Introduction

Class Action is a newly introduced concept in India through the Companies Act, 2013. This concept has already been existing in countries like the USA and the UK. The need for this section relating to class action was brought into notice at the time of Satyam Fraud Case in India in 2009, wherein the Chairman and Managing Directors and other managerial staff of the company had indulged in large scale fraud and misappropriation of company’s money, thereby causing a huge loss to the company and its shareholders. The American Shareholders of Satyam Computer Services were able to secure a settlement of USD 125 million through class action suits. However, there being no such law in India at the time of the scandal, the Indian shareholders had no recourse. Because of the Satyam scam, India has introduced class action suit in the new Companies Act, 2013 by means of Section 245 which is yet to be notified by the Ministry of Corporate Affairs.

What is a Class Action?

A Class Action allows the shareholders/ depositors with a common grievance against the company to file a lawsuit against it. Claimants can pool their resources, share attorneys’ services and save the time and cost of litigation. This is especially useful for claimants who have limited resources or small claims and hence makes individual lawsuits expensive and unfeasible for them.

Who can file a Class Action Suit?

A Class Action Suit may be filed before the National Company Law Board Tribunal (NCLT) by

• Members
  • In case of a Company having a share capital,
    • At least 100 members or 10% of the total number of members, whichever is less; or;
    • Any member or members holding 10% or more of the issued capital of the company
  • In case of a Company not having a share capital, not less than 1/5th of the total number of members
• Depositors
  • At least 100 depositors or 10% of the total number of depositors, whichever is less; or;
  • Any depositor or depositors holding at least 10% of the total value of outstanding deposits of the company

Against whom a Class Action Suit can be filed?

Class action suit can be filed against

• Company (except for a banking company),
• 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 any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner

Causes of Action and Remedies

• An action can be brought by any class of members or depositors on any of the following grounds:
  • Misleading statement or inclusion or omission of any matter in the prospectus;
  • To restrain the company from committing an act which is ultra vires the articles or memorandum of the company;
  • To restrain the company from committing breach of any provision of the company’s memorandum or articles;
  • To 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;
  • To restrain the company and its directors from acting on such resolution;
  • To restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
  • To restrain the company from taking action contrary to any resolution passed by the members;
  • To claim damages or compensation or demand any other suitable action from or against-
    • 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;
    • 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
    • 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;
  • To seek any other remedy as the Tribunal may deem fit.
• The order passed by NCLT shall be binding.
• Penalty for non-compliance with the with an order passed by the Tribunal
  • The cost or expenses connected with the application shall be defrayed by the company or any other person responsible for any oppressive act.
  • For the company:
    • Fine > Rs. 5 Lakh but < Rs. 25 Lakh
  • For every officer of the company who is in default
    • Fine > Rs. 25,000/- but < Rs. 1,00,000/-
    • Imprisonment for a term which may extend to 3 years.
  • If the NCLT finds that the application has been filed on frivolous grounds, in addition to dismissing the application, it may also impose a fine of Rs 1,00,000 on applicants.

Action taken by NCLT on a Class Action Suit Application

• On receipt of a class action suit application, the Tribunal will look into the following before admitting it:
  • whether the member or depositor is acting in good faith in making the application for seeking an order;
  • any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters on which an order can be passed;
  • whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;
  • any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;
  • where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would likely to be—
    • authorised by the company before it occurs; or
    • ratified by the company after it occurs;
  • where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.
• If the application is admitted by NCLT, it shall take the following steps
  • Issue a public notice to all the members of the class by publishing the same within 7 days of admission of the application once in a vernacular newspaper in the principal vernacular language of the state in which the registered office of the company is situated and circulating in that state and at least once in English in an English newspaper circulating in that State.
  • Require the company to place the public notice on the website of such company, if any, in addition to publication of such public notice in newspaper and such notice shall also be placed on the website of the Tribunal, if any, on the website of Ministry of Corporate Affairs, on the website, if any, of the concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock exchange(s) where the company has any of its securities listed, until the application is disposed of by the Tribunal.
  • Consolidate all similar applications prevalent in any jurisdiction into a single application and the class members or depositors shall be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side
  • Not allow two class action applications for the same cause of action.
• The Tribunal shall give notice of every application made to it under this section to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing a final order under those sections.

Conclusion

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.