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This article was written by Kritya Sinha, a student of Chanakya National Law University, Patna.
“In the democracy the poor will have more power than the rich, because there are more of them, and the will of the majority is supreme.” — Aristotle
The new legal regime brought in with the advent of Companies Act,2013 introduced Class Action Suits as one of its novelties. It was a concept not completely unknown to the corporate world and has already been adopted in various legal systems of developed countries. It was given a legal recognition under section 245 of the Act, which aimed to protect the minority shareholders against the oppression of the majority rule. The objectivity underlining the provision all around the world has always been that minority’s interest must be an important consideration in the decision making of the company and it cannot be blatantly crushed.
A dire need was felt after the Satyam Scam brokeout in the year 2009 and the Indian shareholders had no legal redresses to address their grievances. Their claim of 5000 crore against the company brought before National Consumer Disputes Redressal Commission to the Supreme Court went unheard and was rejected. On the other hand, the US Investors who owned American Depositary Receipts (ADRs) demanded a settlement to the tune of USD 125m by mounting a class action suit.
What is a class action suit?
It is legal action brought by a group of people representing a common interest or have been subjected to common injuries by the same defendant. It is a procedural instrument brought before the Tribunal by a group to sue or be sued. In the Indian context it has been elaborately dealt under section 245 of the Companies Act,2013. The provision is a part of the set provisions mentioned in Sections 241-246, which provide means to restrict the company from carrying out its operations and duties without heading an ear to the minority shareholders and depositors.
Section 245, Companies Act,2013
An attempt is made here to understand the concept of class action suits vis-à-vis Indian Companies Act,2013. An application can be brought by requisite members or deposit holders or both before the National Company Law Tribunal. The legalities involved and as mentioned in the act are as follows
Who can sue?
Section 245 (2) provides for the persons who are capable to bring an action before the Tribunal under the said provision.
- a) In case of a company having share capital:
- 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.
- 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 can be sued?
A class action suit can be filed against the
- Any of its directors
- Auditor, including audit firm
- Expert or advisor or consultant or any other person
In case of any claim against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making or furnishing any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
When can an application be made under the said provision?
The grounds available to the aggrieved party was been enumerated under section 245(1) of the new act. They are as follows
- To put a restrain on the company from performing any Act which is Ultra Vires of the Articles or Memorandum of Association or from committing a breach of any provision mentioned therein.
- To put a restrain on the company from taking actions against any resolutions that has been passed by its members.
- To put a restrain 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 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 acted in connivance of the breach.
- Any expert or consultant or any other person for furnishing any incorrect or misleading statement made or performing any fraudulent or unlawful act.
What are the subsequent proceedings before the Tribunal?
Once an application is made to the Tribunal, the Tribunal looks into various considerations as elaborated under 245(4). Whether the applicant has acted in good faith, whether there are evidences pertaining to involvement of persons other than directors on the matters mentioned in the application, whether the cause of action is an act or omission, has occurred or likely to occur are some of other imperative requisites to be looked into by the Tribunal before notifying the suit and proceeding with the merits of the case.
The next task involves choosing a lead applicant. The tribunal shall serve Public Notice on admission of the application [Section 245(5)].All the parties having same cause of action, such similar applications shall be consolidated into one application and the applicants are required to choose a lead applicant. The tribunal can also appoint a lead applicant in case there is no consensus between the parties. More than one application for the same cause of action shall not be allowed. Any costs of the applications shall be defrayed by the company or the person responsible for the oppressive act.
What are the penalties for non-compliance?
The order passed by the NCLT is binding on the company, members, depositors, auditors including audit form, consultant or advisor or any other person associated with the company [Section 245(6)].If the company, which fails to comply with the order of the NCLT under Section 245(7) provides it 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. The provision relating to class action suit under shall not be applicable to banking companies. If an application is found to be frivolous or vexatious, the same will be rejected by NCLT and it may order the applicant to pay a compensation not exceeding INR 1 lakh to the opposite party making such application.
The provision has certainly become bedrock in the management and decision making of Indian companies. The majority now fear that the rights of the minority cannot be taken for granted. The legislature has made all attempts so that there can be no misuse of power only by the virtue unanimity. The minority are to be respected as equal stakeholders and there interests must not be adversely affected. The provision has been recently notified and it will be interesting to see how viable an option it is in terms of applicability and operation.