India: Get Ready For Class - Action

Last Updated: 28 September 2016
Article by Lalit Kumar

The government must keep a low threshold of shareholders or depositors needed to initiate class action

Class-action—this buzzword is not new to Indian jurisprudence. It is already embedded in statutes such as the CPC 1908 and the Consumer Protection Act 1986, but has been rarely invoked. Class-action gained popularity only when the Companies Act 2013 introduced it in Section 245. Concurrent with the establishment of the National Company Law Tribunal (NCLT) from June 1, 2016, class-action has also been notified and is now in force.

The rules of the game are now going to change for good with substantial rights being vested in shareholders and depositors to file class-action suits with the NCLT over misconduct, not only against errant companies and directors but also against their auditors and other advisors, experts and consultants.

In 2005, the JJ Irani Committee voiced the need to introduce class-action and derivative-action in Indian company law, but these recommendations remained on the back-burner till India Inc was shocked by the Satyam scam.

The company law of the day, Companies Act 1956, didn't have any effective provision for mass shareholder activism and minority protection.

While many class-action suits were successfully filed in the US by holders of ADRs of Satyam, nothing could be done here in India as the Companies Act 1956 did not permit this action. Thus, the legislature included specific class-action provisions in the Companies Act 2013. Section 245, which applies to all kinds of companies except banks, meets this deficit.

The section provides that a certain number or percentage of 'members and depositors or any class of them', whichever is less, can file an application before the NCLT.

The aggrieved members or depositors can seek an order restraining a company from committing an act which is ultra vires of or is in breach of the company's charter documents; declaring a resolution altering the charter documents as void if such resolutions are passed by superseding material facts or through a misstatement; restraining the company from doing any act which is contrary to the Companies Act or any other law; restraining the company from taking action contrary to any resolution passed by the members; or awarding damages, compensation demand or any suitable action from or against the company, its directors, auditors and in some cases even from experts, advisors or consultants.

In the case of a company and its directors, such damages or compensation can be ordered for any fraudulent, unlawful or wrongful act or omission by them; the auditors, on the other hand, can be held accountable for any improper or misleading statement in their audit report.

The auditor's liability will be joint, i.e., of both the audit firm as well as the partner who prepared and signed the report.

To file a class-action suit, the members or depositors will need to establish that the management's conduct of the company's affairs are prejudicial to their or the company's interests.

While Section 245 lays the substantive law and provides that any 100 or more members or depositors, as the case may be, can file a class-action, other aspects such as the minimum percentage of the total number of the members/depositors that would be required for filing class-action will be provided through rules that are forthcoming from the ministry of corporate affairs.

It is suggested that the government should consider providing a relatively lower threshold to ensure that class-action right is within the reach of members and depositors.

Interestingly, the provisions for class-action are contained in the chapter related to prevention of oppression and mismanagement under the Companies Act 2013; therefore, a question arises what is the need to have a separate provision for class-action when they can be covered under the already existing provision of oppression and mismanagement.

The remedies sought from class-action are very different from the remedies derived from the general provisions of oppression and mismanagement.

While, in the class-action, applicants seek an order restraining the company and its directors from doing certain acts; remedies under general oppression and mismanagement could be the acquisition of shares or interest of the other members of the company, restrictions on transfer or allotment of shares by the company.

The order of the NCLT in a class-action matter will be binding not only on the members or depositors who filed the class-action but on all its members, depositors, auditors and others.

Whereas class-action is now a reality in Companies Act, derivative-action is still not specifically provided for. Derivative-action too plays a significant role in corporate governance; therefore, similar provisions for them could have been provided in the Companies Act. However, that's a separate matter and can be discussed at some other time.

This article was originally published in THE FINANCIAL EXPRESS

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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