The change in the 57 years old legislation has shown a very illuminating light towards corporate development as it has brought about a more realistic approach to the present increasing corporate frauds and discrepancies. One of the major steps taken by the Indian legislature in order to do away with such problems is inclusion of the provision of class action suits into the New Companies Act, 2013.
A class action or a class suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. The concept that is common in developed countries such as the US, UK and Singapore did not exist in India. The provision of class suit gives stakeholders an edge in retrenching their rights.
This concept altogether is a great move towards bringing together people with common interest on a common platform, it also increases the efficiency of the legal process and lower down the costs of litigation. Aggregating large number of complaints together makes cost and effort involved in a legal process worthwhile as amounts to be recovered by each aggrieved individual may be too small to justify solo action.
The threat of class action tends to enhance sense of responsibility and diligence of the defendant towards the interest of stakeholders. Further a class action avoids the situation where different court rulings could create "incompatible standards" of conduct for the defendant to follow. Corporate frauds like Satyam, unfavourable world economies and inadequate protection measures for the investors are some of the prominent concerns and reasons for incorporation of such provision.
When in 2009 during the period of Satyam scandal, when the shareholders went to Supreme court for claiming a relief of Rs. 5,000 Crore their petition was dismissed by the apex court due to lack of above mentioned provisions. The auditors who move out with clean hands after the window dressing of the balance sheets and other professionals who are equal culprits in these situations are now bought into the limelight by enactment of these provisions.
All these measures are taken by the Government in order to boost the investors’ confidence in the Capital markets, to initiate healthy investments and healthy growth of economy. This will be a great opportunity for the investors to make money by investing at the right time and reap its benefits, instead of having thick lines on their forehead.
RELEVANT PROVISIONS IN THE COMPANIES ACT 2013
Clause 245 of the Companies Act, 2013 enables members and depositors or any class of them to file an application to the Tribunal (National Company Law Tribunal) on behalf of the members or depositors, if they opine that the management or affairs are being conducted pre-judicial to the interests of the Company.
Suit under Clause 245 may be filed by members or depositors or any class of them before the National Company Law Tribunal, if they believe that the management or conduct of the affairs of the company prejudices the interest of the company, its members or depositors.
WHO CAN MAKE AN APPLICATION FOR CLASS ACTION?
Number of members required to file class action are:
In the case of a company having a share capital, more than one hundred members of the company or such percentage of the total number of its members as may be prescribed, whichever less is; or any member or members holding more than such percentage of the issued share capital of the company as may be prescribed. This is subject to the condition that the applicant or applicants has/have paid all calls and other sums due on his or their shares;
In case of a company without share capital More than one-fifth of the total number of its members.
Numbers of depositors required to file class action:
More than 100 in number or more than such percentage of the total number of depositors as may be prescribed, whichever is less, or
Any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.
AGAINST WHOM ACTION CAN BE BROUGHT
The Act has brought the following individuals in the eyes of law, if their motives of the same were fraudulent, unlawful or wrongful act or omission or conduct on their part.
- Directors by removing corporate veil
- Auditors and auditor firm for any improper & misleading statement in the audit report.
- An expert or advisor or consultant or any other person associated in this regard.
The power has also been given to the members and depositors to make an application for those actions which are yet to occur in the future, by the company. The order passed in this regard will be binding on the company it members, depositors, auditors, advisors, consultants, experts and other persons associated to that aspect. If anyone fails to comply with the order, he will be liable to a minimum penalty of Rs. 5 Lakh but not more than 25 Lakh and in case of the officer of the company with an imprisonment of 3 years and with a penalty of minimum of Rs. 25 thousand not exceeding Rs. 1 Lakh. The above mentioned provisions are not applicable to Banking Companies.
IMPACT OF THE PROVISION
Stakeholders will definitely benefit with this provision. So far, filing a case of oppression and mismanagement was the only recourse available to aggrieved shareholders. Class action suit gives them additional rights and grounds to fight for their rights and any abuse of powers by the company, its management or to that matter even the auditor and consultant.
Deposit holders, who had no option but to file a civil suit so far, can also take action against any wrongful act by the company or other specified persons. This should make them feel more secure about their investment.
Including auditors and consultants of the company within the ambit of class action suit along with the company and its management provides additional empowerment to stakeholders to seek action against such person for specified wrong deeds. It will also ensure that experts, advisors and auditors of the company act carefully and diligently before advising the company and its management.
The facility to file suit through any person, group of person or associations may also motivate NGOs and other activists to take up causes for the affected people.
Likely to encourage faster action and speedy disposal of matters calling immediate attention.
Higher penalties and mandatory imprisonment, if proved wrong, would act as a deterrent to any fraudulent, unlawful or wrongful act or for any improper or misleading statement.
The provision to claim damages from the company or its directors and other specified persons for expenses of a class suit is a positive and encouraging move for stakeholders.
- For the corporate sector, class action means stakeholders will have more rights and powers to seek action against them.
- At the same time, it will also ensure companies become more careful in their action and that actions are weighed for legal implications.
- Since they can be sued in their individual capacity, companies can rely on their auditors, consultants, advisors or any others associated with the company to give more sound and accurate advice.
Professionals such as auditors, experts, advisors or consultants or any other persons associated with the company will exercise more independence, diligence and efficiency in their work. Manipulations by professionals to the company will also decline.
COMPARISON WITH THE COMPANIES ACT 1956
Although the companies act 1956, no where provides for class action suits but rather Sections 397 and 398 of the Companies Act, 1956 deal with the filing of petition before the Company Law Board against oppression and mismanagement? There are wide range of differences that exist between an oppression and mismanagement suit and a class action suit. First of all, depositors can file class action suits but not a suit under Section 397/398 of the 1956 Act. Secondly, oppression and mismanagement case can be filed against the company and its statutory appointees only, while a class suit can be filed against an expert or advisor or consultant or any other person for any incorrect or misleading statement to the company and also against an auditor for any improper or misleading financial statements. Third, petitions under section 397/398 of the Act can be filed for past mismanagement and to prevent recurrence, while class action suit can ask the management or directors of company to desist from one or more particular action that have not been taken yet.
Therefore the concept of the class action suit adopted by the Indian legislature is very important steps towards avoiding corporate menace. But one of the very apparent lacunas which we could analyse from the above provision is that the Class action suit can be filed by members and deposit holders only. Other stakeholders such as creditors, bankers, debenture holders etc are deprived such right. Further the regulatory authorities are not empowered to file class suit against companies.
Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.