A class action allows a number of claimants with a common grievance against a company to file a lawsuit against it. Claimants can pool their resources, share attorneys’ services and save the time and costs of litigation. The scale of economies associated with class actions seem especially critical to those individuals who have limited resources or small claims that render individual lawsuits expensive and unfeasible. Class action suits are well established in the US and have been used even by employees to file against discrimination and unfair policies.
Provisions of the Companies Act, 2013
Under Section 245 of the Companies Act, 2013 (“2013 Act”), shareholders or depositors (number defined below) may file an application with the National Company Law Tribunal (NCLT) alleging that the management or conduct of the affairs of any company other than banking companies[ see end note 1] are being conducted in a manner prejudicial to the interests of the company, its members or depositors[ see end note 2 ]. Such class action may include suits against the company, its directors as well as experts or consultants or any other person for any wrongful, fraudulent or wrongful act; suits may also be filed against the audit firm as well as the partners responsible for any misleading or improper statements in the auditors’ report or any misconduct or fraud by act or omission.
The reimbursement of legal expenses undertaken in such class action shall be reimbursed from the Investor Education Protection Fund (IEPF)[ see end note 3 ] and 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[ see end note 4 ]. The feasibility of reimbursements from IEPF shall be an acid test for the 2013 Act.
The Tribunal, while considering an application, shall consider whether the members or depositors are acting in good faith, whether the cause of action in one which could be pursued individually instead of class action. It shall also consider evidence relating to involvement of persons other than directors or officers and views of those members having no personal interest in the derivative action.
A separate provision has also been made for ‘Securities Class Action’ under Section 37 of the 2013 Act. An interesting point to note is that if a misleading statement or the inclusion or omission of any matter is made in the prospectus affecting any group of persons, a suit instead of an application with the NCLT shall be filed for appropriate remedy. No minimum number of persons required for filing such a suit has yet been prescribed. The provision also states that ‘any other action’ may be taken imposing civil or criminal liability on persons responsible for such misleading statements made in the prospectus.
Number of members/depositors who may bring class action[ see end note 5 ]
1. Company having share capital –
- Not less than 100 members of the company; or
- Not less than 10% of the total number of its members, whichever is less, or
- Any member or members singly or jointly holding not less than 10% of the issued share capital of the company, subject to the condition that the applicant or applicants have paid all calls and other sums due on their shares
2. Company not having share capital - Not less than one-fifth of the total number of its members
3. Depositors of company having share capital –
- Not less than 100 depositors; or
- Not less than 10% of the total number of depositors, whichever is less; or
- Any depositor or depositors singly or jointly holding not less than 10% of the total value of outstanding deposits of the company
While the 2013 Act allows waiver of the requirements related to number of persons eligible to make an application for oppression and mismanagement, no such relaxation has been provided in case of class action.
Causes of action and remedies
A derivative action may be brought by the members of the company on any one of the following grounds:
- misleading statement or the inclusion or omission of any matter in the prospectus[ see end note 6 ]
- 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 the 2013 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; and
- 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.
The orders of the Tribunal are binding and a company that fails to implement an order of the Tribunal may be fined between INR 5 lakhs and INR 25 lakhs and every officer responsible is liable for imprisonment besides a personal fine. It is important to note that if the Tribunal finds the application has been filed on frivolous grounds, it may in addition to dismissing an application also impose a fine of INR 1 lakh on the applicants. It is however questionable whether the amount of the fine will act as an adequate deterrent against vexatious applications under this section.
The recent collapse of a number of major corporations worldwide has created an environment requiring much greater vigilance with regard to corporate governance and the actions of key managerial personnel within companies. Companies are likely to face increased threat of litigation posed by ‘class actions’ and other multi-claimant proceedings seeking significant relief against companies, their directors, officers as well as external auditors and experts. There is also a trend worldwide for shareholders to bring class actions against companies and their directors for compensation claims associated with their investment in the company’s shares, one recent example in India being the Sahara case[ see end note 7 ]. Whether the powers to decide such securities class actions of listed companies shall be delegated to the Securities and Exchange Board of India is yet unclear.
[ The author is an Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad ]
End Notes :
- Section 245(9)
- Section 245
- Section 125(3)(d)
- Section 245(5)
- Section 245 read with Draft Companies Rules, 2013 issued by the Ministry of Corporate Affairs.
- Section 37
- (2013) 1 SCC 1