Central Government dictates details of Class Action Suits via National Company Law Tribunal (Second Amendment) Rules, 2019

Background

At the time of Satyam scam, the Indian investors, as opposed to their counterparts in USA, could not file litigations against the fraudulent company. Owing to the peculiarity of weighty financial scam of Satyam in 2009, the need for class action suits was conceived and put into limelight in India. The intention was to enable any group of investors to take legal recourse and claim damages against the deceitful actions of any defrauding company and its auditors.

The concept of class action paved its way in the Indian legislation through the means of Section 245 of the Companies Act, 2013. A class action suit is a representative law suit which allows a group of people with common interests and grievances to lodge a complaint or sue the accused party. Here, one or more plaintiffs prosecute legal proceedings on behalf of the group. Section 245 of the Companies Act, 2013 was inserted to introduce the concept of class action.

Overview of Section 245 and Rule 84

Section 245 allows the members of a company, depositors or a class of them, to file a petition for relief before the National Company Law Tribunal (NCLT), if they are of the opinion that the company’s affairs are being conducted in a manner prejudicial to its own interests or to the interests of members or depositors. While Section 245 lays down detailed provisions in regard to class action suits, Rule 84 of the National Company Law Tribunal Rules, 2016 prescribes ancillary regulations in relation to the right to make an application under Section 245 of the Companies Act, 2013.

As per Section 245(1), the petition to the National Company Law Tribunal may be filed to seek for all or any of the following orders:

(a)  to restrain the company from committing an act which is ultra vires the articles or memorandum of the company;

(b)  to restrain the company from committing breach of any provision of the company’s memorandum or articles;

(c)   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;

(d)  to restrain the company and its directors from acting on such resolution;

(e)  to 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;

(f)   to restrain the company from taking action contrary to any resolution passed by the members;

(g)  to claim damages or compensation or demand any other suitable action from or against –

                     i.        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;

                    ii.        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

                  iii.        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;

(h)  to seek any other remedy as the Tribunal may deem fit.

Amendments brought by MCA

By exercising the powers conferred upon it by sub-section (1) and (2) of Section 469 of the Companies Act, 2013, the Central Government has made further amendments to the National Company Law Tribunal Rules, 2016, effective from 8th May, 2019. The rules laid down to amend the National Company Law Tribunal Rules, 2016 (principal rules) are referred to as the National Company Law Tribunal (Second Amendment) Rules, 2019.

With this amendment, sub-rules (3) and (4) have been inserted after sub-rules (1) and (2) in Rule 84 to the principal rules. While sub-rules (1) and (2) comprise stipulations concerning Form NCLT-9 and serving of copies of application for class action suits, sub-rules (3) and (4) bring more lucidity to the requisite number of applicants needed to file such suits as previously given under Section 245(3) of the Companies Act, 2013.

Comparative Analysis of Section 245 and Rule 84 (incorporating amendments)

The refined rules of the National Company Law Tribunal cover the thresholds prescribed under Section 245(3) which are necessary for filing a petition of class action suit before the Tribunal.  Let us have a look at the regulations before and after the enforcement of amendment:

  Section 245 of the Companies Act, 2013 Rule 84 of the National Company Law Tribunal Rules, 2016
Application for class action Section 245 (1):

Any members/depositors or any class of them, if they are of the opinion that affairs of the company are being conducted in a manner prejudicial to the interests of the company/members/depositors, may file a petition to the NCLT.

 

Rule 84(1):

The application specified under Section 245(1) read with sub-section (3) has to be filed in Form NCLT-9.

 

Rule 84(2):

The copy of every application under sub-rule (1) shall be served on the company, respondents and such other persons as may be directed by the Tribunal.

Requisite number of persons to file a petition for class action Section 245(3):

The requisite number of members to file a petition u/s 245(1) shall be as under–

For company having share capital, not less than 100 members or such percentage of the total number of members as may be prescribed, whichever is less; OR any member or members holding, singly or jointly, not less than such percentage of the issued share capital as may be prescribed.

For company not having share capital, not less than 1/5th of the total number of members.

 

The requisite number of depositors to file a petition u/s 245(1) shall be as under–

not less than 100 depositors or such percentage of the total number of depositors as may be prescribed, whichever is less; OR any depositor or depositors to whom the company owes, singly or jointly, such percentage of the company’s total deposits as may be prescribed.

Rule 84(3): As inserted by the National Company Law Tribunal (Second Amendment) Rules, 2019

The requisite number of members to file a petition u/s 245(1) shall be as under–

For company having share capital, not less than 100 members or 5 percent of the total number of members, whichever is less; OR any member or members holding, singly or jointly, not less than 5 percent of the issued share capital in case of an unlisted company (2 percent in case of a listed company).

 

 

 Rule 84(4): As inserted by the National Company Law Tribunal (Second Amendment) Rules, 2019

The requisite number of depositors to file a petition u/s 245(1) shall be as under– not less than 100 depositors or 5 percent of the total number of depositors, whichever is less; OR any depositor or depositors to whom the company owes, singly or jointly, 5 percent of the company’s total deposits.

The rationale behind enforcing such an amendment by the Central Government surely seems to explicitly mention the threshold limits of applicants required for filing petitions of class action cases. The National Company Law Tribunal (Second Amendment) Rules, 2019 as notified by the Ministry of Corporate Affairs came into force on 8th May, 2019. A pinpointed specification of the requisite number of members/depositors under Rule 84 for the purpose of filing a petition under Section 245(1) is a move that intends to fill the gaps existent in Section 245(3).

Supplementary Provisions of Section 245

To have a deeper insight into the ‘class action’ regulations, let’s look at some of its other provisions:

According to Section 245(6), any order passed by the NCLT in respect of Section 245 shall be binding on the company, its members, depositors, auditor including the audit firm, expert, consultant, advisor or any other person associated with the company.

As per Section 245(7), in case of non-compliance of an order passed by the NCLT, the company shall be punishable with fine that may range between INR 5 lakhs to INR 25 lakhs. Every officer-in-default of the company shall also be punishable with imprisonment up to a term of three years and with fine that may range between INR 25,000 to INR 1 lakh. Furthermore, in addition to these penalties, penalties specified under Section 337 to 341 shall also be imposed.

Also, in pursuance of Section 245(8) and (9), if any such application for class action filed before the NCLT is found to be frivolous by the Tribunal, it shall reject such application and order the applicant to compensate the opposite party for costs (as may be specified in order) not exceeding INR 1 lakh. Section 245 does not apply to a banking company.

Conclusion

In Section 245(3), the absolute number of members or depositors are appropriately mentioned, however, the limits on the percentage of members or depositors were the ones capable of probable deliberation. Such percentage limits are clearly defined under the recent amendment.

Author Bio

Qualification: CA in Job / Business
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Location: Uttar Pradesh, IN
Member Since: 11 May 2019 | Total Posts: 1

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One Comment

  1. Aditya Capoor says:

    Well written article which analyses the provision of Section 245 of the Companies Act, 2013 and rule 84 of NCLT Rules. Clarifies the law.

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