In January 2009, India witnessed one of its biggest corporate scandals – the 'Satyam scandal' also referred to as 'India's Enron'. Satyam Computers Services Limited ("SCSL") was under the microscope for fraudulent activity and misrepresentation of its accounts to its board, stock exchanges, regulators, investors and all other stakeholders. Thereafter, shareholders of SCSL, approximately 300,000 were unsuccessful in claiming damages worth millions due to the absence of the provision for filing a class action suit under the Companies Act, 1956. American investors on the other hand were able to claim their part of damages in the US courts through a class action suit against SCSL.
The concept of class action was first introduced in the US in the year 1938. 'Class Action', which is also known as 'Representative Action', is actually a form of lawsuit where a large group of people collectively brings a claim to the court through a representative. A class action suit is filed generally when a number of people have suffered the same or similar injuries. Often many of the individuals' injuries are relatively minor, such that they might not pursue legal redress on their own. Together, however, the value of the claims of the class add up, and claiming as a class helps consolidate the attorneys, evidence, witnesses, and most other aspects of the litigation.
Post the Satyam scandal, the Indian Parliament drafted the Companies Bill, 2009 and introduced provisions enabling affected shareholders to file a 'Class Action Suit'. Section 245 and 246 of the Companies Act, 2013 Act ("Act") specifically deals with the class action suits. These provisions permit members and depositors (both terms are as defined under the Act) to approach the National Company Law Tribunal ("NCLT") if they believe that the affairs of the company are being conducted in a manner detrimental to the interest of the company and its shareholders.
Section 245 of the Act provides that a certain number of members or depositors are entitled to bring an action before the NCLT if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors. Section 245 contains ten different sub clauses and provides the procedure as well as the reliefs which can be sought.
Sub-Section 3 of Section 245 of the Act as illustrated below sets forth the number of members/depositors required to file a class action suit.
- Required Number of Members
For companies having a share capital–minimum 100 members or a prescribed percentage of total members whichever is less, or a member(s) holding a prescribed percentage of the shareholding in the company. For a company without share capital –not less than 1/5th of the total number of its members.
- Required Number of Depositors
Minimum 100 depositors or a prescribed percentage of the total depositors, whichever is less or a depositor(s) to which the company owes such percentage of the total deposits as prescribed.
Until recently, this prescribed numbers of members or depositors required to file a class action suit had not been notified by the government. The government has on May 8, 2019 amended the National Company Law Tribunal Rules, 2016 and notified the threshold limits for filing such class action suits under Section 245 of the Act. The notified threshold limits are:
|No. of Required Members/ Depositors||Percentage of total Members/ Depositors||Percentage of shareholding/deposits owed|
|Whichever is less.|
(In case of a company having a share capital)
|100||5%||In the event of a listed company – 2%
In the event of an unlisted company – 5%
Notification of the thresholds permits shareholders to file class action lawsuits against companies allowing minority shareholders and investors to seek remedies such as restraining the company from committing acts which either violate or which are ultra vires of its charter documents; restraining companies from committing acts contrary to the Act; claiming damages or other appropriate action from directors, auditors, external advisors or any other person who made incorrect statements or who engaged in suppression of material facts or fraudulent conduct etc.
This redressal mechanism protects small and minority shareholders and provides them with a powerful tool to keep companies in check. It may even result in companies and their external auditors, advisors and consultants being more diligent and careful in their activities.
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