CA Intermediate (Batch Nov 2024)

SOLUTION – Test of Chapter 10

Part 1- MCQ questions

Q1. (a) Q2. (c) Q3. (b) Q4. (b)

Part II – Descriptive questions

1. Special Notice - As per section 140(4) of the Companies Act, 2013, resolution for appointment of an auditor
other than retiring auditor at an Annual General Meeting requires special notice.

As per section 115 of the Companies Act, 2013, read with rule 23 of Companies (Management and
Administration) Rules, 2014

Where, by any provision contained in this Act or in the Articles of Association of a company, special notice is
required for passing any resolution, then the notice of the intention to move such resolution shall be given to the
company by such number of members holding not less than 1% of the total voting power, or holding shares on
which such aggregate sum not exceeding INR 5 lakh, as may be prescribed, has been paid-up.

Rule 23 provides, a special notice required to be given to the company shall be signed, either individually or
collectively by such number of members holding not less than 1% of total voting power or holding shares on
which an aggregate sum of not less than INR 5,00,000 has been paid up on the date of the notice.

The afore-mentioned notice shall be sent by members to the company not earlier than 3 months but at least 14
days before the date of meeting at which the resolution is to be moved, exclusive of the day on which the notice
is given and the day of the meeting.

Here, L Ltd. is having 2,000 members with paid-up capital of 1 crore, and it received a notice from its 50
members holding paid-up capital of 6 lakh, in aggregate, on 2nd July, 2022 for a resolution to be passed at
the AGM to be held on 21st August, 2022.

As the members who gave the notice hold more than 5 lakh in the paid-up capital of the company, they were
eligible to give such notice.
Further, the notice should have been given not earlier than 3 months but at least 14 days before the date of
meeting - 21st August, 2022, and the notice was given on 2nd July, 2022 i.e., within the prescribed time limit.

Thus, it can be said that the said notice was made by adequate number of members within the prescribed time
limit to L Ltd.

2. According to section 177 of the Companies Act, 2013 read with the Companies (Meetings of Board and its
Powers) Rules, 2014, in every listed public company- an Audit Committee shall be constituted by Board of
directors.

Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014, provides that in case of a company that
is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a
committee is not required to be constituted, the Board, shall take into consideration the qualifications and
experience of the individual or the firm proposed to be considered for appointment as auditor and whether such
qualifications and experience are commensurate with the size and requirements of the company.

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 The audit committee shall recommend the name of an individual or a firm as auditor to the Board for
consideration; the Board shall consider and recommend an individual or a firm as auditor to the members in the
Annual General Meeting (AGM) for appointment.

If the Board disagrees with the recommendation of the Audit Committee- It shall refer back the recommendation
to the committee for reconsideration citing reasons for such disagreement.

(i) In the given question, the Board shall record reasons for its disagreement with the committee and
send its own recommendation for consideration of the members in the AGM.

Section 139(8) provides that the Board may fill any casual vacancy in the office of an auditor within 30
days.
Section 139(11) prescribes that where a company is required to constitute an Audit Committee under
section 177, all appointments, including the filling of a casual vacancy of an auditor under this section
shall be made after taking into account the recommendations of such committee.

Hence, the position will remain same even in case of casual vacancy.

(ii) In case there was no requirement of appointment of an audit committee then the BOD shall recommend
to the members in the AGM, the name of an individual or a firm which can be appointed as auditor after
considering qualifications and experience of such individual or firm and other matter as laid therein.

3.
a. As per the provisions of Section 140(5), the Central Government may apply to the Tribunal in respect of
such matter highlighting that the auditors miserably failed to fulfil their duties as auditors of the company.

If the Tribunal is satisfied that the auditors were involved in the fraud with the company, the Tribunal may
change the auditors and the new auditor shall be appointed by Central Government. Further, the erstwhile
auditor, involved in fraud, shall not be eligible to be appointed as auditor of any company for 5 years and
also liable for action under section 447 of the Companies Act 2013.

b. Section 140 of the Companies Act, 2013 prescribes procedure for removal of auditors. Under section 140
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 in
that behalf in the prescribed manner.

From this sub section it is clear that the approval of the Central Government shall be taken first and thereafter
the special resolution of the company should be passed.

Provided that before taking any action under this sub-section, the auditor concerned shall be given a
reasonable opportunity of being heard.

Hence, in the instant case, the decision of X Ltd. to remove ABC & Associates, auditors of the company at
the general meeting held on 25-5-2023, is not valid. The approval of the Central Government shall be taken
before passing the special resolution in the general meeting.

4.
i. Provisions and Explanation: Section 141(3) (c) of the Companies Act, 2013 prescribes that any person who
is a partner or in employment of an officer or employee of the company will be disqualified to act as an
auditor of a company. Sub-section (4) of Section 141 provides that an auditor who becomes subject, after
his appointment, to any of the disqualifications specified in sub-sections (3) of Section 141, he shall be
deemed to have vacated his office as an auditor.

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 Conclusion - In the present case, Ayush, an auditor of X Ltd., joined as partner with B, who is Finance
executive of X Ltd., has attracted clause (3) (c) of Section 141 and, therefore, he shall be deemed to have
vacated office of the auditor of X Limited.

ii. As per Section 141(3)(d)(i) of the Companies Act, 2013, a person who, or his relative or partner is holding
any security of or interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company, shall not be appointed as an auditor of the company.
However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor
may hold securities in the company of face value not exceeding rupees one lakh.
In the given case Mrs. Sita, wife of CA. Arjun acquired shares in Stellar Builders Limited, in which he was
a statutory auditor on 15th March, 2018. Since, the securities held by Mrs. Sita is within the prescribed limit
of 1 lakh, such a transaction is valid. Yes, the answer will be different in case where the face value of
acquired shares is 1,50,000. Then in that case -
1. Corrective action to maintain the limit specified (i.e., 1 lac) shall be taken by the auditor within 60 days
of such acquisition, or
2. Auditor has to vacate his office.

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