"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
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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.
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In the case of a company not having a share capital.
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Not less than one-fifth of the total number of its members.
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(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;
(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
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shall be punishable with fine which shall not be less than
five lakh rupees but which may extend to twenty-five lakh rupees
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Every officer of the company who is in default
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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.
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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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Good Article. Covering an Important Topic without any jargons, the article is neatly presented in a FAQ Format. Keep it up priyanka.
ReplyDelete-M.Sundar A.C.S
Sundar Sir..Thank you so much for your valuable comments..
Delete