Class action suits in Indian company law, explained

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New Delhi: Last week, the government notified several provisions of the Companies Act, 2013, bringing them into effect. Among them were sections regarding the National Company Law Tribunal (NCLT), protecting employees during investigations and imposing restrictions on the transfer of securities while an investigation was pending regarding it.

Yet another provision was Section 245, which relates to class action suits in cases of mismanagement of a company by its directors.

Class action suits are not new in India. But this section is a first of its kind under company law.

Here’s a look at how the class action suit would change the company law regime.

What are class action suits under company law?

If 100 shareholders (in case of company with share capital), or 10% of the holding interest, or depositors find that the company’s affairs are not being managed in its best interests, after this notification, they can collectively approach the NCLT for redressing the situation. This is what the new provisions on class action suit would allow.

Under the 2013 Act, shareholders also have the option to not bring a collective case, or a class action suit. For this also, at least 100 shareholders will be required.

Why have a separate provision for class action, then?

A major change is the option of getting monetary compensation or damages owing to the fraudulent actions of a company.

“The injunctive reliefs could be overlapping but you have an entirely different option available to claim compensation, damages or any other suitable action for any fraudulent action of the company, its directors, auditors, advisers. The spread is much wider, the consequences are, insofar as the monetary compensation is concerned is today statutorily provided for,” said Ritu Bhalla, senior litigation partner at law firm Shardul Amarchand Mangaldas & Co, Delhi.

The remedies available under the two are different. Sections 241-244, which also seek to redress cases of oppression and management have a greater array of remedies.

“The provisions of class action come under the head of oppression and mismanagement but there are some differences between the remedies sought under class action under Section 245 and under the general provisions of oppression and mismanagement under Section 242. While under Section 242 the NCLT can order acquisition of the company’s shares, restrict transferability or allotment of shares, removal of managing director and other directors of the company, in class action, the orders will mainly be restraining orders,” said Lalit Kumar, corporate partner at law firm J. Sagar Associates.

These restraining orders could be in the nature of restraining a company from committing an act which is beyond the scope of the company’s memorandum of association or articles of association, declaring a resolution altering the charter documents as void if such resolutions are passed upon suppression of material facts or through a misstatement, he added, by way of examples.

An added advantage of the provisions on class action suit is that they cover depositors also. This was not a feature of the earlier law.

“The earlier provisions don’t cover depositors, the provisions of class action covers them. Everything else seems to be the same with the class actions even the threshold of 100 shareholders is the same,” Kumar said.

What was the need for class action suits in company cases?

The option of class action suits for company law cases is a well established principle in foreign jurisdictions, especially the US.

In India, the need for a change in law arose after the Satyam scam. According to Bhalla, while investors in the US successfully won damages worth thousands of crores of rupees, those in India were left high and dry.

“Technically, yes, options were available, filing civil cases, pay huge stamp duties, file a representative action, get into the civil court, rigours of the civil jurisprudence or go to the consumer forum which had its own challenges of satisfying whether it was a contract of goods or services. There was no real viable option in India, unlike options available overseas, where this jurisprudence is not new, it’s not rare, it’s a common phenomenon,” she said.

This new provision will also bring more accountability, and the company and associated parties such as auditors and advisers, will have a greater liability to act responsibly.

“In class action suit, you can sue the company, the directors, the auditors, the technical advisers of the company who were party to the fraud…They all now need to understand the implication of how the affairs of the company are going to be conducted and how they’re going to be called upon in question. Interestingly, it says auditors including audit firms of the company are now equally liable. It’s a quantum jump for the options available to the investor, it’s a warning for the people running, controlling and advising the company,” Bhalla added.

The provision will enable representative action on behalf of similarly affected people, or for those who don’t have the required numbers to file a case before the tribunal.

“After the class action is filed, the NCLT issues a public notice about it. There could be more people joining in who may or may not have qualifying shares. After the initial opening of the doors, there’s an option of others joining in and this being a representative action for others,” Bhalla said.

Are there enough checks and balances to avoid misuse of the provision?

The qualifications required to file a class action suit, according to Bhalla, give an adequate safeguard against misuse of this provision.