CAN THE AUDITORS OF THE COMPANY CAN BE REMOVED WITHOUT FOLLOWING THE PROCEDURES IN THE ACT?

CAN THE AUDITORS OF THE COMPANY CAN BE REMOVED WITHOUT FOLLOWING THE PROCEDURES IN THE ACT?

No Says NCLT, Hyderabad Bench.

SPC & Associates, Chartered Accountants & DVAK & Co vs NISC Export Services Pvt Ltd

This case involved SPC & Associates, Chartered Accountants & DVAK & Co. Hence, the question was ‘where (here after referred as “Company”) appointed petitioner-CA firm as its Statutory Auditor for period of five years but did not ratify their appointment in its subsequent AGM and appointed another CA firm as its statutory auditor, since company did not obtain prior approval of central Government, removal of petitioner was to be held illegal or not?’ Whether as Principle of natural justice auditor should be provided sufficient opportunity of being heard before his non-ratification or not. Here, after analyzing the provisions of the Companies Act, 2013, the NCLT held:

Principle of Natural Justice:

In The Constitution of India, nowhere the expression Natural Justice is used. However, golden thread of natural justice sagaciously passed through the body of Indian constitution. Preamble of the constitution includes the words, ‘Justice Social, Economic and political’ liberty of thought, belief, worship… And equality of status and of opportunity, which not only ensures  fairness in social and economical activities of the people but also acts as shield to individuals liberty against the arbitrary action which is the base for principles of Natural Justice.

In India, the principles of natural justice are firmly grounded in Article 14 & 21 of the Constitution. With the introduction of concept of substantive and procedural due process in Article 21, all that fairness which is included in the principles of natural justice can be read into Art. 21. The violation of principles of natural justice results in arbitrariness; therefore, violation of natural justice is a violation of Equality clause of Art. 14.

In broad-spectrum, The Principles of Natural Justice have come out from the need of man to protect himself from the excesses of organized power man has always appealed to someone beyond his own creation. Such someone is the God and His laws, divine law or natural law, to which all temporal laws and actions must confirm.

Natural Law

Natural Law is of the ‘higher law of nature’ or ‘natural law’. Exp: Natural Law does not mean the law of the nature or jungle where lion eats the lamb and tiger eats the antelope but a law in which the lion and lamb lie down together and the tiger frisks the antelope.

Natural Law is another name for common-sense justice. Natural Laws are not codified and are based on natural ideals and values which are universal. In the absence of any other law, the Principles of Natural Justice are followed.

Decision of the NCLT Bench:

Upon perusal of all the materials, submissions made by all the parties, The NCLT Bench has held that:

The Petitioner was not ratified in AGM held on 26.09.2016, as Principles of Natural Justice demands that he should have been provided with sufficient opportunity before his non-ratification. Auditor acts as a bridge between management and shareholders of the Company and is an important professional in the whole eco system of the corporate world. Therefore, removal/non-ratification of the Auditor without prior notice/seeking his comments would not be proper.

The NCLT Bench decide the case with following declarations/ directions:

i. The removal of petitioner firm as the auditor of Company and the appointment of new auditor of Company is improper.

ii. We direct the company to continue the Petitioner firm as the Auditor of Company till the next AGM and subsequently necessary course of action can be taken by Company regarding the continuation of Petitioner firm, in accordance with law

iii. We further direct that Company to take necessary steps to re-appoint the petitioners’ firm as Auditor of the Company.

iv. We direct the new auditors firm to submit all the records available in their possession, if any, and to cooperate with the Petitioner firm to conduct the audit of books of account of the   Company.

Courtesy: S K Jain