Class Action Suit Under Companies Act

Key takeaways

• One person or a small group of persons suing on behalf of a larger group of people who have all experienced the same injury is known as a class action lawsuit.
• The main goal behind the availability of class action lawsuits is the protection of the rights of the minority shareholders.
• The NCLT is empowered to provide several reliefs in a class action suit under Section 245(1) of the Companies Act

One person or a small group of persons suing on behalf of a larger group of people who have all experienced the same injury is known as a class action lawsuit. One of the many advancement made by the 2013 Companies Act is the idea of class action lawsuits. The protection of the rights of the minority shareholders is the main goal behind the availability of class action lawsuits. As a result, class action lawsuits are anticipated to be crucial in addressing the numerous instances of unfair and abusive behaviour by the Board of Directors and other administrative staff that have been formally recognized by the Companies Act of 2013.

Forum

Section 245(1) of the Companies Act provides that class actions must be initiated before the National Company Law Tribunal (NCLT). By way of its June 1 2016 notification, the Ministry of Corporate Affairs announced the establishment of the NCLT and its respective locations.

Having constituted the NCLT, the Ministry of Corporate Affairs issued the NCLT Rules 2016 on July 21 2016, which contain, among other things, relevant rules regarding class actions under Section 245 of the Companies Act.

Instituting a class action

According to the Companies Act, if a shareholder, depositor, or a group of these individuals believe that the management or affairs of the company are being conducted in a way that is harmful to the interests of the company, its shareholders, or depositors, they may file class action lawsuit before the NCLT. A similar lawsuit may also be brought on behalf of the people asking for remedy.

Who may be sued through class action suits

• A company or its directors for any unethical, illegal, or wrongdoing deed or omission;
• An Auditor making any inappropriate or deceptive statement made in the audit report or any illegal or fraudulent activity, including the audit firm of a company;
• A consultant, expert, or adviser for making any false or deceptive statements to the company or for engaging in actual or potentially criminal, fraudulent, or unethical behaviour.

Stakeholders have additional authority to pursue legal action against auditors, experts, or consultants for specific wrongdoings when they are included in the class action together with the company and its management. This clause aims to make sure that before counselling a firm and its management, experts, advisers, and auditors use caution and diligence.

The Companies Act provides for a minimum number of claimants to institute a class action:

• • For a company with share capital, an action can be brought by:

1. a minimum of one hundred of its members, or (if less) the requisite percentage of its members;
2. any member(s) holding individually or collectively no less than the required proportion of the company's share capital, provided they have settled all calls and sums owed on the shares (Section 245(3)(i)(a)).

• • In order to file a lawsuit against a company without share capital, at least one-fifth of the firm's members must do so (Section 245(3)(i)(b)).
• • For depositors, an action can be brought by:

1. A minimum of one hundred of the company's depositors or, if less, a predetermined percentage of its depositors; or
2. Any depositor(s) having the necessary percentage of the entire amount of the company's outstanding deposits, either alone or jointly (Section 245(3)(ii)).

The Ministry of Corporate Affairs revealed certain draft rules that, among other things, stipulated that at least 10% of the total number of shareholders or depositors would be necessary to initiate a class action before Section 245 and the NCLT Rules 2016 were fully implemented. However, the Ministry of Corporate Affairs' notification of the NCLT Rules 2016 in this regard is silent, which could leave a loophole in the system.

After a class action suit is filed, any party may, with the NCLT's approval, choose to withdraw from the case at any time. Subject to the restrictions established by the NCLT, any party that opts out may nonetheless pursue a claim against the Company on an individual basis where a remedy is provided under any other legislation (Rule 86 of the NCLT Rules 2016).

Considerations for maintainability of class actions

On receipt of an application for a class action suit, the NCLT will consider (Section 245(4) of the Companies Act):

• • whether the application was made in good faith;
• • any evidence which identifies the involvement of anyone other than the directors or officers of the company on any of the matters claimed as relief;
• • whether the cause of action could be pursued by the member or depositor in his or her own right, rather than through a class action. While considering the desirability of an individual or separate action, the NCLT may take into account whether admitting separate actions would create a risk of (Rule 85(2) of the NCLT Rules 2016):

1. inconsistent or varying adjudications;
2. adjudications that, as a practical matter, would be dispositive of the interests of the other members; or
3. adjudications which would substantially impair or impede the ability of other members of the action to protect their interests;

• • any evidence relating to the views of members or depositors who have no direct or indirect personal interest in the matter;
• • where the cause of action is against an act or omission that has not yet occurred, whether it is likely to be authorised by the company before it occurs or ratified by the company after it occurs; and
• • where the cause of action is an act or omission that has already occurred, whether it is likely to be ratified by the company.

Without limiting the aforementioned rules, the NCLT may, under Rule 85(1) of the NCLT Rules 2016, consider the following when determining whether an application is admissible:

• A class action is desired because there are similar legal or factual issues; there are numerous members of the class, making it impracticable to join them individually.
• The represented parties' allegations or defences mirror those raised in the class action; and
• The representing parties will fairly and effectively defend the class action's interests.

Relief

The NCLT is empowered to provide several reliefs in a class action suit under Section 245(1) of the Companies Act, including:

• • an order to restrain the company from committing:

1. an act which is beyond the powers granted to it by its articles or memorandum; or
2. a breach of the company's memorandum or articles;

• • an order to claim damages or compensation or demand any other suitable action against:

1. the company or its directors for any fraudulent, unlawful or wrongful act, omission or conduct;
2. the auditor (including the company's audit firm) for any improper or misleading statement of particulars made in the audit report, or for any fraudulent, unlawful or wrongful act or conduct;
3. any expert, adviser, consultant or any other person for any incorrect or misleading statement made to the company, or any fraudulent, unlawful or wrongful act or conduct; or

• • any other remedy that the NCLT deems fit.

According to Section 245(6) of the Companies Act, the company, its shareholders, depositors, auditors (including the audit firm), consultants, advisers, and any other person connected to the company are all subject to an order made by the NCLT.

Penalties

A company may be fined a minimum of Rs. 500,000 if it disobeys an NCLT order. According to Section 245(7) of the Companies Act, this fine may be increased to a maximum of Rs2.5 million. In addition, Section 245(8) of the Companies Act provides that each executive of the company who is in default may face up to three years in prison and a minimum punishment of Rs. 25,000 that may be increased to Rs. 100,000.

There is no provision addressing the officers, directors, majority shareholders, experts, or consultants' failure to comply with or violations of orders made according to Section 245 of the Companies Act.

Examples of recent class action lawsuits

• Unwashed poppy seeds can be steeped in water to make tea, and companies that sell and market them despite knowing full well that they contain lethal levels of opium and have been linked to several fatalities globally are facing class action lawsuits.
• Many people have filed lawsuit against Johnson & Johnson on the grounds that the company's talcum powders can lead to ovarian cancer when used close to the genitalia.

Conclusion

It is possible to draw the conclusion that class action lawsuits will be a proper forum for members and depositors to voice their complaints against a company's management, including directors, advisors, consultants, auditors, etc., for actions or omissions that are detrimental, illegal, or wrong for the company's interests. Minority shareholders with a shared interest in promoting open corporate governance may file class action lawsuits as a means of recourse.