Class Action Suits under Companies Act, 2013 ‘The concept of Class Action Suits is among one ofthe many novelties introduced by the Companies Act, 2013. Thought the concept per seis not new but in Indian context it has found statutory recognition and enforceability now oaly by means of Companies Act 2013, ‘The frst time class action suit came to the spotlight in the context of securities market was when the ‘Satyam scam broke out in 2009. At that time, the Indian investors in India couldnt take any legal recourse against the company while their counterpart in USA filed class action suit claiming damages from the ‘company and the auditing firm, Credit to the Satyam seam, India has introduced class action aut in the new Companics Act, 2013 by means of Section 245 which is yet to be notified by the Ministry of Corporate Aas. In simple terms, a classaction suit refers to a lawsuit the allows a large number of people with a common interest in a matter to sue or be sued asa group. Its a procedural device enabling one ox more plaintiffs to file and prosecute a litigation on bebalf ofa larger group or cass, wherein such clas has common rights and grievances. PROVISIONS RELATING TO CLASS ACTION SUIT AS CONTAINED IN COMPANIES ACT, 2013which are Section 245 of the Companies Act, 2013 (Act) contains provisions regarding Class Acton isoused in detail helo” Who can file Class Action Suits? As per Section 245 (1) read with Section 245 (3), a Cass Action Suit may be filed by: |, Member or members or any class of them, as described below - {nthe case ofa company having a share capital. ‘any 100 or more members of the company, or members equa 1o or exceeding 10% of the total number of, is members, whichever lee, oF - any member or members singly or jointly holding atleast 10% ofthe issued share capital of the company, _sobjct to the condition tha the applicant ar applicants has ar have paid ll calls and ather sums due on his or thee shares in the case of a company not having a share capital, members equal to or exceeding Sth of the total _aumbsr ofits members. 2. Depos! ‘or depositors or any class of them, as described below — any 100 or more depositors ofthe company, or depositors equal to or exceeding 10% of the total amber ofits depositors, whichever is lose, orany depositor or depositors singly or jointly holding atleast 10% of the total value of outstanding deposits ofthe company. 3. The Central Government, itis of the opinion thatthe affairs of the company are being conducted in a ‘manner prejudicial to public interest Before which authority class ation suit needs to be filed? Application for cise wetion suit las w be fled belore the National Company Law Boatd Tiibuval (NCL Tribunal) ‘When can a Class Action Suit be fled? ‘Members or depositors or any class of them, a indicated above, may file a classaction suit if they are of ‘the opinion that the management or conduct of the affairs of the company are being conducted in a ‘manner prejudicial to the interests ofthe company or its members or depositors seeking al or any ofthe following orders, namely (2) to restrain the company from committing an act which is ultra vite the articles or memorandum ofthe company: @) co restain he company fiom coumiting breach of any provision of die company's memorandum or articles;(6) to declare a resolution altering the memorandum or articles ofthe company as void ifthe resolution tras passed by suppression of uteri facts or obtained by misstatement to the members or depositors; (6) w resean the company ad its sectors from acting on auch resolution; (6) to restrain the company from doing an act which is contrary to the provisions of tis Actor any other law forthe time being in force; (9 torestrain the company from taking action contrary to any resolution passed by the members; () 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 actor omissicn or conduct or any likely act of omission or conduct omits or ther pat; (id the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for aay fraudulent, unlawful or wrongful at or conduct; or (ii) 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 (2) 10 seek any other remedy asthe Tribunal may deem fit Against whom a Class Action Suit ean be filed?st Bene oF THE ween UAINTIFES HE Css action suit can be filed agains the Company, Any of ts directors Aiitor, including ait frm + Exper or advisor or consultant or ary other person In case of any claim against an audit firm, the lability shall be of the firm as well as ofeach partner who ‘was involved in making any improper or misleading statement of particulars in the avdit report or who acted ina fraudulent, unlavefol or wrongful manner ‘What action wll be taken by NCLT on a clas action suit application? On receipt ofa class action suit application, the Tribunal will lok into the following before admiting it: ‘whether the member or depositor is acting in good faith in making the application for seeking an order; © amy evidence before it as to the involvement of any person other than directors or offivers of the ‘company on any ofthe matters on which an order canbe passed,1 whether the cause of action i one which the member or dapocitor could pure ‘own Hight rather than through an order under this section; ‘0 any evidence before it as to the views of the members or depositors of the company who have no personal intrest, director indirect, nthe matter being proceeded under this section would bey ‘where the cause of sun i an act vt onission dats yet to occur, wheter dhe act Fon land in the circometancse would kay tobe ~ authorised by the company before it occurs; or ~ ratified by the company after it occurs fo where the cause of action is an actor omission that has already occurred, whether the actor omission could be, and inthe cktumstances would be Ikely tobe, ratified by the company. ‘0 Issue a public notice to all the members ofthe class by publishing the same within 7 days of admission ‘of the application once in a vernacular newspaper in the principal vernacular language of the state in “which tie registered office of the company Is situsted and cirelating In that state and atleast ance in ‘English in an English newspaper circulating in that State © Require the company to place the public notice onthe website of such company, i any, in addition to publication of such public notice in newspaper and such notice shall also be placed on tte website of the ‘Tribunal, if any, on the website of Ministry of Corporate Affairs, on the websit,if any, ofthe concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock cexchange(s) where the company has any of its securities listed, until the application is disposed of bythe: ‘Tribunal ‘© Consolidate all similar applications prevalent in any jurisdiction into a single application and the class members or depositors shall be allowed to choose the lead applicant and in the event the members oF depositors ofthe class are unable to come to a consensus, the Tiibunal shall have the power to appoint lead applicant, who shall be in charge ofthe proceedings from the applicant's side ‘© Not allow ovo clas ation applications for the same cause of ation,A copy of every application mage under this section shall be served on the Regionsl Director and Rapist of Companies “The Tribunal shall give notice of every application made to it under this section to the Central ‘Government and shall take into cons deration the representations, if any, made to it by that Government “Lefote passing afinal order under thot sections, ‘Where any application fled before te 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 KS. 1 Lakh, as may be specified inthe order. Penalty for non-compliance of order passed by Tribunal ‘Any company which fils to comply with an ordee passed by the Tribunal under section 245 shall be punishable with fie which shall not be less than Rs. 5 Lakhs but which may extend to Rs, 25 Lakhs and every officer of the company who isin dfaalt shall be punishable with imprisonment fora tm which ‘may extend to 3 years and with fine which shall not be less than Rs. 25,000¥- but which may extend to Rs. 100,000 ‘Under Section 425 ofthe Companies Act, 2013 the Tribunal as also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt fof Courts Act, 1971 Other points relating to Class Action Suits“The cos or expenses connected with the publication of the public notice shall be bome by the applicant ‘and sal be defrayed by the company or aly other persun reyponsibie for any oppressive ot ‘Any order passed by the ‘Tribunal stall be binding onthe company and all its members, depositors and ‘auditor inclading audit firm or expen or consultant or advisor or any other person associated with the ‘company. Provisions relating to class action suits do not aply toa banking compeny. Difference between application for prevention af oppression and mismanagement ws 241 to 244 and Class Action Suits ws 245 244 Prevention of oppressiod] find mismanagement w/e 241]Cass Action Suits Uis 245 jembers of the Company fembers 9s well as deposit holders ofthe company lageinst wh splication can fea? sppointees fompany and its statutory Tampa, ny ofits directors ite, including audit im pert or advisor or consultant.or anyother person ates for which) to prevent recurence led ri ep, defo re eo tne iy current, past oF future activity, melding fo desis ken yet| | Class Action Suit under Companies Act 2013 | Introduction ‘The Companies Act, 2013 introduces some important changes to the company law regime in India ‘ne such feature is @ Class Action. The provision governing Class Action is set out under Section 245 of the Companies Act, 2013 which falls under the Chapter “Prevention of Oppression and Mismanagement”. However, class actions are evidently not the same as petitions against ‘oppression or mismanagement, as commonly understood in India. The concept of a classaction by shareholders wes also recommended by the JJ Irani Committee Report, 2005 which suggested that representative action may be initiated by one shareholder on behalf of one or more of the shareholders, on the premise tha they would all have the same ‘locus stand to initiate an action against an ering, company. Section 245.Companies Act, 2013- Overview ‘This is @ new section and seeks to provide that in case of company having a share capital not less than one hundted members of the company oF not ess than such per cent as may be preseribed of | the total number of its members, whichever isles, or any member or members holding not less than such percent as may be preseribed of the isued share capital ofthe company, and in the case of a company not having a share capital, not less than one-fifth ofthe total number of its members ‘ay file an application before the Tribunal if they are of the opinion that the management or ‘contol ofthe affairs of company are being conducted in a manner prejudicial tothe interests of the ‘company or its members o depositors to restrain the company from oppression or mismanagement, Section 245-Companies Act, 2013 Section 2451) reads ‘Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that 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, fle an application before the Tribunal on behalf of ‘the members or depositors for seeking all or any ofthe following, orders. Who can sue? 1. Sharcholders: ‘As per Section 245 a Class Action canbe instituted by — () Member(s) () Depositor(s) or any class of the two.“The requisite numbers of members who can maintain a Class Action are specified under Section ~ 24503) 0, a) In the case ofa company having share capital~ 1. Not lessthan 100 members of the company or 2, Not less than such percentage of the total number of its embers as may be prescribed, Whichever is less. [Note: The Draft Rules under the Companies Act, 2013 set out in Chapter - XVI Rullel6.1, have prescribed the percentage as 10% ofthe total number of members ofthe company] 3, Amy member or members holding not less than such percantage of the issved share capital ofthe company as may be prescribed [Note: The Draft Rules under the Companies Act, 2013 set out in Chapter XVI Rule 16.1 (a), have prescribed the percentage as 10% of the issued share capital ofthe company ] bb) In case ofa company not having share capital ~ 1. Not les than 1/5th of the total numberof its_ member. 2, Depositors: The requisite numbers of depositors that can maintain an action are set out in Seetion 245 (3) (i. 8) Not less than 100. depositors or (©) Not less than such percentage of the total number of depositors as may be prescribed, Whichever is less, or (©) Any depositor or depositors holding to whom the company owes such percentage of total deposits ofthe company as may be prescribed. ‘Who cam be sued? Im @ Class Action under Section 245, relief can be granted in favour of the applicant against the following: 1 The Company 2. The Directors ofthe Company 3. The Auditor of the Company, including the 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. [Note : Section 245 (2) states that where damage or compensation is being sought against an audit‘em, the lability shall be ofthe firm as well as all the partners who were involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent ‘unlawful or wrongful manner] 4. Any expert of advisor or consultant oF any other person for any incorrect oF misleading Statement made to the Company or for any fravdulent, unlawful er wrongful act oF conduct oF ay likely at or conduct on his par. Hence, forthe first ime a member or depositor ofa company has been empowered to initiate action against auditors, consultants, advisors or experts advising the Company. Forum for instituting a Class Action Section 245 (2) appears to provide for Class Actions to be instituted before the Tribunal. Tribunal has boon defined in Seetion 2 (90) of the Companies Act, 2013 as the National Company Law Tribunal. ‘Under Section 408 of the Companies Act, 2013, the Central Government is empowered 10 constitute @ Tribunal to be known az ~ The National Company Law Tribunal, consisting of & President and such umber of Judicial and Technical Members as the Central Government may ddcem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are conferred on it by or under the Companies Act, 20. ‘Under Section 421 an appeal from an order of the Tribunal would ie before an Appellate Tribunal and in terms of Section 423 any petson aggrieved by the order ofthe Appellate Tribunal may file an appeal before the Supreme Court. The provisions for setting up of the Tribunal have not been notified yet. [Relief under Section 245 “The different kinds of relief that can be granted by the Tribunal in a Class Action are set out in Sestion 245 (1). (@) to restrsin the company from committing an act which is ultra vires the articles or ‘memorandum of the company; (6) 10 restrain the company from committing breach of any provision of the company's memorandum or articles, (©) to declare a resoltion altering the memorandum or articles ofthe company 2s void ifthe resolution was passed by suppression of material facts or ottained by misstatement to the members or depositors, (@) to estesin the company and its directors from acting on such resclution, (©) to restrain the company from doing an act which is contrary tothe provisions of this Act or ary other slaw forthe time © eing in foros(ft restrain the company from taking ation contrary to any resauton pasted by the members: (to claim damages or compensation or demand any other suitable action from oF agsint— (the company oF its directors for aly fraudulent, unlawfsl or wrongful aet oF omIsSON or ‘conductor any likely act or omission or conduct omits or their part; (ii) the auditor including audit firm of the company for any improper or misleading Statement of particulas made in his audit report or for any fraudulent, unlawful oF ‘wrongful act oF conduct, oF Git) any expert or advisor or consultant or any other person for any incorret or misleading Sgatement made to the company or for any fraudulent, unlawful or wrongful act or conduct oF any likely act oF conduct on his part, (0) to seek any other remedy asthe Tribunal may deem fit Procedure set out ia Section 245(4) & 245(5) ‘As per 245 (4), the Tribunal while considering a Class Action filed under Section 245 (1), shall take into account the following = (2) whether the member or depositor is acting in good faith in making the application for sedking an order, () any evidence before it a to the involvement of any person other than directors oF officers of the company on any of the matters provided in clauses (a) to (f) of sub-section oy (6) whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section; (@__anyevidence before it a tothe views ofthe members or depositors ofthe company who hhave no personal interest, director indirect, in the matter being proceeded under this section, (e) where the cause of ection is an actor omision that is yet to occur, whether the act oF omission could be, and inthe circumstances would be likely to be~ (@ authorised by the company before it occurs, or (ii) atfied by the company after it occurs; (where the cause of action is an actor omission that has already occurred, whether the actor ‘omission could be, and in the circumstances would be likely tobe, ratified by the company. Inthe event that a classaction is admitted by the Tribunal, Section 245 (5) sets outs procedure thet is required fo be considered ~ (a) public notice to all the members or depositors of the class in presribed manner to be served on the admission ofthe Class. Action (&) all similar applications prevalent in any jurisdiction should be consolidated into a single ‘avolication and « Lead Avolicant be anoointed from amongst them.(c) ensure not two clas action against sme case of ation isallowed (cost or expenses conneted wit the application fr cas atin are pid Wy the Company ‘and ny other person responsible fr the oppressive act Consequences | “Anca passed by the Tribunal under Seton 245 (1 binding order onthe company a5 el 9° a athe members, depositors and auditor including the audit firm or expert or consultant or fedvitor or any other person associated with the company Consequences of non-compliance have been se out in sub-section (7) ofS () Fine of not less than Rs 5 lakh extendable upto Re25 ak, and (&) Any officer ofthe company who isn default canbe punished with imprisonment for 2 tea upo 3 years and imposed a fine of not less than Rs 25,000 extendable upto Rs. lakh‘Under Section 425 of the Companies Act, 2013 the Tribunal has also been confered the same jumadiction, powers and authori in respect of contempt ofits orders as eonfered on High Court under the Contempt of Courts Act, 1971 Satyam Scam — Scenario The Satyam scam involved a fraudulent scheme wherein the revenies of Satyam Computers Services Lid, were materially overstated based on falsified invoices for hundreds of millions of ‘Sellars in consumer products that did not actually exist, Since Satyam‘s Americas Depository Shares were listed on the New York Stock Exchange, several Class Action Suits were filed against Satyam and the Managing Director including other members of the Management of Satyam on behalf of purchasers of Satyam's American Depository Receipts, inthe U.S. In addition, the global ait firm PwC along with its International and India Unit were charged with ‘Class Action for having recklessly distegarded a multiyear massive fraud by the Satyam ‘Management. In 2011 Satyam and its auditor PwC agreed to pay USD 125 million and USD 25.5 million to setle claims filed by shareholders by way ofa Class Action in. US. However, due to the absence of any statutory provision for Class Action under the Indian ‘Companies Act 1956 to sue the audit firms no similar proceedings could be initiated by the tifected sharcholders of Satyam in India. This lacuna has been sought to be addressed by the Togislture while dafing of the Companies Act, 2013 and introducing the provision of Class ‘Action by way of Section 245, Conclusion “The provisions governing applications in respect of oppression or mismanagement echoing Sections 4307 snd 398 ofthe Companies Act 1956 are set out under Sections 241 to 244 ofthe Companies Act, 3013 and Section - 245 in contrast introduces distinct regime of Class Actions. The order passed tinder Class Action by the Tribunal shall be binding on the Company and all its Members, Depostors, Auditor including Audit Firm or Expert or Consultant or Advise ur any ether person steweiated with the compasy. Stringent imprisonment and fine shall be imposed in case of default, An “pplication for Class Action may also be fled by a Berson or Associaton of Persons representing the affected personssm agora {arom 50561448 (@or, (2008 242 Comper 209 (tom. [aon 144 compas 465(0) Confecorsionof indian nd (198). Deseable Carports Governance ~A Code Sone =