Companies Bill 2012 was passed by Rajya Sabha on August 8, 2013 and it is awaiting final sign-off from President of India. Market is upbeat about the new law which provides for more transparency, better governance, ease of starting and closing a company and protection for share holders. One of the clauses that can be a protection for shareholders is Class Action.
What is Class Action?
As per Wikipedia, class action is a form of law suit in which a large group of people collectively bring a claim to court in which a group of defendants is being sued. In US, Canada and some European countries there is a provision for class action in which a group of individuals may sue a company on behalf of a large group of individuals.
- Aggregation of lawsuits can enhance the efficiency of law suits and reduce the time and cost of litigation – avoids repetition of same witnesses, evidences and arguments.
- Companies too can address the whole issue in one go rather than settling claim with individual appellants.
- Class members gets a chance to claim small damage collectively which they would otherwise not have undertaken.
- Ethical issues raised by individuals get sufficient attention and milestone judgements are passed and changes brought-in. For example when Facebook launched Beacon by which its partner sites would publish activities of the user on user’s Facebook news feed unless the user opts out was a major privacy issue. The lawsuit forced Facebook to terminate beacon and created a fund of $9.5 million to address security and privacy.
- Class lawsuits generally bind all class members with a low settlement while as per a debate lawyers and the lead applicant gets the major benefit.
- Cost of class action suit is prohitively large to companies, thus, impacts profitability or may even cause bankruptcy of companies.
Instances when need for Class Action was felt in India
- When Satyam scam was unearthed, indian shareholders had no respite because India did not have Class Action Provision while Europe and US had. While US and European shareholders got the compensation, Indian shareholders had to run from pillar to post.
- After Bhopal Gas Tragedy, victims could not bring about class action suit against Union Carbide to compensate for the damages. Government of India had to file claims against Union Carbide in New York Courts and later in Indian Courts. The matter was settled for USD 130 million.
Class Action of Companies Bill 2012
Class Action has been documented in clause 245 in chapter XVI Prevention of Oppression and Mismanagement in Companies Bill 2012 pdf. Here’s the WHAT, WHO and HOW of this clause. Refer to Companies Bill 2012 (pdf) for the exact clause.
What may the appellants appeal to court?
- To restrict company from taking an action that is not in conformity to the memorandum or article of company or against the law.
- To compensate for damages caused by act of company and its directors
- To alter the memorandum or request to void article of a company
In scope and out of scope
- All companies excluding all banking companies.
Process of Class Action
- Members appeal to tribunal for impropriety, misinterpretation, damages or such.
- Tribunal may accept the appeal considering whether the appeal qualifies to be considered in this clause and whether member is acting in good faith.
- Public notice will be served to all members or the depositors of the class.
- All similar applications will be combined into one application.
- Class members or depositors will choose lead applicant. If members or depositors do not have a consensus on lead applicant then tribunal will choose a lead applicant.
- Lead applicant will contest the case with defendants.
- Only one class action application will be entertained for one issue.
- An order passed by tribunal shall be binding to the company, auditor, members, depositors, experts, consultants or any other person.
Provision for non-compliance of the order passed by tribunal
- If a company fails to comply with the order of tribunal then
- Company may be fined from Rs 5,00,000 to 25,00,000.
- Every office of the company who is in default may be imprisoned for up to 3 years and fined for Rs 25,000 to Rs 1,00,000.
Provision for false complaint
- Tribunal shall reject the application and applicant will need to pay opposite party the costs that will not exceed Rs 100,000.
How many members may file Class Action?
- If company has share capital then minimum of the following three categories
- 100 members
- A prescribed percentage of share holders
- Holders of a prescribed percentage of shares
- If company does not have share capital
- 1/5 of all members
Who may be sued?
- The company or its directors
- Auditor or Audit firm
- Expert or consultant who gave wrong or misleading information