CLASS ACTION SUITS

Recent Amendment in the National Company Law Tribunal (Second Amendment) Rules 2019 tries to complete the structure of law governing class action suits. We have much earlier here discussed class action suits under the Companies Act, 2013 and rules made thereunder. Here, we will have an updated post discussion the law as up to date 8 May 2019.

RELIEFS UNDER SECTION 245 IN RESPECT OF THE COMPANY

An application under Section 245(1) before the honourable National Company Law Tribunal may be filed for seeking all or any of the following reliefs:

(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.

Members, Depositors or any class of them may seek these reliefs if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors.

An application under Section 245 shall be filled in Form NCLT-9.

RELIEF FROM AUDIT FIRM UNDER SECTION 245(2)

In addition to an action under Section 245(1)(g)(ii), an application may be filed against an audit firm to  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.

To my preliminary understanding, audit and audit firm includes statutory audit, secretarial audit, cost audit and internal audit and accordingly a firm conducting any of these audits.

An application under Section 245 shall be filled in Form NCLT-9.

REQUISITE NUMBERS FOR FILING APPLICATION NCLT – 9

In case of Application by members Company having share capital

According to Section 245 (3)(i)(a), in case of a company having a sharing share capital, the application may be filed by :

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

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

(c) any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed.

This is a “whichever is less” kind of requirement therefore when applicants achieve to satisfy any of these conditions; they become eligible to file an application.

Accordingly, Rule 84(3) of NCLT Rules 2016 prescribes that in case of a company having a share capital, the requisite number of member or members to file an application under sub-section (1) of section 245 shall be –

(i) based on the number –

(a) at least five per cent of the total number of members of the company; or (b) one hundred members of the company, whichever is less; or

(ii) based on a percentage of holdings –

(a) member or members holding not less than five per cent of the issued share capital of the company, in case of an unlisted company;

(b) member or members holding not less than two per cent of the issued share capital of the company, in case of a listed company.

However there is one precondition under Section 245, all these applicants should have or have paid all calls and other sums due on his or their shares. These shares may be partly paid shares but all calls made till application date must have been paid.

In the case of Application by members Company not having share capital

In case of a company having a share capital, the requisite number of member or members to file an application under sub-section (1) of section 245 shall be not less than one-fifth of the total number of its members.

In case of Application by Depositors

The requisite number of depositors provided in sub-section (1) shall not be:

1. less than one hundred depositors or
2. not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or
3. any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

Accordingly, Rule 84(4) of NCLT Rules 2016 prescribes that the requisite number of depositor or depositors to file an application under section 24591) shall be –

(i) (a) at least five per cent of the total number of depositors of the company; or (b) one hundred depositors of the company, whichever is less; or;

(ii) depositor or depositors to whom the company owes five per cent of total deposits of the company.”

SERVICE OF APPLICATION

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

CONSIDERATION OF APPLICATION [SECTION 245(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(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.

EFFECTS OF ORDER [SECTION 245(6)]

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.

PUNISHMENT FOR NON-COMPLIANCE [SECTION 245(7)]

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(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 (9)]

This Section is not applicable to Banking Company.

REPRESENTATIVE CLASS ACTION SUITS [SECTION 245(10)]

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).

APPLICATION OF CERTAIN PROVISIONS TO PROCEEDINGS

The provisions of sections 337, 338, 339, 340 and 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the Tribunal under section 241 or section 245.