(This article was written by Partha Prateem Ray Choudhury, a graduate of Dibrugarh University, during his internship with iPleaders)
The introduction of class action suits is one of the major changes introduced by the Companies Act, 2013. The major objective behind the provision of class action suits is to safeguard the interests of the minority shareholders. So, class action suits are expected to play an important role to address numerous prejudicial and abusive conduct committed by the Board of Directors and other managerial personnel as it has been statutory recognized under the Companies Act, 2013.
What is class action suit?
- A class action suit is a lawsuit where a group of people representing a common interest may approach the Tribunal to sue or be sued.
- It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on behalf of a larger group or class having common rights and grievances.
Who are entitled to file class action suits?
a) In case of a company having share capital, member or members:
- not less than 100 members of the company or
- not less than 10% of the total number of its members, whichever is less or
- any member or members singly or jointly holding not less than 10% of the issued share capital of the company.
Provided that the applicants have paid all calls and other sums due on their shares.
b) In case of a company not having a share capital, member or members:
- not less than 1/5th of the total number of its members.
- The number of depositors shall not be less than 100 or
- not less than 10% of the total number of its depositors, whichever is less or
- any depositor or depositors singly or jointly holding not less than 10% of the total value of outstanding deposits of the company.
Who may be sued through class action suits?
A class action suit may be filed against the following authorities:
- A company or its directors for any fraudulent, unlawful or wrongful act or omission;
- an auditor including audit firm of a company for any improper or misleading statement of particulars made in the audit report or for any unlawful or fraudulent conduct.
- an expert or advisor or consultant for an incorrect or misleading statement made to the company.
Which reliefs may be claimed through class action suits?
Any member or depositor on behalf of such members or depositors may file a class action suit before the National Company Law Tribunal (NCLT) to:
A) restrain the company from committing an act which is beyond the powers of the articles or memorandum of association of the company;
B) restrain the company from committing breach of any provision of company’s memorandum or articles;
C) to declare a resolution as void for altering the memorandum or articles of the company or passed by suppression of the material facts or obtained by mis-statement to the members or depositors;
D) to restrain the company and its directors from acting on such resolutions;
E) restrain the company from committing any acts which is contrary to the provisions of the Act or any other law for the time being in force;
F) restrain the company from taking action contrary to any resolution passed by its members;
G) claim damages or compensation on demand any other suitable action against :
i) the company or its directors for any fraudulent, wrongful or unlawful act;
ii) an auditor including audit firm of a company for any improper or misleading statement of particulars made in the audit report or for any unlawful or fraudulent conduct.
iii) an expert or advisor or consultant for an incorrect or misleading statement made to the company.
Considerations by NCLT on receipt of an application [Section 245(4)]
On receipt of an application, the NCLT shall take into account:
- whether the member or depositor has acted in good faith while making the application to seek an order;
- any evidence which identifies the involvement of any person other than the directors or officers of the company on matters claimed as reliefs;
- whether the cause of action could be pursued by the member or the depositor in his own right than through an order;
- any evidence relating to the views of members or depositors who have no personal interest directly or indirectly in the matter;
- whether the cause of action is an act or omission that is yet to occur or already occurred and in the circumstances is likely to be:
a) authorized by the company before it occurs or
b) ratified by the company after it occurs.
Publication of notice by NCLT on admission of a class action suit [Section 245(5)]:
The Tribunal shall-
I. serve a public notice on admission of the application to all the members or depositors of the class in prescribed manner;
II. all similar applications may be consolidated into a single application and a lead applicant be appointed who shall be in charge of the proceedings on the applicants side;
III. two class action application for the same cause of action shall not be allowed;
IV. cost or expenses connected with the class action suit will be paid by the company and any other persons responsible for the oppressive act.
Penalties for non-compliance with NCLT order
1) An order passed by the NCLT shall be binding on the company, members, depositors, auditors including audit form, consultant or advisor or any other person associated with the company [Section 245(6)]
2) A company, which fails to comply with the order of the NCLT under Section 245(7):
- shall be punishable with a minimum fine of INR 5 lakh which may extend to INR 25 lakh and
- every officer of the company who is in default shall be punishable with imprisonment which may extend to 3 years with fine of minimum INR 25 thousand which may extend up to INR 1 lakh.
3) If an application is found to be frivolous or vexatious, NCLT may reject the application by recording the reasons in writing and order the applicant to pay a compensation not exceeding INR 1 lakh to the opposite party [Section 245(8)].
4) No provision relating to class action suit under Section 245 of the new Act shall be applicable to banking company [Section 245(9)].
It may be concluded that class action suits will be an apt platform for members and depositors to raise their grievances against the management of a company including directors, advisors, consultants, auditors etc for acts or omission that is prejudicial, unlawful or wrongful to the interest of the company. Class action suits may be undertaken as a redressal tool by minority shareholders having common interest for promotion of transparent corporate governance.