Class Actions under Companies Act 2013 and new Era of Corporate Democracy in India
15 Oct 2013
India Inc has never faced the challenge in its corporate democracy as it would now face as soon as Section 245 of The Companies Act 2013 comes into effect. Class suits were not heard in India until Class suit was filed in USA against the SATYAM company when the biggest ever corporate fraud was disclosed and American Investors were shocked to know the quantum and quality of the fraud by its own Managing Director cum Promoter of the company, who was the most darling of the investor community worldwide. Class Action Suits consultants are imminent for companies in India.
This section 245 of the Companies Act 2013 would certainly change the companies are mis-managed and robbed of by unscrupulous promoters or management of the companies.Recently number of such big frauds and mis-management reports have come into the light. Serious Frauds Office has initiated its investigations against them,for example, Reebok frauds in NCR of Delhi, currently in NSEL etc.
What are the legal provisions, rights and obligations of shareholders or depositors or companies or its directors are explained in section 245 and 246 of the Companies Act 2013 and the same are stated herein below to make your own judgment of effectiveness:
245. (1) 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, namely:—
(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 mis-statement 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 actor conduct or any likely act or conduct on his part;
(h) to seek any other remedy as the Tribunal may deem fit.
(2) Where the members or depositors 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 reportor who acted in a fraudulent, unlawful or wrongfulmanner.
(3) (i) The requisite number of members provided in sub-section (1) shall be as under:— (a) in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed,whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital,not less than one-fifth of the total number of its members.
(ii) The requisite number of depositors provided in sub-section(1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed,whichever is less, or any depositor or depositors towhomthe company owes such percentage of totaldeposits of the companyas may be prescribed.
(4) In considering an application under sub-section (1), the Tribunal shall take into account, in particular—
(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.
(5) If an application filed under sub-section(1) is admitted, then the Tribunal shall have regard to the following, namely:—
(a) public notice shall be served on 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 the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be incharge of the proceedings from the applicant’s side;
(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.
(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.
(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.
(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.
(9) Nothing contained in this section shall apply to a banking company.
(10) Subject to the compliance of this section, 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).
246. The provisions of sections 337 to 341 (both inclusive) shall apply mutatis mutandis,
in relation to an application made to the Tribunal under section 241 or section 245.
Rules Under Chapter XVI of the Companies Act 2013 in respect of Class Actions:
Number of members who can file an application for class action.
16.1.(a) For the purposes of sub-clause (a) of clause (i) of sub-section (3) of section 245, the number of members that may file an application for class action as provided in sub-section (1) shall be, in the case of a company having share capital, not less than one hundred members of the company or not less than ten per cent of the total number of its members, whichever is less, or any member or members singly or jointly holding not less than ten percent of the issued share capital of the company, subject to the condition that the applicant or applicants have paid all calls and other sums due on his or their shares.
(b)For the purposes of sub-clause (ii) of sub-section (3) of section 245, the number of depositors that may file an application for class action as provided in sub-section(1) shall be not less than one hundred depositors or not less than ten per cent. of the total number of depositors, whichever is less or any depositor or depositors singly or jointly holding not less than ten percent of the total value of outstanding deposits of the company.
Publication of Notice.
16.2. (1) For the purposes of clause (a) of sub section (5) of section 245, on the admission of the class action application filed under sub-section (1) of section 245, a public notice shall be issued by the Tribunal, to all the members of the class-
(i) by publishing the same within seven days of admission of the application by the Tribunal at least once in a vernacular newspaper in the principal vernacular language of the state in which the registered office of the company is situated and circulating in that state and at least once in English in an English newspaper circulating in that State;
(ii) the Tribunal shall require the company to place the public notice on the website of such company, if any, in addition to publication of such public notice in newspaper under (i) above:
Provided that such notice shall also be placed on the website of the Tribunal, if any, on the website of Ministry of Corporate Affairs, on the website, if any, of the concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock exchange(s) where the company has any of its securities listed, until the application is disposed of by the Tribunal.
(2) The date of issue of the newspaper in which such notice appears shall be taken as the date of serving the public notice to all the members of the class.
(3) The public notice shall, inter alia, contain the following-
(i) name of the lead applicant;
(ii) brief particulars of the grounds of application;
(iii) relief sought by such application;
(iv) statement to the effect that application has been made by the requisite number of members/depositors;
(v) statement to the effect that the application has been admitted by the Tribunal after considering the matters stated under sub-section (4) of section 245 and it is satisfied that the application may be admitted;
(vi) Informing other members or depositors that they can also join the applicant, if they so wish;
(vii) date and time of the hearing of the said application;
(viii) time within which any representation may be filed with the Tribunal on the application; and
(ix) such other particulars as the Tribunal thinks fit.
(4) The cost or expenses connected with the publication of the public notice shall be borne by the applicant and shall be defrayed by the company or any other person responsible for any oppressive act.
16.3 Application under clause (a) or clause (b) of sub-section (1)of section 241 of the Act shall not be withdrawn without the leave of the Tribunal.
16.4 (1) A copy of every such application under clause (a) or clause (b) of sub-section (1) of section 241 of the Act shall be served on the concerned company and on such person as the Tribunal directs.
(2) A copy of every application made under section 241 or 245 shall be served on the Regional Director and Registrar of Companies.
16.5 Where an order made by the Tribunal on a petition under this Chapter involves a reduction of share capital or alteration of the memorandum of association, the provisions of the Act and rules relating to such matters shall apply as the Tribunal may direct.
16.6 An application under clause (b) of subsection (1) of section 243 for leave to any of the persons mentioned therein as to be appointed or to act as the managing director or other director or manager of the company, shall state that whether notice of the intention to apply for such leave has been given to the Central Government and shall be accompanied by a copy of such notice. Notice of the date of hearing of the petition together with a copy of the petition shall be served on the Central Government not less than 14 clear days before the date fixed for the hearing.
16.7 Notice to be given to the Central Government, of applications under sections 241 and 245
The Tribunal shall give notice of every application made to it under section 241 or 245 to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing a final order under those sections.
Class Actions would change traditional management style in India and promote more aggressive corporate democracy in the larger interest of investors.
Class Action Suits consultants under companies Act 2013 are imminent for companies in India. One of such leading firm may be contacted at : www.hpacs.com
Author: Hemant Paliwal - Practicing Company Secretary
Email: [email protected]
Web: www.hpacs.com