Class actions under Companies Act
The legislature introduced the concept of class action into law by way of Section 245 of the Companies Act 2013. Specifically, Section 245 has introduced the concept of specialised class action by a company's shareholders and depositors. Although this specialised provision was first introduced on September 12 2013, it came into force on June 1 2016.
The introduction of this specialised remedy was in part based on recommendations from the JJ Irani Committee, which suggested the development of a concept of representative action that could be initiated by one shareholder on behalf of one or more shareholders, on the premise that they would all have the same locus standi to initiate an action against an erring company.
Class actions under Companies Act
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
Under the Companies Act, class action claims can be filed before the NCLT by a shareholder, depositor or a group of such persons if they are of the opinion that the management or the affairs of the company are being conducted in a manner that is prejudicial to the interests of the company, its shareholders or depositors. Such an action can also be filed on behalf of the individuals seeking relief.
A class action may be filed against:
- a company or its directors for any fraudulent, unlawful or wrongful act or omission;
- an auditor, including the audit firm of a company, for any improper or misleading statement made in the audit report or any unlawful or fraudulent conduct; and
- a consultant, expert or adviser for rendering any incorrect or misleading statement made to the company or any actual or likely fraudulent, unlawful or wrongful act or conduct.
Where auditors, experts or consultants are included within the ambit of the class action alongside the company and its management, stakeholders have further powers to take action against such individuals for specified wrongdoings. This provision is geared towards ensuring that experts, advisers and auditors act carefully and diligently before advising a company and its management.
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:
- a minimum of 100 of its members or a previously prescribed percentage of its members (whichever is less); or
- any member(s) individually or jointly holding no less than the prescribed percentage of the company's share capital, on the condition that they have paid up all calls and sums due on the shares (Section 245(3)(i)(a)).
- For a company without share capital, a minimum of one-fifth of the total number of its members is required to bring an action (Section 245(3)(i)(b)).
- For depositors, an action can be brought by:
- a minimum of 100 of the company's depositors or a previously prescribed percentage of its depositors (whichever is less); or
- any depositor(s) individually or jointly holding the required percentage of the total value of the company's outstanding deposits (Section 245(3)(ii)).
Before Section 245 and the NCLT Rules 2016 were formally enacted, the Ministry of Corporate Affairs shared certain draft rules which prescribed, among other things, that at least 10% of the total number of shareholders or depositors would be required to institute a class action. However, the NCLT Rules 2016, as notified by the Ministry of Corporate Affairs, are silent in this regard, which may create a gap in the system.
A party to a class action can opt out of the proceedings at any time after it is instituted, with the NCLT's permission. Any party that opts out can still pursue a claim against the company on an individual basis under any other law, where a remedy is available, subject to the conditions imposed by the NCLT (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):
- inconsistent or varying adjudications;
- adjudications that, as a practical matter, would be dispositive of the interests of the other members; or
- 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 prejudice to the aforementioned provisions, the NCLT may, while considering the admissibility of an application, consider whether (Rule 85(1) of the NCLT Rules 2016):
- the class has so many members that joining them individually would be impractical, making a class action desirable;
- there are common questions of law or fact;
- the representative parties' claims or defences are typical of the claims or defences of the class action; and
- the representative parties will fairly and adequately protect the interests of the class action.
Section 245(1) of the Companies Act enables the NCLT to grant various reliefs in a class action, including:
- an order to restrain the company from committing:
- an act which is beyond the powers granted to it by its articles or memorandum; or
- a breach of the company's memorandum or articles;
- an order to claim damages or compensation or demand any other suitable action against:
- the company or its directors for any fraudulent, unlawful or wrongful act, omission or conduct;
- 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;
- 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.
An order passed by the NCLT is binding on the company and its shareholders, depositors, auditors (including the audit firm), consultants, advisers and any other person associated with the company (Section 245(6) of the Companies Act).
It a company fails to comply with an NCLT order, a minimum Rs500,000 fine may be imposed. This fine can be extended to up to Rs2.5 million (Section 245(7) of the Companies Act). In addition, each officer of the company who is in default may be subject to imprisonment for up to three years and a minimum fine of Rs25,000, which can be extended to up to Rs100,000 (Section 245(8) of the Companies Act).
There is no provision addressing default on or violations of orders passed under Section 245 of the Companies Act by the officers, directors, majority shareholders, experts or consultants.
The enactment of Section 245 is likely to have far-reaching effects on the legal regime. In addition to empowering shareholders and depositors, it will affect how companies conduct their affairs.
For further information on this topic please contact Jasleen K Oberoi or Rishabh Sureka at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected] or [email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.