COMPANY LAWUNIT - 5 LESSON 1 : DIVIDEND, AUDIT, AND AUDITORS

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 5  

 LESSON 1 : DIVIDEND, AUDIT, AND AUDITORS

INTRODUCTION OF DIVIDENDS

- A dividend is a portion of the profit that is distributed among shareholders.

- It is declared in the annual general meeting of the company.

- Dividend distribution is contingent upon the company's profitability.

- If no profit is made or there are no available funds for distribution, dividends will not be declared.

- The power to declare dividends lies with the Board of Directors and does not need to be explicitly mentioned in the Memorandum of Association or Articles of Association.

PROVISIONS RELATED TO PAYMENT OF DIVIDEND

(INTERIM AND UNPAID &UNCLAIMED DIVIDEND)

Sections 123 and 127 of the Companies Act lay down the following provisions regarding dividends:

1. Source of Dividends:

   - Dividends can be declared and paid from current profit, accumulated revenue profits, or government-provided funds for dividend guarantees.

2. Transfer to Reserves:

   - A percentage of profits must be transferred to reserves before declaring dividends.

3. Dividends from Reserves:

   - Dividends should only be paid from general reserves and not from capital.

4. Separate Bank Account:

   - The amount of dividends must be deposited in a separate scheduled bank account within 5 days of declaration.

5. Payment to Registered Shareholders:

   - Dividends should be paid only to registered shareholders.

6. Cash Payment:

   - Dividends should be paid in cash through cheque, dividend warrant, or digital mode.

7. Proportional Distribution:

   - Dividends should be paid proportionately based on the shares held by each shareholder.

8. Time Limit for Payment:

   - Dividends must be paid within 30 days from the date of declaration.

Penalties for Non-Payment:

   - Directors will be liable to pay a daily penalty of at least 1000 rupees for failure to pay dividends within 30 days.

   - Directors may face imprisonment for up to two years.

   - The company will be liable to pay interest at a rate of 18% per annum on the defaulted amount.

Interim Dividends:

   - Interim dividends can be declared during any financial year.

   - They can be declared from the profits of the current financial year or accumulated profits from previous years.

   - The amount of interim dividends declared must be deposited in a separate bank account within 5 days.

Note: The provisions for payment of final dividends also apply, to the extent possible, to interim dividends according to section 2(35) of the Companies Act.

Unpaid and Unclaimed Dividends Account - Summary:

Section 124 and Section 205A of the Companies Act, 2013, provide provisions for unpaid and unclaimed dividends, which can be summarized as follows:

1. Creation of Unpaid Dividend Account:

   - If declared dividends remain unpaid or unclaimed for 30 days from the declaration date, the company must deposit the amount in a separate account called the Unpaid Dividend Account within seven days.

2. Preparation of Statement:

   - The company must prepare a detailed statement with the names of shareholders, their addresses, and the unpaid dividends.

   - This statement should be uploaded on the company's website and the prescribed government website within 90 days of transferring the amount to the Unpaid Dividend Account.

3. Interest on Defaulted Amount:

   - If the company fails to transfer the amount to the Unpaid Dividend Account, it must pay interest at a rate of 12% per annum on the outstanding amount from the date of default.

   - The accumulated interest should be utilized for the benefit of the shareholders who have not received their dividends.

4. Claiming Unpaid Dividends:

   - Shareholders can apply to the company to claim the money transferred to the Unpaid Dividend Account.

5. Transfer to Investor Education and Protection Fund (IEPF):

   - If the amount transferred to the Unpaid Dividend Account remains unclaimed for seven years, the company must transfer the amount and the accumulated interest to the IEPF.

   - Details of the transfer should be sent to the relevant authority, and a receipt should be obtained as proof of the transfer.

6. Claiming Shares from IEPF:

   - Shareholders can claim their shares from the IEPF if their shares were transferred from the Unpaid Dividend Account to the fund.

7. Non-Compliance Penalty:

   - Failure to comply with the provisions of this section may result in a fine of at least 5 lakh rupees, extendable up to 25 lakh rupees for the company.

   - Officers of the company associated with the default may face a fine ranging from 1 lakh rupees to 5 lakh rupees.

IN-TEXT QUESTIONS

1. A dividend is the part of__________ which is distributed among shareholders.

2. Once the dividend is declared, it becomes__________ of the company.

3. The dividend which is declared by the directors between two annual general meetings is called__________ dividend

4. Dividends are not allowed to be paid from-------of the company.

5. Dividend shall be paid to the__________ shareholders.

6. The amount equivalent to the dividend must be deposited in a__________ schedule bank within 5 days from the date on which the dividend was declared.

7. Shareholders' consent is not required at the time of declaring the dividends. T/F

8. Dividends may be paid in any kind or form. T/F

9. Dividends cannot be paid out of capital. T/F

10. Every company shall transfer the amount of unpaid or unclaimed dividends to a separate account known as an Unpaid dividend Account. T/F.

ANSWERS:

1. A dividend is the part of the profit which is distributed among shareholders.

2. Once the dividend is declared, it becomes a liability of the company.

3. The dividend which is declared by the directors between two annual general meetings is called an interim dividend.

4. Dividends are not allowed to be paid from the capital of the company.

5. Dividends shall be paid to the registered shareholders.

6. The amount equivalent to the dividend must be deposited in a separate scheduled bank within 5 days from the date on which the dividend was declared.

7. False (Shareholders' consent is not explicitly mentioned in the given information)

8. False (Dividends are typically paid in cash, through cheques, dividend warrants, or digital modes)

9. True

10. True

AUDIT & AUDITORS - INTRODUCTION

- Audit is a systematic examination of a company's transactions to determine if its financial statements provide a true and fair view.

- It is conducted by an independent party to ensure objectivity.

- The Companies Act, 2013, governs the appointment, qualification, removal, and powers of auditors.

QUALIFICATION OF AUDITOR

- Only a qualified chartered accountant can be appointed as an auditor of a company.

- When a firm or Limited Liability Partnership (LLP) is appointed as an auditor, only chartered accountant members of the firm can sign on behalf of the firm.

DISQUALIFICATION OF AUDITOR

- Disqualified persons include body corporates (except LLPs), officers or employees of the company, and individuals related to officers or employees.

- Disqualification also applies to persons who have:

  - Interest in the company, its subsidiaries, holding company, or subsidiary of the holding company, within the permissible limit.

  - Indebtedness to the company, its subsidiaries, holding company, or subsidiary of the holding company exceeding 5 lakh rupees.

  - Given guarantees for indebtedness of a third person to the company, its subsidiaries, holding company, or subsidiary of the holding company exceeding 1 lakh rupees.

  - Direct or indirect business relationships with the company, its subsidiaries, holding company, or subsidiary of the holding company.

  - Relative of a director or any key managerial personnel of the company.

  - Full-time employment elsewhere or part of a firm appointed as an auditor for more than 20 companies.

  - Conviction for an offense or fraud within the past 10 years.

  - Rendered services to the company, its subsidiaries, holding company, or subsidiary of the holding company.

Vacation of Office in Case of Disqualification:

- If a person is appointed as an auditor and later found to be disqualified, they must vacate the office.

- The vacancy is considered a casual vacancy in the auditor's office.

APPOINTMENT OF AUDITOR

Appointment of Auditor at First Annual General Meeting:

- Section 139(1) states that an individual or a firm shall be appointed as an auditor at the first annual general meeting of the company.

- The appointment requires the auditor's written consent, certificate of qualification, and notifying the registrar within 15 days.

Tenure of Auditor:

- The auditor remains in office from the date of appointment in the annual general meeting until the conclusion of the sixth annual general meeting.

Rotation of Auditors:

- A listed company cannot appoint or reappoint an individual auditor for more than one term of continuous five years.

- An audit firm cannot be appointed for more than two terms of continuous five years each.

- Members must ensure rotation of auditing partners and their team during the appointment, and audit by more than one auditor.

Appointment of Auditor in Government Companies:

- For government companies or companies owned or controlled by the central or state government, an auditor must be appointed within 180 days from the beginning of the financial year until the annual general meeting.

First Appointment of Auditor:

- Except for government companies, every other company must appoint the first auditor within 30 days from the date of registration.

- The appointment is done by the Board of Directors, and if the board fails, an Extraordinary General Meeting (EGM) must be called within 90 days for the appointment.

- For government companies, the Comptroller and Auditor-General of India appoint the first auditor within 60 days, and if there is a failure, the board appoints a qualified auditor within the next 30 days. If the board fails, the members appoint the auditor in an EGM within 60 days.

The procedure of Appointment:

- The procedure for appointing an auditor includes intimating the proposed auditor(s), obtaining consent and a certificate, considering recommendations of the audit committee (if applicable), holding a board meeting, and approving the appointment.

- The appointment must be intimated to the auditor and filed with the Registrar of Companies (ROC) using Form ADT-1 within 15 days.

AUDITOR’S ROTATION

Re-Appointment Limitations:

- Section 139(2) states that a company cannot reappoint an individual auditor for more than one term of 5 consecutive years and an audit firm for more than two terms of 5 consecutive years each.

- Re-appointment of the same auditor or audit firm is prohibited until 5 years have elapsed from the completion of their term.

The rule for Rotation of Auditors:

- The Central Government provides rules for the rotation of auditors as per section 139(4).

- The audit committee of the company or the Board of Directors (in the absence of an audit committee) must recommend the name of the next individual auditor or audit firm after the completion of the present auditor's tenure. The final decision is made by the members in the annual general meeting.

- The next auditor or audit firm being considered for appointment must not be associated with the current auditor (e.g., belonging to the same audit firm under the same brand or trade name or having common control).

- Any break taken by the appointed auditor within the continuous tenure of 5 years is considered as fulfilling the rotation requirement.

- If a partner of an audit firm, who is in charge of the appointed audit firm, retires and joins another audit firm, both audit firms become ineligible for re-appointment after the completion of the present tenure.

REMOVAL OF AUDITOR

Removal of Auditor:

- Section 140 of the Companies Act, 2013 governs the removal, resignation, and giving of special notice of the auditor.

- An auditor serving a company can be removed from the position between their tenure of service by a special resolution, but only after obtaining approval from the Central Government and providing the auditor with an opportunity to be heard.

- A special notice is required in the annual general meeting to appoint a new auditor when the retiring auditor is being removed before completing the prescribed tenure.

- The retiring auditor must be given a chance for representation, and their written representation should be shared with the members of the company or filed with the registrar if not sent to the members.

- Misuse of representation rights by the auditor may result in the representation not being sent or read in the meeting.

Resignation of Auditor:

- If an auditor wants to resign, they must submit a resignation letter with reasons and relevant facts to the company and the registrar within 30 days.

- In the case of a Government Company or a company with government control, the resignation must be submitted to the Comptroller and Auditor General of India.

Penalty for Violation:

- Failure to follow the rules for resignation may result in a penalty of up to Rs. 50,000 or an amount equal to the auditor's remuneration, whichever is lower.

- Continued non-compliance may lead to a daily fine of Rs. 500, up to a maximum of Rs. 5 lakh.

Final Order by Tribunal:

- If the Tribunal determines that the auditor is engaged in fraudulent activities against the company, it may order the company to replace its auditors.

- The auditor against whom the final order is given is prohibited from taking up audit assignments for any other company for at least 5 years from the date of the order, and they may be liable for punishment under section 447.

AUDITOR’S REPORT

Introduction:

- An audit of accounts is a systematic examination and evaluation of records to determine the true and fair view of the financial position of a business.

Preparation of Audit Report:

- According to Section 143(2) of the Companies Act 2013, the auditor is required to prepare a report on the examined accounts, financial statements, and important financial documents presented in the annual general meeting.

- The auditor ensures that the financial statements comply with laws and provide a true and fair representation of the company's affairs, following accounting and auditing standards and other requirements.

Content of Auditor's Report:

- Section 143(3) specifies the information to be included in the auditor's report, which includes:

  1. Confirmation of obtaining all relevant information for the audit and disclosure of any unavailable information and its impact on the financial statements.

  2. Confirmation of whether proper books of account have been maintained by the company as required by law, including details from branches not visited by the auditor.

  3. Disclosure of how the auditor has considered the audit information of any other person for branch offices.

  4. Verification that the audited income statement and balance sheet align with the books of account.

  5. Verification of compliance with accounting standards in preparing the financial statements.

  6. Auditor's comments on any adverse information or facts that may affect the company.

  7. Confirmation that all directors meet the qualification criteria as per the relevant section.

  8. Mention of any information, qualification, or negative remark regarding the maintenance of books of accounts.

  9. Inclusion of any other prescribed matters.

- The report explains the reasons behind any qualifications, remarks, or negative comments made by the auditor.

Reporting for Government-Controlled Companies:

- If a company is owned or controlled by the Central/State Government and the auditor is appointed by the Comptroller and Auditor-General of India, the audit report must be submitted to the Comptroller and Auditor-General.

- The report should state any directions given, actions taken, and their impact on the financial statements.

Signing the Audit Report:

- The audit report must be signed by authorized signatories:

  - Individual auditor appointed by the company signs the report.

  - In the case of a firm, only chartered accountant partners sign the report.

Presentation and Discussion:

- The final report, signed and authenticated by the auditor, is presented to the company in the annual general meeting.

- The report remains open for discussion or inspection by any member of the company.

POWERS OF AUDITOR

Access to Information:

- The auditor has the right to access all relevant information, books of accounts, and vouchers necessary for conducting the audit of financial statements.

- The auditor can inquire about various aspects, including loans and advances, transactions, investments, deposits, disclosure of personal expenses, and cash received against shares.

Access to Subsidiary and Associated Companies:

- An auditor of a holding company has the right to access the records of its subsidiary and associated companies to facilitate the consolidation of financial statements.

Preparation of Audit Report:

- The auditor is required to prepare a proper report of the audit, as specified in subsections 143(2) and (3) of the Companies Act 2013.

Adherence to Auditing Standards:

- The auditor must follow and practice auditing standards while performing the audit.

Reporting of Fraud or Offenses:

- The auditor has the right to report any fraud or offense directly to the Central Government if the amount involved is equal to or more than 1 crore rupees.

- If the amount is less than 1 crore rupees, the auditor should inform the audit committee about the fraud.

Good Faith Reporting:

- Reporting fraud in good faith does not violate the auditor's duty.

Concealing Fraudulent Activity:

- Knowingly concealing any fraudulent activity discovered during the audit may result in punishment for the auditor, with a fine ranging from 1 lakh to 25 lakh rupees.

 An auditor is a person who examines the systematic way of financial records.

 An auditor is a watchdog, not a bloodhound.

 An auditor may be removed from their position by passing a special resolution.

 The Tribunal may direct the company to change its auditor if they have acted in a fraudulent manner.

 An auditor has the right to be notified of all notices and documents related to any general meeting.

 Auditor is responsible to detect errors and fraud.

 An unqualified report does not necessarily mean error-free financial statements.

 Auditor has the right to access the books of accounts and documents.

 An auditor must be a chartered accountant or meet the qualifications specified in the Companies Act.

 An auditor is entitled to receive remuneration upon completion of the audit or as per the terms of the engagement agreement.