To prevent misuse of class action suits, the new Companies Act may specify a minimum number of shareholders or creditors of companies for exercising the right to file such cases, the Corporate Affairs Minister, Mr Salman Khurshid, has said. This is a major change from the current position on class action suits as mentioned in the Companies Bill, 2009, which is now before the Parliamentary Standing Committee on Finance.
CURRENT NORM
The present provisions say that class action suits can be filed against a company by even a single member or creditor on finding that the company is being run against their interests. Many companies and lawyers feel this could lead to disgruntled shareholders or creditors holding companies to ransom by filing such suits in different courts. They want the law to specify a minimum limit on the number of shareholders and the amount involved in such a collective action. Mr Khurshid pointed out that class action suits are for enabling an aggrieved class of shareholders or creditors of a company to get compensation, damages and disgorgement (or a court order asking the wrongdoers in the company to repay their ill-gotten gains) amounts. The Minister told Business Line that, “if we have a ceiling of a minimum of 10 per cent minority shareholders (to file a suit against the company) on prevention of oppression and mismanagement, then we can have a ceiling in class action suits also.” He said the minimum limit on the number of shareholders or creditors would prevent frivolous suits and encourage genuine complaints.
SUING A COMPANY
The Section on prevention of oppression and mismanagement in the Companies Bill, 2009, says minority shareholders can sue a company if it is being run against their interests. But there are riders. To initiate action against a company with share capital, there should be not less than one hundred members of the company or not less than one-tenth of its total number of members, whichever is lesser, or any member holding not less than one-tenth of the issued share capital. Besides, these applicants should have paid all calls and other sums due on his/their shares. In case of a company not having a share capital, the minimum limit is not less than one-fifth of the total number of members. Going by what the Minister says, these conditions could be extended to class action suits as well.
