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Class Action Suits in India under Companies Act, 2013

By June 30, 2020 No Comments

A. INTRODUCTION:

Class Action Suits, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member of that group. The concept of class action suits originated in the United States in the 18th century. A major revision of the FRCP in 1966 radically transformed Rule 23 of Federal Rules of Civil procedure governing class action litigation, made the opt-out class action the standard option, and gave birth to the modern class action. In a class action, a single plaintiff or small group of plaintiffs seeks to proceed on behalf of an entire class who has been harmed by the same conduct by the same defendants. The concept of class action suits first came to highlight in the context of securities market when Satyam scam broke out. It has found its recognition and enforceability by Companies Act, 2013. Section 245 of Companies Act, 2013 contains provisions regarding Class Action.

B. WHO CAN FILE CLASS ACTION:

Members or depositors, as mentioned below are of the opinion that the management or conduct or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors file an application before the Tribunal on behalf of the members or depositors.

Number of members required to file class-action are:

In the case of a company having a share capital, not less than one hundred members of the company or not less than five per cent of the total number of its members, whichever is less; or

Any member or members holding not less than five per cent of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares.

In case of company not having share capital, not less than one-fifth of the total number of its members.

Number of depositors required to file class-action are:

Not less than 100 depositors or not less than five per cent of the total number of depositors, whichever is less; or

Any depositor or depositors to whom the company owes five per cent of the total deposits of the company.

C. AGAINST WHOM CLASS ACTION CAN BE FILED:

The members or depositors can claim damages or compensation or demand any other suitable action from or against:

  1. The company or directors for any fraudulent, unlawful or wrongful act or omission or conduct.
  2. The auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or
  3. any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part.

In case of any suit against auditor or audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

D. RELIEFS THAT CAN BE SOUGHT:

The members or depositors can seek all or any of the following orders:

  1. to restrain the company from committing an act which is ultra vires the articles or memorandum of the company;
  2. to restrain the company from committing a breach of any provision of the company’s memorandum or articles;
  3. to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
  4. to restrain the company and its directors from acting on such resolution;
  5. to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  6. to restrain the company from taking action contrary to any resolution passed by the members.

E. POWERS OF THE TRIBUNAL:

On receipt of a class action suit application, the Tribunal will look into the following before admitting it:

  1. whether the member or depositor is acting in good faith in making the application for seeking an order;
  2. any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters;
  3. whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;
  4. any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;
  5. where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be authorized by the company before it occurs or ratified by the company after it occurs;
  6. where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

If the application is admitted: The tribunal shall have regard to the following:

  1. public notice shall be served on the admission of the application to all the members or depositors of the class in such manner as may be prescribed;
  2. all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event, the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side;
  3. two class action applications for the same cause of action shall not be allowed;
  4. the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.

Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

F. EFFECT OF ORDER PASSED BY TRIBUNAL:

Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.

If a company fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

G. COSTS AND EXPENSES:

The cost or expenses connected with the publication of the public notice shall be borne by the applicant and shall be defrayed by the company or any other person responsible for any oppressive act.

H. CLASS ACTION VS. OPPRESSION:

The shareholders of a company can also avail a remedy under Section 241 (Application to Tribunal for relief in cases of oppression etc.) of the Companies Act, which allows relief in cases where the affairs of the company have been conducted in a manner prejudicial to public interest or oppressive to any other member or in a manner prejudicial to the interest of the company.

However, Section 241 limits its protection to the shareholders of a company, while section 245 also includes depositors in its purview. Although, as compared to Section 245, the scope of remedies available under Section 241 is much wider (such as order for purchase of shares by any member, restrictions on transfer or allotment, termination or modification of an agreement, removal or appointment of director etc.), Section 245 is much more generous with an award for damages and compensation to the applicants.

Any order made under Section 245 is in nature of rem and is binding even on those members or depositors who are not party to the application as opposed to an order of oppression and mismanagement which is only binding on the parties to the application. While a Class Action can be invoked in case of any act prejudicial to the interest of the members, the depositors or the company; in case of oppression and management, public interest is also taken into account.

The Companies Act has equipped the shareholders with strong weapons in the form of Section 241 to Section 245 which can be used to make the delinquent officers accountable for their decisions and for enforcement of the corporate law. In wake of this new empowerment of the stakeholders, the corporate officers will have to become more prudent with their operations to secure themselves against a Class Action.

The concept of class action is at a very nascent stage in India. The concept is yet to be evolved and adapted as per the practical application and the changing market trends. Although other remedies under the Companies Act have plethora of precedents to guide the applicants, India is yet to develop its own library of judgments to rely on, for the purpose of Class Action. One may have to refer the judgments of foreign countries on this concept for some guidance till that time.

I. CONCLUSION:

The provision of Class Action in the Companies Act ensures that the management of a company prioritizes the interest of the stakeholders and the company against its own and make them answerable to the stakeholders of the company for their acts. It makes the management more responsible towards their fiduciary duties in relation to the company. The legal backing to a Class Action has given a stronger foothold to the minority shareholders of a company to safeguard their interest through a representative suit. However, this additional power should not be misunderstood as a new technique to hold the company at ransom for their demands.

As compared to other remedies, Class Action is of a more serious nature and involves grave ramifications if the application is found to be made with malafide intentions or does not conform to the criteria prescribed in the Companies Act. The shareholders or depositors would not be able to easily get away for filing a frivolous or vexatious application. The applicants should carefully weigh their options under different provisions of the Companies Act before proceeding under this section.

Considering the stringent quantitative and qualitative screening of all Class Action applications, an alternate remedy under the Companies Act may sometimes prove to be a safer bet for the shareholders and depositors. However, the possibility of a Class Action suit filing is a welcome introduction.

Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate; Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in (iii) nisha@rna-cs.co.in.

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