Class action suit in India- Absence of a distinguishing factor -Part II

In absence of a distinguishing factor, the underlying principle of class action gets frustrated and nullified. The Companies Act, 2013 confers rights upon members and depositors to initiate two proceedings with regard to the same subject matter. This is second part of a three part series
 

Who can sue for class action?

 

Section 245(1) of the Companies Act, 2013 now empowers the members, depositors or any class of them to proceed with a class action suit if they are of the opinion that the management or affairs of the company are being conducted in manner that is pre-judicial to the interests of the company or its members or depositors. Section 245(3) further provides for a minimum number of class actioners for perusing a class action as below:

 

Type of Company

Requisite Shareholders

Requisite Depositors

Company with Share Capital

100 members of the Company or 10% of total no. of members

100 depositors of the Company or;

10% of total no. of depositors or;

Any depositor or depositors to whom the company owes 10% of total deposits of the company

Company without Share Capital

1/5th of total no. of members

 

It is pertinent to note the language of the section to a substantial extent is similar to what has been provided under oppression and mismanagement under section 241 of the Act. Section 241 provides that a member can move an application for oppression and mismanagement if “the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company”. Thus with respect to members, one can see that Act the outlines of two sections are not distinct from each other.

 

The Act incorporated class action provisions to provide members with additional rights against abuse of powers by the company. The member now thus has a right to proceed under section 241 as well as section 245 separately and distinctly, if the affairs of the company are being conducted in a manner prejudicial to the interests of the company. Thus, the section apparently gives the member a right to initiate two proceedings on same subject matter. This is diabolically opposed to the principle of res judicata as provided under Civil Procedure Code, 1908.

 

Also, the Act empowers only members and depositors to proceed under class action. It has grossly failed in its attempt to include creditors, debenture holders and other stakeholders of the company.

 

Section 245 further provides that an application for class action suit can be filed before the Tribunal “on behalf of the members or depositors”. Will this apparently mean that such an action is brought on behalf of all the members? If the answer were in affirmative, would the damages be awarded to the class as whole or to only those who brought the action? If the answer were negative, then how would the same classify as “class” with respect to class action.

 

Even if one assumes that it included all members, then, it would also include those members who were or might be behind the wrongs complained of. In such a case how would the Tribunal ensure just and proper distribution of monetary compensation.  The Act thus grossly fails to reflect upon the above questions and absence of such clear demarcations would only result in confusion having wide implications.

 

Who can be sued for Class Action?

 

As per the provisions of section 245 (1) (g) a class action suit can be brought against:

  1. The company
  1. Directors of the company
  1. Auditors and audit firm of the company for any false and misleading statement in the audit report or for fraudulent, unlawful or wrongful conduct.
  1. Any expert or advisor or consultant or any other person for misleading statements made to company or any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part.

Upon perusal of the section, one finds that class action suits under the Act can be brought against third parties also. It will thus be very difficult to escape the provisions by the professionals and to take any stand as the words used in the clause have a very wide meaning and includes any wrongful act or conduct on part of professional.

 

This is prima facie in violation with the principles of privity of contract, which states that only parties to the contract can sue each other to enforce their rights or claim damages. It is pertinent to note here that there exist separate contracts- one between the members and the company and the other between the company and the consultant/expert. There exists privity between the member and the company and between the company and the member.

 

Even if one was to assume that the members being the beneficiaries of such contracts had the authority to bring an action in equity, the same would not hold good under common law principles as such actions in equity are always claimed through a party to the contract who either holds the position that of a “cestuique trust” or that of a principal suing through an agent. What appears instantly from the perusal of the section is that members and depositors are directly claiming damages from third parties rather than claiming through the company.

 

This indeed is opposed to common law principles and would thus create confusion with respect to implementation of the section.

 

The intention to introduce class actions was to provide an additional tool in the hands of the members and to recognise the same as a supplementary remedy. But sadly the provisions have been introduced without even comprehending as to how it would accommodate the already existing remedies under common law. This surely comes across, as work of haste, which will eventually open the Pandora’s box and will give rise to serious analytical and interpretational issues.

 

Where Class Action Suits are instituted?

 

Section 245(1) provides that all class action suits shall be instituted in the Tribunal. Tribunal as defined in Section 2 (90) of the Companies Act, 2013 means the National Company Law Tribunal.

 

The Tribunal being a quasi-judicial body shall consist of a President and such number of judicial and technical members as the Central Government may deem necessary. All appeals from an order of the Tribunal shall lie before an Appellate Tribunal and appeals from order of the Appellate Tribunal shall lie before the Supreme Court.

 

Civil courts under section 430 of the Act have no jurisdiction to entertain any proceeding in respect to any matter, which the Tribunal or the Appellate Tribunal is empowered to determine. The section further provides that any court or any other authority in respect of any action taken or to be taken by the Tribunal shall grant no injunction.

 

It is very surprising to note here that the jurisdiction of a quasi –judicial body has been empowered tremendously to the extent that it has ousted the jurisdiction and powers of a judicial body per se.

 

How can class action suits be instituted?

 

Sections 245(4) and 245(5) provide for procedure to be followed while instituting the class action suits under the Act.

 

As per section 245(4) the Tribunal while considering a class action shall take the following into account –

 

Whether the member or depositor, while seeking relief under class action, is acting in good faith;

 

Any evidence as to the involvement of any person other than directors or officers of the company.

 

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;

 

Any evidence before it that corroborates that the members or depositors of the company have no personal interest in the matter being proceeded as class action;

 

Where the cause of action is yet to occur, the Tribunal shall duly consider all acts and circumstances that would be likely (i) authorised by the company before it occurs; or (ii) ratified by the company after it occurs;

 

Where the cause of action has already occurred, the Tribunal shall duly consider and evaluate all acts and circumstances that would be likely ratified by the Company.

 

Once the Tribunal admits an application as class action, the following procedure shall in terms of section 245(5) be followed:

 

A public notice shall be served to all the members or depositors of the class;

 

All similar applications in any jurisdiction shall be consolidated into a single application and a lead applicant shall be appointed from amongst them;

 

No two class actions for the same cause of action shall be allowed; and

 

The company and any other person responsible for the oppressive act shall pay for the cost and expenses connected with class action suits.

 

Section 245(5) provides that the costs and expenses in connection with class action suits shall be borne by the company and the person responsible for the “oppressive act”. It is pertinent to note here that the section casts the liability to bear costs of application upon the person who does or is responsible for the oppressive act. This could possibly mean that the member or depositor who is moving the application is aggrieved of an oppressive act. Insofar as the member is concerned, they already have a right to proceed under section 241 for oppression. This section, thus grossly fails to demarcate or distinguish circumstances when a member can proceed under section 241 and when can reliefs be sought under section 245. In absence of such distinguishing factor, the underlying principle of class action, which aims at reducing multiplicity of suits, gets frustrated and nullified. The Act thus confers rights upon members and depositors to initiate two proceeding with regard to same subject matter.

 

You may also want to read…
 

Class action suit in India- Will it deliver or fail? -Part I

 

(Both Shambo Dey  and Prachi Narayan are researchers at Vinod Kothari & Co)

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COMMENTS

Deepika

3 years ago

Your part I ends with a statement that there are differences between the provisions related to class action and oppression/mismanagement. However, this part II says contrary. Can you clarify?

SEBI bars PG Electroplast, promoters from markets for 10 years

SEBI barred four promoters of the PG Electroplast for diverting funds, manipulative activities and trading in its own shares during IPO in 2011

Market regulator the Securities and Exchange Board of India (SEBI) has barred PG Electroplast and its four promoters from markets for 10 years for manipulation of funds raised from the company’s initial public offering (IPO).
 

In its probe, SEBI found PG Electroplast and its four promoters, Promod Gupta, Anurag Gupta, Vishal Gupta and Vikas Gupta allegedly diverting funds and indulging in manipulative activities during its IPO in 2011.
 

SEBI order also reveals that PG Electroplast’s share prices have been fluctuated by diverting funds and indulging in manipulative activities during days of IPO in 2011. It came up with an IPO of 57.45 lakh shares at Rs210 per share, which opened on 7 September 2011 and closed on 12 September 2011.
 

According to SEBI, PG Electroplast suppressed material facts in its IPO prospectus as well as siphoning off and diverting the proceeds for the purpose of purchasing its own shares. It has failed to disclose information in the prospectus regarding funds raised through Inter corporate Deposits (ICDs). It had also diverted the IPO proceeds to entities who had purchased its shares, among others. SEBI then directed the company promoters to take urgent and effective measures to recover all the money on account of investments in ICDs, contracts for purchase of land which have not fructified till now and report it to SEBI till 10 May 2014.
 

However SEBI said that, the period of ban already undergone by the company and its promoters pursuant to the interim order on 28 December 2011, wherein the entities were restricted from the capital markets shall be taken into account for the purpose of computing the period of prohibition imposed in this order.
 

On Tuesday, PG Electroplast closed 10.16% up at Rs172.10 on BSE, while the 30-share Sensex closed marginally up at 21,832.

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Class action suit in India- Will it deliver or fail? -Part I

Class actions under Section 245 of the new Companies Act, 2013 are evidently distinctive and separate and were brought in as additional tool for investor protection. This is first part of a three part series

Very generally speaking, class action suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

 

A Short History

The class action suit began in the equity courts of seventeenth-century England as a bill of peace. English courts would allow a bill of peace to be heard if the number of litigants was so large that joining their claims in a lawsuit was not possible or practical; the members of the group possessed a joint interest in the question to be adjudicated; and the parties named in the suit could adequately represent the interests of persons who were absent from the action but whose rights would be affected by the outcome. If a court allowed a bill of peace to proceed, the judgment that resulted would bind all members of the group.

 

Justice Story, who served on the US Supreme Court from 1811 to 1845 wrote that in equity courts, "all persons materially interested, either as plaintiffs or defendants in the subject matter of a bill ought to be made parties to the suit, however numerous they may be," so that the court could "make a complete decree between the parties [and] prevent future litigation by taking away the necessity of a multiplicity of suits" (West v. Randall).

 

The bill of peace, and later the class action, provided a convenient and efficient vehicle for resolving legal disputes affecting a number of parties with similar claims. Common issues that could have similar outcomes did not have to be tried piecemeal in separate actions, thus saving the courts and the litigants’ time and money.

 

Initially, a class action could be brought only in equity cases, disputes in which the parties did not necessarily seek monetary damages but instead might desire some other type of relief. The adoption of Rule 23 of the Federal Rules of Civil Procedure in 1938 broadened the scope of the class action suit, providing that cases in law seeking money damages as well as cases in equity could be brought as class actions. In 1966, the scope of the class action was again clarified and expanded when Rule 23 was amended to provide that unnamed parties to a class action were bound by the final judgment in the action so long as their interests were adequately represented.

 

Rule 23 of the Federal Rules of Civil Procedure defines three kinds of class actions:

  1. The first type is instituted where separate lawsuits might adversely affect other members of the class or the defendant in either of two ways—if the piecemeal litigation resulting from separate suits might impose inconsistent standards of conduct on the defendant, or if multiple suits might "impair or impede" the class members from protecting their various interests.
  1. In the second type of class action, a class seeks an Injunction or some type of relief compelling the defendant either to cease a certain activity or to perform some other type of action.
  1. In the third category of class action lawsuit, there are questions of law or fact common to the entire class that predominate over questions peculiar to each individual plaintiff, and a class action suit is a more efficient means to resolve the controversy. Under this type of class action, individual members of the class may "opt out" of the litigation if they do not want to be bound by the results of the suit. (Phillips Petroleum Co. v. Shutts).

The Indian Scenario

The Satyam Computers’ fallout had created uproar in the country. Investors of the company abroad brought in several class actions seeking damage, while investors in India did not have any such recourse to legal remedies. This steered the Ministry to incorporate and include proactive measures for the protection of the shareholders and investors and thus the provisions of class action suits were incorporated under the Companies Act 2013.

 

Prior to the enactment of Companies Act 2013, class actions suits have been filed as “representative suits” under Civil Procedure Code 1908 or under the pretext of public interest litigations (PILs). The laws were not well defined with respect to class action and thus were unable to be described as “sui generis”.

 

This article is an attempt to reflect upon the provisions pertaining to class action as detailed under the Companies Act 2013(Act) and to ascertain the effectiveness of the new redressal mechanism.

 

Relevant Provisions under Companies Act, 2013

 

The Companies Act, 2013 introduces the concept of class action under Section 245, detailed in Chapter XVI – Prevention of Oppression and Mismanagement. However, this is not to be misunderstood with provisions governing oppression and mismanagement as set out under sections 241-244. Class actions under 245 are evidently distinctive and separate and were brought in as additional tool for investor protection.

 

(Both Shambo Dey  and Prachi Narayan are researchers at Vinod Kothari & Co)

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