Class Action Suits

Since the provisions of National Company Law Tribunal (NCLT) have been notified with effect from 1^st June, 2016, the term “Class Action Suits” has become the buzz word.

I. MEANING:

In a class action suit, a large group of people, having same or similar interests, collectively bring a claim to court, represented by one or more persons. A group of persons, belonging to a certain class, will collectively bring their claims to 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 that is prejudicial to the interest of the claimant(s). Class action suits will be taken as a lesson to the wrong doers which will deter them as well as others to take such actions.

II. GENESIS:

This form of class action lawsuits are very popular in USA, UK, Singapore and most of the European Countries.

In India, the erstwhile Companies Act, 1956 did not have enabling provisions relating to the protection of interest of small shareholders. This was clearly witnessed under the “Satyam corporate fiasco”. In this case, no proceedings could be initiated in India due to the absence of any statutory provision for class action. While the American depositors were able to receive an amount of US$ 125mn; as a result of strong class action framework in USA.

J.J. Irani committee had recommended for this measure in 2005 in order to be at par with countries like USA, UK etc.

Based on the need of the hour, enabling provisions were introduced under the Companies Act, 2016 for Class Action Suits vide section 245.

III. PERSONS ELIGIBLE TO FILE THE SUIT:

1. Members
   1. For Company having share capital, subject to the condition that all are fully paid shares:
   2. For Company not having share capital:Not less than 1/5^th of the total number of its members
2. Deposit holders:

IV. AGAINST WHOM IT CAN BE FILED:

1. 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;
2. 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
3. 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;

V. PROCEDURE TO FILE CLASS ACTION SUIT:

The procedure is contemplated under section 245 read with the rules under chapter XVI (Prevention of Operations and Management) of the Companies Act, 2013. The rules are not yet notified. The brief procedure for filing and adjudicating Class Action Suits is as follows:

1. Cause of Action:When the management or affairs of the Company are being conducted in a manner prejudicial to the interest of the Company or its members or depositors.
2. Qualification: In such cause of action, application shall be filed in form NCT 1 by the requisite number of members or depositors before the Tribunal. Also such application may be filed by any person, group of persons, or any association of persons representing the person affected by any act or omission.
3. Service:A copy of application shall be served on the Regional Director, Registrar of Companies, the Company, other respondents and all such persons as the Tribunal may direct.
4. Notice to Central Government:The Tribunal shall give a notice of every application to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing a final order under those sections.
5. Admission of Application:The Tribunal shall either admit the application or deny the application.
6. Publication:On the admission of an Application filed under section 245(1), a public notice shall be issued by the Tribunal as per Form No. ONM 2 to all the members of the class as under:
   1. Publishing the same within seven days of admission of the application by the Tribunal at least once in a vernacular newspaper in the principal vernacular language of the State in which the registered office of the company is situated and at least once in English in an English newspaper that is in circulation in that State;
   2. Requiring the company to place the public notice on the website of such company, if any, in addition to publication of such public notice in newspaper under sub-clause (a) aboveProvided that such notice shall also be placed on the websites of the Tribunal and the Ministry of Corporate Affairs, the concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock exchange(s) where the company has any of its securities listed, until the application is disposed of by the Tribunal.
7. Contents of Publication:The public notice shall, inter alia contain the following:
   1. name of the lead applicant;
   2. brief particulars of the grounds of application;
   3. relief sought by such application;
   4. statement to the effect that application has been made by the requisite number of members /depositors;
   5. statement to the effect that the application has been admitted by the Tribunal after considering the matters stated under section 245(4) and these rules and it is satisfied that the application may be admitted:
   6. date and time of the hearing of the said application;
   7. time within which any representation may be filed with the Tribunal on the application;
   8. the details of the admission of the application and the date by which the form of opt out has to be completed and sent as per Form No. ONM1: and
   9. such other particulars as the Tribunal thinks fit.
8. Service to Public:The date of issue of the newspaper in which such notice appears shall be considered as the date of serving the public notice to all the members of the class.
9. Cost/expenses of Publication:The cost or expenses connected with the publication of the public notice under this rule shall be borne by the applicant and shall be defrayed by the company or any other person responsible for any oppressive act in case order is passed in favour of the applicant.
10. Rule of opt in/out: A member of a class action under section 245 of the Act is entitled to opt-out of the proceedings at any time after the institution of the class action, with the permission of the Tribunal, as per Form No. ONM. 1.
    1. For the purposes of opting out a class member, who receives a notice under section 245(5)(a) of the Act, shall be deemed to be the member of a class, unless he expressly opts out of the proceedings, as per the requirements of the notice issued by the Tribunal in accordance with Rule 11; and
    2. A class member so opting out will not be precluded from pursuing a claim against the company on an individual basis under any other law, where a remedy may be available, subject to any conditions imposed by the Tribunal.
11. Duplication of proceedings:In accordance with section 245(5) (b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side.
12. Lead Counsel:The class members or depositors may choose a lead counsel and in the event the members or depositors of the class are unable to come to a consensus on this matter, the Tribunal shall have the power to appoint a lead counsel on their behalf.
13. Compromise/Settlement:In case of an agreement or compromise in an Application under section 245 of the Act, the Tribunal shall afford an opportunity to individual parties to exclude themselves from the class so as to not be bound by the agreement or compromise.
14. Binding Nature of Settlement Order:Unless an individual has opted out of the proposal of settlement and compromise, the order of the Tribunal recording the agreement compromise shall be binding on all members of the class and the relevant parties. Further said Order shall also be binding on the company and auditors, including audit firms or experts or consultants or advisors or any other person associated with the company.
15. Frivolous Application:Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding INR 1 lakh, as may be specified in the order [section 245(8)].

VI. RELIEFS THAT CAN BE SOUGHT FROM TRIBUNAL:

Any member or depositor who files the Class Action Suits can seek all or any of the following reliefs from NCLT:

1. To restrain the Company from:
   • committing an act which is contrary to the provisions of this Act or any other law for the time being in force;
   • Taking action contrary to any resolution passed by the members;
   • Committing an act which is ultra vires the articles or memorandum of the company;
   • Committing breach of any provision of the company’s memorandum or articles;
2. 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;
   • To restrain the company and its directors from acting on such resolution;
3. To claim damages or compensation or demand any other suitable action from or against:
   1. 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;
   2. 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
   3. 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.

VII. PENALTY FOR NON COMPLIANCE OF ORDER PASSED BY TRIBUNAL:

Any company which fails to comply with an order passed by the Tribunal under Section 245 of the Act, shall be punishable with fine which shall not be less than Rs. 5 Lakh but which may extend to Rs. 25 Lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years and with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 1,00,000/-.

Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt of Courts Act, 1971.

It is strange to note that no penalty is provided, if auditor, auditor firm, expert, advisor, consultant or any other person failed to comply with the order passed by the NCLT.

VIII. BENEFITS:

• Single application: Persons having similar cause or similar claims need not file multiple applications, they all can club and proceed with single application.
• Time and Cost saving: For similar kind of claims one application and one proceeding will save huge amount of time and cost of claimants as well as of Tribunal.
• Reduction of Duplicity: As the provision states for consolidation of similar application in the prevalent jurisdiction of the tribunal into single application, it will reduce the duplicity of applications.
• No discrimination: As the decision of the Tribunal will be for whole of the class, not only for the applicants, there is no place for discrimination.
• Awareness: Provisions relating to this requires for publication of claim and because of this clause even if a person relating to the class of applicant is not aware of the situation, the same person will come to know by seeing the publication.

IX. CONCLUSION:

Although class action suits have not yet been tested, surely it will change the litigation landscape for potential claimants and their lawyers, as well as for defendants. It will be easier for claimants to bring collective actions for breach of law, share and minimize legal fees, and mutually benefit from a successful result or settlement. Those who breach the law and drive mileage on it can expect an increased likelihood of a class action filed against them. Firms and consultants are also under the ambit of class action, therefore they need to act with due care and caution.

However, the new provision (i.e. Section 245 of the Act) and rules framed thereunder provide some important controls to curb the wrongful acts by promoters or directors. Much will depend on how broadly or narrowly the class will be defined, the merits of each claim, and the risk appetite of defendants either to settle or defend the case to its conclusion. The NCLT’s first few decisions will be vital in shaping the development of Indian class action practices and determining whether claimants will seek to bring increasingly large and complex cases or not.

It may be concluded that class action suits will be an apt platform for members and depositors to raise their grievances against the management of a company including directors, advisors, consultants, auditors etc for acts or omission that is prejudicial, unlawful or wrongful to the interest of the company. Class action suits may be undertaken as a redressal tool by minority shareholders having common interest for promotion of transparent corporate governance.