In order to bring a ‘collective action’ by the ‘minority shareholder’ against the company, there was no such provision till 2013 under the Indian Companies Act. However, there were/are provisions of ‘oppression remedy’ under the Indian Companies Act i.e. Section 397 & 398 under the Companies Act, 1956 (‘the Erstwhile Act’) and Section 241 under the Companies Act, 2013 (‘the New Act’). It is pertinent to mention that one of the main limitations of the ‘oppression remedy’ is that the minority shareholders cannot bring a ‘representative suit’ on behalf of the company, rather they can only file an oppression suit individually.
The idea of protecting minority shareholder rights as a class becomes more important reason being in ‘Satyam Scam’ where over 3 lakhs small investors and minority shareholders in India got defrauded and they could not get back the money, but whereas the investors in the USA, who filed a class action against Satyam Computer Services Ltd (‘Satyam’) could able to get a compensation of $125 million dollars which is around Rs. 675 crores.
The ‘Satyam Scam’ involved material overstatement of Satyam revenues, based on falsified invoices for hundreds of millions of dollars based on customer projects that did not actually exist. Apart from being listed in the Indian Stock Exchange, Satyam had also issued American Depository Receipts (ADRs) in the US. When the Satyam scam broke out, class actions were filed on behalf of purchasers of Satyam’s ADRs before US courts.
Although various Indian Statutes provide for collective actions, but such provisions are rarely used and collective action is not a very popular civil remedy in India. Other than this, in writ jurisdiction representative actions or actions brought in the public interest via Public Interest Litigation (PIL) have gained much popularity and are widely used (to the Supreme Court for the enforcement of fundamental rights under Article 32 of the Constitution, or to the High Courts for the enforcement of fundamental rights or any other legal right under Article 226 of the Constitution of India).
The class actions against Satyam and its directors and auditors were ultimately settled, with US$125 million paid out to the purchasers of the ADRs. However, shareholders in India, where the concept of securities class actions was not developed, did not have recourse to such a remedy and failed to receive compensation, unlike the ADR holders in the US. In view of this, the Indian legislature decided to introduce Section 245 of the New Act. The Indian Legislature took a further step towards promoting class actions by introducing the concept of “class action suits” under Section 245 of the newly amended Companies Act 2013, in Chapter XVI pertaining to “Prevention of Oppression and Mismanagement”.
The concept of “Class action” was brought in, which aims in protecting the rights of the small investors and shareholders. Section 245 of the New Act brought in force from June 1, 2016 vide Ministry of Corporate Affairs (“MCA”) Notification number S.O. 1934(E) dated 01st June 2016. Section 245 of the New Act permits members and/ or depositors of a company to band up and jointly proceed against said company, its directors, auditors, or advisors, on behalf of all the members/ depositors within the formed class, before the National Company Law Tribunal (“NCLT”). Soon after, the National Company Law Tribunal Rules, 2016 (“Rules”) were notified to clarify the procedure for filing such suits further, within Rule 84.
Supremacy of Majority but some protection to Minority Shareholders.
Needless to mention that minority shareholders in a company had a very little protection qua the conduct by the majority or by directors controlled by the majority. The majority has the power to ratified any act which is claimed as wrongful but neither the company nor an individual shareholder can sue to redress the wrong. It is majority only who can ratify any wrongful in their meeting by passing a resolution for that. Every member holds equal right with other members in the same class and any differences amongst the members is to be decided by a vote of the majority.
The Rule of Majority or Supremacy of Majority was upheld in the case of Foss v Harbottle [Foss v. Harbottle 67 E.R.189; 2 Hare 461 (1843, House of Lords)]. In the aforesaid matter the Court had observed that: “Courts are reluctant to interfere in the internal management affairs of the corporation”.
We can say that the protection to minority shareholders is generally not available in the statute, when the majority does anything in exercise of the powers for the internal administration of the company and if there is any wrongful act the same can be ratified by the majority at the general meeting. The minority shareholders have no locus standi. All the decision taken by the majority shareholder in the interest of the company and within the powers conferred on them under the articles of the company, shall be binding on the minority shareholders.
Hon’ble Apex Court in the case of Rajahmundry Electric Supply Co v Nageshwara Rao AIR 1956 SC 213 observed that:
“The courts will not in general interfere, at the instance of the shareholders, in the matters of internal administration and the management of the company by its directors so long as they are acting within the powers conferred on them under the articles of the company. Moreover, if the directors are supported by majority shareholders in what they do, the minority shareholders can, in general do nothing about it.”
The principle of ‘rule by majority’ has been made applicable to the management of affairs of companies. The members pass a resolution on various subject either by a simple majority or by three fourth majority. Once passed by majority members as per requirements, it becomes binding on all the members of the company. In such cases, Court do not, in general, interfere in the management of the company on the insistence of shareholders in matter of internal administration as long as the directors are acting within the powers conferred to them under the Memorandum and Article of Association of the company.
Exceptions to the Rule of Majority.
The principle of majority rule has certain well-established exceptions and these are generally said to be the exception of rule laid down in ‘Foss v Harbottle’. Under the following, minority shareholder can intervene:
1. Ultravires and Illegality Acts: Directors cannot take any action which is ultravires the company or which is illegal. In such cases, every shareholder has a right to restrain company from doing such an act, by bringing an injunction suit against the majority acts.
2. Breach of Fiduciary Duties: Actions can be brought against promoters or directors for breach of their fiduciary duties to the company; if they can prevent the company from suing them.
3. Fraud on Minority: Majority shareholders cannot sue their powers to defraud the minority. Where the majority of a company’s members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder. “Fraud on minority” means taking decisions and passing resolutions which would discriminate between majority and minority shareholders, so as to give undue advantage to the majority shareholder.
In instances where Section 241 to 246 of the New Act applies or Section 397 and 398 of the Erstwhile Act applies a suit that can be brought by minority shareholders. This a statutory right granted to a shareholder which overrides the limitations of the majority rule. Any member can approach the company law board for relief in case of mismanagement or oppression by those in control of the company. For examples like allotment of shares, appointment of the new director, dismissal of the directors, are considered to be few important examples of oppression by majority over the minority shareholder.
Prior to the introduction of the ‘Class Action’ under the New Act, the idea of oppression remedy was only prevalent in India. The Act does not define what oppression is. Normally, oppression means violation of conditions of fair play. The complaining members must be under a burden which is unjust, harsh or tyrannical. It involves lack of probity or fair dealing to a member in the matter of his right as a shareholder. There must be unfair abuse of powers and impairment of confidence in the probity with which the company’s affair are being conducted.
A separate provision for a “securities class action” is also provided under Section 37 of the New Act headed by ‘Action by affected person’. Under this provision, a lawsuit can be filed (or any other action may be taken) for a misleading statement, or for the inclusion or omission of any matter in a company prospectus. Such an action can be filed any person, group of persons or any association of persons affected by the statement/inclusion/omission.
In India, the filing of representative actions is recognised under Order 1 Rule 8 of the Code of Civil Procedure, 1908. Similar provisions allowing parties to represent other aggrieved persons in a representative capacity are set out in the:
- Consumer Protection Act 1986;
- Industrial Disputes Act 1947;
- Competition Act 2002.
It is submitted that a complaint was filed under Section 12(1)(d) of the Consumer Protection Act 1986, in terms of which the central or state government can, in its individual capacity, or as a representative of the interests of consumers in general, file complaints to the National Commission. The Government instituted an action against Nestle India Ltd, with respect to instant noodles sold in India under the brand name “Maggi”, in the National Consumer Disputes Redressal Commission.
Conclusion: There is an alarming need to bring a class action suit in India, in order to protect minority shareholder rights and also by ensuring that the minority shareholder, has the right to bring collective representative suit on behalf of the company, in order to make sure the company does not act which is outside the object clause.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.
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