Class Action Suits – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions
Question 1.
“The minority shareholders are empowered under the Companies Act, 2013 to bring action with a view to prevent the majority from oppression and mismanagement”. Justify the statement with rights available to minority shareholders under the Act.
Answer:
The various rights which are available to the minority shareholders under the Companies Act, 2013 to bring action with a view to prevent oppression and mismanagement are as under:
1. Oppression and Mismanagement: The minority shareholders can file an application with the National Company Law Tribunal (NCLT) under the provisions of the Companies Act, 2013. Sections 241, 242 and 244 of the Companies Act, 2013 under prescribes the remedies that minority shareholders can resort to in cases of oppression and mismanagement.
2. Class Action Suit: A class-action suit usually means a legal suit wherein a group of members can file an application to NCLT if they are of the view that the affairs of the company are being conducted in a manner that is prejudicial to the interests of the company or members or depositors. Sections 245 and 246 of the Companies Act, 2013, lays down the remedies and procedure for filing the Class Action Suit. Class Action Suit allows the members to claim damages from not only the company and its directors but also from the auditor, an expert, an advisor or a consultant.
3. Right to appoint Small Shareholders’ Directors: The small shareholders or minority shareholders of a listed company have a right to appoint a shareholder of their choice on the board and such shareholder may be called as a ‘Small Shareholders’ Director’ under section 151 of the Companies Act, 2013.
Question 2.
“Class action suit is a new mechanism in India to claim the loss caused to the speciFied stakeholders of the Company not only from the Company but also from other entities”. Analyse the statement in brief.
Answer:
Sections 245 and 246 of the Companies Act, 2013 Act specifically deals with the class action suits. Section 245(1) provides that certain prescribed number of member or members, depositor or depositors or any class of them, may file an application before the Tribunal if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial I to the interests of the company or its members or depositors.
Such application may be made to claim damages or compensation or demand any other suitable action from or against.
- the company or its directors;
- the auditor including audit firm of the company for any improper or misleading audit report or for unlawful or fraudulent conduct;
- any expert or advisor or consultant or any other person for incorrect or misleading statement made to the company or any fraudulent, unlawful or wrongful act or omission.
A Class Action Suit can be filed against the auditor or an expert or advisor or consultant and damages can be recovered. The definition of expert is wide under the Companies Act, 2013 which includes an engineer, a valuer, a company secretary, a chartered accountant, a cost accountant and any other person who has authority to issue certificate in pursuance of any law for the time being in force.
However the definitions of advisor or consultant has not been provided in the Companies Act, 2013. The meaning of the same will be derived in common parlance.
Thus a class action suit is a new mechanism to claim the loss caused to the specified stakeholders of the company not only from the company but also from other entities.
Question 3.
HDF Limited, a listed entity was into real estate business. Over a period in an attempt to diversify its operations it borrowed heavily from banks and financial institutions. The Company appointed a Merchant Banking firm, to provide strategic inputs for its business operations. On the recommendation of the firm, the Company created complex group structures and business models.
Due to financial mismanagement and lack of strategic operations, the Company started making losses and over a period was not able to repay the loans it had taken. The Company also failed to repay the deposits had raised from public. Gradually, the market capitalization of the Company eroded and now it has been reduced to a penny stock. The shareholders are evaluating the option of filing a case against the Company, the Merchant Banking firm and also the Rating Agency which were involved with the Company during such period. Evaluate whether the shareholders and depositors be successful in filing a suit in these circumstances.
Answer:
1. Section 245(1) provides that certain prescribed number of member or members, depositor or depositors or any class of them, may file an application before the Tribunal if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors.
Such application may be made 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;
- the auditor including audit firm of the company for any improper or misleading audit report or for unlawful or fraudulent conduct;
- any expert or advisor or consultant or any other person for f incorrect or misleading statement made to the company or any fraudulent, unlawful or wrongful act or omission.
2. Requisite number of member or members to file an application under j section 245(1) shall be:
- Company having Share Capital: at least 5% of total number of members or 100 members whichever is less. (Listed or Unlisted)
- Unlisted Company: member or members holding not less than five per cent (5%) of the issued share capital.
- Listed Company: member or members holding not less than two per cent (296) of the issued share capital.
3. Requisite number of depositor or depositors to file an application under section 245(1) shall be
- At least five per cent (596) of the total number of depositors of the company or one hundred (100) depositors of the company
- Depositor or depositors to whom the company owes five per cent of total deposits of the company.
4. In the light of the above-mentioned provisions of section 245, the members and depositors will be successful in filing the Class Action Suit against the company, its directors and consultants including merchant banking firm and rating agency. ;
Question 4.
What do you mean by Class Action Suit?
Answer:
In a class-action suit, a large group of people, having same or similar injuries caused by the same person, collectively bring a claim to court, represented by one or more persons. This form of lawsuit is also called a Representative Action. One set of persons representing a larger group approach the court for redressal of their grievances.
The rationale behind such suits are – firstly to protect the interest of members of a class who are geographically dispersed and secondly to reduce the duplication of the litigation as it combines the various proceedings initiated in different parts/jurisdictions bearing same cause of action(s).
Further it also makes adjudication possible; otherwise, as per the rule of necessary party all the members of a class are required to be made plaintiff, which otherwise would have made the adjudication impossible.
In January 2009, India witnessed one of its biggest corporate scandals the ‘Satyam scandal’ also referred to as ‘India’s Enron’. Satyam Computers Services Limited (“SCSL”) was under the microscope for fraudulent activity and misrepresentation of its accounts to its board, stock exchanges, regulators, investors and all other stakeholders.
Thereafter, shareholders of SCSL, approximately 300,000 were unsuccessful in claiming damages worth millions due to the absence of the provision for filing a class action suit under the Companies Act, 1956. American investors on the other hand were able to claim their part of damages in the US Courts through a class action suit against SCSL.
The concept of class action was first introduced in the US in the year 1938. ‘Class Action’, which is also known as ‘Representative Action’, is actually a form of lawsuit where a large group of people collectively brings a claim to the court through a representative. A class-action suit is filed generally when a number of people have suffered the same or similar injuries. Often many of the individuals’ injuries are relatively minor, such that they might not pursue legal redress on their own. Together, however, the value of the claims of the class add up, and claiming as a class helps consolidate the attorneys, evidence, witnesses, and most other aspects of the litigation.
Class Action suits under Companies Act, 2013:
1. A suit can be filed or any other action may be taken by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus under the following provisions of the Act. (Section 37)
- Section 34 – Criminal Liability for misstatements in prospectus
- Section 35 – Civil Liability for misstatements in a prospectus
- Section 36 – Punishment for fraudulently inducing persons to invest money.
2. A class action suit can be filed by members or depositors of the company or any class of them if they Eire of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or members or depositors. (Section 245)
Question 5.
What reliefs can be sought under Class Action Suit?
Answer:
Following orders can be sought from Tribunal by Members/Depositors:
(A) To restrain the Company from:
- committing an act which is ultra vires to Memorandum of Association (MOA) or Articles of Association
- (AOA) committing breach of any provision of MOA or AOA
- acting on resolution which is void (due to suppression of facts/ misstatements)
- doing an act which is contrary to the provisions of this Act or any other Act
- taking action contrary to any resolution passed by the members
(B) to claim damages or compensation or demand any other suitable action from or against
- the company or its directors
- the auditor/audit firm for any improper or misleading statement made in audit report or for any fraudulent, unlawful or wrongful act or conduct
- 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;
(C) 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 misstatement to the members or depositors
(D) to seek any other remedy as the Tribunal may deem fit.
Question 6.
State the persons against whom class action suit can be filed?
Answer:
A class-action suit can be filed against following persons 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.
- the auditor/audit firm for any improper or misleading statement made in audit report or for any fraudulent, unlawful or wrongful act or conduct.
- 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.
Question 7.
Write a short note on Class Action Suits and related law In India.
Answer:
In a class-action suit, a large group of people, having same or similar injuries caused by the same person, collectively bring a claim to court, represented by one or more persons. This form of lawsuit is also called a Representative Action. One set of persons representing a larger group approach the court for redressal of their grievances.
The rationale behind such suits are- firstly to protect the interest of members ola class who are geographically dispersed and secondly to reduce the duplication of the litigation as it combines the various proceedings initiated in different parts/jurisdictions bearing same cause of action(s).
Further it also makes adjudication possible; otherwise, as per the rule of necessary party, all the members of a class are required to be made plaintiff, which otherwise would have made the adjudication impossible.
Class Action suits under Companies Act, 2013:
1. A suit can be filed or any other action may be taken by any person, group of persons or aný association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus under the following provisions of the Act. (Section 37)
- Section 34 – Criminal Liability for misstatements in prospectus
- Section 35 – Civil Liability for misstatements in a prospectus
- Section 36 – Punishment for fraudulently inducing persons to invest money.
2. A class action suit can be filed by members or depositors of the company or any class of them if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or members or depositors. (Section 245)
Class Action suits under Code of Civil Procedure:
There are no limits on the subject matter except for actions that cannot be filed in the civil courts at all, such as mismanagement suits. All persons having same interest in the suit can make an application for the class action suit.
Class Action suits under Competition Act:
A class may dispute an agreement which causes an appreciable adverse effect on competition within India or abuse of dominant position by an enterprise. Any person, consumer or their association can bring the action. E.g. Price-Fixing.
Class Action suits under Consumer Protection Act:
The suit under this Act is restricted to disputes relating to goods and services sold/provided or delivered or agreed to be sold/provided or delivered. Consumers of the goods or services aggrieved can bring the action under this Act.
Question 8.
When Application for class action suit will be considered by Tribunal?
Answer:
Section 245(4) provides that in considering an application under sub-section (1), the Tribunal shall take into account, in particular-
(a) whether the member or depositor is acting in good faith in making the application for seeking an order;
(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in this section;
(c) 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;
(d) 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;
(e) 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 be likely to be – authorised by the company before it occurs or ratified by the company after it occurs;
(f) 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.
Question 9.
Who can apply for Class Action Suit as per Companies Act, 2013?
Answer:
(A) Members:
- Subscriber to MOA whose name is entered in ROM (Register of Members)
- Person agreed to become member in writing whose name is entered in ROM
- Person holding shares who is beneficial owner in the records of Depository
(B) Depositors: Companies (Acceptance of Deposits) Rules, 2014:
- any member who has made a deposit u/s 73(2) of the Act
- any person who has made a deposit with a public company as per section 76
(C) Other Classes of Members and Depositors:
- Members: equity/preference shareholders (convertible/non-convertible, cumulative/non-cumulative etc.), equity shareholders having DVR (different voting right)
- Depositors: depositors with different rate of return, different term of maturity, etc.
Question 10.
What are required number of Members or Depositor to apply for class action suit?
or
How many members or depositors are required for applying for class action suits?
Answer:
(A) Members:
- Company having Share Capital: at least 5% of total number of members or 100 members whichever is less. (Listed or Unlisted)
- Unlisted Company: member or members holding not less than five per cent (596) of the issued share capital.
- Listed Company: member or members holding not less than two per cent (296) of the issued share capital.
- Company having not Share Capital: at least 1 / 5th of total number of members.
(B) Depositors:
- At least five per cent (596) of the total number of depositors of the company or one hundred (100) depositors of the company.
- Depositor or depositors to whom the company owes five per cent of total deposits of the company.
Question 11.
What will the Tribunal take into account while considering application of class action suit?
Answer:
Section 245(4) provides that in considering an application under
sub-section (1), the Tribunal shall take into account, in particular –
(a) whether the member or depositor is acting in good faith in making the application for seeking an order;
(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in this section;
(c) 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;
(d) 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;
(e) 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 be likely to be – authorised by the company before it occurs or ratified by the company after it occurs;
(f) 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.
Question 12.
Write a short note on procedure followed after admission of application u/s 245(5).
Answer:
- In case of admission of Application [Section 245(5)]
- public notice shall be served on admission of the application to all the members or depositors.
- all similar applications prevalent in any jurisdiction should be conso- Mated into a single application
the class members or depositors should be allowed to choose the lead applicant - the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings (If members/depositors can’t decide)
- two class action applications for the same cause of action shall not be allowed
- the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.
Question 13.
What is the punishment prescribed for non-compliance of Tribunal’s order in case of class action suit?
Answer:
Any Order passed by the Tribunal shall be binding on the Company, Members, Depositors, Directors, Auditors, Experts, Consultant, Advisors or any other person. [Section 245(6)].
In case the company or any officer who is in default does a non-compliance of any order passed by the Tribunal under section 245, then the fine punishment is as follows [Section 245(7)]:
- Company: Fine ₹ 5,00,000 to ₹ 25,00,000
- Officer in Default: Imprisonment up to 3 years and fine ₹ 25,000 to ₹ 1,00,000.
Question 14.
What are the advantages of Class Action Suit?
Answer:
1. ClubbIng of similar applications and bar on futile litigations:
When the facts are similar in suits filed in different dominions by the members of the same class, standing against the same or similar defendants, it makes sense to combine them all and adjudicate it under one roof. Clubbing of similar claims/suits would also result in efficiency of judiciary, as the same would save precious time of judiciary from adjudicating the similar dispute numerous times.
Hence Class Action Suits against similar defendants/respondents seeking similar relief may be consolidated into one. Further the legislature also intends to bar the future class action on same subject matter.
2. Reduction of Cost:
The cost of bringing a claim to the settlement under the present mechanism at times is very expensive as well as time-consuming particularly while filing of suits under Civil Procedure Code, 1908. Further, the territorial jurisdiction of the civil court also leads to duplicity of litigation leading to multiplicity of cost for same cause of action. It, therefore, makes far greater sense for people to share the costs of litigation by teaming up with others in a similar position. If as a group, only one set of counsels are instructed and the factual cases of each members are identical the legal cost will be far less than that would have been if instituted individually.
3. Class action suits would allow individuals to hold some of the world’s most powerful companies and organizations accountable for their actions. These lawsuits will cover a wide range of issues including the mismanagement of monies invested with a company, securities law related fraud, malfunctioning of accounts, restraining company to act ultra vires or in breach of the articles of association of the Company, etc.
4. Class action suits will provide a window to the small shareholders to redress their grievances irrespective of their jurisdictional limitation.
5. It allows great number of interested parties (Members or Depositors) to join the litigation which otherwise would have become impracticable.