Ministry’s Removal of Difficulty Order- Clarifies the position w.r.t appointment of auditors

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Customer Care No. 91-11-45562222
Ministrys Removal of Difficulty Order- Clarifies
the position w.r.t appointment of auditors
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• 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.

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• 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.

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• 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.

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• 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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