SHAREHOLDERS CLASS ACTION LAWSUITS

UNDER THE NEW COMPANIES ACT, 2013: LESSONS LEARNT FROM THE U.S.

EXPERIENCE

PRESENTED AT ‚THREADING THE NEEDLE IN US-INDIA DEALS‛

Ameet Hariani, Managing Partner, Hariani & Co. Soura Subha Ghosh, Asssociate

HISTORY & BACKGROUND

The underlying, fundamental principles of ‚Class Action‛, of America, were recognized by the Indian Courts from the early Twentieth Century

These principles of representative litigation were incorporated in the substantive laws of India and also expanded by the Supreme Court while exercising judicial activism in the form of Public Interest Litigation.

REPRESENTATIVE SUIT

Order I Rule 8 of Code of Civil Procedure, 1908, as amended in 1976

Where there are numerous persons having the same interest in one

suit, one or more of such persons, may with the permission of the

court, sue or be sued or may defend on behalf of all such persons so

concerned

If such suit is permitted to be filed, the Court shall then give notice of institution of suits to all persons, so interested in the suit. Those interested parties may then apply to court to be made a party to the suit

This is an exception to the general rule that all persons interested in the suit ought to be made parties thereto. The objective is to facilitate

decision of questions in which large body of persons are interested,

without following the ordinary procedure

Objective is to avoid multiplicity of proceedings. Chairman, Tamil Nadu Housing Board v. T.N. Ganapathy AIR 1990 SC 642

REPRESENTATIVE SUIT contd…

For a suit to be filed under Order I Rule 8, it is essential that all the

parties should have the same interest in the suit. Therefore, cause of

action may not be the same, but what is required is that there should

be ‘same interest’, that is common interest and common grievances.

Leave of court should normally be taken prior to filing of the suit, in exceptional circumstances, permission can be sought from court even after filing of the suit. However, court’s permission is mandatory.

Interestingly, the rule does not apply only to Plaintiffs. The rule equally applies when there are numerous Defendants and one of the Defendants wants to defend on behalf of others. Even in that case, court’s permission is required.

Decree passed in such suit is binding on all persons on whose behalf or for whose benefit the suit is instituted. Decree is binding on all classes of persons represented eo nomine and even includes persons who are constructively represented.

PUBLIC INTEREST LITIGATION

‚Public Interest Litigation‛ is an instrument for the

administration of Justice. It does not mean settling disputes

between individual parties, as ‘Public interest’

is the anti-thesis of private or self interest. It contemplates a legal

proceeding for the vindication of the fundamental rights of

persons who are unable to enforce them on account of their

incapacity.

‚Public Interest Litigation‛ is in consonance with the principles

enshrined in Article 39A of the Constitution of India which

emphasizes obligations of state to ensure social justice for all. The

main objective of such petitions was to do away with the cumbersome

process of filing a normal legal case.

PUBLIC INTEREST LITIGATION Contd..

S.P Gupta vs. Union of India, AIR 1982 SC 149, Upendra Baxi vs. State of U.P (1981) 3 Scale 1136, uphold the validity of Public Interest Litigations.

Its scope and ambit is however limited only to petitions filed under Articles 32 and 226 of the Constitution of India. Resultantly, only government authorities amenable to writ jurisdictions come within its ambit.

THE SATYAM SCAM

Large number of experts and analysts credit ‘The Satyam Scam’

for the eventual inclusion of ‘Class Action suits’ in Companies

Act, 2013.

The Satyam Scam broke out in the year 2009, when its Chairman,

Mr. Ramalinga Raju confessed to having falsified

and exaggerated the accounts of the company.

Duringthe investigations that followed, the auditors for Satyam

were also found to be in breach of their obligations.

Company Law Board, appointed 10 nominee directors and barred the then existing board from functioning any further. Subsequently through an auction process, 46% of shares of Satyam were bought by Mahindra & Mahindra owned company Tech Mahindra.

SATYAM SCAM Contd…

Effect of Satyam Scam was devastating, specially on retail investors. During the scam, the share price of the company fell precipitously causing huge losses to more than 3,00,000 investors.

Retail investors in India suffered because they had virtually no

recourse available against the company for the fraud perpetrated.

Unlike Indian investors, investors from United States filed Class

Action suits against the company.

Legislators in India realized this anomaly and introduced ‘Class action suits’ provisions in the new Companies Bill.

INCORPORATION OF CLASS ACTION SUITS

‘The Satyam Scam’ underlined the need for change in corporate law

to include Class Action suits.

New Companies Bill was subsequently drafted and the same was debated on the floors of both the Houses of Parliament. The new bill contained provisions of ‘Class Action’.

Finally it became the Companies Act, 2013 wherein provisions

relating to Class Action were incorporated in Section 245. However,

the said action has not yet come into effect. Only some

sections of Companies Act, 2013 have been brought into effect

PROVISIONS UNDER THE NEW COMPANIES ACT

Who can sue

Members/ Shareholders and Depositors

Qualifications

In the case of a company having a share capital, more than one hundred members of the company or such percentage of members as may be prescribed, whichever is less or members holding not less than such percentage of total the issued share capital of the company as may be prescribed.

In case of depositors, more than 100 or more or such percentage of the total number of depositors as may be prescribed, whichever is less, or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed

PROVISIONS UNDER THE NEW COMPANIES ACT Contd..

Who can be sued

Directors

Auditors for any improper & misleading statement in the audit report.

An expert or advisor or consultant or any other person associated in this regard.

Forum

The statutory forum provided under the Act for filing of Class Action suit is National Company Law Board Tribunal (NCLT)

PROVISIONS UNDER THE NEW COMPANIES ACT Contd..

Reliefs

Restrain the company from committing an act which is ultra vires

the MOA and AOA of the company or in breach of AOA and MOA

of the company.

Declare a resolution altering the MOA or AOA as void if the

resolution was passed by suppression of material facts or obtained by

misstatement to depositors and restrain the company from acting on such

resolutions.

Restrain the company from doing any act which is contrary to the

provisions of this act or any other law for the time being in force.

Restrain the company from doing an act which is contrary to any

resolution passed by the members.

Claim damages and compensations against company or its directors,

auditors, experts, advisors, consultants for any fraudulent, unlawful or

wrongful act

Power has also been given to members and depositors to make

applications for future actions, by the company.

PROVISIONS UNDER THE NEW COMPANIES ACT Contd.. Procedure

On receipt of a class action suit application, the Tribunal (NCLT) will look

into the following before admitting it:

Whether the member or depositor is acting in good faith;

Whether the evidence before it incriminates any person/s other than

directors and officers of the company;

Whether the cause of action is one which the member or depositor could

pursue on his own.

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;

If the cause of action is an act or omission which is yet to occur, whether

the circumstances are likely to be authorized by the company before it

occurs or ratified by the company after it occurs

Where the cause of action has occurred, and whether the company has

ratified it.

PROVISIONS UNDER THE NEW COMPANIES ACT Contd…

Procedure (Contd..)

If the application is admitted, the Tribunal will….

Issue a public notice to all the members of the class by publishing the same.

Consolidate all similar applications prevalent into a single application. The

NCLT shall also have the discretion to choose a lead applicant, who shall be in

charge of the Applicants

Two class action applications for the same cause of action will not be allowed.

Notice to Regional Director, Registrar of Companies and Central

Government.

Thereafter the case will be heard and disposed as per the normal procedure

adopted by Company Law Board