The Hindu Business Line : Experts feel `unjust' removal of auditors can be challenged

COMPANY law experts are of the view that removal of a statutory external auditor who has just been re-appointed (at a properly constituted AGM), through a specially called extraordinary general meeting subsequently, though permissible under the Companies Act, is generally not resorted to by most professionally managed companies.

Asked to comment if the re-appointment of the audit firm of R.S. Lodha & Co, by Grasim, at its recently concluded AGM, could be reversed through an EGM convened through proper notice to members (in this case 21 days plus two days for posting of notice), experts said it was possible, as company law provisions, beginning with Section 171 onwards (governing notice of meetings) and specifically Section 224 (appointment and remuneration of auditors) allowed it.

Asked to clarify, they however felt it devolved on the company to clearly justify such a decision, especially if the board had recommended re-appointment of the same auditor. It is pointed out that more than the company seeking such a step, the said audit firm may have enough scope to challenge the decision of removal as "unjust" in a court of law and successfully at that. Under any case, the external auditor will have the opportunity to present his case before members of the company, who will have to approve his removal at the EGM.

According to one senior lawyer, courts have issued directions in such cases, stating that the auditor cannot be removed till the next AGM, particularly going by the principles of natural justice. The auditor can also take the matter to the "Committee of Unjust Removal of Auditors" of the Institute of Chartered Accountants of India (ICAI). The generally accepted practice, according to them, was for the companies to ask auditors, if involved in any major controversy after re-appointment, to resign on their own.

Under Section 224 (7), except as provided in the proviso to sub-section 5, any auditor appointed under this section may be removed from office before the expiry of his term only by the company in a general meeting, after obtaining the previous approval of the Regional Directors of RoC.

As per provisions with regard to resolutions for appointing or removing auditors, under Section 225 of Companies Act,

1) special notice shall be required for a resolution at an annual general meeting appointing, as auditor, a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be appointed.

2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor, and

3) Where notice is given of such a resolution and where the retiring auditor makes representations in writing to the company (not exceeding a reasonable length) and requests their notification to members, the company shall, unless the representations are received too late, state the fact of representations having been made in the notice, and send a copy to every member to whom notice of the meeting is sent.

And if the copy is not sent as aforesaid either because it was sent too late or because of company's default, the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.

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