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June 2019

Class Action Suits under Companies Law – A Reality?

by Manasa Tantravahi

Introduction

The viability of class action suits under company law in India has been a cause for much debate, ever since Section 245 of the Companies Act, 2013 (“Act”) got notified on 1st June, 2016. Section 245 of the Act permits members and/ or depositors of a company to band up and jointly proceed against said company, its directors, auditors, or advisors, on behalf of all the members/ depositors within the formed class, before the National Company Law Tribunal ("NCLT").

Soon after, the National Company Law Tribunal Rules, 2016 (“Rules”) were notified to clarify the procedure for filing such suits further, within Rule 84. However, without specifying the thresholds with respect to eligibility to initiate these proceedings, any explanation as to what constitutes ‘prejudicial to the interests of the company, its members or depositors’, identifiable difference between the right to bring action under section 245 as compared to action for oppression/ mismanagement under Sections 241, 242 and 244 of the Act etc., the law governing class action has created much speculation and ambiguity.

Notification of Thresholds

On 8th May, 2019, the Central Government issued the National Company Law Tribunal (Second Amendment) Rules, 2019 through which sub-rules (3) and (4) to Rule 84 were inserted, for prescribing the threshold limits to file a class action suit. In case of a company with share capital, (a) Atleast 5% of the total members/ 100 members, whichever is less, or (b) members holding atleast 5% of the issued share capital in case of an unlisted company, and holding atleast 2% in case of a listed company, may prefer the suit.

With respect to depositors, the threshold has been prescribed as (a) 5% of the total number of depositors/ 100 depositors, whichever is less, or (b) depositors entitled to 5% of the total deposits of the company (hereinafter collectively referred to as “Thresholds”).

Overlaps between Sections 241 (Oppression and/ or mismanagement) and 245 (Class Action)

As per Section 245 of the Act, when 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, a suit may be filed on behalf of the class of members/ depositors aggrieved by such action.

Section 241 of the Act lays down similar criteria for bringing action for oppression and/ or mismanagement, which includes where the affairs of the company have been or are being conducted in a manner prejudicial to public interest, or in a manner prejudicial or oppressive to him or any other member or members, or in a manner prejudicial to the interests of the company, a complaint may be filed by the aggrieved member(s).

On a preliminary reading of both the sections viz., 241 and 245, there appears an overlap as to when actions under these two independent provisions may be initiated. Further qualifications under both the provisions are highlighted as under:

S. No. Particulars Section 241 Section 245
1. Who may file a suit? Member(s) of a company Member(s)/ depositor(s)/ any class of members or depositors
2. On behalf of whom. Filing member, or any other member(s), class of members, Company Class of members/ depositors.
3. Against whom. Company (NCLT may issue orders against the Board of Directors/ managers). Company, Board of Directors, Auditors and Advisors (including experts and consultants).
4. Thresholds Company having a share capital: Atleast 100 members or atleast 1/10th the total members of the company, whichever is less or member(s) holding atleast 1/10th of the Issued Share Capital of the company.Company without share capital: Atleast 1/5th of the total members. As per the Thresholds.

The major distinguishing factor between both the provisions viz., action for oppression/ mismanagement and a class action suit is the beneficiaries of the suits. While in case of a suit for oppression/ mismanagement, requisite aggrieved members proceed against the directors for the protection of their rights/ interests, in a class action suit, requisite member(s)/ depositor(s) identifying a class of such member(s)/ depositor(s) aggrieved by the actions of directors, may file a petition on behalf of such a class.

As per section 245 of the Act, read with Rule 86 of the Rules, as soon as the petition for class action is admitted, NCLT shall issue a public notice in Form No. NCLT – 13, which includes the following:

“The members of the class for the purpose of this class action petition shall mean...........If you belong to the class in relation to which this Application has been filed, you will be bound by the outcome of this Application, unless you decide to opt-out from the proceedings by submitting the relevant form to the following address..............subject to the Tribunal's permission.”

Therefore, the NCLT identifies the class at the time of admitting a class action petition and the member(s)/ depositor(s) who are a part of the class are automatically a part of the suit, provided they chose to not opt-out in the manner prescribed under the Rules.

On a side note, Section 245 also allows a member(s)/ depositor(s) to proceed against auditors, the audit firm, experts, advisors or consultants, for any fraudulent conduct on their part. This sidesteps the rule of ‘privity of contract’ allowing members/ depositors to proceed against third parties for their acts done for the company.

Interpretation of Section 245

Though section 245 of the Act got notified in 2016, till date, no class action suit has been initiated under the Act, for obvious reasons. The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) within the Order dated 21st September, 2017 in Cyrus Investments Private Limited & Anr., v. TATA Sons Limited & Ors., [2017 SCC OnLine NCLAT 261], acknowledged that the court shall first assess as to whether the thresholds are fulfilled under both sections (241 and 245) and only then proceed to assess whether any conduct is prejudicial to the interests of a class of members/ depositors, as applicable. Further, “Issued Share Capital” automatically means “Issued and subscribed Share Capital” and includes both equity and preference share capital, in context of the sections.

The NCLAT, vide an order in Shanta Prasad Chakravarty & Ors., v. M/s. Bochapathar Tea Estate Private Limited & Ors., [2017 SCC OnLine NCLAT 335], observed that while a petition under section 241, 242 and 244 of the Act may be preferred only against the company, board of directors, shareholders or its members, under section 245, one may proceed against the statutory auditors and/ or advisors as well.

Since the concept of ‘class action’ has evolved from the laws of the United States, it may be assistive to examine the procedure prescribed under their laws viz., the Federal Rules of Civil Procedure (“FRCP”), under Rule 23, which covers class action and outlines a process including: (a) complaint filed by a plaintiff on behalf of a putative (or proposed) class, (b) such class be certified by the court, (c) appointing of class representatives and class counsel, to represent the class, (d) issue of public notice to all members of the class, with an option to opt-out, and (e) final judgment from either a trial or settlement which will bind all class members who have not opted out of the class action.

Some of the recent interpretations given to Rule 23 of FRCP include the following: (a) filing a class action suit, does not extend the statutory limitation time for filing of the suit (California Public Employees Retirement Systems v. ANZ Securities, Inc, [137 S Ct 2042 (2017)]; (b) an appeal may be preferred against a wrongful class certification; and (c) evidence for such class action suits must be taken on individual basis and not common evidence for all members of the class [Tyson Foods, Inc v. Bouaphakeo, 136 S. Ct. 1036, 1045 (2016)].

Therefore, there exists developed jurisprudence in the United States with regard to class action suits. However, the abovementioned case-laws are as far as applicable to class action in India.

Class Action under other laws, if any.

While class action has been scanty with respect to companies, in the past few years, there has been a slow but steady rush of class action suits, under section 12(1)(c) of the Consumer Protection Act, 1986 (“COPRA”). Section 37 of the Companies Act read with sections 34-36, allows for securities class action suits for misleading statements or inclusion or omission of any matter in the prospectus. Section 53N (4) of the Competition Act, 2002 allows class action, with the permission of NCLAT. However, no such securities or competition class action suits have been preferred till date. The newly passed Goods and Services Tax, 2017, too does not disclose any provision for class action.

In the absence of specific laws providing for class action, there is always a remedy under Order 1, Rule 8 of the Civil Procedure Code, 1908, which allows for the filing of ‘representative suits’. This is a generic remedy, in case the aggrieved are many, having common interest.

Conclusion

With the notification of the Thresholds for filing class action suits under the Act, we may now look forward to class action being a preferred form of litigation against various acts of oppression/ mismanagement or general misconduct by various parties. The advantages are many, ranging from negating multiplicity of proceedings, reduction in costs, reduction in voluminous proceedings and the time taken to settle the same. More importantly, minority investors may now rest assured on having their interests thoroughly protected through the weapon of class action, with low thresholds for bringing action under section 245 of the Act. What is left to be seen is whether the Government clarifies/ resolves the rest of the gaps within the class action law over time.

[The author is an Associate in Corporate practice, Lakshmikumaran & Sridharan, Hyderabad]

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