CS Professional:Resolution of Corporate Disputes,Non-Compliances & Remedies [Ch-3 Class Action Suits]

CLASS ACTION SUITS

a large group of people with similar injuries caused by the same person can collectively bring a claim to court for redressal,represented by 1/more of those injured.also called a REPRESENTATIVE ACTION. in India,governed by 245-246 of co. act,2013 as the SATYAM FIASCO put forth the need for such a provision.

• protecting member's interest
• reduce litigation duplication by combining proceedings with the same cause of action
• makes adjudication possible as not all members need to be made plaintiff

very popular in the USA ([started in 1842 with Equity Rule 48]; [1966]Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d)),UK (Rule 19.6 of the Civil Procedure Rule governs the Class Action Suits),Singapore (Order 15, Rule 12 of Rules of Courts) and other european countries.

Imp. case law: Enroll scandal, 2006 ;  Satyam fiasco,2009

the three other methods of representative action are: civil courts,consumer court or Public Interest Litigation (PIL) but they lack jurisdiction towards fraud on minority and lon adjudication periods discourage claims.

TYPES OF CLASS ACTIONS:

1. Employment Class Actions
2. Consumer Class Actions
3. Securities Class Actions

1. action by affected persons (37)
• for misleading statements/inclusions/omissions of matters in the prospectus under the following:
• (34) criminal liability for untrue/misleading misstatements in the prospectus under chapter iii resulting in fraud liability under section 447.
• (35) civil liability for misstatements to a subscriber of securities acting on such statement/inclusion/omission and sustained loss/damage resulting in compensation liability. 
• (36) punishment for fraudulently inducing people to invest w.r.t false,deceptive,misleading actions; resulting in 447
2. Class actions (245)
• by members/depositors/any class of them
• eligibility of members (245[3][i])
• eligibility of depositors (245[3][ii])
• also specified under NCLT(second amendment),rules 2019

CONDUCTING a class action (rule 85 of NCLT rules,2016)

1. without prejudice to 245(4),the tribunal may admit the application and additionally consider:
• Whether a class has so many members that joining them individually would be impractical
• questions of law/fact common to class
• claims/defences of representative parties are typically of the class
• whether representative parties fairly/adequately protect class interest
2. for 245(4)(c) while considering an individual's desirability/separate action, the tribunal shall consider risks in case of separate actions:
• inconsistent/varying adjudications
• adjudication would be dispositive of a member's interest
• adjudication would substantially impair/impede ability to protect interests

OPT OUT RULE (RULE 86)

1. any time before institution of class action with Tribunal's permission as per NCLT-1
2. whoever receives a notice under (5)(a) deemed member unless they expressly opt-out accordance with rule 38.
3. class members opting out shall not be precluded from pursuing claim on individual basis under another law, subject to tribunal imposed conditions.

NOTICE PUBLICATION (RULE 87)

1. per (5)(a),on admission of applications, tribunal issues a notice per NCLT-13 to all class members by-
• publishing within 7 days of admission at least once in RO's vernacular/english newspaper.
• co. to place notice on website in addition to above
• placed upon websites of Tribunal/MCA/ROC/stock exchange until application is disposed.
2. newspaper issue date considered as notice serving date to all class members
3. public notice shall inter-alia contain information as prescribed
4. publication cost/expenses borne by applicant and shall be defrayed/another responsible person in case order passed in favor of applicant.

SECTION 245

MEMBERS:

• subscribers to memorandum deemed to have agreed to become members
• agrees in writing to become a member and name entered into member's register
• every person holding shares and name entered as beneficial owners with depositories

DEPOSITORS: defined under co. (acceptance of deposits) rules,2014

NCLT jurisdiction for filing class action suit (order dated 19/07/2016): powers conferred on the president, NCLT by first proviso of 419(3) of co. act,2013; class actions are assigned to the principal bench of New Delhi.

AGAINST WHO CLASS ACTIONS CAN BE FILED

• company/directors
• auditor/audit firm
• expert/advisor/consultant

ORDERS SOUGHT FROM NCLT 245(1)

file an application before the tribunal on behalf of injured persons and seek:

1. restrain co. from committing an act ultra vires to MOA/AOA
2. restrain from committing breach of provisions
3. declare void an altering resolution,if passed by suppressing material facts/mis-statement.
4. restrain from acting on above resolution
5. restraint doing an act contrary to law
6. restrain  from acting contrary to a resolution passed
7. claim damages/compensation or demand suitable action for/against defendants
8. seek other remedies as tribunal deems fit

FACTORS CONSIDERED BY NCLT TO CONSIDER APPLICATION 245(4)

• whether plaintiffs acting in good faith
• evidence of involvement of another person
• The cause of action could be pursued in individual right
• evidence of having no personal interest
• cause of act/admission yet to occur (future) likely to be authorised/ratified by co. before/after it occurs.
• already occurred act/ omission likely to be ratified by co.

IN CASE APPLICATION IS ADMITTED (5) 

1. public notice served to all members/depositors
2. all similar applications in the jurisdiction be consolidated into a single one and plaintiffs/tribunal allowed to elect a lead applicant
3. two applications for the same cause of action shall not be allowed
4. cost/expenses be defrayed by co./person responsible

ORDER BINDING (6): binding on co./members /depositors/auditors/experts/consultants

PUNISHMENT FOR NON-COMPLIANCE (7): CO: fined 5L-25L; OFFICER: imprisoned up to 3 years AND fined 25K-1L

APP FILED IS FRIVOLOUS/VEXATIOUS (8): reject and state reasons and order for applicants to pay the opposite party upto 1L

EXEMPTION (9): nothing applicable to a banking co.

APPLICATION FILED ON BEHALF OF AFFECTED PERSONS (10)

Section 246 of Companies Act, 2013 provides that the provisions of sections 337, 338, 339, 340 and 341 (both inclusive) related to winding up, shall apply mutatis mutandis, in relation to an application made to the National Company Law Tribunal under section 241 or section 245. Section 337 to 341 relates to liability of officers, directors etc.

CLUBBING OF FUTURE APPLICATIONS AND BAR ON FUTURE LITIGATION

pertinent to note that the bar is only upon class action and it does not cover other measures. Thus, other civil actions can be invoked on the same cause of action. On a literal interpretation of the clause, it will not be wrong to state that any class action, whether brought by members or depositors, both are based on the same cause of action.

CLASS ACTIONS AND RELATED LAWS IN INDIA

Also refer to NEW CONSUMER PROTECTION LAW,2019 and DIFFERENCE BETWEEN SECTION 241 AND 245 OF COMPANIES ACT,2013