Sections 139 and 140 of the Companies Act, 2013: Appointment, Removal and Resignation of Auditors
Sections 139 and 140 form part of Chapter X of the Companies Act, 2013 dealing with audit and auditors. Section 139 governs appointment, tenure, rotation, first auditors and casual vacancies. Section 140 governs removal before expiry of term, resignation, special notice and Tribunal-directed change of auditor.
Section 139 - Appointment of Auditors
Meaning: Section 139 prescribes how a company appoints its statutory auditor, the period for which the auditor holds office, rules for rotation in prescribed classes of companies, appointment of the first auditor, filling of casual vacancies and the role of the Audit Committee where one is required.
Appointment at the first annual general meeting
Subject to Chapter X, every company is required at its first annual general meeting to appoint an individual or firm as auditor. The auditor ordinarily holds office from the conclusion of that meeting until the conclusion of the sixth annual general meeting, subject to the Act, the applicable rules, eligibility requirements and rotation provisions.
Before appointment, the company must obtain the auditor's written consent and the prescribed certificate. The certificate must, among other matters, support compliance with the applicable conditions and Section 141. The company must inform the auditor of the appointment and file the prescribed notice with the Registrar within the statutory period.
Rotation of Auditors under Section 139(2)
For a listed company and prescribed classes of companies, Section 139(2) limits consecutive tenure. An individual auditor cannot be appointed or re-appointed for more than one term of five consecutive years. An audit firm cannot be appointed or re-appointed for more than two terms of five consecutive years.
| Auditor | Maximum consecutive tenure | Cooling-off position |
|---|---|---|
| Individual auditor | One term of 5 consecutive years | Not eligible for re-appointment in the same company for 5 years after completion of the term |
| Audit firm | Two terms of 5 consecutive years | Not eligible for re-appointment in the same company for 5 years after completion of the term |
The Act also restricts appointment of another audit firm having common partner or partners with the outgoing audit firm in the circumstances stated in Section 139(2). Members may additionally resolve on rotation of the auditing partner and team or on a joint audit, subject to the Act.
First Auditor, Government Companies and Casual Vacancies
First auditor of a non-Government company
Under Section 139(6), the Board of Directors must appoint the first auditor within 30 days from registration. If the Board fails, it must inform the members, who must appoint the first auditor within 90 days at an extraordinary general meeting. The first auditor holds office until conclusion of the first annual general meeting.
Government company
For Government companies and other companies covered by Section 139(5), the Comptroller and Auditor-General of India appoints the auditor for a financial year within 180 days from commencement of that financial year. The special mechanism for the first auditor of such a company is contained in Section 139(7).
Casual vacancy
For a company not audited by an auditor appointed by the Comptroller and Auditor-General of India, the Board generally fills a casual vacancy within 30 days. Where the vacancy results from resignation, the appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation. Separate rules apply where the accounts are subject to audit by a CAG-appointed auditor.
Audit Committee
Where a company is required to constitute an Audit Committee under Section 177, appointments and filling of casual vacancies under Section 139 must take into account the recommendations of that committee.
Section 140 - Removal, Resignation and Change of Auditor
Meaning: Section 140 regulates removal of an auditor before expiry of the term, the filing obligations following resignation, special notice concerning replacement or non-reappointment of a retiring auditor, and Tribunal action where an auditor is found to have acted fraudulently or abetted or colluded in fraud.
Removal before expiry of term - Section 140(1)
An auditor appointed under Section 139 may be removed before expiry of the term only by a special resolution of the company after obtaining previous approval of the Central Government in the prescribed manner. The auditor must be given a reasonable opportunity of being heard before action is taken.
Resignation - Section 140(2)
An auditor who resigns must, within 30 days from the date of resignation, file the prescribed statement with the company and the Registrar stating the reasons and other relevant facts. In a company referred to in Section 139(5), the statement must also be filed with the Comptroller and Auditor-General of India.
Failure to comply with Section 140(2) attracts the penalty under Section 140(3): fifty thousand rupees or an amount equal to the auditor's remuneration, whichever is less, and, for continuing failure, a further penalty of five hundred rupees for each day after the first, subject to the statutory maximum of two lakh rupees.
Special Notice and Rights of the Retiring Auditor
Section 140(4) requires special notice for a resolution at an annual general meeting appointing a person other than the retiring auditor, or expressly providing that the retiring auditor shall not be re-appointed, except in the rotation situation specified in the provision.
On receiving such notice, the company must send a copy to the retiring auditor. Subject to the statutory conditions, the retiring auditor may make a written representation and request that it be notified to members. The provision also protects the auditor's right to be heard, while allowing the Tribunal to restrict circulation or reading of a representation where the statutory right is being abused.
Tribunal-directed change for fraud - Section 140(5)
If the Tribunal is satisfied that an auditor has directly or indirectly acted fraudulently or abetted or colluded in fraud by or in relation to the company or its directors or officers, it may direct the company to change its auditors. A final order under Section 140(5) also carries the statutory five-year ineligibility for appointment as auditor of any company and may attract action under Section 447.
Important Forms and Timelines
| Event | Key requirement | Common form |
|---|---|---|
| Appointment of auditor | Notice to Registrar within 15 days of the meeting in which appointment is made | ADT-1 |
| Removal before expiry of term | Previous Central Government approval and special resolution; reasonable opportunity of hearing to auditor | ADT-2 for prescribed approval application |
| Resignation by auditor | Statement to company and Registrar within 30 days; additional filing with CAG for Section 139(5) companies | ADT-3 |
Forms, filing fees, web-form architecture and portal procedures can change. Verify the current MCA portal and applicable rules before filing.
Related Provisions
Sections 139 and 140 should be read with Section 141 on eligibility, qualifications and disqualifications of auditors, Section 142 on remuneration, Section 143 on powers and duties of auditors and auditing standards, Section 144 on prohibited non-audit services, Section 147 on punishment for contraventions, and the Companies (Audit and Auditors) Rules, 2014.
Official Legal Resources
For authoritative verification, refer to the Companies Act, 2013 on the Ministry of Corporate Affairs website, the India Code portal, and the Ministry of Corporate Affairs portal for current rules, notifications, forms and filing services.