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NAME: AMAN INANI (AO14)

PROTYUSHA THANAWALA (A041)

SUBJECT: COMPANY LAW II


SCHOOL OF LAW, MUMBAI

A Project Submitted

CLASS ACTION SUITS- A CASE STUDY

IN COMPLIANCE TO THE PARTAIL FULFILLMENT OF THE MARKING SCHEME, FOR TRIMESTER IX OF 2016-
2017, IN THE SUBJECT OF COMPANY LAW II

SUBMITTED TO :- SUBMITTED BY:-

DR. RAHUL NIKAM AMAN INANI (A014)

III YEAR

BA. LLB (Hons.)

Received by.

On date ... Time.

SR. PG.
NUMBER TITLE NUMBER

1. ABBRIVIATIONS 3

2. LIST OF CASES 4

3. RESEARCH METHODOLOGY 5
4. INTRODUCTION 6-7

5. RAMANBHAI M. NILKANTH vs. GHASHIRAM 8


LADLIPRASAD

6. 9 - 10
GENERAL PRINCIPLES REGARDING ALLOTMENT

7. CONCLUSION 11

8. BIBLIOGRAPHY 12

TABLE OF CONTENTS

ABBRIVIATIONS

E.g. Example
AIR All India Reporter
S.C Supreme Court
H.C High Court
Etc. etcetera
J. Justice
Ltd. Limited
Prof. Professor
USA - United States of America
UK United Kingdom
AP Andhra Pradesh
LIST OF CASES
1. Changa Mal v. Provisional Bank (1914) ILR 36 All 412

2. Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)

3. Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX 109

4. Ramanbhai v. Ghasi Ram (1918) BOM. LR 595


INTRODUCTION
The concept of Class Action Suits is among one of the many novelties introduced by the
Companies Act, 2013. Thought the concept per se is not new but in Indian context it has
found statutory recognition and enforceability now only by means of Companies Act 2013.

The first time class action suit came to the spotlight in the context of securities market was
when the Satyam scam broke out in 2009. At that time, the Indian investors in India couldn't
take any legal recourse against the company while their counterparts in USA filed class action
suit claiming damages from the company and the auditing firm. Credit to the Satyam scam,
India has introduced class action suit in the new Companies Act, 2013 by means of Section
245 which is yet to be notified by the Ministry of Corporate Affairs. In simple terms, a class
action suit refers to a lawsuit that allows a large number of people with a common interest in
a matter to sue or be sued as a group. 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.

Section 245 of the Companies Act, 2013 (Act) contains provisions regarding Class Action Suits.

Need of a Separate Provision for Class Action

A major change is the option of getting monetary compensation or damages owing to the
fraudulent actions of a company.

The injunctive reliefs could be overlapping but you have an entirely different option
available to claim compensation, damages or any other suitable action for any fraudulent
action of the company, its directors, auditors, advisers. The spread is much wider, the
consequences are, insofar as the monetary compensation is concerned is today statutorily
provided for

The remedies available under the two are different. Sections 241-244, which also seek to
redress cases of oppression and management have a greater array of remedies.

The provisions of class action come under the head of oppression and mismanagement but
there are some differences between the remedies sought under class action under Section 245
and under the general provisions of oppression and mismanagement under Section 242.
While under Section 242 the NCLT can order acquisition of the companys shares, restrict
transferability or allotment of shares, removal of managing director and other directors of the
company, in class action, the orders will mainly be restraining orders.

These restraining orders could be in the nature of restraining a company from committing an
act which is beyond the scope of the companys memorandum of association or articles of
association, declaring a resolution altering the charter documents as void if such resolutions
are passed upon suppression of material facts or through a misstatement, he added, by way of
examples.

An added advantage of the provisions on class action suit is that they cover depositors also.
This was not a feature of the earlier law.

The earlier provisions dont cover depositors, the provisions of class action covers them.
Everything else seems to be the same with the class actions even the threshold of 100
shareholders is the same.
Filing Class Action Suits

As per Section 245 (1) read with Section 245 (3), a Class Action Suit may be filed by:

1. Member or members or any class of them, as described below


In the case of a company having a share capital,

- Any 100 or more members of the company, or members equal to or exceeding 10% of the total
number of its members, whichever is less, or

- Any member or members singly or jointly holding atleast 10% of the issued share capital of the
company, subject to the condition that the applicant or applicants has or have paid all calls and
other sums due on his or their shares

- In the case of a company not having a share capital, members equal to or exceeding 1/5th of the
total number of its members.

2. Depositor or depositors or any class of them, as described below

- Any 100 or more depositors of the company, or depositors equal to or exceeding 10% of
the total number of its depositors, whichever is less, or

- Any depositor or depositors singly or jointly holding at least 10% of the total value of
outstanding deposits of the company.

3. The Central Government, if it is of the opinion that the affairs of the company are being
conducted in a manner prejudicial to public interest

Authority - Class Action Suit

Application for class action suit has to be filed before the National Company Law Board Tribunal
(NCLT/Tribunal).

Conditions under which Class Action Suit be filed

Members or depositors or any class of them, as indicated above, may file a class action suit 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
seeking all or any of the following orders, namely:.

(a) To restrain the company from committing an act which is ultra vires the articles or
memorandum of the company;
(b) To restrain the company from committing breach of any provision of the companys
memorandum or articles;

(c) To 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;

(d) To restrain the company and its directors from acting on such resolution;

(e) To restrain the company from doing an act which is contrary to the provisions of this Act or
any other law for the time being in force;

(f) To restrain the company from taking action contrary to any resolution passed by the members;

(g) To claim damages or compensation or demand any other suitable action from or against - (i)
the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct
or any likely act or omission or conduct on its or their part; (ii) 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; or (iii) 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;

(h) To seek any other remedy as the Tribunal may deem fit.

Class action suit can be filed against the:

Company,
Any of its directors
Auditor, including audit firm
Expert or advisor or consultant or any other person

In case of any claim against an audit firm, the liability shall be of the firm as well as of each
partner who was involved in making any improper or misleading statement of particulars in
the audit report or who acted in a fraudulent, unlawful or wrongful manner.
LEGAL ANALYSIS

Class Action Suit

A class action suit is a lawsuit where a group of people representing a common


interest may approach the Tribunal to sue or be sued.

It is a procedural instrument that enables one or more plaintiffs to file and prosecute
litigation on behalf of a larger group or class having common rights and grievances.

Legal Framework
The legal framework for class action suits is covered in section 245 of CA 2013 as well as
National Company Law Tribunal Rules, 2016 (NCLT Rules). Section 245 permits
members1 and depositors2 to file a petition against the company, its directors, auditors or
advisors with the National Company Law Tribunal (NCLT) in case they commit any act
which is prejudicial to the interest of the company. Banking companies are excluded from its
purview. Section 245 contains ten different sub clauses and the framework of the section
covers the procedure as well as the reliefs which can be sought. The ambit of the section is
very wide because it permits shareholders to seek relief where the interests of the company
may be jeopardized. What will be prejudicial to the interest of the company, its shareholders
or depositors is not clarified and, until jurisprudence evolves under this section, due
consideration will have to be paid to the provisions of the erstwhile Act of 1956 as well as the
judge-made law thereunder.

To avoid potential class action suits a company has to (a) ensure it operates within the
confines of its charter documents, (b) it should not suppress material facts from its
shareholders or misrepresent to them or the depositors, (c) operate in accordance with all
applicable law. Where a company violates the foregoing, a class action suit can be filed. For
companies with a share capital, 100 members or a prescribed percentage of 10% 3, whichever
is less or member(s) holding at least 10% shareholding in the company. It is imperative that
the member should have paid all calls and dues. For a company without share capital, 1/5th
total members is sufficient to launch proceedings. In case of depositors, minimum 100 or at
least 10% of the total depositors, whichever is less or a depositor to which company owes
10% of the total deposits.

The aggrieved members can secure different remedies ranging from: -

1 Member is defined under Section 2(55) of CA 2013 to mean a person who is a


subscriber to the memorandum of the company, has agreed in writing to become
a member, holds shares and his/her name is entered as a member in the register
of members

2 Depositor refers to any member of the company who has made a deposit with
the company as per Section 73(2) of CA 2013.

3 Prescribed percentage has been defined as 10% under Rule 6(2) of the
Companies (Prevention of Oppression and Mismanagement) Rules, 2016 which,
however, is yet to be notified
- seeking injunctive orders, restraining the company from committing acts which either
violate or which are ultra vires of its charter documents, or any law or action which may be
contrary to adopted resolutions;

- Declaration that resolutions are void when they are rooted in misrepresentation or
suppression of material facts;

- Claiming damages4 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;

- seek any other remedy.

An application for a class action suit has to be filed in Form NCLT 9 along with application
fee of INR 5,000 (about USD 746 ). The NCLT will consider the following, amongst other
things, while reviewing the application whether it has been filed in good faith; check if
there is evidence of involvement of third parties i.e. other than directors or officers of the
company. Apart from the provisions of section 245(4) of CA 2013, other elements are
prescribed in Rule 85 of the NCLT Rules which include an assessment of whether: - the class
action suit is a better option than individual suits; - there are questions of law common to the
class; and - the representative parties will protect the interest of the class. After admission,
under Rule 87 the NCLT shall serve a public notice 5 in Form NCLT 13 to all the members
and depositors of the class. The applications of similar subject matter will be consolidated
and a lead applicant will be in charge. The NCLT will not consider two class actions having
the same cause of action. Its orders will be binding and any contravention by the company, its
members, depositors or auditors shall attract fiscal and penal consequences. The fine will be
payable to the company and defaulting officers for the former, it ranges from INR 500,000
to INR 2.5 million (about USD 7,400 to 37,000) and for the officers, it is a range of INR
25,000 to INR 100,000 (about USD 370 to 1,500). Further, the statute also prescribes
imprisonment of three years. Additionally, where NCLT feels the application is frivolous and

4 Under section 245(2), the liability to pay damages for misleading statements in
the audit report shall be on the audit firm as well as its partners involved in
providing misleading statements in the report

5 This notice contains the name of the lead applicant, grounds of application,
relief sought, statement that application has been filed by the requisite number,
etc.
vexatious then it can order the applicant to pay a maximum of INR 100,000 (about USD
1,500) to the other party.

Role of NCLT

Currently, there is no clear definition of good faith and based on existing jurisprudence as
well as equitable principles, the concept is fact and conduct specific. Given the obligation
imposed on NCLT to scrutinize if the suits are filed in good faith, presumably, in due course,
the concept will be refined with greater clarity in the context of class action suits. There is a
high degree of responsibility on NCLT to assess and scrutinize, at threshold levels, the bona
fide of the suit and the applicants in order to minimize misuse by them. While reviewing the
evidence to substantiate that no personal interest or gain is present, NCLT will act as a watch
dog over the minority shareholders as well and protect the company and its directors from
becoming a victim of their personal interest. The shareholders need to prove that their rights
have been affected and such suit would benefit the company. Further, the ambit of liability is
widened and now it can be affixed on any other person and not merely the management.
This, eventually, means that all third parties will have to exercise caution when dealing with
companies.

ROLE OF JUDICIARY

Class Action Suit against Satyam Computer Services Limited (Satyam)


12 class action suits have been filed so far (and more are expected to be filed) against
Satyam, the Chairman, Ramalinga Raju, and the Managing Director, Rama Raju by several
law firms on behalf of purchasers of Satyams American Depository Shares (ADS). Vianale
& Vianale LLP first filed a class action suit on behalf of Aekta Ben Patel and any one else
who has also bought ADS of Satyam between January 6, 2004 and January 6, 2009 in the
federal district court of the Southern District of New York.

Charges

The charges alleged against the defendants in the law suit are:

1) The defendants issued misleading financial information about the Company including
information contained in its Annual Reports, which were signed by the defendants and
contained fairness opinions issued by Satyams auditor, PricewaterhouseCoopers.

2) A letter was sent by Ramalinga Raju to the Board of Directors of Satyam and SEBI
admitting to falsification of accounts, overstatement of profits and debt owed to the Company
and understatement of liabilities. The purchasers of Satyams ADS were injured through their
purchase of stock at inflated prices because they relied on the false and misleading
information provided by the defendants.

3) None of the statements made by the defendants,that have been alleged to be false in the
lawsuit, had any qualifying cautionary statements identifying factors that could cause results
to differ materially from that stated.

Relief Sought

The plaintiffs have alleged that by defrauding the purchasers of Satyams ADS, the
defendants have violated provisions of the US Securities Exchange Act, 1934 and therefore
the plaintiffs should be awarded unspecified compensatory damages.

Enforcement of Foreign Court Awards in India

Section 44 A of the Indian Code of Civil Procedure, 1908 (Code) allows for the direct
enforcement of foreign awards in India if the award is made by a superior court in a country
that is a reciprocating territory, as defined in the Code. Currently, the Indian government
has not notified the US to be a reciprocating territory and therefore, any judgement against
Satyam in any class action law suit instituted in the US cannot be directly enforced in India.
In contrast, arbitral awards rendered in the US are enforceable in India, subject to certain
exceptions, as the Indian government has notified the US to be a country that is a party to the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New
York Convention).

COMPARITIVE STUDY
Difference between application for prevention of oppression and mismanagement u/s
241 to 244 and Class Action Suits under Section 245 of Companies Act, 2013.
.

CONCLUSION
In terms of the viability of class suits in India, initially before the company law 2013 was
implemented, it was tough to get a judicial recourse in any such situations like Satyam, but
with the implementation of company law 2013, it has become very viable in the context of
Indian Judicial Systems. People have started opting for these class suits since they have
received an additional ground while fighting against any abuse of powers by the company
management, against initial days where the only recourse available was a civil suit, which
was not at all viable being highly time & cost consuming.

Even though it is a highly complex scenario, the courts must determine initially that the
particular class action suit was brought in good faith, and second, it has a good possibility of
success. It should tackle the problem of the aggrieved party in very rational manner. Class
Action Suits are still in an emerging stage and for most of the regulators from various
Securities and Investments Commissions; Financial Service Authorities & European Union
are facing jurisdictional problems. These problems can arise in India as well, and courts have
to be very careful during the litigations under this act.

Small and retail investors who otherwise not take any recourse under litigations; now have a
great tool as class action suits. This mechanism empowers small investors to seek claims on
their small investments which might have been tough Now since the inception of company
law 2013, people or rather group of people will start getting faster actions and speedy
disposal of cases which require immediate attention. These remedies are more effective than
the earlier ones offered under oppression and mismanagement. The remedies are punitive and
injunctive in nature.

Huge penalties and imprisonment chances will also act as a deterrent for the wrongdoers
against any fraudulent acts. Investors need to be more vigil and alert against any misdoings of
management. The investors associations need to display more activism, which has
successfully led to many amendments in the laws in the past.

It will also successfully reduce the number of lawsuits since it has allowed the group of
people to file the case against one defendant on common grounds. This has also helped in
increasing the efficiency of the legal process in India.

Class actions suits in India will become a highly beneficial place for stakeholders to raise
complaints if any against the management for the unlawful & wrong acts, as it will act as a
redressal tool for people having a common interest against the mighty management of
companies.
However, on the divergent, such a notion may be open to misuse by dishonest minority
shareholders in the continuance of their vested interest thereby impeding the proper
functioning of the company. Keeping this in mind, it could be said that the government failed
to consider the negative consequences of class action suit as it is evident by the absenteeism
of provision to check its misuse.

As of now, incorporation of the concept of class action suit is a highly welcomed step for the
betterment of the Indian society in general and Indian corporate industry in particular,
however, its victory in the industry is still indeterminate, reason being the exclusion of key
class of stakeholders mainly creditors, bankers and debenture holders. Other reasons which
have acted as a hindrance for the community was the elimination of banking companies from
the scope of this Section as mentioned before as well. Further, even the regulatory authorities
have been kept out of the ambit of class action suit as they are not entitled to file a case under
this law, which has been widely criticised throughout India.

Other major challenges for the minority stakeholders are the delays observed during the
constitution of NCLT, because of which the serious cases of the class action were filed in the
civil courts, now delaying those further due to long queue in those courts.

Nevertheless, on reading the provision of this Section and further analysing it, it can be said
that the suit may indeed prove to be a powerful tool to keep a check on the culpability of a
company and contain any likely bias against the minority & small shareholders.

It is also concluded that class action suits will be a beneficial platform for small & minority
shareholders to raise their grievance against the company including its managing director,
directors, auditors, consultants, etc. for acts or omission that is wrongful & unlawful to the
interest of the company and its shareholders. Minority shareholders may undertake class
action suit as a redressal for those having a common interest for the promotion of proper
corporate governance.

Apart from the technical and procedural facet, there are lots of changes required in securities
laws in case class actions suits are to be successful in India. The present rules on various
fronts, mostly in areas such as insider trading and price manipulation necessitate plaintiffs to
hold a relatively high burden of evidence. Just by giving encouragement to class actions
alone may not be adequate, and may require addressing some of the substantiate issues as
well.

Last but not the least, though this class action suit seems to be an armament in the hands of
the minority shareholders, the real strength can only be measured by giving it full effect upon
the constitution of NCLT.

Till then, it is not justified to treat it as a proper step towards a better legal system regarding
class action suit. We all should also remember that, a shareholder, class action suit, would
mean five to seven years of original court (suit) followed by another three years of division
bench appeal and followed by another three years of appeal in the Supreme Court which in
total makes in at least an eleven years process if not more to get a final determination.

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