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Introduction

The Companies Act, 2013 introduces some important changes to the company law regime in India. One such feature is a Class Action. The provision governing Class Action is set out under Section 245 of the Companies Act, 2013 which falls under the Chapter “Prevention of Oppression and Mismanagement”. However, class actions are evidently not the same as petitions against oppression or mismanagement, as commonly understood in India. The concept of a class action by shareholders was also recommended by the J.J.Irani Committee Report, 2005 which suggested that representative action may be initiated by one shareholder on behalf of one or more of the shareholders, on the premise that they would all have the same ‘locus standi’ to initiate an action against an erring company.

Section 245-Companies Act, 2013 – Overview

This is a new section and seeks to provide that in case of company having a share capital not less than one hundred members of the company or not less than such per cent as may be prescribed of the total number of its members, whichever is less, or any member or members holding not less than such percent as may be prescribed of the issued share capital of the company, and in the case of a company not having a share capital, not less than one-fifth of the total number of its members may file an application before the Tribunal if they are of the opinion that the management or control of the affairs of company are being conducted in a manner prejudicial to the interests of the company or its members or depositors to restrain the company from oppression or mismanagement.

Section 245-Companies Act, 2013

Section 245(1) reads:

Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders.

Who can sue?

1. Shareholders:

As per Section 245 a Class Action can be instituted by –

(a) Member(s)

(b) Depositor(s) or any class of the two.

The requisite numbers of members who can maintain a Class Action are specified under Section - 245(3) (i).

a) In the case of a company having share capital–

1. Not less than 100 members of the company or

2. Not less than such percentage of the total number of its members as may be prescribed, whichever is less.

[Note: The Draft Rules under the Companies Act, 2013 set out in Chapter - XVI Rule16.1, have prescribed the percentage as 10% of the total number of members of the company]

3. Any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed.

[Note: The Draft Rules under the Companies Act, 2013 set out in Chapter XVI Rule 16.1 (a), have prescribed the percentage as 10% of the issued share capital of the company.]

b) In case of a company not having share capital -

1. Not less than 1/5th of the total number of its member.

2. Depositors:

The requisite numbers of depositors that can maintain an action are set out in Section 245 (3) (ii).

a) Not less than 100 depositors,or

(b) Not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or

(c) Any depositor or depositors holding to whom the company owes such percentage of total deposits of the company as may be prescribed.

Who can be sued?

In a Class Action under Section 245, relief can be granted in favour of the applicant against the following:

1. The Company

2. The Directors of the Company

3. The Auditor of the Company, including the 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.

[Note : Section 245 (2) states that where damage or compensation is being sought against an audit firm, the liability shall be of the firm as well as all the partners who were involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.]

4. 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.

Hence, for the first time a member or depositor of a company has been empowered to initiate action against auditors, consultants, advisors or experts advising the Company.

Forum for instituting a Class Action

Section 245 (2) appears to provide for Class Actions to be instituted before the Tribunal. Tribunal has been defined in Section 2 (90) of the Companies Act, 2013 as the National Company Law Tribunal.

Under Section 408 of the Companies Act, 2013, the Central Government is empowered to constitute a Tribunal to be known as – The National Company Law Tribunal, consisting of a President and such number of Judicial and Technical Members as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are conferred on it by or under the Companies Act, 2013.

Under Section 421 an appeal from an order of the Tribunal would lie before an Appellate Tribunal and in terms of Section 423 any person aggrieved by the order of the Appellate Tribunal may file an appeal before the Supreme Court. The provisions for setting up of the Tribunal have not been notified yet.

Relief under Section 245

The different kinds of relief that can be granted by the Tribunal in a Class Action are set out in Section 245 (1).

(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 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—

(i) 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;

(ii) 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

(iii) 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.

Procedure set out in Section 245(4) & 245(5)

 As per 245 (4), the Tribunal while considering a Class Action filed under Section 245 (1), shall take into account the following -

(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 sub-section (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—

(i) authorised by the company before it occurs; or

(ii) 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.

In the event that a class action is admitted by the Tribunal, Section 245 (5) sets out a procedure that is required to be considered –

(a) public notice to all the members or depositors of the class in prescribed manner to be served on the admission of the Class Action.

(b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and a Lead Applicant be appointed from amongst them.

(c) ensure not two class action against same cause of action is allowed.

(d) cost or expenses connected with the application for class action are paid by the Company and any other person responsible for the oppressive act.

Consequences

An order passed by the Tribunal under Section 245 (1) is a binding order on the company as well as on all the members, depositors and auditor including the audit firm or expert or consultant or advisor or any other person associated with the company.

Consequences of non-compliance have been set out in sub-section (7) of Section 245

(a) Fine of not less than Rs.5 lakh extendable upto Rs.25 lakh, and

(b) Any officer of the company who is in default can be punished with imprisonment for a term upto 3 years and imposed a fine of not less than Rs.25,000 extendable upto Rs.1 lakh.

Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt of Courts Act, 1971.

Satyam Scam – Scenario

The Satyam scam involved a fraudulent scheme wherein the revenues of Satyam Computers Services Ltd. were materially overstated based on falsified invoices for hundreds of millions of dollars in consumer products that did not actually exist. Since Satyam‘s American Depository Shares were listed on the New York Stock Exchange, several Class Action Suits were filed against Satyam and the Managing Director including other members of the Management of Satyam on behalf of purchasers of Satyam’s American Depository Receipts, in the U.S.

In addition, the global audit firm PwC along with its International and India Unit were charged with Class Action for having recklessly disregarded a multiyear massive fraud by the Satyam Management. In 2011 Satyam and its auditor PwC agreed to pay USD 125 million and USD 25.5 million to settle claims filed by shareholders by way of a Class Action in US.

However, due to the absence of any statutory provision for Class Action under the Indian Companies Act 1956 to sue the audit firms no similar proceedings could be initiated by the affected shareholders of Satyam in India. This lacuna has been sought to be addressed by the legislature while drafting of the Companies Act, 2013 and introducing the provision of Class Action by way of Section 245.

Conclusion

The provisions governing applications in respect of oppression or mismanagement echoing Sections 397 and 398 of the Companies Act 1956 are set out under Sections 241 to 244 of the Companies Act, 2013 and Section - 245 in contrast introduces a distinct regime of Class Actions. The order passed under Class Action by the Tribunal shall be binding on the Company and all its Members, Depositors, Auditor including Audit Firm or Expert or Consultant or Advisor or any other person associated with the company. Stringent imprisonment and fine shall be imposed in case of default. An application for Class Action may also be filed by a Person or Association of Persons representing the affected persons.

- Suryah SG

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