In thsi article, Noopur Kalpeshbhai Dalal pursuing M.A, in Business Law from NUJS, Kolkata discusses Can class action be effective in stopping oppression & Miss-management in Companies.
INTRODUCTION
Class Action Suit given in the Companies Act, 2013 is a successful instrument for the security of retail shareholders. While examining the different remedies accessible to minority shareholders under the Companies Act, 2013, the centre of this section is to investigate the reasonability of class activity in securing retail shareholders against securities misrepresentation by drawing correlations with the US Securities Class action structure.
SHAREHOLDER’S ACTIVISM
Absence of shareholder activism particularly among retail shareholders is the inherent shortcoming in the Indian corporate governance structure.[1] Considerately despite the fact that shareholders are the real owners of a Company, yet they cannot have control over the working and management of the Company unless they hold a major stake in the Company. Ownership Model in majority of the Companies in India, including Listed Companies, is majorly family oriented and promoter controlled[2]. This ceases the ownership structures of the corporate entities and leaves the power of control in the hands of insider’s who controls the management and administration of the Company[3].
While shareholders are entitled to many rights by virtue of the shareholders agreement, Retail shareholders due to their minor stake in the company are restricted to any detailed information. In spite of the fact that they have a the right to vote against any decision of the Company in the General meetings, they prefer to “vote with their feet” and exit the Company, by selling their stake, instead of challenging the decisions of the directors or major stake holders of the Company who have controlling power.
ADDITION OF REGULATORY FRAMEWORK FOR INCREASE IN SHAREHOLDER INVOLVEMENT
Shareholders enjoy the rights, individual as well as collective rights. Any shareholder of a Company limited by shares and holding equity share capital has a privilege to vote on each decisions made by the Company through passing of Resolutions.[4] For more involvement of scattered shareholders, recent changes in the Indian regulatory framework have accommodated elective strategies for voting on issues influencing the interests of shareholders by method for a postal ticket or through electronic means[5]. SEBI revised the listing agreement directing major 500 listed Companies to give e-voting window to its shareholders in regard of those businesses, which were executed through postal ballot[6]. While it stays to be observed that upto what extent the e-voting facility would collect more shareholder involvement, postal ballot facilty has however not given the coveted outcomes attributable to its limitations[7].
Small Shareholder’s representation of interest should be made through a person selected as their elective representative on the Board of the Company as mentioned in the Appointment of small shareholder’s director Rules, 2001 under the erstwhile Companies Act, 1956 has also remained ineffective[8]. The Companies Act 2013 has constrained its relevance only to the listed Companies. The draft rules issued by MCA stipulate that such Company may suo moto or on a notice by at least 500 or one tenth of small shareholders, choose a representative from the small shareholders who can be appointed as an independent director on the Board of the Company[9].
RULE OF THE MAJORITY
The general standard of Company law is that each shareholder holds equal rights with other shareholders in a similar class and any distinctions among the shareholders is chose by a vote of majority. The control of majority shareholders was maintained on account of Foss V. Harbottle[10]. It is currently a settled decision that, if there should be an occurrence of damage endured by any company, the remedy can be looked for by the Company itself in the limit of being the offended party.
Protection of rights of the minority shareholders the most important part is not accessible when the majority share does anything in exercise of the forces for the inner administration of the Company. The said rule was additionally emphasized in the case of Burland V. Eagle[11] and Pavildes V. Jemsen[12], conserve the right of majority shareholders to decide on any resolution. The Honourable Supreme Court of India in Rajahmundry Electric Supply Co V. Nageshwara Rao[13] stated that
“The courts won’t by and large meddle, at the example of the shareholders, in the matters of internal management and the administration of the Company by its directors insofar as they are acting inside the powers entitled to them under the articles of association of the Company. Also, if the directors are bolstered by majority of the shareholders in what they do, the minority shareholders can, when all is said in done do nothing about it.”
While this standard of non-interference by the courts in issues of internal administration of the Company has been acknowledged, an opposite view[14] has likewise been taken challenging that, the outright utilization of this method of reasoning in the Indian setting would not be attractive considering that Indian Companies don’t include countless small individual shareholder specialists yet have money related establishments subsidizing 80% of the fund however they hold just a small ratio of shares. Henceforth it was held that barring them or rendering them voice less by applying the guideline of non-interference would be out of line and low. The contention that streams from this judgment is that control is not supreme but rather subject to certain exemptions. Perceiving the need to secure minority shareholders against the conceivable seizure by the controlling larger part, certain shields have been given in the precedent-based law and under the past Companies Act, 1956.
These incorporate assurance to the minority shareholders under Ultra vires acts, Fraud on minority, miscreants in charge, Breach of obligations and cases of oppression and mismanagement.
Rights of Minority Share Hodlers
Shareholder rights & remedies can be looked for either through individual actions or subordinate actions. Individual actions are accessible to minority shareholders on the grounds of Oppression and Mismanagement[15] wherein the imperative number of shareholders[16] may apply to the Honourable National Company Law Tribunal (NCLT).
More prominent protection to minority shareholders is presently given operation & Mismanagement under section 242 wherein NCLT is engaged to pass orders for the evacuation of the Managing Director, Manager and Directors of the Company, restricting any transfer or allotment of shares[17] and interestingly statutorily accommodating the recovery of undue increases made by any Managing Director, Manager or Director amid the time of his arrangement. The cash so recuperated can either to reimbursed to identifiable victims or credited to the Investor Education and Protection Fund. This extra powers of NCLT to expel the undue increases from the people responsible for the Company and reimbursement to identifiable casualties is proposed to give pay to speculators against misfortunes, which was heretofore inadequate.
CLASS ACTION SUIT
A class action suit, or an agent activity is a type of claim in which a large group of shareholders altogether convey a case to court as well as in which a large group of litigants are being sued.
This is the new arrangement embedded under the Companies Act,2013. The Companies Act,2013 accommodates class‐action claims, which can permit countless number of shareholders with common interest for an issue to sue or be sued as a group. Section 245 and 246 of the Companies Act, 2013 provides these provisions.
Under these, speculators might record class‐action suits if they are of the feeling that the issues of the Company are being directed in a way biased to the common interest of the Company, its shareholders or investors.
Class suits have a few points of interest, the financial aspects of conglomeration. Apparently, class suits limit prosecution by maintaining a strategic distance from various suits. The measure of pay being asserted by each inquirer might be too little to warrant singular interest.
CLASS ACTION IN OTHER COUNTRIES
- Class activity gone for financial settlements begun in the USA is still overwhelmingly a US wonder, however a few European purviews have, recently, established a few arrangements allowing class action.
- Outside of USA, Australia is a nation where securities class case is broadly pervasive, as courts have held prosecution subsidizing by legal counselors as admissible.
European wards permit class activity to be sought after by purchaser affiliations as it were also, not by people. This has been considered sensible as the goal is to limit entrepreneurial interest by firms.
WHO ARE ENTITLED TO FILE CLASS ACTION
Section 245 of the Companies Act, 2013 has been placed in the Chapter managing oppression and mismanagement, which accommodate class action. According to the said section, the accompanying might be dealt with as imperative number of shareholders or, on the other hand investors for documenting a suit under this Section:
| Class of companies | Requisite number of
members |
Requisite number of
Depositors |
| In case of company not
having share capital |
one‐fifth of the total
number of its shareholders |
At least 100 depositors or 10% of
total number of depositors whichever is lower or any depositor or depositors to whom the company owes 10% of total deposits |
| In case of companies
limited by shares |
At least 100 shareholders or 10% of
number of shareholders whichever is lower or any shareholders or shareholders holding 10% of the issued share capital of the company[18] |
At least 100 depositors or 10% of
total number of depositors whichever is lower or any depositor or depositors to whom the company owes 10% of total deposits |
The JJ Irani Committee has in its report[19] expressed that,
“In the event of misrepresentation on the minority by cheats who are in charge and control the Company itself acquiring an activity its own particular name, subsidiary activities in regard of such wrong non-rectifiable decisions have been permitted by courts. Such subordinate actions are brought out by shareholders in the interest of the Company and not in their own person capacity, in regard of the wrong done to the Company. So also the standards of “Class Action” by one shareholder for at least one of the shareholders of a similar kind have been permitted by courts on the grounds of people having some locus standi. Despite the fact that these standards have been maintained by courts on many events, these are yet to be reflected in law. The Committee communicates the requirement for acknowledgment of these standards”.
In light of these suggestions, the Companies Act 2013, while getting numerous arrangements upgrading the protection of minority shareholders likewise cleared a path for the incorporation of class activity under Section 245 of the Companies Act, 2013[20] for the assurance of small investors through a lawful premise.
PROCEDURE FOR FILING A CLASS ACTION SUIT AS PER SECTION 245(5) IS AS UNDER:
The essence of class action is involvement of all affected members in a solitary response to keep away from duplication of suit. For this reason, an open notice is issued to every one of the shareholders/ members from a class by the Tribunal on permission of an application for class action. A representative can be enacted by the members from the class suo moto, coming up short which the tribunal delegates the representative speaking to the members/ shareholders. The cost or costs are to be settled by the Company or, on the other hand some other member in charge of any oppressive action.
LIABILITY FOR MISSTATEMENT IN PROSPECTUS
CRIMINAL LIABILITY
Sec 34 of the Companies Act, 2013[21] provides that where a prospectus, issued, distributed or circulated under this section, incorporates any explanation which is false or deluding in the frame or setting in which it is incorporated or, then again where any incorporation or oversight of any issue is probably going to misdirect, each person who apply for the issue of the purchase of shares offered through the said prospectus might be liable under Sec 447 of the Companies Act, 2013.
CIVIL LIABILITY
Section 35 of the Companies Act, 2013[22] provides that where a man has subscribed for securities of a Company following up on any prospectus included, or the incorporation or oversight of any issue, in the outline which is deluding and has supported any loss or harm as an outcome thereof, the Company and each shareholder who is said in that under condition (a) to (e) might be liable to pay compensation to each shareholder who has incurred loss or harm because of the misstatement of the prospectus.
Inside the importance of this section, the Directors of the Company at the time of the issue and who is named in that as the promoter, director or any other person who has approved the issue of prospectus including a specialist under section 26(5) of the Companies Act 2013 will be held liable to pay compensation to each shareholder who has incurred such loss or harm.
Section 36 of the Companies Act, 2013[23] states that any individual who either purposely or neglectfully puts forth any expression, guarantee or information which is misleading, deceptive, false, intentionally disguises any material realities, to incite someone else to go into or to offer to go into:-
- Any understanding for, or with a view to gaining, discarding, subscribing for or guaranteeing securities or
- Any understanding the reason or the pretended intention behind which is to secure a benefit to any of the parties from the yield of securities or by reference to fluctuations in the share valuations or
- Any contract for or with a view to getting credit facilities from any bank or any other financial institution;
In the above stated situations the Company and all its executives, directors & promoters as mentioned in the prospectus might be liable under Sec 447 of the Companies Act, 2013.
Section 447 of the Companies Act, 2013[24] accommodates discipline for misrepresentation which is detainment for a term which might not be under six months which might be reached out to 10 years and should likewise be subject for fine at the very least the sum involved in the fraud, yet which may reach out to three times the sum required in the misrepresentation.
Fraud as per this section can be explained as below:
- “Fraud” in connection to undertakings of a Company or anyone corporate incorporates any concealment of any fact, exclusion, disguise of any reality or mishandle of position committed by any person of the Company or any other individual with the intrigue in any way, with plan to deceive, to increase undue advantage from, or to harm the interests of, the Company or its members or its creditors or any other individual, regardless of whether there is any fraudulent gain or fraudulent loss;
- “fraudulent gain” implies the gain by unlawful methods for property to which a man gains is not legitimately entitled;
- “fraudulent loss” implies the loss by unlawful methods for property to which the individual losing is legitimately entitled”
The Companies Act, 2013 now accommodates particular provisions identified with any situation of fraud and in every single such occasion of misrepresentation, class action can be filed.
CONCLUSION
Thus from the above we can derive that Class Action is not some provision which is new for the Indian Legal Framework, as the same was already available in statutes including Civil Procedure Code, 1908 and the Consumer Protection Act 1986.
The Interest and rights of the all group of shareholders will now be protected as the these rules provide for filing of class-action suit in the Honorable National Company Law Tribunal (NCLT) for the misconduct done not only by the directors, promoters or majority of the shareholders of the Company but also against the Auditors, consultants and advisors who are involved in the said misconduct.
While many class-action suits were effectively documented in the US by holders of ADRs of Satyam, nothing should be possible here in India as the Companies Act 1956 did not allow this class action. Along these lines, the lawmaking body included particular class-action arrangements in the new Companies Act 2013.
Section 245, which applies to a wide range of Companies with the exception of banks, meets this shortfall. The section gives that a specific number or percentage of members/ shareholders and investors or any class of them’, whichever is less, can file an application before the NCLT under Class Action Suit for any matter related to Oppression & Mismanagement.
The aggrieved shareholders or investors can seek to restrict a Company from conferring an act which is ultra vires or is in breach of the Companies stated objects in the articles, announcing a resolution modifying the articles of association as void if such resolutions are passed by superseding material realities or through a misquote; limiting the Company from doing any business or activity which is in opposition to the Companies Act or any other law; controlling the Company from making a move in opposition to any resolutions passed by the shareholders; or granting damages, demand compensation or any reasonable activity from or against the Company, its directors, Auditors and at times even from consultants, experts or advisors.
On account of a Company & its directors, such damages or compensation can be requested for any unlawful, wrongful or fraudulent act or oversight by them; the Auditors, then again, can be considered responsible for any misleading or improper proclamation in their Audit report.
The Auditor’s obligation will be joint, i.e., of both the Auditor’s firm and the Partner who has prepared and signed the Auditor’s report.
To file a class-action suit, the depositors or shareholders should set up that the Management of the Company is misleading and the issues are biased to their or the Company’s advantages.
While Section 245 lays the substantive law and gives that any at least 100 shareholders or depositors, all things considered, can file a class action suit, different perspectives, for example, the minimum percentage of shareholders or depositors that would be required for documenting class-action as specified in the Rules led down by the Ministry of Corporate affairs.
Curiously, the arrangements for class-action are contained in the chapter of Oppression and Mismanagement under the Companies Act 2013; in this manner, an inquiry emerges what is the need a different provision for class-action when they can be secured under the legally existing provisions of Oppression and Mismanagement.
The remedies which are sought for from class-action are altogether different from the remedies received from the general provisions of Oppression & Mismanagement.
While, in the class-action, petitioners seek for a request restricting the Company and its directors from passing certain resolutions; remedies under general provisions of Oppression & Mismanagement could be the securing of allotment & transfer of shares as well as common interest of shareholders, restriction on change in the voting rights or class of shares.
The decree or order passed by NCLT in the case of class action suit will be restricting not just on the depositors or shareholders who filed the class action suit but on every one of its shareholders, investors, Depositors, Auditors, Directors and others.
Thus, a class action suit filed by shareholder or class of shareholders is effective in stopping oppression & miss-management in Companies.
References
[1] Varottil, U. (n.d.). The Advent of Shareholder Activism in India. SSRN Electronic Journal.
[2] Varottil, U. (2010). Evolution of Independent Directors in the Indian Corporate Governance. 6 Hastings BUS.L.J 281.
[3] Sarkar, J., Sarkar, S. and Sen, K. (n.d.). A Corporate Governance Index for Large Listed Companies in India. SSRN Electronic Journal.
[4] Section 47 of the Companies Act, 2013
[5] Section 110 of the Companies Act, 2013; corresponding section 192 A of the Companies Act, 1956 gives the power to the central government to declare the items of business that can be transacted
only through postal ballot
[6] SEBI vide Circular no.CIR/CFD/DIL/6/2012 dated 13th July, 2012
[7] Upadhyay Payaswini, The Firm: Welcome to the world of E-Voting dated July 12, 2012
[8] Jaleel Kishore Tania, ‘As a small shareholder your path to the Company’s Board is blocked” The
Business Standard dated 21st August, 2012
[9] Section 151 of the Companies Act, 2013 provides for the appointment of Small shareholder’s
director in case of listed companies as against Section 252 of the Companies Act,1956 which limited
it to public companies having paid up capital of Rs 5 crore or more or 1000 small shareholders.
[10] Foss V.Harbottle 67 E.R.189;(1843)2 Hare 461
[11] Burland V. Earle, (1920) A.C 83
[12] Pavlides V. Jensen (1956) Ch. 565
[13] Rajahmundry Electric Supply Co V. Nageshwara Rao AIR1956 SC 213
[14] Delhi High court in the case of ICICI v.Parasrampuria Ltd, SSL July 5, 1998
[15] Under section 241 of the Companies Act, 2013; Corresponding sections 397 &398 under the
Companies Act, 1956 have been combined under sec 241 of the Companies Act, 2013 and relief
sought under Oppression and mismanagement shall be sought through the Tribunal
[16] Under section 244, in case of a company having a share capital, not less than 100 members or not
less than 1/10 th of the total members or members holding not less than 1/10 th of the issues share
capital
[17] Sec 242(2)(d) of the Companies Act, 2013
[18] Section 244 of Companies Act, 2013
[19] The J.J Irani Report on Company Law (2005)
Available at http://www.mca.gov.in/Ministry/chapter1.html last accessed on 19.03.2014
[20] in Chapter XVI under Prevention of Oppression and mismanagement of the Companies Act, 2013
[21] Section 34 of the Companies Act, 2013
[22] Section 35 of the Companies Act, 2013
[23] Section 36 of the Companies Act, 2013
[24] Section 447 of the Companies Act, 2013
