Class Action Suit under Companies Act, 2013

ACS Deep Vaghela

Section 245 brought in force from June 1, 2016 vide Ministry of Corporate Affairs notification number S.O. 1934(E) dated 01st June 2016.

Class Action Suit became reality for Indian investor(s)/depositor(s) under new Companies Act, 2013 which is also known as Representative Suit. This kind of lawsuit is very popular in countries like USA, UK, Singapore, Canada, Austria and other European countries.

Class Action Suit gained momentum with the case of Satyam, where the financials of the Company were manipulated for number of years and the Indian investors drown their hard earn money in the market due to fraud my company’s promoter. The noteworthy point was that the American depositors of Satyam were able to receive $125 million in settlement because of strong framework of class action in USA.

Class Action Suit is still on black white, but any member(s)/depositor(s) or any class of them fulfilling the requisite number as per Section 245(3) of the Companies Act, 2013 can file a Class Action Suit against:

A Company or its directors for any fraudulent, unlawful or wrongful act or omission or any likely act or omission or conduct on its or their part;
An auditor including audit firm for any improper or misleading statement of particulars made in their audit report or for any fraudulent, unlawful or wrongful act or conduct;
An expert or advisor or consultant or any other person associated with the company 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 their part.

Class Action Suit can be filed against any type of companies and the Companies Act, 2013 empowers the Central Government to exempt any company or class of company from this provision. However, banking companies are exempted from these provisions.

Further, the Class Action Suit is not permitted for matters which can be pursue for claiming the rights or damages by member(s)/depositor(s) under other sections of the Companies Act, 2013 and in case the Tribunal found that the member(s)/depositor(s) misuses the mechanism of Class Action Suit, they will be penalised as per Section 245(8).

Action Plan:

An application or petition under Section 245(1) be filed in Form NCLT-9 as per rule 84 of NCLT Rules, 2016;
A copy of application also needs to be serve to the Company, Regional Director, Registrar of Companies, others respondents and all such persons as the Tribunal may direct;
The Tribunal after taking into account the points as mentioned in Section 245(4) and rule 85 of NCLT Rules, 2016, may admit or dismiss the application;
On admission of application, a public notice shall be issued by the Tribunal in Form NCLT-13 to all the members of the class as per Section 245(5) and rule 87 of NCLT Rules, 2016;
In case any applicant wants to opt-out of the proceedings after the institution of suit, applicant may do so with the permission of Tribunal by filing Form NCLT-1 as per rule 86 of NCLT Rules, 2016;
Relief that can be sought in a Class Action Suit under Section 245(1) are:
- Restrain the company from committing an act which is ultra vires;
- Restrain the company from committing breach of any provisions of the memorandum or articles of association;
- Invalidating resolutions if the resolution was passed by suppression of material facts or was obtained by making misstatement;
- Restrain the company and its directors from acting on such resolutions;
- Restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;
- Claim damages or compensation or demand suitable action from parties involved; and
- Any other remedy as the Tribunal may deem fit.

In case the Company fails to comply with an order passed by the Tribunal, the Company shall be punishable with fine which shall not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs 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/-.

Though everything on paper appears to be good, but in real scenario Class Action Suit is yet to break the ice and everything will depend on how the Tribunal will decide the initial cases which will ultimately shape the Class Action Suits in India.

For any Advice in above matter, feel free to contact Deep Advisory Services at +91-9913803369 or vagheladeep@gmail.com.