"CLASS ACTION SUITS" – WILL IT BE A NEW BEGINNING FOR A HAPPY ENDING?

"CLASS ACTION SUITS" – WILL IT BE A NEW 

BEGINNING FOR A HAPPY ENDING?

Priyanka Venkatapathy (Awaiting CS - Membership )

Though we are familiar with the word "Class Action Suits", we as Indians are yet to try and test it. This phenomenon of Class Actions Suits had its origin in the United States of America and are still predominantly practiced in United States. It became a popular topic for discussion in India when the victims of Bhopal Gas Tragedy were struggling for their remedies. Corporate India felt its importance only when Satyam Scam stunned India. Now with the new Companies Act, 2013, we are ready to embrace it.

A. What is a Class Action Suit?

To put it simple, Class Action Suit is a lawsuit where one or more persons representing a large number of people with common interest are allowed to knock the doors of judiciary as a group.

B. Class Action Suit under Companies Act, 2013

Section 245 under CHAPTER XVI on PREVENTION OF OPPRESSION AND MISMANAGEMENT speaks about Class Action Suits.

C. Who can file a Class Action Suit?

1. Member or members as per the following

Company Having a Share Capital	Not less than one hundred members of the company or not less than ten per cent of the total number of its members, whichever is less, or any member or members singly or jointly holding not less than ten percent of the issued share capital of the company.
In the case of a company not having a share capital.	Not less than one-fifth of the total number of its members.

(It is to be noted that this limit is similar to what was provided in Sec. 297 of the Companies Act earlier)

2. Depositor or Depositors or any class of them

Depositor or Depositors or any class of them who shall not be less than one hundred depositors or not less than ten per cent of the total number of depositors, whichever is less or any depositor or depositors singly or jointly holding not less than ten percent of the total value of outstanding deposits of the company.

While Companies Act 1956 allowed shareholders only to file a case for Oppression and mismanagement, Companies Act gives this right to Deposit holders also.

D. Where should be a Class Action Suit brought?

Section 245 reads that a Class Action Suit can be brought in the Tribunal.

Section 1(90) of the Companies Act, 2013 defined “Tribunal” means the National Company Law Tribunal constituted under section 408;

E. When can be a Class Action Suit brought?

Section 245(1) gives the right to the members/depositors to file an application to the Tribunal “if they are of the opinion that the management 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…” 

F. What relief can be claimed in a Class Action Suit?

(a) to restrain the company from committing an act which is ultra vires the articles or  memorandum of the company;

(b) to restrain the company from committing breach of any provision of the company’s  memorandum or articles;

 (c) 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;

(d) to restrain the company and its directors from acting on such resolution;

(e) 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;

(f) to restrain the company from taking action contrary to any resolution passed by the members;

(g) to claim damages or compensation or demand any other suitable action from or against—

(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;

(ii) 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

(iii) 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 actor conduct or any likely act or conduct on his part;

(h) to seek any other remedy as the Tribunal may deem fit.

G. What should a Tribunal take into account in considering an application under Section 245(1)?

(a) whether the member or depositor is acting in good faith in making the application; 

(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in Section 245(1) clauses (a)to (f);

(c) 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;

(d) 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;

(e) 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—

(i) authorised by the company before it occurs; or

(ii) ratified by the company after it occurs;

(f) 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.

H. What would the Tribunal regard once an application Section 245(1) is admitted?

Tribunal would regard the following once an application is admitted:-

(a) public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed;

(b) 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 incharge of the proceedings from the applicant’s side;

(c) two class action applications for the same cause of action shall not be allowed;

(d) 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.

E. Who will be bind by the Order of the 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.

F. What would be punishment for Non Compliance?

Any company which fails to comply with an order passed by the Tribunal	shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees
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. Who can be sued?

Applicants in a class action can sue the following:-

1. The Company

2. The Directors of the Company

3. The Auditor of the Company, including the 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.

Note: Section 245(2) states that where damage or compensation is being sought against an audit firm, then liability shall be of the firm as well as all the partners who were involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner

4. 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.

F. Class Action is a representative action:-

An application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission.

G. Other points to be noted:-

1. Section 245 of the Companies Act, 2013 is yet to be notified.

2. Section 245(1) reads:

“Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management 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 for seeking all or any of the following orders…”

The reference “indicated in sub-section (2)” seems to be a typographical error since the details regarding the number of members/depositors is contained in sub-section (3).

3. “Member” is defined in s. 2(55) to mean:

 “(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; 

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository...”

4. The term depositor is not defined. However the term “Deposits” are defined as “any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.”

5. Nothing in Section 245 shall be applicable to the banking company.

6. As per Rules 16.1 Under Chapter XVI of the Companies Act 2013 in respect of Class Actions, the Tribunal shall give notice of every application made to it under section 241 or 245 to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing a final order under those sections.

Conclusion:-

Numerous corporate scams in the recent past have been a main contributor to the evolution of this concept in India. We may also accept that it will be helpful to protect shareholders interest in the corporate world to some extent. Having said that, though this right of class action suit  seems to be a weapon in the hands of the minority shareholders, the real strength of it can only be measured once it is tested in courts.

Section 245 of the Companies Act: will it be a new beginning for a happy ending? The answer to this question depends on how this will be used and interpreted in courts.

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