The appointment, removal, and duties of directors and auditors - Companies Act 2013

The Companies Act, 2013, regulates the appointment, removal, and duties of directors and auditors through detailed statutory provisions and prescribed procedures.

I. Regulation Pertaining to Directors

The Act governs directors primarily under Chapter XI ("Appointment and Qualifications of Directors") and Chapter XII ("Meetings of Board and its Powers").

A. Appointment of Directors

The appointment procedures cover eligibility, regular appointments, and filling temporary vacancies:

1. Eligibility and Identification:

   • Any individual intending to be appointed as a director must first obtain a Director Identification Number (DIN) from the Ministry of Corporate Affairs (MCA). It is a punishable offense to hold more than one DIN.
   • Every proposed director must furnish their DIN and a declaration confirming they are not disqualified to become a director under the Act (Section 164).
   • A person appointed as a director must give consent (Form DIR-2) to hold the office, which must be filed with the Registrar of Companies (ROC) within thirty days of appointment.

2. Regular Appointment:

   • Every director is generally appointed by the company in a general meeting (Section 152).
   • Retirement by Rotation: In public companies, unless the Articles of Association (AOA) specify otherwise, at least two-thirds of the total number of non-exempt directors must be liable to retire by rotation. At each Annual General Meeting (AGM), one-third of the directors liable to retire must step down. The vacancy can be filled by re-appointing the retiring director (if qualified) or appointing another person. If the vacancy remains unfilled at the meeting and the adjourned meeting, the retiring director is deemed re-appointed, provided they are not disqualified and a resolution for their reappointment was not expressly rejected. The provisions for retirement by rotation (Section 152(6)) are not mandatorily applicable to private companies unless adopted in their AOA.
   • Non-Retiring Directors: A person other than a retiring director standing for election must give notice in writing to the company fourteen days before the general meeting, often along with a deposit of ₹1,00,000 (which is refunded if elected or if they secure 25% of the votes). This deposit requirement does not apply to the appointment of an Independent Director (ID) or a director recommended by the Nomination and Remuneration Committee (NRC) or the Board (if an NRC is not required).
   • ID Appointment: The appointment of an ID must be approved by the company in a general meeting, and the notice must include an explanatory statement justifying the choice and confirming the director fulfils the independence criteria. Reappointment for a second term requires a special resolution.

3. Filling Vacancies/Ad-hoc Appointments:

   • Additional Director: The Board can appoint a person as an Additional Director if authorized by the AOA; this director holds office until the date of the next AGM or the date the AGM should have been held, whichever is earlier.
   • Casual Vacancy: If a vacancy occurs before the director's normal term expires (in a director appointed by the company in a general meeting), the Board can fill it. This appointment must be subsequently approved by members in the immediate next general meeting.

B. Removal and Resignation of Directors

1. Resignation:

   • A director resigns by giving notice in writing to the company.
   • The Board must take note of the resignation. The resignation takes effect from the date the company receives the notice or the date specified in the notice, whichever is later.
   • The company must file e-Form DIR-12 with the ROC within 30 days of receiving the notice of resignation. The director remains liable for offenses that occurred during their tenure, even after resigning.

2. Removal by Members:

   • A company can remove a director (who was not appointed by the Tribunal or via proportional representation) before their term expires by passing an ordinary resolution, after giving the director a reasonable opportunity of being heard (Section 169).
   • Special notice is required for the removal resolution.
   • The company must send a copy of the special notice to the director concerned. The director has the right to make a written representation, which the company must circulate to members, unless the Tribunal rules against it due to the representation containing defamatory matter intended for needless publicity.
   • Independent Directors re-appointed for a second term (Section 149(10)) can only be removed by passing a special resolution.
   • If a vacancy created by removal is filled at the same general meeting, special notice of the intended appointment must have been given. A director removed from office cannot be re-appointed by the Board to fill that casual vacancy.

C. Duties and Obligations of Directors

1. Statutory Duties (Section 166):

   • A director shall act in accordance with the company's articles.
   • They must act in good faith to promote the company’s objects for the benefit of its members as a whole, and in the best interests of the company, its employees, the community, and for the protection of the environment.
   • They must exercise their duties with due and reasonable care, skill and diligence and maintain independent judgment.
   • A director shall not get involved in situations where they have a conflict of interest with the company.
   • They shall not make or attempt to make any undue gain or advantage for themselves, their relatives, partners, or associates. If found guilty, they must pay the amount of the gain back to the company.

2. Board Functioning:

   • The Board exercises the general powers of the company. However, powers such as approving financial statements, issuing securities, approving mergers, or taking loans exceeding limits must be exercised only by way of a resolution passed at a meeting of the Board (Section 179(3)).
   • The Board can pass resolutions by circulation for urgent matters, provided the draft resolution and necessary papers are sent to all directors and approved by a majority. Resolutions passed by circulation must be noted at the next Board meeting.

3. Disclosure of Interest:

   • Every director must disclose their concern or interest in any company or body corporate (Section 184) at the first Board meeting they attend, and subsequently annually, and whenever circumstances change.
   • An interested director must abstain from participating (physically or electronically) in the discussion and voting regarding the contract or arrangement in which they are interested.

II. Regulation Pertaining to Auditors

The regulation of auditors falls primarily under Chapter X ("Audit and Auditors").

A. Appointment of Auditors

1. First Auditor (Non-Government Companies):

   • The first auditor must be appointed by the Board of Directors within thirty days from the date of registration (incorporation).
   • If the Board fails, the company's members must appoint the auditor within ninety days at an Extraordinary General Meeting (EGM).
   • The first auditor holds office until the conclusion of the first AGM.

2. First Auditor (Government Companies):

   • The first auditor must be appointed by the Comptroller and Auditor-General of India (CAG) within sixty days from the date of registration.
   • If the CAG fails, the Board of Directors appoints the auditor within the next thirty days.
   • If the Board fails, the members appoint the auditor within the next sixty days at an EGM.

3. Subsequent Auditors (At AGM):

   • Every company must appoint an auditor at the first AGM, who holds office until the conclusion of the sixth AGM and thereafter until the conclusion of every sixth AGM.
   • The company must obtain the auditor’s written consent and a certificate of eligibility (confirming compliance with Section 141 criteria) before appointment.
   • If a company is required to constitute an Audit Committee (Section 177), the appointment (or filling of a casual vacancy) must be made after considering the Committee's recommendations.
   • The company must file a notice of appointment with the ROC (Form ADT-1) within fifteen days of the meeting (Board or General Meeting) where the appointment was made.

4. Rotation Requirement:

   • Listed companies and certain classes of prescribed companies cannot appoint an individual auditor for more than ** one term of five consecutive years**, or an audit firm for more than two terms of five consecutive years. An auditor who completes their term is ineligible for re-appointment in the same company for five years from the completion of that term.

5. Casual Vacancy:

   • If the vacancy is due to reasons other than resignation, the Board fills it within thirty days.
   • If the vacancy is caused by resignation, the Board must fill it within thirty days, and this appointment must also be approved by the members at a general meeting convened within three months of the Board's recommendation.
   • In government companies, the CAG fills the vacancy within thirty days; if the CAG fails, the Board fills it in the next thirty days.
   • An auditor appointed in a casual vacancy holds office only until the conclusion of the next AGM.

B. Removal and Resignation of Auditors

1. Removal Before Term Expiry (General):

   • Requires a special resolution of the company.
   • Requires the previous approval of the Central Government (Regional Director).
   • The auditor concerned must be given a reasonable opportunity of being heard before the removal action is taken.
   • Upon receiving Central Government approval (Form ADT-2 must be filed within 30 days of the Board resolution), the company must convene a General Meeting within sixty days to pass the special resolution.

2. Removal by Tribunal (Fraud):

   • The Tribunal (NCLT) can direct a company to change its auditors if it is satisfied that the auditor acted fraudulently or abetted/colluded in fraud (Section 140(5)).
   • An auditor against whom a final order is passed by the Tribunal for fraud is ineligible to be appointed as an auditor of any company for a period of five years.

3. Resignation:

   • The auditor must file a statement of resignation with the company and the ROC (Form ADT-3, as prescribed). Failure to comply results in a penalty.

C. Duties and Restrictions of Auditors

1. Duties:

   • Auditors have the right of access to the company's books of account and vouchers at all times and are entitled to require information and explanations from officers.
   • The auditor must report to the members on the accounts examined and the financial statements presented at the general meeting, confirming compliance with accounting standards.
   • The report must state whether any director is disqualified from appointment under Section 164(2).
   • The report must assess whether the company has adequate internal financial controls with reference to financial statements and the operating effectiveness of such controls.
   • Fraud Reporting: If an auditor believes a fraud (involving the prescribed amount) is being committed by officers or employees, they must report the matter to the Central Government. If the fraud involves a lesser amount, the report goes to the Audit Committee or the Board.
   • The auditor is required to attend every general meeting (personally or through an authorized representative) and has the right to be heard on any business concerning them as auditor.

2. Restrictions (Section 144):

   • An auditor cannot render certain non-audit services to the company, its holding company, or its subsidiary company, including, but not limited to: internal audit, outsourced financial services, actuarial services, investment advisory services, and management services. Statutory auditors are explicitly not eligible to provide internal audit services.