Attorneys at Law Since 1964

Class Action Suit: A Double Edged Sword for Corporate Devils!

Class Action Suit: A Double Edged Sword for Corporate Devils!

An over view

Section 245, of the Companies Act, 2013 contains provisions in respect of Class Action Suit. The concept of Class Action Suit has been introduced under the Companies Act, 2013 to bring the Indian Companies Act in line with the developed countries.
The provisions with regard to Class Action Suit were incorporated under the Companies Act, 2013 when India witnessed nerve wrecking corporate frauds. The main objective to introduce Class Action Suit under Companies Act, 2013 is to protect the interest of the members, depositors and to prohibit companies from committing acts ultra vires the provisions of the Act.

 

Satyam Saga

The shareholders of Satyam saw their investment tank from heights of Rs.528 per share to Rs.6.30 per share post disclosure of the Accounting fraud by Mr. Ramalingam Raju. The shareholders of Satyam Computers witnessed a sudden jolt after Mr.Ramalingam Raju confessed to the manipulation of accounting books of Satyam Computers. While the erstwhile Companies Act, 1956 was successful in punishing the offender, it was unsuccessful in bringing relief to the shareholders who lost heavily on account of the fraudulent practices. The Companies Act, 2013 has come to the rescue of shareholders who were left penniless after the value of their shares substainably collapsed due to the fraudulent activities of the promoters and management. The Companies Act, 2013 has provided a very good combination where the offender will be punished and the people who are involved will be liable even for a class action, wherein they have to compensate the shareholders and depositors for the losses caused to them on account of the fraudulent practices.

 

What is a Class Action Suit?

In simple terms, A Class Action Suit refers to a lawsuit whereby a particular class of people or group can collectively file a Suit against a particular Company to which they are associated if the Company conducts any act prejudicial or detrimental to their interest.

 

Who can file a Class Action Suit?

As per Section 245 of the Companies Act members or depositors of a Company can file a Class Action Suit against that Company, provided there must be atleast one hundred members in case of a company having share capital and not less than one-fifth of the total number of members in case of a company not having a share capital. The requisite number of depositors shall not be less than one hundred depositors.

 

When can a Class Action Suit be filed under the Companies Act, 2013

A Class Action Suit can be filed against the Company if the members or depositors are of the opinion that the management and conduct of the affairs of the company are being conducted in a manner prejudicial to the interest of the company or its members or depositors.

 

Against whom can a Class Action Suit be filed?

A Class Action Suit can be filed against the company or its directors, its auditor including audit firm of the company, any expert or adviser 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 their part.

 

Adjudicating Forum

The members or depositors as the case may be can file a Class Action Suit with the National Company Law Tribunal established under jurisdiction of the respective State where the registered office of the Company is situated.

 

What reliefs can be claimed?

  1. To restrain the Company from committing an act which is ultra vires the articles or memorandum of the company;
  2. To restrain the company from committing breach of any provision of the company’s memorandum or articles;
  3. 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;
  4. To retrain the company and its directors from acting on such resolution;
  5. To restrain the company from doing act which is contrary to the provisions of the Companies Act or any other law for the time being in force;
  6. To restrain the company from taking action contrary to any resolution passed by the members;
  7. To claim damages or compensation or demand any other suitable action from or against
    • 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;
    • 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
    • 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;
    • To seek any other remedy as the Tribunal may think fit.
  8. To seek any other remedy as the Tribunal may think fit.

 

Unreasonableness

The Tribunal if finds that the application is frivolous or vexatious it shall reject the application and make an order that the applicant shall pay cost to the opposite party.

 

Conclusion

The introduction of Class Action Suit in the Companies Act, 2013 is a weapon of choice to members and depositors. It is a caveat to the management and the promoters including auditors, experts or consultants to conduct the affairs in the interest of the members and depositors. It will instill confidence among the members and depositors and will raise the standard of corporate governance in the Corporate World. Class Action Suit is a step towards strengthening corporate democracy.

Leave a comment

Chennai

61, TTK Road, Alwarpet
Chennai 600 018
Tel: +91 44 4691 1111

Coimbatore

965, Harita Centre, Avinashi Road
Coimbatore 641 037
Tel: +91 422 652 1111

Top