The Director Who Missed Three Years and the Auditor's Second Term
Vardaan Engineering Limited is an unlisted public company with paid-up capital of ₹12 crore. It failed to file its financial statements and annual returns for 2020-21, 2021-22 and 2022-23. Ramesh, a director, continued to attend board meetings during this period and signed the accounts. At the 2024 annual general meeting, the board proposes his reappointment. The statutory auditor, M/s Rao & Co., a sole proprietorship, was appointed at the 2019 AGM for five years and the board now proposes reappointment for a further five years. A shareholder has objected to both proposals. The company secretary must advise the chairman before the resolutions are put to vote, and must identify the filings that follow if the company chooses a new auditor.
1. Is Ramesh eligible for reappointment as a director? Apply the disqualification provisions and explain the effect of his continued attendance.
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Ramesh is not eligible. Section 164(2)(a) provides that a person who is or has been a director of a company which has not filed financial statements or annual returns for three consecutive financial years shall not be eligible for reappointment as a director of that company for five years from the date on which the company failed to file. Vardaan failed for 2020-21, 2021-22 and 2022-23, so the disqualification is triggered. Section 167(1)(a) provides that the office of a director becomes vacant if he incurs a disqualification under Section 164. Ramesh's continued attendance at board meetings and his signature on accounts do not cure the disqualification; they may even aggravate the position because he acted while disqualified. The chairman should not put the reappointment resolution to vote. The board should record that his office has become vacant, appoint a replacement in accordance with the articles and Section 152, and file the necessary cessation and appointment forms. The shareholder's objection is well founded.
2. Can M/s Rao & Co. be reappointed for a further five years? Analyse the rotation rules for this company.
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M/s Rao & Co. cannot be reappointed. Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 applies the rotation requirement to unlisted public companies having paid-up share capital of ₹10 crore or more. Vardaan has ₹12 crore, so rotation applies. A sole proprietorship is an individual auditor for this purpose. M/s Rao & Co. has completed one term of five consecutive years, covering 2019-20 to 2023-24, and an individual auditor cannot be reappointed for a second term; the firm must observe a cooling-off period of five years. The board's proposal is therefore invalid. The company must appoint a new auditor at the AGM by ordinary resolution, after obtaining the proposed auditor's written consent and the certificate that the appointment complies with the limits in Section 141. The incoming auditor should also be intimated of the change, and the outgoing auditor's term should be recorded accurately in the notice.
3. What filings and records follow if the company appoints a new auditor at the AGM, and what should be done about Ramesh's cessation?
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If a new auditor is appointed at the AGM, the company must file Form ADT-1 with the Registrar within 15 days of the appointment, together with the certified copy of the resolution and the auditor's consent and eligibility certificate. The appointment should be recorded in the minutes within 30 days under Section 118, and the register of directors and key managerial personnel should be updated. An ordinary resolution is sufficient for the auditor's appointment, so MGT-14 is not required for that item unless the company is also filing some other resolution covered by Section 117. For Ramesh, the company should file Form DIR-12 for cessation within 30 days, record the vacation of office in the register of directors and key managerial personnel, and ensure that the board minutes state the ground of disqualification. If a replacement director is appointed at the same meeting, a separate DIR-12 for appointment must be filed within 30 days, with the consent in Form DIR-2 and the disclosure of non-disqualification.