Class Action Suits under New Company Law

A class action or a class suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. The concept that is common in developed countries such as the US, UK and Singapore did not exist in India. The provision of class suit gives stakeholders an edge in retrenching their rights.

Bringing together people with common interest on a common platform increases the efficiency of the legal process and lowers the costs of litigation.

Aggregating large number of complaints together makes cost and effort involved in a legal process worthwhile as amounts to be recovered by each aggrieved individual may be too small to justify solo action.

The threat of class action tends to enhance sense of responsibility and diligence of the defendant towards the interest of stakeholders.
Further a class action avoids the situation where different court rulings could create "incompatible standards" of conduct for the defendant to follow.
The Companies Bill, 2012 includes provisions that will enable stakeholders in Indian companies to bring class suits.

Companies Bill, 2012 on Class Action

  • Suit under Clause 245 may be filed by members or depositors or any class of them before the National Company Law Tribunal, if they believe that the management or conduct of the affairs of the company prejudices the interest of the company, its members or depositors. 
  • Number of members required to file class action are: 
    1. In the case of a company having a share capital, more than
      a) one hundred members of the company or such percentage of the total number of its members as may be prescribed, whichever is less; or
      b) any member or members holding more than such percentage of the issued share capital of the company as may be prescribed. 
      This is subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
    2. In case of a company without share capital 
      More than one-fifth of the total number of its members.
  • Numbers of depositors required to file class action:
  • More than 100 in number or more than such percentage of the total number of depositors as may be prescribed, whichever is less, or 
  • Any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed. 
  • Orders that may be sought from the Tribunal;
  • Restrain from committing an act which is ultravires the Articles or Memorandum of the company;
  • Restrain from committing breach of any provision of the company’s Memorandum or Articles;
  • 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 mis-statement to the members or depositors;
  • Restrain the company and its directors from acting on such resolution;
  • Restrain from doing an act which is contrary to the provisions of the Bill or any other law for the time being in force;
  • Restrain from taking action contrary to any resolution passed by the members;
  • Claim damages or compensation or demand any other suitable action from or against—
    1. 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; 
    2. 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. Where any action for such cause has been raised against an audit firm, the liability shall be of the firm as well as of each partner who acted as such. 
    3. 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; 
  • Seek any other remedy as the Tribunal may deem fit.
  • There are specified conditions to be taken into account by the Tribunal before considering applications under class suit such as whether person was acting in good faith, evidence of person other than allegedly involved, cause of action etc. 
  • Considerations of the Tribunal after admitting an application:
    1. A public notice to all the members or depositors of the class in prescribed manner to be served on the admission of the application;
    2. All similar applications in any jurisdiction be consolidated into a single application and a lead applicant be appointed from amongst them
    3. Ensure no two class action against same cause of action is allowed;
    4. Cost or expenses connected with the application for class action are paid by the company and any other persons responsible for the oppressive act.
  • Order passed by the Tribunal shall be binding on the company and all its members, depositors and auditors including audit firm or expert or consultant or advisor or any other person associated with the company. 
  • Banking company has been exempted from the provisions of this Provision. 
  • It may be noted that application under this provision may be filed or any other action may be taken under this provision by any person, group of persons or any association of persons representing the persons affected by any act or omission, pursuant to compliance of this Clause. 
Impact of the provision
On Stakeholders
  • Stakeholders will definitely benefit with this provision. So far, filing a case of oppression and mismanagement was the only recourse available to aggrieved shareholders. Class action suit gives them additional rights and grounds to fight for their rights and any abuse of powers by the company, its management or to that matter even the auditor and consultant. 
  • Deposit holders, who had no option but to file a civil suit so far, can also take action against any wrongful act by the company or other specified persons. This should make them feel more secure about their investment. 
  • Including auditors and consultants of the company within the ambit of class action suit along with the company and its management provides additional empowerment to stakeholders to seek action against such person for specified wrong deeds. It will also ensure that experts, advisers and auditors of the company act carefully and diligently before advising the company and its management. 
  • The facility to file suit through any person, group of person or associations may also motivate NGOs and other activists to take up causes for the affected people. 
  • Likely to encourage faster action and speedy disposal of matters calling immediate attention. 
  • Higher penalties and mandatory imprisonment, if proved wrong, would act as a deterrent to any fraudulent, unlawful or wrongful act or for any improper or misleading statement. 
  • The provision to claim damages from the company or its directors and other specified persons for expenses of a class suit is a positive and encouraging move for stakeholders. 
On Industry 
  • For the corporate sector, class action means stakeholders will have more rights and powers to seek action against them. 
  • At the same time, it will also ensure companies become more careful in their action and that actions are weighed for legal implications. 
  • Since they can be sued in their individual capacity, companies can rely on their auditors, consultants, advisers or any others associated with the company to give more sound and accurate advice. 
On Professionals 
  • Professionals such as auditors, experts, advisers or consultants or any other persons associated with the company will exercise more independence, diligence and efficiency in their work. Manipulations by professionals to the company will also decline. 

Class Action Suit vis-a-vis Suit for Oppression and Mismanagement 

  • Sections 397 and 398 of the Companies Act, 1956 deal with the filing of petition before the Company Law Board against oppression and mismanagement. There is some difference between an oppression and mismanagement suit and a class action suit. One, depositors can file class action suits but not a suit under Section 397/398 of the 1956 Act. Two, oppression and mismanagement case can be filed against the company and its statutory appointees only, while a class suit can be filed against an expert or advisor or consultant or any other person for any incorrect or misleading statement to the company and also against an auditor for any improper or misleading financial statements. Three, petitions under section 397/398 of the Act can be filed for past mismanagement and to prevent recurrence, while class action suit can ask the management or directors of company to desist from one or more particular action that have not been taken yet. 

The Missing feature

Class action suit can be filed by members and deposit holders only. Other stakeholders such as creditors, bankers, debenture holders etc are deprived such right. Further the regulatory authorities are not empowered to file class suit against companies.

For any related query, feel free to Contact:
Mr. Ankit Singhi
+9111406222208, +919910888952,
Email:- ankit@indiacp.com

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