Jasleen K Oberoi

8/11/2019 Jasleen K Oberoi

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National Conference

Companies Act-2013

Class Actions Suits & Special Courts

Amarchand & Mangaldas & Suresh A. Shroff & Co.

advocates & solicitors

September 19, 2013

ByMs. Jasleen K. Oberoi

Partner


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Part A

Class Action Suits

Privileged & Confidential| 2


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What is a Class Action Suit?

A Class Action is a law suit in which a single person or a small group of peoples represents the interest of a

larger group before the Court.

It is a procedural device enabling one or more plaintiffs to file and prosecute a litigation on behalf of a

larger group or class, wherein such class has common rights and grievances.

The term Class Action owes its origin in the US law which is used to describe a sui generisarea of

litigation.

While Indian law recognizes the concept of arepresentative suit,it has not, as opposed to the law in US,

used the term or phraseclass action to describe asuigenerisarea of litigation.

In India, a representative suit may be instituted under the Indian Civil Procedure Code, 1908 for the benefit

of, or on behalf of, the interested parties. A similar concept has also been evolved by the Courts in India in

form of Public Interest Litigations and Social Interest Litigations.



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Class Action Litigation in the United States

Class Action is a well defined area of litigation in the U.S.

The relevant provision for a class action is detailed under Rule 23 of the US Federal Rules of Civil

Procedure. (Rule 23)

Rule 23 (a) is extracted herein below:

(a) PREREQUISITES. One or more members of a class may sue or be sued as representative parties

on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the

class; and

4) the representative parties will fairly and adequately protect the interests of the class.

U.S. class action litigation can broadly be categorised into two different groups:

a) Securities Class Action instituted by shareholders involving violation of securities, regulations,

accounting, fraud, etc.

b) Consumer Class Action or Employee Class Actioninstituted by a large number of consumers who

suffer losses due to some illegal claims made by the companies, or those may claims against illegal

debt collection practices, unfair credit reporting, product liability, etc.


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Satyam Scam

The Satyam scam involved a fraudulent scheme wherein the revenues of Satyam Computers Services Ltd.

(Satyam) were materially overstated based on falsified invoices for hundreds of millions of dollars in

consumer products that did not actually exist.

The primary charges that were made out in the scam are

a) The defendants issued misleading financial information

b) Due to falsification of accounts, the purchasers of Satyam ADS were injured through their purchase ofstock at inflated prices.

c) None of the statements made by the defendant had any qualifying cautionary statement.

Since SatyamsAmerican Depository Shares were listed on the New York Stock Exchange, several class

actions were filed against Satyam and the managing director including other members of the errant

management of Satyam on behalf of purchasers ofSatyamsAmerican Depository Receipts, in the U.S.

In addition, the global audit firmPwCalong with its international and India unit were charged with class

action for having recklessly disregarded a multi-year massive fraud by the Satyam management.


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Satyam Scam

Contd

In 2011 Satyam and its auditorPwCagreed to pay USD 125 million and USD 25.5 million to settle claims

filed by shareholders by way of a class action in US.

However, due to the absence of any statutory provision for class action under the (Indian) Companies Act,

no similar proceedings could be initiated by the affected shareholders of Satyam in India. This lacuna has

been sought to be addressed by the legislature while drafting of the Companies Act, 2013 and introducingthe provision of class action by way of Section 245.

The concept of a class action by shareholders was also recommended, prior in time, by the J.J. Irani

Committee Report, 2005 which suggested that representative action may be initiated by one shareholder on

behalf of one or more of the shareholders, on the premise that they would all have the same locus standito

initiate an action against an erring company.


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Section 245-Companies Act, 2013

The Companies Act, 2013 introduces some important changes to the company law regime in India. One

such feature is a Class Action. The provision governing Class Action is set out under Section 245 of the

Companies Act, 2013.

Section 245 of the Companies Act, 2013 falls under ChapterXVI Prevention of Oppression and

Mismanagement.

However, class actions are evidently not the same as petitions against oppression/mismanagement, ascommonly understood in India. Provisions governing applications in respect of

oppression/mismanagement (echoing s. 397-398 of the 1956 Act) are set out under Sections 241-244 of

the Companies Act, 2013 and Section 245 in contrast introduces a distinct regime of class actions.

Section 245(1) reads:

Such number of member or members, depositor or depositors or any class of them, as the case

may be, as are indicated in sub-section (2) may, if they are of the opinion that the management orconduct of the affairs of the company are being conducted in a manner prejudicial to the interests

of the company or its members or depositors, file an application before the Tribunal on behalf of

the members or depositors for seeking all or any of the following orders


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Who Can Sue? Contd

b) In case of a company not having share capital-

Not less than 1/5th of the total number of its member.

The requisite number of depositors that can maintain an action are set out in Section 245(3)(ii).

not less than 100 depositors, or

not less than such percentage of the total number of depositors as may be prescribed, whichever

is less, or

[Note: The Draft Rules under the Companies, 2013 set out in Chapter XVI Rule 16.1(b) have

prescribed the percentage as 10% of the total number of depositors of the company]

any depositor or depositors holding to whom the company owes such percentage of total

deposits of the company as may be prescribed.

[Note: The Draft Rules under the Companies, 2013 set out in Chapter XVI Rule 16.1(b) have

prescribed the percentage as 10% of the issued share capital of the company.]


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Who Can Be Sued?

In a Class Action under Section 245, relief can be granted in favour of the applicant against the following:

The Company

The Directors of the Company

The Auditor of the Company, including the audit firm of the Company, for any improper or misleading

statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or

conduct.

[Note: Section 245(2) states that where damage or compensation is being sought against an audit firm, the

liability shall be of the firm as well as all the partners who were involved in making any improper or

misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful

manner.]

Any expert or advisor or consultant or any other person for any incorrect or misleading statement

made to the Company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or

conduct on his part.

Hence, for the first time a member or depositor of a company has been empowered to initiate action against

auditors, consultants, advisors or experts advising the Company.


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Forum For Instituting a Class Action

Section 245(2) appears to provide for Class Actions to be instituted before the Tribunal.

Tribunalhas been defined in Section 2 (90) of the Companies Act, 2013 as the National Company Law

Tribunal.

Under Section 408 of the Companies Act, 2013, the Central Government is empowered to constitute a

Tribunal to be known as The National Company Law Tribunal, consisting of a President and such

number of Judicial and Technical Members as the Central Government may deem necessary, to beappointed by it by notification, to exercise and discharge such powers and functions as are conferred on it

by or under the Companies Act, 2013.

In terms of Section 419 of the Companies Act, 2013, such numbers of benches of the Tribunal may be

notified as may be specified by the Central Government with the Principal Bench of the Tribunal being set

up at New Delhi.

Section 430 of the Companies Act, 2013 ousts the jurisdiction of Civil Courts to entertain any proceeding in

respect to any matter which the Tribunal is empowered to determine under the said Act.

Under Section 421 an appeal from an order of the Tribunal would lie before an Appellate Tribunal and in

terms of Section 423 any person aggrieved by the order of the Appellate Tribunal may file an appeal before

the Supreme Court. The provisions for setting up of the Tribunal have not been notified yet.


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Relief(s) under Section 245

The different kinds of relief that can be granted by the Tribunal in a Class Action are set out in Section 245(1).

Restrain the Company from committing an act which is ultra vires the Articles or Memorandum of the

Company.

Restrain the Company from committing breach of any provision of thecompanysMemorandum or Articles.

Declare a resolution altering the Memorandum or Articles of the company as void if the resolution was passed

by suppression of material facts or obtained by mis-statement to the members or depositors, and Restrain the

Company and its directors from acting on such resolution;

Restrain the Company from doing an act which is contrary to the provisions of the Bill or any other law for the

time being in force;

Restrain the Company from taking action contrary to any resolution passed by the members;

Claim damages or compensation or demand any other suitable action, against:

the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct;

the auditor including audit firm of the company for any improper or misleading statement of particulars

made in his audit report or for any fraudulent, unlawful or wrongful act or conduct;

any expert or advisor or consultant or any other person for any incorrect or misleading statement made to

the company or for any fraudulent, unlawful or wrongful act or conduct.

Any other remedy that the Tribunal may deem fit.


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Procedure set out in Section 245(4) & 245(5)

As per 245(4), the Tribunal while considering a Class Action filed under Section 245 (1), shall take into accountthe following-

(a) whether the member or depositor is acting in good faith

(b) any evidence as to the involvement of any person other than directors or officers of the company

(c) whether the cause of action is one which the member or depositor could pursue in his own right ratherthan through an order under this section;

(d) any evidence before it as to the views of the members or depositors of the company who have no

personal interest..in the matter being;

(e) where the cause of action is an act or omission that is yet to occur, whether the act or omission could be,

and in the circumstances would be likely to be

(i) authorised by the Company before it occurs; or

(ii) ratified by the Company after it occurs;

(f) where the cause of action is an act or omission that has already occurred, whether the act or omission

could be, and in the circumstances would be likely to be, ratified by the Company.


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Procedure set out in Section 245(4) & 245(5)

Contd

In the event that a class action is admitted by the Tribunal, Section 245(5) sets out a procedure that is required tobe considered

A public notice to all the members or depositors of the class in prescribed manner to be served on the

admission of the Class Action;

[Note:The Draft Rules under the Companies, 2013 set out in Chapter XVI Rule 16.2(i) the manner, period

and procedure of issuance of public notice by the Tribunal]

All similar applications in any jurisdiction be consolidated into a single application and a lead applicant be

appointed from amongst them

Ensure no two class action against same cause of action is allowed;

Cost or expenses connected with the application for Class Action are paid by the Company and any other

persons responsible for the oppressive act.


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Consequences

An order passed by the Tribunal under Section 245(1) is a binding order on the company as well as on all

the members, depositors and auditor including the audit firm or expert or consultant or advisor or any other

person associated with the company.

Consequences of non compliance have been set out in sub-section (7) of Section 245-

Fine of not less than Rs. 5 lakh extendable upto Rs. 25 lakh, and

Any officer of the company who is in default can be punished with imprisonment for a term up to 3

years and imposed a fine of not less than Rs. 25,000 extendable upto Rs. 1 lakh.

Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same

jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under

the Contempt of Courts Act, 1971.


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Part B

Special Courts


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Special Courts

The Companies Act, 2013 under Chapter XXVIII introduces the concept ofSpecial Courts.

Section 435 of the Companies Act, 2013 provides that Central Government may for the purpose of

providing speedy trial of offences under this Act, may by notification, establish or designate as many

Special Courts as may be necessary.

Section 436 (1) (a) provides that all offences under the Companies Act, 2013 shall be triable only by the

Special Court established for the area in which the registered office of the Company (in relation to

which the offence is committed) is located.

Section 436 (2) of the Companies Act, 2013 provides that when trying an offence, a Special Court may

also try an offence other than an offence under this Act with which the accused may, under the Code

Criminal Procedure, 1973 be charged at the same trial.


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Special Courts Contd..

TERRITORIAL JURISDICTION-

All offences under the Companies Act, 2013 are triable by the Special Court established for the area in

which the registered office of the company in relation to which the offence is committed is situated.

SUMMARY TRIAL

Section 436(3) r/w provisos thereof empowers the Special Court to order summary trial in cases where the

offence is punishable with imprisonment for a term upto three years. In all other cases, regular trial will

have to be conducted.APPLICATION OF CRIMINAL PROCEDURE CODE

Save as otherwise provided in the Companies Act 2013, the provisions of Code of Criminal Procedure shall

apply to the proceedings before the Special Court as per Section 438 and the Special Court is deemed to be

a Court of Session in this regard.

TRANSITIONAL PROVISION

There is also a transitional provision contained in Section 440 that states that until such time a Special Court

is established, an offence committed under this Act shall be tried by a Court of Session.

APPEAL TO HIGH COURT

The Companies Act 2013 saves the powers of the High Court in relation to appeal and revision from the

orders of the Special Court. (Section 437).


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Thank You

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Jasleen K Oberoi

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