Removal/Change of Auditor by Tribunal (Section 140(5))
# Change of Auditor by Tribunal
Section 140(5) of the Companies Act, 2013 empowers the National Company Law Tribunal (NCLT) to direct removal of an auditor where fraud or fraudulent collusion is involved.
## When Can the Tribunal Order Change?
The Tribunal may act:
Suo motu (on its own motion), OR
On an application by the Central Government (CG), OR
On an application by any concerned person.
## Grounds for Tribunal's Order
The Tribunal must be satisfied that the auditor has directly or indirectly:
1. Acted in a fraudulent manner, OR
2. Abetted or colluded in any fraud by, or in relation to, the company or its directors or officers.
## Consequences of Tribunal's Order
### General Order
The Tribunal may order the company to change its auditor.
### Special Rule — Where Application is by Central Government
If the application is made by the Central Government and NCLT is satisfied that change of auditor is required:
Step
Action
1
NCLT shall pass order within 15 days of receipt of application
2
The auditor shall not function as auditor of the company
3
CG may appoint another auditor in his place
### Debarment of the Auditor
The auditor against whom the final order is passed:
Shall not be eligible to be appointed as auditor of any company for 5 years from the date of the order; AND
Shall be liable for action under Section 447 (punishment for fraud).
## Application to Firms — Joint and Several Liability
Where the firm is the auditor, the liability under Section 447 shall be of:
The firm, AND
Every partner or partners who acted in a fraudulent manner or abetted/colluded in any fraud.
## Key Takeaway
Unlike removal under Section 140(1) which requires Central Government approval after a special resolution, Section 140(5) is a punitive removal based on fraud — with serious professional consequences including 5-year debarment and prosecution under Section 447.
Worked example
### Example 1
Example 1 — Suo Motu Action by NCLT:
During proceedings against ABC Ltd. for financial fraud, NCLT notices that the statutory auditor CA Ramesh certified fabricated revenue figures. NCLT may suo motu order the company to change its auditor under Section 140(5). CA Ramesh will also be debarred for 5 years and face action under Section 447.
### Example 2
Example 2 — Application by Central Government:
The MCA's inspection report finds that the audit firm 'M/s. P & Co.' colluded with directors of XYZ Ltd. to conceal related-party transactions. The Central Government applies to NCLT.
Outcome: NCLT must pass order within 15 days. On satisfaction, M/s. P & Co. cease to function as auditor immediately; CG appoints a replacement. The firm and the specific partner(s) involved in the fraud are debarred for 5 years and prosecuted under Section 447.
### Example 3
Example 3 — Firm Liability:
In M/s. ABC & Co. (a CA firm), only Partner X actively colluded with the company's CFO to falsify audit reports. Partners Y and Z had no role.
Outcome: The firm and Partner X are liable under Section 447. Partners Y and Z are NOT personally liable as they did not act fraudulently or abet the fraud.
⚠️ Common exam mistakes
Confusing removal under Section 140(1) (by special resolution + CG approval) with removal under Section 140(5) (by Tribunal for fraud).
Believing that all partners of an audit firm are automatically liable — only those who acted fraudulently or abetted the fraud are personally liable under Section 447.
Forgetting the 15-day time limit applies ONLY when the application is made by the Central Government, not for suo motu action or applications by concerned persons.
Overlooking the 5-year debarment from acting as auditor of ANY company — not just the company where fraud occurred.
Assuming the company can choose the replacement auditor when CG applies — once NCLT orders removal on CG's application, the CG appoints the new auditor.
Missing that Section 140(5) liability is 'without prejudice' to any other action — the auditor can be proceeded against under other laws (e.g., IPC, CA Act) as well.
Bare-Act text Section 140(5) · The Companies Act, 2013 · click to expand
Section 140(5): Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors. Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place. Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447. Explanation I — It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.