This article on ‘Class Action Suit under the Companies Act: All you need to know’ was written by an intern at Legal Upanishad.
Class action suits are commonly used in cases of consumer fraud, product liability, and securities fraud, where a large number of people have been affected by the same wrongful conduct. This mechanism allows for a more efficient and cost-effective way for individuals to seek legal redressal, as opposed to filing individual lawsuits.
In India, the Companies Act, 2013 provides for class action suits in case of fraud, mismanagement, or oppression by the company’s management. Members of a company, Investors, or any other person can file an application before the National Company Law Tribunal seeking relief through a class action suit. This article tries to analyse the concept of Class action suits along with the laws governing it in India. The author also sheds light on the landmark cases related to class action suits in India.
Class Action suits: Meaning and Purpose
A class action suit, also known as a class action lawsuit, is a legal mechanism that enables a group of people who have suffered similar losses or injuries caused by a common defendant to collectively sue the defendant in a single lawsuit. In a class action suit, one or more individuals, called class representatives, represent the interests of the entire class of individuals who have suffered similar harm.
The primary purpose of class action suits under the Companies Act is to provide a mechanism for shareholders to seek redress for any breach of their rights or loss suffered as a result of the actions of a company. In many cases, the damages suffered by individual shareholders may be too small to justify the cost of filing a separate lawsuit. By pooling their claims together, shareholders can increase the size of the claim and reduce the cost of litigation.
In addition to providing a cost-effective means of seeking redress, class action suits under the Companies Act also serve to promote corporate accountability. By holding companies accountable for any harm caused to shareholders, the threat of litigation can act as a deterrent against misconduct and encourage companies to act in the best interests of their shareholders.
Legal Framework for Class Action Suits under the Companies Act
Section 245 of the Companies Act, 2013 provides the legal framework for class action suits in India. The provision enables members of a company, Investors or any other persons, to file an application before the National Company Law Tribunal (NCLT) for relief against any oppression or mismanagement in the company. The section also allows any class of members or Investors to file such an application if the members or Investors who constitute that class have an aggregate value of not less than a specified percentage of the share capital, debt or deposits of the company.
The Companies Act further empowers the NCLT to make orders to rectify any acts of oppression or mismanagement in the company. The orders may include directing the company to refrain from doing any act that the tribunal deems oppressive or prejudicial to the interests of the members or directing the company to compensate the aggrieved party or parties. The NCLT may also pass orders for the winding up of the company if it is of the opinion that it is just and equitable to do so.
Procedures for Initiating a Class Action Suit under the Companies Act
The procedures for initiating a class action suit under the Companies Act are set out in Section 245 of the Act. In order to initiate a class action suit, one or more shareholders must satisfy the following conditions:
- The shareholders must hold at least 2% of the total voting power of the company or have a total value of shares of at least Rs. 1 crore;
- The shareholders must have a common grievance or claim against the company, which arises from the same or similar transactions;
- The class action suit must be in the interest of the company as a whole, and not just the interests of the shareholders initiating the suit.
Once these conditions are met, the shareholders may file an application with the National Company Law Tribunal (NCLT) seeking permission to initiate a class action suit. The application must include details of the nature of the claim, the relief sought, and the names and addresses of all the members of the class.
If the NCLT is satisfied that the conditions for initiating a class action suit have been met, it may grant permission for the suit to proceed. The NCLT may also appoint a lead plaintiff to represent the interests of the class and may require the plaintiffs to give security for the costs of the suit
Process for Filing Class Action Suits
The process for filing class action suits under the Companies Act begins with the filing of an application before the NCLT. The application must be made by any member of the company, Investor, or any other person who has an interest in the company. The application must specify the grounds for the relief sought and must be supported by such evidence as the tribunal may require.
If the NCLT is satisfied that the application discloses a prima facie case, it will issue notice to the company and any other person it deems necessary. The company must then file a reply to the application within the time prescribed by the tribunal. The NCLT may also direct the company to circulate the notice to its members, Investors or any other class of persons as it deems fit.
Benefits of Class Action Suits to Shareholders and Investors
- Class Action Suits allow shareholders and investors who have suffered similar harm to join forces and bring a lawsuit together. This collective strength allows them to pool their resources and increase their chances of success.
- It can be more cost-effective than individual lawsuits. The costs of litigation can be shared among the members of the group, making it more affordable for individual investors to pursue legal action.
- It can be a more efficient use of resources as they avoid the need for multiple lawsuits, which can lead to duplicative efforts and waste of resources.
- It serves as a deterrent for companies that may be tempted to engage in wrongful conduct, knowing that they may face legal action from a large group of shareholders or investors.
- It promotes transparency and accountability in the corporate sector by providing a mechanism for minority shareholders to hold companies and their management accountable for any acts of fraud, mismanagement or oppression.
- It can provide relief to shareholders and investors who have suffered harm due to the actions or omissions of a company or its management. The damages awarded in such cases can compensate shareholders for their losses and help restore their confidence in the company and the market.
Outlook of Courts
- National Consumer Disputes Redressal Commission vs. Laxmi Engineering Industries (2015): This Supreme Court judgment recognized the concept of “Public Interest Litigation” (PIL) in class action suits and emphasized the importance of protecting the rights and interests of consumers, especially those from marginalized or disadvantaged communities.
- Association of Victims of Uphaar Tragedy vs. Union of India (2011): This judgment by the Supreme Court of India allowed the victims of the Uphaar Cinema tragedy to file a class action suit against the owners of the cinema for the deaths and injuries caused by a fire in the cinema hall.
- Securities and Exchange Board of India vs. Sahara India Real Estate Corporation (2012): In this case, the Supreme Court allowed a class action suit to be filed against Sahara India Real Estate Corporation for illegal fundraising and the non-payment of dues to investors.
- National Stock Exchange vs. SEBI (2019): In this case, the Securities Appellate Tribunal allowed a class action suit to be filed against the National Stock Exchange for allegedly unfair trading practices and manipulation of currency derivatives.
Class action suits under the Companies Act play an important role in promoting corporate accountability and providing a mechanism for shareholders to seek redress for any harm caused to them by a company’s actions. By allowing shareholders to pool their claims together, class action suits provide a cost-effective means of seeking justice, particularly in cases where the damages suffered by individual shareholders are too small to justify the cost of filing a separate lawsuit.
However, there are several limitations to class action suits under the Companies Act that must be taken into account. Eligibility criteria may limit the number of individuals who can participate in the suit, and the relief that can be obtained is limited to damages or compensation. The success of a class action suit also depends on the strength of the underlying claim and the procedures for initiating a suit can be complex and costly.
Despite these limitations, class action suits remain an important tool for promoting corporate accountability and protecting the rights of shareholders. By holding companies accountable for any harm caused to shareholders, class action suits can act as a deterrent against misconduct and encourage companies to act in the best interests of their shareholders.
In order to ensure that class action suits are used effectively, it is important for shareholders to be aware of their rights and to work together to initiate suits where necessary. Companies also have a responsibility to act in a transparent and accountable manner, and to take steps to prevent any harm being caused to their shareholders.
List of References:
- Prachi Narayan and Shambo Dey, Class Action under Companies Act 2013- A Quagmire in Disguise?, Vinod Kothari, 15 January 2014, available at: https://vinodkothari.com/wp-content/uploads/2017/03/Class_Action_Companies_Act_2013.pdf
- CS Madhur Gandhi, Class Action Suit – Explained, tax Guru, 2 February 2023, available at: https://taxguru.in/company-law/class-action-suit-explained.html#:~:text=The%20Companies%20Act%2C%202013%20of,filing%20their%20own%20individual%20lawsuit.
- PK Mittal, CLASS ACTION, The Institute of Company Secretaries of India, available at: https://www.icsi.edu/media/portals/70/316102013.pdf