CLASS ACTION IN COMPANIES ACT, 2013

UPDATE: on 30^th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

In continuation with my last blog post on Oppression and Mismanagement; I am reading Class Action under Clause 245 of the Bill. Provisions relating to Class Action are under Chapter XVI of the Companies Bill, 2012 and basically target to achieve investor protection in a limited manner and on an experimental basis.

[Law discussed in this post was valid till 8 May 2019 and have academic and Historic value.]

APPLICATION OF CLASS ACTION AND RELIEFS (SECTION 245, SUB – SECTION 1):

Members, Depositors or any class of them may file an application before the tribunal for seeking all or any of the following order:

(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 a 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—

1. 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;
2. 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
3. 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.

Liabilities of Audit Firm and its Partners (Section 245, Sub – Section 2):

Where applicants seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

Number of Applicants (Section 245, Sub – section 3):

In the case of a company having sharing share capital:

(a)  Not less than one hundred members of the company, or

(b) Not less than the prescribed percentage of the total numbers of its members,

Whichever is less shall have the right to apply.

However, any member or members holding not less than the prescribed percentage of the issued share capital of the company, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares, shall also have right to apply.

In case of a company not having a share capital, not less than one – fifth of the total number of its members shall have the right to apply.

In case, application by depositors:

(a)  Not less than one hundred depositors of the company, or

(b) Not less than a prescribed percentage of the total numbers of depositors,

Whichever is less shall have the right to apply.

However, depositor or depositors who owe not less than the prescribed percentage of total deposits of the company shall also have the right to apply.

An application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1).

Consideration of Application (Section 245, Sub – section 4):

When considering an application for class action, the tribunal shall take into account:

(a)   whether the member or depositor is acting in good faith in making the application for seeking an order;

(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of subsection (1);

(c)  whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;

(d)  any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;

(e)  where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—

1. authorised by the company before it occurs; or
2. ratified by the company after it occurs;

(f)   where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

Guideline for Tribunal for admitted applications (Section 245, Sub – section 5):

The Tribunal shall have regard to the followings:

(a)  public notice shall be served on the admission of the application to all the members or depositors of the class in such manner as may be prescribed;

(b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and a lead applicant shall be chosen or appointed;

(c)  two class action applications for the same cause of action shall not be allowed;

(d)  the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.

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Effects of Order (Section 245, sub – section 6, 7):

Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.

Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Frivolous or vexatious Application (Section 245, Sub – section 8):

Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

Exemption to Banking Company (Section 245, sub – section 10):

This Section is not applicable to Banking Company.

According to Section 246, the provisions of sections 337 to 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the Tribunal under section 241 or section 245. We will discuss these provisions in our next post.

Please note: this blog post is not a professional advice but general information about the subject covered here. I welcome your comments and feedback.