Class Action Suits Under Companies Act, 2013

August 29, 2016

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In this blog post, K Yashwanth Rao, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, critically analyses class action suits under Companies Act, 2013.

The new and revised Companies Act was passed by the legislature in 2013, wherein various old provisions were reviewed and amended wherever found necessary, while at the same time multiple new provisions were also added to the enactment such as the incorporation of a One Person Company. The new enactment also included the provision concerning “Class Action Suits”. This is a new concept which was incorporated into the act. This feature of Class Action Suits has been part of the legal systems in various foreign developed nations. The need for the said provision was felt especially in the instance of Satyam Scam when shareholders could not do much to restrict or obtain any relief, whereas their counterparts in the USA were able to file a Class Action Suit against the Company and its auditing firm claiming damages.

The said provision concerning Class Action Suits provides protection largely to the minority shareholders and depositors against, Oppression and Mismanagement on the part of the company. The said provision is a part of the set provisions mentioned in Sections 241-246, which provide certain means to restrict the company from carrying out its operations and duties without heading an ear to the minority shareholders and depositors, who also are important stakeholders in the company and who too must be taken into confidence before the any Act is performed by the company.

Section 245, of the new Act which deals with Class Action Suits, enumerates in great detail as to who can sue, what could be the grounds against whom can it be instituted and what remedies can be obtained from an order concerning the said suit? Class Action Suits can be instituted when the applicant/s are of the opinion that the management or conduct of the affairs of the company is being carried out in a manner prejudicial to the interests of the company or its members or depositors. The application in the said regard for a suit is to be filed by before the National Company Law Tribunal as constituted.

Grounds For Applications

The provision provides grounds when such application can be filed before the Tribunal. These grounds are in the form of different orders which are being pleaded for before the Tribunal by the applicants. The said orders/grounds has been enumerated under Sub-section (1) of Sec 245. They are as follows –

Restraining the company from performing any Act which is Ultra Vires of the Articles or Memorandum of Association of the company or from committing a breach of any provision therein.
Restraining the company from taking actions against any resolutions passed by its members.
Restraining from acting against the provisions of law in force.
Declaration of a resolution being void on being adopted by suppression of material facts or misstatement of the events to members or depositors.
Claiming damages or compensation or demanding any other such required action from –
- The company or its director for any fraudulent, unlawful or wrongful Act or omission.
- The auditor, including the audit firm of the company for any improper or misleading statements made in the audit report or for any other fraud or unlawful act. The liability herein will not only be upon the audit firm, but it shall also lie on the individual partners of the firm, who have deviated from their duties.
- Any expert or consultant or any other person for any incorrect or misleading statement made or performing any fraudulent or unlawful act.

It is pertinent to note that the said subsection, not only describes enumerates the circumstances wherein the class action is said to be filed, it also enlists the persons or entities against whom the suit can be filed. As mentioned above relief can be claimed against – the company itself, the directors of the company, the auditing firm, consultants, advisors and experts when it is found that they have not performed their duties in a just and correct manner.

Persons Or Class Of Persons Capable Of Filing Such Suit

The persons who are said to be capable of filing such an application before the tribunal for a Class Action Suit have been enumerated under subsection (2) of Sec 245 of the new act. According to the section for a company having share capital, those members /s shall be able to sue, when –

The number of members suing is not less than 100, or
The number of members suing is not less than 10% of the total, or
The member/s not holding more than 10% of the total issued share capital [all calls having been paid].

In the case of a company not having –

The number of members suing is not less than 100, or
The number of members suing is not less than 10% of the total, or 3) The member/s not holding more than 10% of the total issued share capital [all calls having been paid]. In the case of a company not having.
The member/s not holding more than 10% of the total issued share capital [all calls having been paid]. In the case of a company not having.

In the case of a company not having share capital, such a suit can be instituted by 1/5^th of the total number of members. Sec245 not only permits the members, i.e. shareholders to benefit from the provisions herein, it also allows for depositors to file such a suit to ensure that the company does Act and there is no prejudice to their interest. The requisites for depositors to file the suit is that –

They should not be less than 100 in number or
They should not be less than 10% of the total number of depositors, or
Any depositor/s having not less than 10% of total deposits.

Further, Sec 245 also puts down certain aspects which the Tribunal is required to take into consideration under subsection (4). The section of the Act explicitly states the necessity to look out for bona fide intentions on the part of the member/depositor/s who have approached the tribunal and also check if, the person/s approaching the tribunal could have pursued his rights through any other means other than an order under the provision. The Tribunal is also required under the section to take into evidence showing the involvement of individuals other than the directors or officers of the company. And where the cause of action is an Act or omission yet to occur, the tribunal shall take into account whether the said Act or omission would be authorised before it occurs or ratified after it occurs, taking into consideration the circumstances therein.

Proceedings Before The Tribunal

The tribunal shall serve Public Notice on admission of the application, to all those who fall within the same class as those filing it, and all such similar applications present in any jurisdiction shall be consolidated into a single application and the class members, or depositors should be allowed to choose a lead applicant, if no consensus is reached the tribunal shall appoint such a leader. It is worth mentioning that concept of lead applicant seems to be a parallel provision concerning a representative suit, discussed under Order I Rule 8. Also, two class applications for the same cause of action shall not be allowed. Further the costs of the applications shall be defrayed by the company or the person responsible for the oppressive act.

Binding Nature

Any order passed by the Tribunal shall be binding on the company and all its members and depositors, auditors including the firm and the partners and also on the experts/advisors/consultants. Furthermore, if a company fails to abide by order of the Tribunal, it shall be punished with fine not less than 5 Lakhs, which may go up to 25 Lakhs and also the officers who have defaulted, shall be punished with imprisonment up to 3 years and with fine not being less than 25,000 and going up to 1 Lakh.

In case the application is found to be frivolous, the tribunal shall reject the application with reasons recorded and make the applicant pay costs up to 1 Lakh Rupees.

It is pertinent to take note of the fact that the provisions of the said dealing with Class Action Suits can not be instituted against a Banking Company.

Conclusion

Section 245 of the Act clearly indicates the importance given to the minority shareholders and the depositors who also are very important stakeholders, and whose views and decisions are most often overlooked. It can be said that this provision is a means to ensure there is no tyranny of the majority, whereby in the interests of the minority are adversely affected. The provision provides a means of redressal against oppression and mismanagement. The drawback currently being, the fact, that the said section of the new Act is yet to be notified, and hence, the provision, for now, is merely restricted to the books and cannot be implemented in the real world.