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Grounds for Removal of Auditor under Section 140
Auditors play a critical role in ensuring the financial integrity of companies. However, circumstances may arise where their removal becomes necessary before their term expires. Section 140 of the Companies Act, 2013 governs this process, balancing corporate governance needs with procedural fairness. This post explores the grounds for removal of auditor under Section 140, drawing from key judicial interpretations and statutory provisions.
Understanding these grounds is essential for company directors, shareholders, and auditors alike. We'll break down the legal framework, procedures, exceptions, and recent case law to provide clarity on when and how removal can occur.
Overview of Section 140: Removal and Resignation of Auditors
Section 140(1) states: The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government... IND_Delhi_WP(C)-11225_2016 2017_DHC_6351 M/S MONISH UPPAL & ASSOCIATES Vs REGIONAL DIRECTOR NORTH REGION & ORS - 2017 Supreme(Online)(DEL) 5273
This provision establishes strict safeguards:
- Special Resolution: Requires 75% majority approval from shareholders.
- Prior Approval: Must seek permission from the Central Government (delegated to Regional Director).
The intent is to prevent arbitrary dismissals while allowing removal for valid reasons. Without these steps, removal is invalid, as seen in cases where courts quashed improper actions. SPC and Associates Chartered Accounts VS Premier Devices Private Limited and Another - 2023 Supreme(Online)(NCLT) 2850 SPC and Associates Chartered Accounts VS Premier Devices Private Limited and Another - 2019 Supreme(Online)(NCLT) 4920
Key Procedural Requirements
To initiate removal:
1. Board Resolution: Company files application with Regional Director under Rule 7 of Companies (Audit & Auditors) Rules, 2014.
2. Special Notice: Shareholders give 14 days' notice for the resolution.
3. Auditor's Representation: Auditor gets opportunity to respond.
4. Regional Director's Approval: Limited jurisdiction to assess if removal is justified prior to term expiry. MONISH UPPAL & ASSOCIATES VS REGIONAL DIRECTOR, NORTH REGION - 2017 Supreme(Del) 3558
Courts have emphasized the Regional Director's role is limited to considering the application for permission to remove an auditor prior to the expiry of his term. If improperly denied or granted, writ petitions under Article 226 may lie. MONISH UPPAL & ASSOCIATES VS REGIONAL DIRECTOR, NORTH REGION - 2017 Supreme(Del) 3558
Grounds for Removal under Section 140
While Section 140 does not exhaustively list grounds, judicial precedents and statutory context imply removal is warranted for serious lapses in duty, fraud, or incompetence. Common grounds include:
- Fraud or Misconduct: Where auditors fail to report irregularities, as in IL&FS cases involving financial defaults. Proceedings continue even post-resignation. Union of India VS Deloitte Haskins and Sells LLP - 2023 Supreme(SC) 463
- Dereliction of Duty: Incomplete audits or non-compliance with auditing standards.
- Conflict of Interest: Working across verticals without disclosure, potentially breaching independence. Pipara and Co LLP VS Gujarat State Police Housing Corporation Limited - 2021 Supreme(Guj) 558
- Non-Compliance with CAG Instructions: For government companies, CAG-appointed auditors must follow directives; unilateral removal mid-term without hearing violates natural justice. Pipara and Co LLP VS Gujarat State Police Housing Corporation Limited - 2021 Supreme(Guj) 558
In Union of India v. IL&FS Auditors, the Supreme Court clarified: The resignation of auditors does not end the NCLT’s proceedings against them under Section 140(5); NCLT must inquire into auditor conduct regardless of resignation. This underscores that removal or resignation doesn't shield from accountability. Union of India VS Deloitte Haskins and Sells LLP - 2023 Supreme(SC) 463
Special Case: Section 140(5) - Tribunal's Power
Section 140(5) empowers the National Company Law Tribunal (NCLT) to remove auditors for gross negligence, fraud, or failure to disclose material facts. If satisfied, NCLT may:
- Direct company to file casual vacancy.
- Impose 5-year disqualification from auditor appointments.
Key ruling: Even on resignation by an auditor... there shall not be any termination of the proceedings under section 140(5). Dattatray Maruti Khune VS Union of India through Ministry of Corporate Affairs - 2026 Supreme(Online)(NCLT) 241
This provision survived constitutional challenges under Articles 14 and 20. Courts held disqualification is regulatory, not punitive, ensuring high moral standards for auditors distinct from directors. N Sampath Ganesh VS Union of India, Ministry of Corporate Affairs - 2020 Supreme(Bom) 249
Exceptions and CAG-Appointed Auditors
For government companies, auditors are appointed by Comptroller and Auditor-General (CAG) under Section 139(7). Removal follows unique rules:
- CAG has powers to direct audits, issue instructions, and comment on reports. Pipara and Co LLP VS Gujarat State Police Housing Corporation Limited - 2021 Supreme(Guj) 558
- Mid-term removal requires show-cause notice and hearing; abrupt termination violates Article 226 principles. If there is a power to decide and decide detrimentally... the duty to act judicially is implicit. Pipara and Co LLP VS Gujarat State Police Housing Corporation Limited - 2021 Supreme(Guj) 558
Section 140 does not apply to CAG-appointed auditors in the same manner: Section 140 does not talk about removal of an Auditor appointed under Section 139 by the C&AG. PIPARA AND CO LLP vs TOURISM CORPORATION OF GUJARAT LIMITED - 2021 Supreme(Online)(Guj) 1219
Judicial Safeguards and Challenges
Courts intervene where procedures falter:
- Lack of Prior Approval: Removal without Regional Director's nod is illegal. Petitions to declare such actions void succeed. SPC and Associates Chartered Accounts VS Premier Devices Private Limited and Another - 2023 Supreme(Online)(NCLT) 2850
- Timeliness: Fresh applications allowed if prior ones defective. MONISH UPPAL & ASSOCIATES VS REGIONAL DIRECTOR, NORTH REGION - 2017 Supreme(Del) 3558
- Natural Justice: Auditor must get hearing; post-decisional hearing inadequate for elected or statutory roles. Analogous to service law under Article 311, though not identical. VANDANA VS STATE OF U. P. - 2017 Supreme(All) 140 DELHI TRANSPORT CORPORATION VS D. T. C. MAZDOOR CONGRESS ANB - 1990 Supreme(SC) 493
In auditor removal challenges, High Courts direct Regional Directors to decide within timelines, upholding limited jurisdiction. MONISH UPPAL & ASSOCIATES VS REGIONAL DIRECTOR, NORTH REGION - 2017 Supreme(Del) 3558
Unjust Enrichment and Refund Analogies
While not directly on point, excise refund cases highlight procedural fairness: Claims must follow statutory mechanisms unless unconstitutional. Similarly, auditor removals demand adherence to Section 140 to avoid abuse. Mafatlal Industries LTD. VS Union Of India - 1997 1 Supreme 684
Practical Implications for Stakeholders
- Companies: Document grounds thoroughly; obtain approvals to avoid litigation.
- Auditors: Respond promptly to show-cause; resignation doesn't halt probes.
- Shareholders: Special resolutions ensure democratic oversight.
Recent Trends: NCLT increasingly uses Section 140(5) post-scandals like IL&FS, imposing disqualifications. Prosecutions under Section 212(14) may follow SFIO reports, but require application of mind. Union of India VS Deloitte Haskins and Sells LLP - 2023 Supreme(SC) 463 N Sampath Ganesh VS Union of India, Ministry of Corporate Affairs - 2020 Supreme(Bom) 249
Key Takeaways
- Removal under Section 140(1) mandates special resolution + Central Government approval.
- Section 140(5) allows NCLT intervention for misconduct, persisting post-resignation.
- CAG auditors enjoy heightened protections.
- Courts prioritize natural justice and procedural compliance.
Disclaimer
This post provides general information based on statutes and case law. It is not legal advice. Consult a qualified professional for specific situations, as outcomes depend on facts and jurisdiction.
For deeper insights, reference primary sources like Companies Act, 2013, and NCLT judgments.
Search Results for "Grounds for Removal of Auditor under Section 140"
1985 0 Supreme(SC) 229 • India - Supreme Court
D. P. MADAN, M. P. THAKKAR, R. S. PATHAK, V. D. TULZAPURKAR, Y. V. CHANDRACHUD
(2) WITHOUT FORMAL PROCEEDINGS - LARGE SCALE BREAKDOWN OF DISCIPLINE—HOLDING OF FORMAL ENQUIrY UNDER ARTICLE 311(2) NOT POSSIBLE—DISPENSED ... is dispensed with, the Govt. servant cannot complain that he is deprived of his livelihood. ... Livelihood is a matter of concern to the individual and his family as also a matter of public interest and in appropriate case public ... Sub-section (1) of #HL_....
1973 0 Supreme(SC) 163 • India - Supreme Court
S. M. SIKRI, J. M. SHELAT, K. S. HEGDE, A. N. GROVER, A. N. RAY, P. JAGANMOHAN REDDY, D. G. PALEKAR, H. R. KHANNA, K. K. MATHEW, M. H. BEG, S. N. DWIVEDI, A. K. MUKHERJEA, Y. V. CHANDRACHUD
Comptroller and Auditor General. ... The form is the same for the Comptroller and Auditor-General of India under Article 148(2) of the Constitution. ... be no "removal or debilitation" of such rights.
1974 0 Supreme(SC) 257 • India - Supreme Court
Y.V.CHANDRACHUD, A.ALAGIRISWAMI, A.N.RAY, D.G.PALEKAR, K.K.MATHEW, P.N.BHAGWATI, V.R.KRISHNA IYER
India Act, 1935 - Section 59(3) and 59 - Land Acquisition Act, 1894 - Section 4(1) - Representation of the People Act, 1951 - Section ... of security of securily of State it is not expedient to hold an enquiry for dismissal or removal or reduction in rank of an officer ... that Governor as constitutional or formal head of State can exercise pow....
1997 1 Supreme 684 • India - Supreme Court
B. N. KIRPAL, A. S. ANAND, B. L. HANSARIA, B. P. JEEVAN REDDY, K. S. PARIPOORNAN, S. C. AGRAWAL, SUHAS C. SEN, A. M. AHMADI, J. S. VERMA
(1) of Section Customs Act, 1962, as amended by the said Amendment Act, all claims for ... Under the Self Removal Procedure (S.R.P.), the procedure in vogue until recently - speaking broadly - was that at the time of removal ... with the Comptroller and Auditor-General of I....
1975 0 Supreme(SC) 79 • India - Supreme Court
A.ALAGIRISWAMI, A.C.GUPTA, A.N.RAY, K.K.MATHEW, Y.V.CHANDRACHUD
it thinks fit, appoint one of members as Vice-Chairman of Commission - Under Section 12 of 1959 Act Commission may, for purpose of ... 14 and 16 - Order for removal from service - Whether an order for removal from service contrary to regulations, would enable employees ... Oil and Natural Gas Commission Act, 1959 - Section 12 and ... as may be....
2017 0 Supreme(Del) 3558 • India - Delhi
VIBHU BAKHRU
Companies Act, 2013 - Removal of Auditor - Section 140(1), Rule 7 of the Companies (Audit & Auditors) Rules, 2014Fact of ... removal of the petitioner as the auditor. ... The court also allowed the respondent to file a f....
2021 0 Supreme(Guj) 558 • India - Gujarat
J.B.PARDIWALA, VAIBHAVI D.NANAVATI
Constitution of India1950 - Article 226 - Companies Act 2013 - Section 140 - Illegal action of terminating ... under this sub-section - Comptroller and Auditor-General of India shall have power - Direct manner in which company's accounts shall ... assignment - claim to be working across verticals - Whether Section of Companies Act#HL_....
1998 0 Supreme(Pat) 394 • India - Patna
S.N.MISHRA
the provisions of Section 28(2)(b) of the Act or there is a vacancy on the post of trustee, the President of the Board cannot take ... of Section 28(2) (b) of the Act nor there was any vacancy on the post of Mahanth - Unless the trustee is removed in accor....
2010 0 Supreme(All) 3795 • India - Allahabad
YATINDRA SINGH, RAJES KUMAR, KRISHNA MURARI
adopted and ground on which, removal can be done—Mentioned—Proceedings for removal can be initiated only when grounds mentioned in ... found that charges on face of it, or even if they are presumed to be proved—Do not make out a case under any of the grounds specified ... Municipalities Act, 1916—Section 48(2)—Constitution of India, 1950—Article 226—Removal—Proc....
2024 0 Supreme(AP) 808 • India - Andhra Pradesh
TARLADA RAJASEKHAR RAO
Co-operative Societies Act - Section 21 - The court interpreted Section 21 of the APCS Act, emphasizing the authority of the general ... society by the 4th respondent, claiming it was illegal and arbitrary under Section 21 of the APCS Act, arguing that only the general ... Ratio Decidendi: #....
2023 0 Supreme(SC) 463 • India - Supreme Court
M. R. SHAH, M. M. SUNDRESH
(A) Companies Act, 2013 - Section 140(5) - High Court quashed directions under Section 212(14) for prosecution based on IFIN SFIO ... ... ... Ratio Decidendi: The resignation of auditors does not end the NCLT’s proceedings against them under Section 140(5); NCLT ... ... ... Issues: Whether resignation of auditors affects the continuation of legal proceedings against them under Section 140(5) of ... The heading of Section 140 of the Act (i.e., "#H....
2021 0 Supreme(Guj) 558 • India - Gujarat
J.B.PARDIWALA, VAIBHAVI D.NANAVATI
Constitution of India1950 - Article 226 - Companies Act 2013 - Section 140 - Illegal action of terminating ... Section 140 of the Companies Act, 2013 :“140. Removal, resignation of auditor and giving of special notice. ... Let us assume for the moment that Section 140 of the Act, 2013 has no application as Section 140 does not talk about removal of the Auditor b....
2023 Supreme(Online)(NCLT) 2850 • India - National Company Law Tribunal
; another UNDER SECTION 140 ORDER Present: Ld. ... In the result, this petition is dismissed on the grounds of limitation. ... This is an application filed by the Petitioner, seeking to:i) declare that the removal of Petitioner Firm as Auditor of Respondent 1 Company and the appointment of Respondent 2 Firm as Auditor of Respondent 1 Company as illegal. ... It is stated that the Respondent 1 had not obtained prior approval of the Central Government (Regional Director) for #HL_STAR....
2019 Supreme(Online)(NCLT) 4920 • India - National Company Law Tribunal
; another UNDER SECTION 140 ORDER Present: Ld. ... In the result, this petition is dismissed on the grounds of limitation. ... This is an application filed by the Petitioner, seeking to:i) declare that the removal of Petitioner Firm as Auditor of Respondent 1 Company and the appointment of Respondent 2 Firm as Auditor of Respondent 1 Company as illegal. ... It is stated that the Respondent 1 had not obtained prior approval of the Central Government (Regional Director) for #HL_STAR....
2026 Supreme(Online)(NCLT) 241 • India - National Company Law Tribunal
Therefore, on true interpretation, even on resignation by an auditor of a company even during the enquiry/proceedings under section 140(5) or even prior to that, there shall not be any termination of the proceedings under section 140(5) as observed and held by the High Court. ... proviso to Section 140(5) for disqualification of the Applicant herein as an auditor of any company for a period of five years from the date of passing of the order. ... The....
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