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Class Action Suits

Class Action Suits

Class Action Suits

A suit can be filed by one or more persons in general. But when the suit is against a company, there is a chance that there can be a large number of people existing who are directly or indirectly concerned with the matter. For them, it might be possible to file suit in the individual capacity, but for the tribunal (National Company Law Tribunal), it is more than impossible to deal with every individual case on the same subject matter with regard to one company. Hence, the Companies Act, 2013 has come up with a concept called Class Action Suits to enable numerous aggrieved persons with a common interest in a matter to be represented as a single unit on a common platform. This formation as a single unit gives them the right to sue against and be sued or by a company, respectively.

Section 245 of the Companies Act, 2013

Section 245 of the Companies Act, 2013 mentions about Class Action Suits. Class action suits are the ones which can be filed by a group of persons, instead of them filing different individual suits on the same subject matter. Whenever the shareholders or creditor/depositors feel that the management of a company is conducting affairs which are prejudicial to the interests of the shareholders or depositors or both, they can together file a class action suit by few people representing the whole group of aggrieved persons.

This is an effective way for individuals who cannot bear the expenses of their own suits. When they are being represented by a specific set of people, every person’s voice regarding the common cause is heard before the tribunal. All the aggrieved parties can share the expenses or costs for the litigation and make it a cost-effective procedure as a whole.

Variable Legal Aspects of Class Action Suits

Kinds of relief granted

If any members or depositors are of the opinion that management or conduct of affairs of a company are being conducted in a detrimental manner as against the interests of such or members or depositors then, they can file an application on behalf of all such aggrieved persons before the Tribunal for seeking the following orders under Section 245(1). They are:

  • Restraining the company from acting ultra vires (beyond one’s legal power or authority) to articles or memorandum of the company
  • Restraining the company from committing a breach of any provisions of the articles or memorandum of the company
  • Declaring the alteration to memorandum or articles of the company as void because it was done by suppressing the facts and misleading the members or depositors
  • Restraining the directors of the company from acting on such falsely obtained alteration
  • Restraining the company from acting against the provisions of the law in force
  • Restraining the company from taking action against the resolution passed by the members
  • Claiming damages or compensation from or against
    1. The company or its directors for a fraudulent, unlawful or wrongful act or omission or order
    2. The auditor including his audit firm for furnishing improper and misleading financial statements for the commission of fraudulent, unlawful or wrongful activity in relation to the company
  • The expert or advisor or consultant for giving incorrect or misleading statements to the company for doing any fraudulent or unlawful or wrongful activity
  • Seeking any other remedy as opinionated by the Tribunal

Sub-section (2) of Section 245 states that whenever such members or depositors seek damages or compensation from the audit firm which is responsible for the fraudulent furnishings of accounts of the company, then the liability is not only of the firm, it also extends to every partner who took part in such unlawful, wrongful, fraudulent activity.

Minimum persons required for filing the application

Sub-section (3) of Section 245 mentions about the required number of people for filing an application. The requisite number of members or depositors for filing the application under Sub-section (1) of Section 245, before the Tribunal, is clarified through the recent amendment in Rule 84 of the National Company Law Tribunal Rules, 2016, which has prescribed the requisite number and hence has given rise to the National Company Law Tribunal (Second Amendment) Rules, 2019.

According to such amendment, in case of a company having share-capital,

  • there should be at least 5% of the total number of members of the company or one hundred members of the company, whichever is less (or)
  • member or members who hold a minimum of 5% in the issued share capital of a company if it is unlisted; member or members holding a minimum of 2% in the issued share capital if the company is listed.

In the case of depositors, the requisite number is

  • at least 5% of the total number of depositors of the company or one hundred depositors of company, whichever is less (or)
  • the depositor or depositors to whom the company owes 5% of total deposits of the company.

Considerations by the Tribunal

While considering an application under Sub-section (1) of Section 245, the Tribunal has to take into account the following matters, as per Sub-section (4) of Section 245. They are:

  1. When the application is filed, the Tribunal has a responsibility to see whether the members or depositors are acting in good faith for seeking an order.
  2. The Tribunal also considers any evidence against the persons involved in the mismanagement other than director or officer.
  3. The Tribunal should consider the fact that any member or depositor can attain relief for the cause of action, other than the orders mentioned above under the kinds of relief.
  4. The Tribunal should examine if the members or depositors have any personal interest, either direct or indirect, in the matter that is being proceeded.
  5. The Tribunal should consider if the cause of action is yet to occur, and such act or omission is likely to be authorized or ratified by the company.
  6. If the cause of action has already occurred, then Tribunal considers whether the same is to be ratified by the company.

Conditions to be followed after admission of a suit by Tribunal

According to Sub-section (5) of Section 245, the Tribunal shall have regard to the following matters after an application is admitted. They are:

  • The public notice should be served to all the members or depositors concerned, after the suit is admitted by NCLT, in the manner prescribed by the relevant provision
  • All the similar applications in any jurisdiction should be converted into a single application, and a lead applicant on behalf of all the applicants should be selected and appointed when there is a consensus among all such members or depositors. On intimation, the Tribunal shall have the power to appoint such lead applicant who is responsible for the proceedings on the applicants’ side
  • There should not be two class-action suits for the same cause of action. They are not allowed and entertained in any manner
  • The costs or expenses for the class action suits shall be met by either the company or the persons who are responsible for the fraudulent/oppressive actions.

Binding effect of the Order

Sub-section (6) of Section 245 states that any order passed by the Tribunal with regard to the class action suit shall be binding on all the members, depositors, directors, officers, audit firms, audit consultant, experts or any other persons who are associated with the company and its mal-practices.

Sub-section (7) of Section 245 states that when a company fails to obey the order passed by the tribunal, a penalty of amount from Rs.5 lakhs which can be extended to Rs.25 lakhs is levied on the company. When an officer of a company who is in default fails to oblige the order passed by the Tribunal, then he is punishable by imprisonment which may extend to 3 years along with imposing of fine, not less than Rs.25,000 but which may extend to Rs.1,00,000.

Penalty for Baseless Application

  • Sub-section (8) of Section 245 states that when the Tribunal finds out that the application filed by members or depositors is frivolous or vexatious, then it may reject the application. The Tribunal has to record reasons for rejection in writing and therefore order the applicant to pay costs not exceeding Rs.1,00,000 as a penalty to the opposite party. The amount to be paid is specified in the order passed by the Tribunal.
  • Sub-section (9) of Section 245 states that none of this whole procedure is applicable to a banking company. Any company other than a banking company is covered under this Section.
  • Sub-section (10) of Section 245 states that the persons filing an application or taking any action under sub-section (1) of Section 245 should comply with the above-mentioned requirements that are relevant.

As a final note, Class action suits are very much helpful in reducing costs for the people who are aggrieved due to the same cause of action and unable to approach the Tribunal independently for justice. Under the Companies Act, 1956, there was no concept called the class of suits, but there was a concept called ‘oppression and mismanagement’ wherein the suit can be instituted only against the company and its statutory appointees. But underclass action suits, every associated person who involved in the unlawful activity like, auditors, experts, consultants, etc. can also be punished. The class-action suits are already very popular in the United States and thus has been introduced in India through Companies Act, 2013. Class action suits increase a sense of responsibility and diligence in the companies with respect to protecting the interests of the stakeholders. This is because the vigilant stakeholders are paid attention to and being addressed by the Tribunal through the class action suits, which is a very good sign for the protection of corporate ethics in the corporate world for upholding fair practices.