for application | Within 30 days of the board passing the resolution |
| Shareholders meeting | Must be held within 60 days after government approval |
| Auditor’s right | Auditor must be given a chance to explain before removal |
Summarised Key Points: Resignation of Auditor
| Situation | What Happens |
|---|---|
| Auditor resigns | Auditor files Form ADT-3 within 30 days |
| Government company auditor resigns | Statement also filed with CAG |
| Failure to file resignation statement | Penalty up to ₹2 lakh |
FAQs: Removal and Resignation of Auditor Under Companies Act 2013 (Beginner Guide)
When people first learn about company auditors, many small doubts come up. Let’s clear the most common questions in simple language.
What does Section 140 of the Companies Act 2013 deal with?
Section 140 explains the rules for removing an auditor before their term ends and the process an auditor must follow if they resign. It also includes procedures like government approval, shareholder voting, and filing forms with authorities.
Can a company remove its auditor anytime it wants?
No. A company cannot remove an auditor casually. The company must first get approval from the Central Government and then pass a special resolution in a shareholders’ meeting.
What is Form ADT-2 used for?
Form ADT-2 is used when a company wants government permission to remove its auditor before the end of the auditor’s term.
Within how many days must Form ADT-2 be filed?
The company must file Form ADT-2 within 30 days after the board of directors decides to apply for removal of the auditor.
What is a special resolution for removing an auditor?
A special resolution means a proposal that must be approved by a large majority of shareholders during a general meeting of the company.
What happens if a company removes an auditor without government approval?
The removal becomes legally invalid. Even if shareholders agreed, the action violates the Companies Act.
What should an auditor do if they resign from a company?
The auditor must file Form ADT-3 with the company and the Registrar of Companies within 30 days of resignation.
Why does the auditor need to file a resignation statement?
This helps regulators understand if there were serious problems in the company or disagreements that led to the resignation.
What happens if the auditor forgets to file Form ADT-3?
The auditor may face a penalty of up to ₹50,000 or the amount of their audit fee, whichever is lower. If the delay continues, additional daily penalties may apply.
Can shareholders directly remove an auditor without board approval?
In practice, the process usually begins with the board applying to the government. Shareholders then approve the removal through a special resolution
Is the procedure different for the first auditor appointed by the board?
No. Even the first auditor must be removed according to Section 140 rules if the company wants to replace them early.
Why are these procedures strict for auditors?
Auditors ensure financial transparency. Strict rules prevent companies from removing auditors simply because they reported uncomfortable financial facts.
