A company's first auditor is one of the earliest steps to achieving compliance for any company registered in India. Auditors are essential to achieving transparency, financial discipline, and statutory compliance from the start of the company's operations. Appointing a first auditor is a timeline-driven procedure defined under the Companies Act 2013. However, in practice, there are often challenges faced by Companies whose Board of Directors fail to appoint a first auditor within 30 days from the date of Incorporation. This creates a legal and procedural challenge surrounding the appointment process: “Since an Auditor appointment is an ordinary business matter, and since ordinary business matters can only occur at an Annual General Meeting, how can the first Auditor appointment be done by way of an Extraordinary General Meeting?". This challenge creates confusion for promoters, Directors, and compliance professionals. This blog will discuss the legal framework, procedures, judicial interpretation, and compliance procedures surrounding the appointment of the first Auditor by way of an EGM. This blog also contains information on the various common misunderstandings between ordinary and special business. The blog will assist start-ups, private companies, Compliance Officers and professionals providing Appointment and Removal of Auditor Services in India.
Legal Framework Governing the Appointment of First Auditor
To determine the way in which an extraordinary general meeting (EGM) fits within the process, we must first look at the statutory provisions provided within the Companies Act 2013.
Section 139(6) of the Companies Act, 2013Section 139(6) specifically deals with the appointment of a company's first auditor. This section of the act provides that:
• Within 30 days from the date of incorporation, the board of directors shall appoint the first auditor.
• If the board of directors fails to appoint such as auditor within that period, the members of the company will appoint the first auditor within 90 days in an EGM.
This provision creates a backup system that takes authority away from the board of directors to appoint the first auditor and gives it to the shareholders.
Key Takeaway
The law itself explicitly permits the appointment of the first auditor at an EGM when the Board fails, irrespective of whether auditor appointment is typically categorized as ordinary business.
Understanding Ordinary Business vs. Special Business
Auditor appointment creates confusion mainly because they are categorized as ordinary items of business.
What's Ordinary Business?
As stated in 2013 Companies Act, section 102(2)(a) - items that are classified as ordinary business on the agenda during annual general meeting (AGM):
• Financial statement approval
• Dividend declaration
• Appointment of a director who succeed to retire
• Appointing auditors, including setting their pay
Typically, ordinary business can only be dealt with at an AGM.
Then Why Is an EGM Allowed for First Auditor Appointment?
The statutory override and legislative purpose reveal the resolution to the issue.
• Section 139(6) is a special provision made to specifically cover newly incorporated companies.
• This provision functions independently of any AGM structure.
• The legislation acknowledges that a newly incorporated company may not yet have completed its first financial year and may therefore not be able to convene an AGM.
Accordingly, although the appointment of an auditor would normally be done at an AGM, the appointment of the first auditor becomes a statutory exception to the general rule.
Why the Law Allows First Auditor Appointment in an EGM
An extraordinary general meeting (EGM) for the appointment of the first auditor is not simply a loophole but rather the result of careful thought when legislated.
1.Providing Early Financial Oversight
Financial transactions literally start happening within minutes of incorporation. Without an auditor in place until an annual general meeting (AGM), it is possible for a company to have a very long period as a non-compliant (not having had its first financial year audited) before there is an AGM.
2. Practical Impossibility of AGM Timing
As an AGM can only occur once the first full financial year of operation has finished, waiting until after the conclusion of an AGM would render early oversight of audits impossible.
3. Shareholder Supremacy in Case of Board Failure
If the directors do not perform their required duties as they relate to the Company, Shareholders must be given a mechanism to exercise their rights as Shareholders. They have the option of calling an EGM, providing an additional layer of Authority and therefore re-enforcing the principles of Corporate Governance.
Why the Board May Fail to Appoint the First Auditor
Some common reasons for defaulting under the law are:
• Directors be unavailable
• Delay in setting up a board of directors
• Promoter disputes
• Lack of knowledge of statutory deadlines
• Lack of professional assistance
• Companies that have been incorporated but are inactive
Although these reasons are not a proper excuse for non-compliance, the law provides for the appointment of directors by members at an extraordinary general meeting as a method of bringing about compliance.
The Confusion: Auditor Appointment as Ordinary Business
What Is Ordinary Business?
Under Section 102(2)(a) of the Companies Act, ordinary business at an AGM includes:
Because appointment of auditors is listed as ordinary business, many assume it can only be transacted at an AGM which leads to confusion when the law allows appointment at an EGM.
Why First Auditor Appointment Through EGM Is Legally Valid
Key Legal Distinction: First Auditor vs Subsequent Auditor
The appointment of the first auditor is not the same as the appointment or ratification of auditors at an AGM.
Aspect
First Auditor
Subsequent Auditor
Governing section
Section 139(6)
Section 139(1)
Appointing authority
BOD / Members
Members
Meeting type
Board Meeting / EGM
AGM
Tenure
Till first AGM
5 years
Ordinary business?
No
Yes
Why It Is Not Ordinary Business
• AGM is only for matters of ordinary business.
• A first auditor must be appointed immediately after incorporation, per law.
• Waiting for an AGM could delay appointment of first auditor by months.
• Section 139(6) permits appointment as an EGM;
Therefore, a first auditor may be appointed at EGM, which is contrary to the rule regarding ordinary business.
Legal Intent Behind Allowing EGM for First Auditor Appointment
The law states that:
Consequently, the extraordinary general meeting (EGM) is viewed as a corrective tool to ensure compliance when needed, but should not be considered a substitute for the powers of the annual general meeting (AGM).
Step-by-Step Process: Appointment of First Auditor Through EGM
This part contains guidelines for professionals who offer services for the process of Appointment & Removal of Auditor
Step 1 Board Records Failure
The Board will record in a meeting that:
• 30 days have passed since the first auditor was not appointed.
• Members must now appoint an auditor under Section 139(6).
Step 2 Board Approves EGM Notice
The Board will pass a resolution to:
• Call an Extraordinary General Meeting.
• Approve the EGM notice and agenda.
• Authorize a director/company secretary to issue documents.
Step 3 Issue EGM Notice
• A minimum of 21 days’ notice must be given before the date of the EGM (unless consent for shorter notice has been obtained).
• The notice must include:
Step 4 Hold EGM
• Members will pass an ordinary resolution.
• The/Refer to section 7 of the resolution appoints the first auditor.
• The tenure of the auditor is from appointment until the conclusion of the first AGM.
Step 5 Auditor Consent & Eligibility Certificate
Pursuant to Section 139(1) and Rule 4, the auditor has to provide:
• A written consent.
• An eligibility certificate.
• Confirmation that the auditor is within limits.
Step 6 File Forms With ROC
• File form ADT-1 within 15 days.
• Attach the following to the form:
What If No Auditor Is Appointed Even After EGM?
Failure to appoint a first auditor will result in the following issues:
• Penalties for non-compliance
• Challenges opening a bank account
• Issues with GST, income tax and MCA filings
• Risk of disqualification for directors
• Loss of credibility with prospective investors
Consequently, many companies use professional Change of Company Auditor Service Providers to help resolve these breaches or non-appointments effectively.
Can the First Auditor Be Removed?
Yes, but there are qualifications.
Removal of a First Auditor
• Removal of a first auditor can be done prior to the first annual general meeting (AGM), however,
• The following will be required in order to be removed:
• Justifiable reasons for the auditor's removal must be documented.
The appointment and removal of an auditor in India are very compliance-conscious processes. Any deviation from requirements can lead to regulatory inquiry into your Company.
Is the Appointment at EGM Legally Valid?
Yes, absolutely.
The legality is based on the following:
• Explicit provisions made in Section 139(6);
• MCA notifications and compliance interpretations pertaining to the company;
• Well-established compliance practices across the corporate world.
The appointment of a first auditor in respect of the EGM does not infringe upon the term "ordinary business" as being conducted by any company at an AGM.
Role of Shareholders in Auditor Appointment
When the Board is in default, shareholders are the ultimate caretakers of corporate governance.
The ability of shareholders to appoint and remove the first auditor in an EGM provides them with the tools necessary to:
• Ensure continuity of the statutory audit;
• Protect stakeholder interests; and
• Ensure compliance with the Companies Act.
This mechanism also highlights the balanced structure within which Auditor Appointment and Removal in India, as there are provisions for establishing the checks and balances of the law.
Common Mistakes Companies Make
1.AGM required for appointing first auditor
2. 90-day EGM time limit for appointment missed
3. ADT-1 not timely filed
4. Ineligible auditor appointed
5. EGM notice poorly drafted
Any of these errors can result in penalties and ongoing re-compliance risks.
Consequences of Not Appointing a First Auditor
If the board of directors or shareholders do not appoint an auditor by the deadline, they may face repercussions such as:
• Company and officer penalties for non-compliance
• Issues with filing documents required by law
• Issues with due diligence, finding funding or performing an audit
• Growing concern that regulators will create additional scrutiny on the company
For these reasons, it is recommended to utilize a professional service for the appointment or removal of auditors in India.
Common Misconceptions Clarified
1.Auditors can only be appointed in AGM
Incorrect first auditor can be appointed via EGM
2.EGM cannot handle ordinary business
EGM handles statutory exceptions, not ordinary AGM business
3.Delay can be fixed at first AGM
Non-compliance period still exists and may attract penalties
Conclusion
The appointment of a first auditor is not just a procedural formality. It is an essential step towards achieving transparency, accountability, and compliance with regulations for every company at the beginning of its life. While the Companies Act, 2013 provides for the Board of Directors to appoint the company's first auditor, it has recognized through the use of Extraordinary General Meetings that, in practice, some companies fail to comply with this requirement due to the fact that shareholders can also appoint auditors. In general, there is a misconception that the appointment of auditors is only an ordinary business matter to be conducted at annual general meetings (AGMs). This misconception can cause companies to experience delays or expose them to risk from regulatory fees or sanctions, thereby creating additional liability for the company's directors and shareholders. Although there is a distinction between the process used to appoint the first auditor and that used to re-appoint succeeding auditors, the law provides for flexibility through the use of EGMs to support good corporate governance. By establishing policies and procedures that recognize the fundamental difference between the appointment of the first auditor and other auditors, companies demonstrate responsible management and continue to meet their obligations under the Companies Act. Furthermore, given the technical complexity and requirements for filing required for the Appointment and Removal of Auditor in India, obtaining professional assistance for this process will ensure that companies meet the requirements of accuracy, timeliness, and peace of mind, and allow them to focus on business growth and expansion without concern for regulatory compliance issues.
(FAQs)
1. Is appointing a first auditor through EGM legally valid?
Yes. Section 139(6) explicitly permits members to appoint the first auditor through an EGM if the Board fails within 30 days.
2. Is first auditor appointment considered ordinary business?
No. Ordinary business applies only to AGM matters. First auditor appointment is a statutory exception.
3. What resolution is required to appoint a first auditor?
An ordinary resolution passed by members in an EGM.
4. How long does the first auditor hold office?
From the date of appointment until the conclusion of the first AGM.
5. Is ADT-1 mandatory for first auditor appointment?
Yes. Form ADT-1 must be filed within 15 days of appointment.
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