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S. Murlidharan

AT LEAST at two places, the Companies Act, 1956 is nebulous when it deals with auditor.

Proposed new incumbent playing truant: An auditor holds office from conclusion of the annual general meeting in which he is appointed till the conclusion of the next annual general meeting. And the normal rule is that a retiring auditor of a company is automatically reappointed. Exceptions to this rule are contained in Section 224(2) one of which is clause (d) thereof which says, "where notice has been given of an intended resolution to appoint some person or persons in place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with", he shall not be reappointed.

The section should have gone the full hog and spelt out the further course of action that must be taken to ensure that there is no void in the office of the auditor. As the law stands, if such resolution cannot be proceeded with for the reasons stated, then all hell may break loose. The company might tackle the situation by adjourning the meeting and in the meanwhile arrange to have a new name proposed through a special notice so that it can be taken up at such adjourned meeting. Failure to do so would bring the Central Government into the picture.

Only one thing is certain in that eventuality — the retiring auditor cannot be reappointed. But then there is no rationale for this prohibition. Besides, it can lend itself to mischief. If a notice is given proposing change of guard to this august office, and the proposed auditor becomes unavailable for appointment, in all fairness, the retiring auditor ought to be re-appointed, unless of course he has fallen foul of clause (c) of that section as well which says, he also shall not be reappointed where "a resolution has been passed at that meeting... providing expressly that he shall not be reappointed." In other words, unless the company has expressed itself against his continuance, he has to be reappointed. This stalemate can of course be avoided if the notice proposing some other auditor has been given sufficiently in advance and subsequently the death or incapacity or disqualification of that person takes place soon thereafter leaving sufficient time for withdrawal of such notice. This is assuming the notice was given in the first place bona fide.

The mischief potential of this mindless prohibition can be appreciated with an example. Suppose, a group of shareholders is inimical to the company or is not favourably disposed towards the incumbent auditor. It may not have the necessary shareholding clout to dislodge the incumbent auditor but may have the audacity to flex its muscles. It may, just for the heck of it, throw its hat in the ring by proposing its own nominee to the office of auditor and thereafter arrange or contrive to have the nominee disqualified.

The easiest way to court disqualification, as it were, is to acquire shares carrying voting rights of the company in which one is an auditor or the proposed auditor. Now a spanner has been effectively thrown in the works of the company. The rival group may sadistically gloat over the discomfiture of the company, which is decidedly in a logjam over auditor's appointment. This stalemate would activate the next sub-section of Section 224, that is, sub-section (3) that says, "Where at an annual general meeting no auditors are appointed or reappointed, the Central Government may appoint a person to fill the vacancy." Unless the Central Government is able to see through the chicanery and appoints the incumbent himself, the rival group may laugh up its sleeve.

What is `too late'?: An incumbent auditor cannot be dislodged unless the elaborate drill prescribed by Section 225 has been gone through. This is just as well because no auditor should be removed out of spite or cussedness. One of the precautions taken is to allow the retiring auditor to make a representation, which must be circulated amongst the members so that they know his side of the story as well before his scalp is placed on the chopping block. But if the representation is received too late, then such representation need not be circulated but may be read out at the meeting. Now, this is not satisfactory at all. What is `too late'? No law should use an expression, which is wishy-washy.

Parliament could have easily spelt out what exactly is `too late'. In the absence of exactness as to what is `too late', a company may not circulate a retiring auditor's representation (so what if it turns out to be a swan-song) taking shelter behind this nebulous term.

That the representation can be read out is only a cold comfort for him because often there is advantage in winning the hearts of the voters in advance through a powerful and cogent written material, which makes an indelible impression on them.

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