By Alok Sunny
The Companies Act 2013 brought in a slew of changes, the Parliament passed the new Companies Act in 2013 thereby replacing the Companies Act of 1956. With the growing complexity of modern business environment it was a long standing demand of the business community and industry that the Companies Act is in need of a thorough reworking.
One of the major changes brought in by the Companies Act 2013 was of ‘Class Action Law Suits’. Collective lawsuits/Class Actions originated in the United States in 1938 and are still predominantly a U.S. phenomenon. It describes a ‘sui generis’ area of litigation. In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332(d).
In India, representation suits may be filed under Sec. 91 of Code of Civil Procedure, under Sec. 12(1)(c) of Consumer Protection Act, 1986 and there can be Public Interest Litigation in High Courts and Supreme Court and Class Petition for human rights violations. The problem with this was that courts were free to dismiss these PILs, resulting in no real solution to the grievances of the investors.
A class action suit can be filed under the Companies Act, 2013 against members of a company, instead of individual suits where there are numerous persons having the same interest in that suit. Different regulations may have a different requirement for filing it, but generally more than one person can file it. However, the new section in Companies Act, 2013 requires at least 100 members or depositors to file a class action under Section 245.
A class action suit can be filed under the Companies Act, 2013 against members of a company, its auditors, or any expert, advisor, consultant to the company under several grounds. Members or depositors or any class of them, as indicated above, may file a class action suit if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors seeking all or any of the following orders, namely:
- (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.
According to the company law provisions, the order of the National Company Law Tribunal in any class action suit is binding on a company. Any failure to implement the order of the Tribunal can attract fine in the range of Rs 5 lakh to Rs 25 lakh on the defaulting company. Further, every officer responsible for such default shall be liable for imprisonment and fine.
Interestingly, if the Tribunal finds the application for filing class action suit frivolous, it may, in addition to dismissing the application, impose a fine of Rs 1 lakh on the applicant. Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt of Courts Act, 1971.
Class action law suits can prove to be advantageous in many ways. Such as, reduction in number of lawsuits and allowing number of people with a common interest in a matter to sue or be sued as a group. It reduces litigation costs, efforts and increases efficiency of a legal process. Avoids repetition of same witnesses, documents and trial time and again. Stakeholders will have another strong legal recourse in their hands besides filing a case of oppression and mismanagement.
Deposit holders who have no other option but to file civil suit, can take action against wrongful acts by the company or specified people and assure more security, as class action suits can be filed by stakeholders against auditors, consultants, advisors of the company, so all professional shall ensure full independence, accuracy and diligence while giving advises and opinions to the companies. Companies will be more vigilant now and more cautious in selecting their experts, advisors, auditors who would give them more sound and accurate advice.
It may happen that the class action suits, due to the new provisions in the 2013 Act will become in the years to come a beneficial platform for members and depositors to raise their grievances against the management of a company including directors, advisors, consultants, auditors etc for acts or omission that is prejudicial, unlawful or wrongful to the interest of the company. Class action suits can also be undertaken as a redressal tool by minority shareholders having common interest for promotion of transparent corporate governance.
However, for Class Action Law suits to become as ubiquitous as is the case in the west there are challenges that it faces in the Indian legal System. First is the absence of Plaintiff Law firms which are present in the west, they organize litigants and file the suit. They also advertise themselves which law firms can’t do in India. Secondly, in the west most firms work on a contingency model, where they do not take any fees upfront and usually collect a portion of the settlement claim. In India the contingency model is prohibited. Thirdly, the huge cost of filing the suits and the delay within the legal system also works as an impediment.
Even though the practice of filing the Class Action Law Suits may not become as pervasive as in the west, what the new provisions in the 2013 Companies Act seeks to achieve is commendable and can be seen as step in the right direction.