GOVERNMENT NOTIFIES THRESHOLD FOR FILING CLASS ACTION
SUITS
Quick Reference:
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Applicability
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All Companies except Banking Companies[1]
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Applicable Section
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Section 245
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Applicable Rules
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Rule 84, 85, 86 and 87 of National Company
Law Tribunal Rules, 2016
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Background:
The concept
of “Class Action Suits” was first introduced in
the US, also known as “Representative Action”, which is usually a
form of court case, filed by larger group of people collectively who has
suffered same or similar injuries. However the same was not new India.
Lately in
year 2005, it was recommended by “J.J. Irani
Committee Report[2]”
the principle of “Class/Representative Action” by one shareholder on behalf of
one or more of the shareholders of the same kind have been allowed by courts on
the grounds of persons having same locus standi.”
Post the Satyam Scandal, the Indian
Parliament drafted the Companies Bill 2009[3] and introduces the provisions
enabling shareholders to file class action suits providing a way out to small
or minority group of stakeholders for redressing their grievances apart from
stakeholders like Creditors, Bankers, debentures holders etc. and later in
Companies Bill 2011. Thereafter the 2013 act has now introduced the concept of
class action under section 245.
What are Class
Action Suits under the Company Act, 2013……….?
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The
provisions governing Class Action is set out under the Section 245 of
the Companies Act, 2013 which falls under the Chapter XVI “Prevention
of oppression and Mismanagement” notified on 01st June, 2016[4].
It contains ten different sub clauses and provides procedures & reliefs
thereafter.
SECTION
245 allows specified categories of Petitioners[5],
who forms a common opinion about the grievances against the mismanagement of
company affairs (other than banking companies) by its directors,
auditors or advisors, and
can collectively approach (on behalf of all) the NCLT for redressing their
situation.
Introduction
of this section places greater liability not only on management but on
auditors & advisors so associated to act responsibly.
This relief is in
addition to the Oppression & Mismanagement of the Company covered under
the Section 241 & 244 of the Act. The members now can file application
under 241 as well as under 245 separately and distinctly, however remedies
available under the two are different, Section 241 to 244 seeks greater array
of remedies to specific members, however there is no such concept of waiver
under section 245.
Please note that
acts so committed/ concluded resulting misconduct are referred under section
241 whereas continual acts are referred in under section 245.
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CIRCUMSTANCES
/ CAUSE OF ACTION
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Where
specified categories of stakeholders forms a common opinion, that the
management & conduct of the affairs are being conducted in a manner
detrimental to the interests of the Company or stakeholders
The group
of people alleges that the defendant is responsible for causing the harm that
was suffered by the members of the “Class”
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WHO CAN
SUE
The
Company Act, 2013 provides for a
minimum number of claimants to institute class section:
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As per Sub
Section (1) of the Section 245 of the Companies Act, 2013 following can
collectively approach Tribunal:
§ Member or Members[6]
§ Depositor or Depositors[7]
§ Any Class of them, as the case may be.
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ELIGIBILTY
CRITERIA
Until
recently, this prescribed numbers of members or depositors required to file a
class action suit had not been notified by the government. The government has
on May 8, 2019 amended the National Company Law Tribunal Rules, 2016 and
notified the threshold limits for filing such class action suits under
Section 245 of the Act. The notified threshold limits are:
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Sub-Section
3 of Section 245 of the Act as illustrated below sets forth the number of
members/depositors required to file a class action suit.
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WHO CAN BE
SUED
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§ Company
§ Its Directors
§ An auditor, including audit firm
§ A consultant,
§ Expert[12]
§ Adviser
Individuals
as stated Auditor, Consultants, Expert & Adviser can be held separately
for their wrong doings alongside the Company and its management by
stakeholders by virtue of their powers. Therefore Individuals so associated
should act carefully and diligently before advising a company and its
management.
HOWEVER
in case of Audit firm, Liability is restricted to only those partners in
firm, involved in such actions.
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Similar provisions
under Companies Act, 2013
A separate provision has also been
incorporated under SECTION 37 of the Companies Act, 2013 which is too the
extent similar to Section 245:
Where affected persons may file suit or any
other action may be taken under Section 34[13] or Section 35[14] or Section 36[15], they may be any person or a
group of person or association of person. A suit instead of application with
NCLT can be filed.
However there is no minimum
number of persons required for filing such suit as required under section 245
of the Act,
How to file Class
Action Suit………….?
§ An application can be filed in Form NCLT-9 as
per rule 84 of NCLT Rules, 2016;
§ A copy of application also needs to be serve to the Company, Regional Director, Registrar of
Companies, others respondents and all such persons as the Tribunal may direct;
§ The Tribunal after taking into account the
points as mentioned in Section 245(4) and rule 85 of NCLT Rules, 2016, may
admit or dismiss the application;
§ Under Oppression & Mismanagement, the
Petitioner cannot ask for documents from the Company - Mohta Bros P Ltd. Vs.
Calcutta Landing and Shipping Co (1970) 40 Comp. Cas. 119 Cal, so exchange of evidence (documents) is not permitted as
permitted in Federal Law.
§
As per sub
section (8) of section 245 of the Act Where Application filed before the
Tribunal is found to be frivolous (not having serious purpose or value) or
vexatious, Tribunal may reject such application & accordingly do so by
mentioning the reason in writing and also may direct pay such as costs not
exceeding 1 Lakh.
§ In an application following
reliefs can be sought:
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§ On admission of application, a public notice
shall be issued by the Tribunal in Form NCLT-13 to all the members of the class
as per Section 245(5) and rule 87 of NCLT Rules, 2016; within Seven days of admission of application
Page 4 of 4
§ The cost of aforesaid public notice will be
borne by applicants and shall be later discharged by company or person so held
responsible in case order is passed in favour of applicants.
§ All similar applications pending in any
jurisdiction should be consolidated into single application
§
In case any applicant wants to opt-out of the proceedings after the institution of suit, applicant may do
so with the permission of Tribunal by filing Form NCLT-1 as per rule 86 of NCLT
Rules, 2016;
§ Order so passed by the Tribunal shall be
binding on 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.
§ Penalty on non-compliance of order
passed:
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GORSIA & ASSOCIATES, MUMBAI
ANJALI GORSIA, PRACTICING COMPANY SECRETARY
EMAIL ID: csanjali.gorsia@gmail.com
(Author-CS
Anjali Gorsia, an Associate Member of the Institute of Company Secretaries
of India and a Commerce Graduate)
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[1]
In other words, class suit actions cannot be filed against banking Companies as
stated in sub section (9) of section 245 of the Companies Act, 2013, due to
availability of special redressal system.
[5]
Under Sub section (1) of the Section 245 of the Act
[6]
As per Section 2(55) of the Companies Act, 2013
[7]
The ambit is also extended to depositors also along with members or any class
of them under section 245 compared to section 241 of the Companies Act, 2013.
[12]
For the purpose of this clause, Expert is defined under section 2(38) of the
Companies Act, 2013
[15]
Section 36: Punishment for fraudulently including persons to invest money.
