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Class Action Suit filed under Companies Act

class action suit

What is Class Action Suit?

One or more than one person can bring the legal suit. But sometimes there might be a situation where the suit is against a corporation or a company, and large number of people gets involved directly or indirectly in the matter.  In such a case, the tribunal (National Company Law Tribunal) cannot deal with every individual case on the same subject matter with regard to one company. Therefore, to handle this matter the Companies Act, 2013 has come up with a concept of Class Action Suit. The Class action suit makes sure that numerous aggrieved persons having a standard interest in an exceedingly touch be represented as one unit on a standard platform. This formation as one unit gives them right to sue against and be sued by a corporation or a company.

What is Section 245 of the Companies Act, 2013

The class action suits can be brought under section 245 of the Companies Act 2013. Class action suits are those suits which can be filed by a large number of people having the same interest instead of filing many individual suits on the same particular subject matter. Whenever the shareholders or creditors/depositors consider that the management of a company is having some issues which are prejudicial to the interests of the shareholders or depositors or both, in such a case, they can together file a class action suit. In the suit, names of only a few people will be present who represent the whole group of aggrieved persons.

These class action suits are effectively useful in terms of both time and money. It is beneficial for those individuals who cannot bear the expenses of their own suits. It also saves the time of tribunal to collectively hold the numbers of cases in one go. When the group of people is represented by a specific number of people, every issue of each person can be heard for the common cause before the tribunal. All the aggrieved parties can share the expenses or costs for the litigation and make it a cost-effective procedure as a whole.

Types of Relief Granted

When the members or depositors are of the opinion that management conducting any affairs of a company which are against the interests of such group of members or depositors, then all can file an application collectively on behalf of all such aggrieved persons before the Tribunal for seeking the relief orders under Section 245(1). The relief is granted other than under this section if following is violated:

  • The respective company can be restrained from acting ultra vires which means acting beyond one’s legal power or authority to memorandum or articles of the company.
  • The company can also be restrained from committing any breach against the provisions mentioned in articles or memorandum of the company.
  • It prohibits on declaring the alteration to memorandum or articles by the company. As it can be void, it can suppress the facts or mislead the members or depositors.
  • The restrictions on directors of the company and prohibits them from acting on such falsely obtained alteration.
  • The company can be restrained from acting against the provisions of the law in force.
  • The company can be restrained from taking action against the resolution passed by the members.
  • The remedy can be granted in form of the damages and the compensation to the aggrieved party against the fraudulent, unlawful or wrongful act or omission or order.
  • The prohibition on expert or advisor or consultant for giving incorrect or misleading statements to the company for doing any fraudulent or unlawful or wrongful activity.
  • The restrictions on auditor including his audit firm for furnishing improper and misleading financial statements for the commission of fraudulent, unlawful or wrongful activity in relation to the company.
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Sub-section (2) of Section 245 states that whenever such members or depositors seek damages or compensation from the audit firm which is responsible for the fraudulent furnishing of accounts of the company, then the liability is not only of the firm; it also extends to every partner who took part in such unlawful, wrongful, fraudulent activity.

Minimum Requirement of People for Filing the Application

Section 245 Sub-section (3) provides about the number of people required for filing an application to bring the suit in action. The requisite number of members or depositors for filing the application under Section 245 sub-section (1) has been clarified through the latest amendment in Rule 84 of the National Company Law Tribunal Rules, 2016. This has prescribed the requisite number and hence has given rise to latest amendment of the National Company Law Tribunal (Second Amendment) Rules, 2019.

According to new amendment, in case of a company having share-capital, the requisite number is:

  • The strength must be at least 5% of the total number of members of the company or one hundred members of the company, whichever is less
  • The members who hold a minimum of 5% in the issued share capital of a company if it is unlisted
  • The members who holds a minimum of 2% in the issued share capital if the company is listed.

In the case of depositors, the requisite number is:

  • The strength must be at least 5% of the total number of depositors of the company or one hundred depositors of company, whichever is less
  • The depositors to whom the company owes 5% of total deposits of the company.

Considerations by the Tribunal

After the consideration of an application under Section 245 Sub-section (1), the Tribunal has to consider the following matters, as per provisions of Section 245 Sub-section (4), which are:

  • The Tribunal has a responsibility to see after filing of the application whether the members or depositors are acting in good faith for seeking a relief order.
  • The Tribunal must take into account as any evidence against the any person who may involve in the mismanagement other than director or officer.
  • The Tribunal should take in account the fact that any member or depositor can attain relief for the cause of action
  • The Tribunal must conduct an examination if the members or depositors have any personal interest, either connected directly or indirectly in the matter that is being preceded.
  • The Tribunal must make sure to check if the cause of action is yet to occur and that particular act or omission is likely ratified by the company within the time prescribed.
  • If the cause of action has already occurred, then the Tribunal needs to examine whether the same can be ratified by the company or not.

Conditions after Admission of a Suit by Tribunal

According to Section 245 Sub-section (5), the Tribunal must look after the following matters after an admission of an application which is:

  • In the manner prescribed by the relevant provision, the public notice has to be served to all the members or depositors concerned, after the application of the suit is admitted by NCLT
  • All the other similar applications in any jurisdiction have to be converted into a single application of the suit under this provision. A lead applicant on behalf of all the applicants should be selected and appointed after the consensus among all such members or depositors.
  • The Tribunal have the power to appoint such lead applicant who is likely to be responsible for the proceedings on behalf of the applicants side
  • There has to be one class action suits and not two can be entertained for the same cause of action. They are not allowed and permissible in any manner
  • The costs or expenses for the class action suit have to be bear either by the company or the persons who are responsible for the fraudulent and the oppressive actions.

Penalty Against the Non-Compliance of Order

Section 245 Sub-section (6)states that any order passed by the respective Tribunal in regard to the class action suit then it must be binding upon all the members, depositors, directors, officers, audit firms, audit consultant, experts or any other persons who are associated with the company and its mal-practices.

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Section 245 Sub-section (7) states that if a company fails to comply with the order passed by the tribunal, Rs.5 lakhs has to be paid as a penalty amount which can be extended upto Rs.25 lakhs for the company as penalty.  An officer of a company who is in default and fails to comply with an order passed by the Tribunal, then he must punished with an imprisonment which may extend to 3 years and also imposing of fine, which  cannot be less than Rs.25,000 and may extend upto Rs.1,00,000.

Penalties for Baseless Application

Section 245 Sub-section (8) states that when the Tribunal gets to know that an application filed by members or depositors is frivolous, then it may reject the application per se. The Tribunal will record reasons for rejection of an application in writing. The tribunal can also impose fine on the applicant to pay costs not exceeding Rs.1 Lakhs as a penalty to the opposite party. The amount to be paid is specified in the order passed by the Tribunal.

Section 245 Sub-section (9) states that procedure cannot be applicable to any banking company. Any company other than a banking company is covered under this section of the Act.

Section 245 Sub-section (10) states that the persons who is filing an application or taking any action under sub-section (1) of Section 245 as a class action suit shall complies with all the provisions and requirements that are relevantly provided under the Act.

Conclusions

Class action suit is helpful in reducing costs for the people who are aggrieved due to the same cause of action and unable to approach the Tribunal independently for justice. Under the previous Companies Act, there was a concept called ‘oppression and mismanagement’ wherein the suit can be instituted only against the company. But under the Companies Act 2013, class action suits are a new concept which covers every associated person who involves in an unlawful activity such as auditors, experts, consultants, etc.  And they can also be punished. Class action suits increase a sense of responsibility and diligence in the companies with respect to protecting the interests of the stakeholders. This is because the vigilant stakeholders are paid attention to and being addressed by the Tribunal through the class action suit, which is a very good sign for the protection of corporate ethics in the corporate world for upholding fair practices.

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