The auditor resigned mid-year: who files what, and who fills the gap?

An auditor resigning in the middle of the year starts two clocks that run on different people. The auditor owes a statement. The company owes a replacement — and if the vacancy was created by resignation, the Board's choice is not final until the members approve it.

Both duties carry forms and periods, and both are routinely missed in ways that show up months later, when the accounts are being signed or a bank asks for the auditor's report.

The auditor's filing: ADT-3, thirty days, two recipients

The obligation is on the auditor, not the company:

"(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation" (s.140(2), Companies Act 2013).

Four things are in that sentence, and the third is the one people forget:

• the clock is thirty days from the date of resignation;
• the statement goes to the company and to the Registrar — a copy to the company is not the filing;
• for a company whose accounts are audited by an auditor appointed by the CAG, a copy also goes to the Comptroller and Auditor-General of India;
• the statement must indicate the reasons and other facts relevant to the resignation.

The form is supplied by the Rules:

"For the purposes of sub-section (2) of section 140, when an auditor has resigned from the company, he shall file a statement in Form ADT-3" (rule 8, Companies (Audit and Auditors) Rules 2014).

Note what that does and does not say. It names the form. It does not create the obligation — s.140(2) does — and it does not soften the "reasons" requirement. A statement of resignation with no reasons is incomplete on the words of the sub-section.

The penalty falls on the auditor

This is the part that gets read as a company default and is not:

"(3) If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, … and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees" (s.140(3)).

Read the "whichever is less" carefully: for a small engagement the cap is the auditor's own remuneration, not ₹50,000. And the continuing failure is a daily amount with a ceiling — the sub-section states both the rate and the maximum, so nothing here needs estimating.

The company cannot discharge this duty on the auditor's behalf, and the auditor cannot discharge the company's duty below.

The company's duty: fill the vacancy, then get it approved

Resignation creates a casual vacancy, and s.139(8) treats a resignation differently from other vacancies:

"(8) Any casual vacancy in the office of an auditor shall— (i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting" (s.139(8)(i)).

So a resignation produces a two-step appointment:

• the Board fills the vacancy within thirty days; and
• because the vacancy is due to resignation, the appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation.

The new auditor holds office till the conclusion of the next annual general meeting, which is what the sub-clause says about the casual appointment.

Where the accounts are audited by an auditor appointed by the CAG, s.139(8)(ii) puts the filling in the CAG's hands, within thirty days. If the CAG does not fill the vacancy in that period, the proviso makes the Board fill it within the next thirty days (s.139(8)(ii), Companies Act 2013).

Two clocks, two parties

A board that appoints within thirty days and then never convenes the general meeting has done the first step and not the second, and the appointment remains unapproved on the text.

What goes wrong in practice

Filing ADT-3 with the company only. The sub-section says "with the company and the Registrar". The two recipients are cumulative.

Leaving out the reasons. s.140(2) requires the statement to indicate "the reasons and other facts as may be relevant". A bare one-line resignation does not meet that description, and the omission is the auditor's, with the penalty in s.140(3) attached to non-compliance with the sub-section.

Treating the Board's appointment as final. It is final for the interval; it is not final for the members. On a resignation, s.139(8)(i) requires the general meeting approval within three months of the Board's recommendation.

Assuming the new auditor holds office for a fresh term. The casual appointment holds "till the conclusion of the next annual general meeting"; the sub-clause sets the holding period itself.

Waiting on the auditor's filing before acting. The two duties sit on different parties. Section 139(8) does not make the Board's thirty days depend on when ADT-3 is filed.

What the company should keep on file

This part is practice rather than law, but it is what settles a file two years later:

• the resignation letter, and the date it was received, because every clock here starts from a date;
• evidence that ADT-3 reached the Registrar. Section 140(2) puts that filing on the auditor and s.139(8) puts the appointment on the company, so a company that cannot show the filing is left arguing about whose default it was;
• the Board resolution filling the vacancy, with its date, and the notice and resolution of the general meeting held inside the three months in s.139(8)(i);
• the reasons the auditor gave — required by s.140(2), and the first thing an incoming auditor or a lender asks for.

What to do now

• Auditor: file Form ADT-3 with the company and the Registrar within thirty days of the date of resignation, stating the reasons (s.140(2); rule 8, Companies (Audit and Auditors) Rules 2014). Consequence of not filing: a penalty of ₹50,000 or the auditor's remuneration, whichever is less, plus ₹500 a day thereafter up to ₹2 lakh (s.140(3)).
• Company (not a CAG-audited company): Board fills the vacancy within thirty days, then calls a general meeting within three months of the Board's recommendation to approve the appointment (s.139(8)(i)). Consequence on the text: an appointment not approved at that meeting does not meet the requirement for a resignation vacancy.

Have a CA review your facts before you act or file.

FAQ

Who has to file ADT-3?
The auditor who resigned, within thirty days of the resignation, with the company and the Registrar (s.140(2)), in Form ADT-3 (rule 8). For a company covered by s.139(5), a copy also goes to the CAG.

Our auditor resigned and refuses to file anything. What can the company do?
The duty in s.140(2) is the auditor's and so is the penalty in s.140(3): ₹50,000 or the auditor's remuneration, whichever is less, with ₹500 a day on continuing failure up to ₹2 lakh. The company's own duty under s.139(8) does not wait on it, so keep a dated record of the resignation and move on the vacancy.

How quickly must the Board appoint the new auditor?
Within thirty days of the casual vacancy (s.139(8)(i)).

The Board appointed someone. Is that enough?
Not where the vacancy arose from a resignation. That appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation (s.139(8)(i)).

How long does the new auditor hold office?
Till the conclusion of the next annual general meeting (s.139(8)(i)).

The auditor was appointed by the CAG. Same route?
No. The Board's thirty days in s.139(8)(i) apply to other companies. For a company whose auditor is appointed by the CAG, the CAG fills the vacancy within thirty days, and the Board fills it in the next thirty days if the CAG does not (s.139(8)(ii)).

This note is general information about the provisions, not advice on a particular appointment.

Need help with this?

Our team handles the paperwork. You focus on your business.