LegalKart Editor

Businesses are experiencing unprecedented challenges and market disruption due to the Covid-19 pandemic and consequential economic meltdown seems inevitable. Economists predict that economy is now dealing with a situation far worse than the global recession of 2008. We are not prepared to deal with this situation since no business has anticipated or predicted menace to this extent, where globally national borders are locked down halting global market and business operations. 

Importantly, we are dealing with a war waged by the unknown, and nations are fighting to safeguard and protect their people and economy. In this context, businesses/ entrepreneur has to operate sustainably, and it is important to set up and administer certain proactive measures to mitigate financial and business losses. These special circumstances require special measures to sustain and thrive, and this article covers some measures that companies may imbibe to thrive over the crisis and to sustain. 

“Pragmatic ideation and proactive resolution will mitigate the impact of impending problems”

WORK FROM HOME

“Work From Home is not an exception but has become a Rule”

Legally, the success of a business and its sustenance depends on how well it protects its confidential information and trade secrets. Especially, in times like now, it has become imperative not only to have sustainable business modus operandi to thrive and succeed during bad market conditions but also to protect what has been already built through years of hard work. This sounds simple yet very difficult to implement and execute in the frontline. 

Employees are key to every organization. Their performance and conduct in operating the business decide the company's future. Good employees build a successful business and the bad ones ruin the organization. A simple claim or lawsuit will change the future of the company or drag the company into darkness (third party infringement and damages suits), so the company should explicitly set out the framework within which the employees have to function within the company. 

With a large number of employees working remotely at the comfort of their houses, the management is now grappling with the management of infrastructure to facilitate employees with work from home access and to keep the business running. While companies are dealing with infrastructure difficulties, protection of confidential information and trade secrets should be set on high priority in order to avoid future uncertainties and to govern the way the organization continues to operate within an uncontrolled environment of homes of the employees.

Measures: Implementing effective policies and conduct awareness training programs so as to how to operate and function while working at the comfort of home. Data Protection Policy, Information Technology and Security Policy and Work from Home Policy are few policies that companies should implement and effectuate measures for protection of data and confidential information.

STRUCTURE BUSINESS CONTRACTS

Businesses don’t operate in silos but are reliant upon clients, service providers, and customers (the list may vary business to business). It is important to evaluate and strategically secure and retain existing business connections. Practically, retaining old clients is a cost-effective measure, since securing new clients is a costly affair during this market meltdown. The business relationship with the client is regulated by a document called “Agreement” and this provides how to govern and operate during the subsistence of the agreement.

An agreement may be implied or express contract. Where the terms of the agreement are explicit, the business should evaluate the risks and be prepared for any foreseeable risks that may arise in the current market circumstances and protect itself from the unforeseen risks (Force Majeure Clause). For implied and unwritten business arrangement, the company will be operating in an uncontrolled and ungoverned territory and may cost the company irreparably, if things don’t operate the way they are supposed to, and legal binding of the implied agreement depends on external factors and burden of proving the transaction and losses are high. So, the management should focus on dealing with the governing business through the Agreements.

“Agreement decides whether you have a falling business or scope to rise above the troubled water.”

It is imperative to work along with the legal team to overcome the uncertainties and to operate within a controlled business environment. In the interest of economies of scale of business, as a rule, litigation should be the last resort. When agreement provides for business certainty why take long shots with regard to company future.

As such, in case a client (or a set of clients) is important for the survival of a business, then the business should take proactive measures to re-negotiate, re-design, or structure the transaction to make it sustainable to both the business and the clients. If you are expensive to your client, your dealings with them are bound to fall to the ground. Importantly, be the first to make a proposal for restructuring a transaction before your clients make a decision against you and it’s too late.

“Change is constant, adaption is a rule and knowing when to adapt will decide the success” 

Conventionally, business teams are oriented to gain business, finance to control costs and project profits, so they pay no heed to transactional risks. Inevitably, in order to succeed, the leaders have to make decisions that involve exposure to risk. However, it is important to take calculative and informed decisions with regard to such a risk exposure and the same has to be documented through an agreement to avoid uncertainties and ambiguity. Drawing up an agreement is not just a good-to-have measure, but it is a tool to resolve conflicts in case of disputes. 

To be triumphant, all teams should collaborate and structure a workable business transaction for the clients. Overpromising-Underperformance and low promises and overperformance both strategies kill the business, but a sustainable, performance and an achievable business agreement works well for all and leads business to a successful path. In this, the legal contribution would be to enlighten the business with unbiased views of the nature of risk and consequences that may arise therefrom.

Notably, business conglomerates are successful in a way they are, since they operate and function by making informed decision knowing their exposure and risks, and on the contrary, start-ups can’t afford legal costs and hence fall prey in the hands of business eagles who specialize in acquiring businesses at low cost (or no cost). As a result, start-ups rise and fall over-night. 

Measures: Evaluate your business agreement and understand the cost-value proposition as the deal/ transaction stands. In essence, restructuring your business agreement to current market will help companies to retain clients. This task also helps companies to evaluate high-cost clientele and to allocate funds to sustain the business or make the decision to let go of a client for the larger good.

SUMMARY

“Pragmatic and proactive measures make to business sustainable and keep it afloat.”

This article outlines legal measures which the business managers have to evaluate and reconsider under the Covid-19 crisis. It aims to highlight the common areas of lacuna in business operations. Pragmatic and proactive measures make the business sustainable and keep it afloat. Introspection into business processes, models, operations, and business flow, and the results of such analysis helps to strategize and acclimatize to the current business environment. Change is inevitable so the factors are key to thrust and succeed. Having enforceable and sustainable contracts is vital to govern the way the business operates and to understand obligations and liabilities. This will help to plan, strategize, and execute business in an informed way during the time of change in the business environment, and to stay out of troubled waters. These measures may mitigate the disaster and help to survive and succeed in the long run.

Authored by: RAMYA KUNAPAREDDY

Corporate and Litigation Lawyer, Hyderabad

Disclaimer: The content of this article is solely the author’s personal analysis and interpretation. In case you wish to act upon on the basis of the content of this article, please seek legal advice. The author shall not be responsible for any loss you may incur as a result of your actions relying upon this content. The content herein is the copyrighted material of the author and is informational and shall not be used for commercial purposes other than for personal reading.

Every company requires an Auditor to audit its financial accounts. This ensures that the company is not manipulating its accounts, inflating its profits or cheating its shareholders. An audit is an examination of accounting records to determine its genuineness. The law mandates that every company needs to appoint an Auditor to examine their accounts. Through this post, we shall discuss how to appoint an auditor.

Appointment of Auditors

The appointment of auditors is a critical process for any organization, as it ensures transparency, accountability, and regulatory compliance in financial reporting. An auditor's role is to independently review and verify a company's financial statements, providing assurance to stakeholders regarding the accuracy and reliability of the information presented. The selection of an auditor involves careful consideration of various factors, including their qualifications, experience, independence, and reputation. In this introduction, we will explore the importance of appointing auditors, the key considerations in the selection process, and the steps involved in ensuring the appointment of qualified and trustworthy professionals to fulfill this crucial function within an organization. 

Appointment of first Auditor 

Every company needs to appoint the first auditor within 30 days of incorporation. Typically, the Board of Directors appoints the first auditor. Certain criteria are laid down in the Companies Act for an auditor, The auditor is required to sign a written consent and certificate confirming that he fulfills the given criteria.  The tenure of an auditor appointed by the board shall be until the conclusion of the first Annual General Meeting (AGM). In case they fail to appoint one, an Extraordinary General Meeting (EGM) shall be convened within 90 days. Government companies are exempt from this rule. Appointment in government companies is done by Comptroller Auditor General within a set period from incorporation, failing so the Board of Directors fulfills the duty. In the event that both fail to carry out an appointment, it is the members, through an EGM, who end up appointing an Auditor.  The appointment of the first auditor for a company marks a significant milestone in its journey, representing the initiation of formal financial oversight and accountability. This process typically occurs during the incorporation of the company or shortly thereafter, as mandated by company law or regulatory requirements. Selecting the first auditor is a crucial decision that sets the tone for the company's commitment to transparency and compliance with financial reporting standards. The appointment is often guided by considerations such as the auditor's expertise, reputation, independence, and alignment with the company's industry and specific needs. Additionally, the first auditor must possess the requisite qualifications and certifications to perform their duties effectively. This initial appointment lays the foundation for the company's ongoing relationship with its auditors, shaping the standards of governance, integrity, and financial management that will define its operations in the years to come. Therefore, careful deliberation and due diligence are essential in ensuring that the first auditor appointed by a company is capable, trustworthy, and committed to upholding the highest standards of professionalism and ethical conduct.

Appointment of Auditor in the first AGM

In the context of corporate governance, the appointment of an auditor during the first Annual General Meeting (AGM) of a company is a pivotal milestone. This initial AGM sets the tone for the company's financial transparency and compliance with regulatory standards from its inception. During this meeting, shareholders gather to make crucial decisions about the company's affairs, including the selection of an auditor to oversee its financial reporting processes. The appointment of an auditor is typically mandated by company laws and regulations, which require an independent and qualified professional to review the company's financial statements and provide an unbiased opinion on their accuracy and fairness. The shareholders play a significant role in this process, as they have the authority to approve the appointment of the auditor based on recommendations from the board of directors. Factors such as the auditor's expertise, reputation, independence, and fees are carefully considered during this decision-making process to ensure that the selected auditor is capable of fulfilling their responsibilities effectively. Additionally, the first AGM serves as an opportunity for the company to establish trust and credibility with its stakeholders by demonstrating a commitment to robust financial governance through the appointment of a reputable auditor. Overall, the appointment of an auditor during the first AGM is a critical step in laying the foundation for sound corporate governance practices and fostering investor confidence in the company's financial integrity.

Appointment of Auditor arising out of a casual vacancy

If there is a vacancy arising out of death, disqualification or resignation of an auditor then it’s referred to as Casual Vacancy. If the same arises out of resignation, then the EGM appoints a new one within 3 months of the recommendation of the Board.  If it is any other reason than Resignation the Board appoints an Auditor within 30 days. Any auditor appointed in a casual vacancy continues to hold office until the ending of the next Annual General Meeting. 

Appointment of Retiring Auditor

The retiring auditor can be reappointed again provided that he is not disqualified, has not given a notice to the company about his unwillingness to continue and no special resolution appointing some other auditor or specifically denying his re-appointment has been passed. If no auditor is appointed at the end of the tenure of the serving auditor then the same auditor shall continue.

Removal of Auditor

An Auditor, who is statutorily appointed can only be removed by a special resolution, after obtaining the previous approval of the Central Government on that behalf in the prescribed manner. The auditor concerned shall be given a reasonable opportunity of being heard before proceeding with the same.

Conclusion

An Auditor is a necessary part of company functioning. They ensure the money invested or earned by the company is utilized in a proper manner. Audits carried out by the Auditor increase trust of the Public and Government in a company. This increase in trust and compliance ultimately helps increase investment in the business. It also helps keep the company financially healthy by detecting fraud.