Auditor Removal Section 140: Four Routes

Auditor removal section 140 is not one procedure. The section carries four separate routes by which a statutory auditor's tenure ends or changes, and they differ in who initiates, what approval is needed, and what the auditor gets to say in reply. Two of them are shareholder driven, one is the auditor's own decision, and the fourth belongs to the Tribunal. This guide sets out each route as the section states it. It is not investment advice.

Auditor removal section 140, route one: before the term expires

Section 140(1) sets the hardest test in the section. An auditor appointed under section 139 may be removed from office before the expiry of his term only by:

• a special resolution of the company, and
• after obtaining the previous approval of the Central Government in the prescribed manner

The word "previous" is load bearing. The Central Government approval comes before the removal, not after it. The proviso then adds a natural justice step: before taking any action under the sub-section, the auditor concerned shall be given a reasonable opportunity of being heard.

Three requirements, all of which have to be satisfied. This is why an early removal is rare and a resignation is common.

Route two: the auditor resigns

Section 140(2) puts the obligation on the departing auditor rather than the company. An auditor who has resigned shall, within thirty days from the date of resignation, file a statement in the prescribed form:

• with the company, and
• with the Registrar, and
• in the case of companies referred to in section 139(5), which are Government companies and companies owned or controlled by government, also with the Comptroller and Auditor-General of India

The statement must indicate the reasons and other facts as may be relevant with regard to his resignation. This is the limb that makes a resignation a disclosure event rather than a private departure.

Section 140(3), as substituted by Act 22 of 2019, section 23, with effect from 2 November 2018, makes the auditor liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure a further penalty of five hundred rupees for each day after the first, subject to a maximum of two lakh rupees. That maximum was substituted by Act 29 of 2020, section 29, with effect from 21 December 2020.

Note the direction of the first limb: it is the lower of fifty thousand rupees and the remuneration, so a small engagement produces a small base penalty. The daily limb is what scales, and the two lakh rupee maximum is written into that limb: the words "subject to a maximum of two lakh rupees" follow the further penalty for continuing failure, not the base penalty.

Route three: special notice at an annual general meeting

Section 140(4) covers the case where nobody is removing the auditor mid term. The company simply does not want to re-appoint him at the next annual general meeting.

Special notice is required for a resolution at an annual general meeting either:

• appointing as auditor a person other than a retiring auditor, or
• providing expressly that a retiring auditor shall not be re-appointed

with one exception on the face of the clause: special notice is not required where the retiring auditor has completed a consecutive tenure of five years, or as the case may be ten years, as provided under section 139(2). Where rotation is doing the work, the special notice machinery is not needed.

Special notice is itself defined elsewhere. Section 115 provides that where any provision of the Act or the articles requires special notice of a resolution, notice of the intention to move it must be given to the company by such number of members holding not less than one per cent of total voting power, or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid up. The company then gives its members notice of the resolution in the prescribed manner.

The retiring auditor's right of reply

This is the most procedurally detailed part of the section, and it is designed so that an auditor being pushed out can put his side in front of the members.

1. On receipt of notice of such a resolution, the company shall forthwith send a copy to the retiring auditor.
2. The retiring auditor may make a representation in writing to the company, not exceeding a reasonable length, and request its notification to members.
3. Unless the representation is received too late for the company to do so, the company must state the fact of the representation having been made in any notice of the resolution given to members, and send a copy of the representation to every member to whom notice of the meeting is sent, whether before or after receipt of the representation.
4. If a copy is not sent because it was received too late or because of the company's default, the auditor may require that the representation be read out at the meeting, without prejudice to his right to be heard orally.

The first proviso closes the loop for the public record: if a copy of the representation is not sent as aforesaid, a copy of it shall be filed with the Registrar. So a representation the members never received still reaches the Registrar's file.

The second proviso is the anti abuse valve. If the Tribunal is satisfied, on an application by the company or any other aggrieved person, that the rights conferred by the sub-section are being abused by the auditor, the copy may not be sent and the representation need not be read out.

Route four: the Tribunal orders a change

Section 140(5) is the only route where the auditor's own conduct is the trigger, and the only one that does not begin with the company.

The Tribunal, either suo motu or on an application made to it by the Central Government or by any person concerned, may by order direct the company to change its auditors, if it is satisfied that the auditor has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. This is without prejudice to any action under the Act or any other law.

Two provisos then follow.

Where the application is made by the Central Government and the Tribunal is satisfied that a change is required, it shall within fifteen days of receipt of such application make an order that he shall not function as an auditor, and the Central Government may appoint another auditor in his place.

An auditor, whether an individual or a firm, against whom a final order has been passed by the Tribunal under the section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of the order, and shall also be liable for action under section 447.

Two Explanations round it off. Explanation I clarifies that in the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud. Explanation II provides that for the purposes of the chapter the word "auditor" includes a firm of auditors.

Fraud under section 447 covers the offence the second proviso points at, and section 143(12) auditor fraud reporting covers the duty that runs the other way, from the auditor to the government.

The four routes side by side

Where to look for it in the filings

This page covers the statute. Where a change of auditor actually surfaces for an outside reader is a different question, and it runs through exchange announcements and Registrar records rather than through section 140 itself.

• How to track auditor resignations covers exactly that: which record carries the change, and how the Indian and US disclosures differ.
• Auditor rotation section 139 covers the tenure limits whose expiry removes the need for special notice under 140(4).
• What is the National Company Law Tribunal covers the forum a section 140(5) application goes to.
• Section 143(12) auditor fraud reporting covers the reporting duty that sometimes precedes a change.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.