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NON – RATIFICATION/ REMOVAL OF THE AUDITOR WITHOUT PRIOR NOTICE

National Company Law Tribunal (NCTL), Hyderabad Bench, ADMITTED THE PRESENT PETITION with certain declaration/directions pursuant to Section 140 of the Companies Act, 2013 (“the Act”) read with Rule 78 of the National Company Law Tribunal Rules, 2016. (Re: [2017] 138 CLA 188 (NCLT) in CP No. 21/140/HDB/2016 19 of 2013).

  1. Parties to the Case:

    SPC & Associates - Chartered Accountants - Petitioner

    And

    DVAK & Co. - Respondent - 1
    NISC Export Services Private Limited - Respondent - 2

  2. Relevant provisions of the Act noted in the Case:

    1. Section 140 of the Companies Act, 2013:
    2. Rule 78 of the NCLT Rules, 2016:
  3. Fact of the Case:

    1. NISC Export Services Private Limited [CIN U72200TG1998PTC030017] (“the Company”) had appointed SPC & Associates (CA Firm - 1) as Statutory Auditor of the Company for continuous 5 years from financial year 2015-16 to 2019-20 at its 17th Annual General Meeting (AGM) and same was also intimated to Registrar of Companies (RoC), Hyderabad.

    2. CA Firm -1 in its letter dated May 27, 2016, informed the Company to increase the audit fees by 10% on the lieu of inflation. However, the contention of the Company was that the audit fees was fixed during the appointment and shall remain unchanged.

    3. Subsequently, there were trail of letters exchanged wherein the CA firm -1 substantively explained the reasons for the enhancement of audit fees. However, Company had an opinion that it was not satisfied in working with the CA Firm - 1 and thereafter stated that it has identified DVAK & Co, Chartered Accountant (CA Firm -2) to act as the Statutory Auditor of the Company and demanded resignation letter from CA Firm -1.

    4. However, CA Firm - 1 did not resign stating the repercussions of various laws of the land and also stated that the impeccable reputation of the 27-year-old CA Firm -1, will also be at stake.

    5. The Company had appointed CA Firm - 2 as the Statutory Auditor of the Company w.e.f. 18th AGM for a continuous period of 5 years without passing a special resolution at AGM and removed CA Firm -1 as Auditor of the Company without taking previous approval of Central Government (Regional Director).

    6. CA Dilli Kumar N and CA Vamsi Krishna Borra, past partners of CA Firm - 1, are the founder partners of (CA Firm - 2) and also have manipulated and misused the client financial information of CA Firm - 1, in the backdrop of relationships developed with the clients of CA Firm - 1.

  4. NCLT’s Observations:

    1. CA Firm -2 is not eligible to be appointed as Auditor of the Company as per the Explanation II (b) to Rule 6 of the Companies (Audit and Auditors) Rules, 2014 which states that a firm in which past auditor is a partner cannot be appointed.

    2. The removal of CA Firm - 1 as the Auditor of the Company and the appointment of CA Firm - 2 in its place is considered as improper. As per the principal of natural justice sufficient opportunity to be heard should have been given to CA Firm -1 before removing them.

    3. NCLT directed the Company to continue CA Firm - 1 as the Statutory Auditor of the Company till the next AGM and advised that the frequent change of the Auditor is not considered good for proper and effective auditing, preparation and transparency of the books of accounts and accounting policies.

    4. NCLT further directed the CA Firm -2 to hand over all the records available in their possession to CA Firm -1 and also to extend their full phase corporation to conduct the Audit.

    5. NCLT further stated that in case there is no proper documentation/finalization of the audit fees then the Auditor is well within his rights to ask for increment in the Audit fees.

Note:

  • Clause 39 of the Companies (Amendment) Bills, 2016 introduced in Lok Sabha on March 15, 2016 seeks to amend Section 139 of the Companies Act, 2013 by doing away with the requirement of annual ratification by members.

  • Appointment of a Statutory Auditor shall be mandatorily fixed for a period of 5 years (not at the discretion of the Company).

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