Friday, September 6, 2013

Class Actions in the Companies Act, 2013: a Recipe for Confusion?

The Companies Act, 2013 introduces some important changes to the company law regime in India. In this post, we shall discuss one such new feature: the class action. The provisions governing class actions are introduced through s. 245 of the Act. These provisions are included under ‘Chapter XVI – Prevention of Oppression and Mismanagement’: however, class actions are evidently not the same as petitions against oppression/mismanagement. Rules governing applications in respect of oppression/mismanagement (echoing s. 397-398 of the 1956 Act) are found in s.241-244: s. 245 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 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, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders…

The reference to “such number… as are indicated in sub-section (2)” appears to be a typographical error: the prescription regarding the number of members/depositors is contained in sub-section (3). The requisite minimum numbers are specified as being either 100, or such percentage of the total number of members/depositors as may be prescribed by the rules.
“Member” is defined in s. 2(55) to mean:
 (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; (ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository...

A depositor is not defined; but a “deposit” is defined as including “any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.” If the RBI does permit certain loans or advances under the latter part of the provision (‘not include such categories…’), such that the loans are not treated as deposits, whether such a lender will nonetheless be considered a depositor is an open question. It may perhaps be argued that the exclusion from certain categories of amounts from the definition of ‘deposits’ is meant to allow deviation from the provisions of Chapter IV (Acceptance of Deposits), but not for the purpose of disentitling the concerned lender from remedies u/s 245.

Section 245(1) thus gives the right to the members/depositors to file an application to the Tribunal “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” Insofar as a member is concerned, the contours of this section are not clearly delineated from the oppression section (s. 241). Under s. 241, an application can be filed by a member who complains that “the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company” The ingredients overlap to an extent. One can perhaps argue that applications u/s 241 can be filed in case of specific oppression to certain members or classes; and while reference is made to “interest of the members” in s. 245, it must mean a reference to all the members as a class. In any case, even such a (perhaps tenuous) distinction would not result in a clear demarcation between the two sections. Insofar as depositors are concerned, it appears that s. 245 can be used only in cases when depositors as a class are being treated in a prejudicial manner. (Depositors also have other remedies for fraudulent deposits etc. under other sections – see s. 75 for example – which we shall discuss separately). The provision is not free of doubt, however. Clarity has not been aided by the wording of s. 241 either. (Section 241 also has requirements as to minimum number of members, and is, naturally, limited to members and not to depositors. The Tribunal has the discretion to waive the minimum number threshold in the case of s. 241, however.)

Section 245 states that the application before the Tribunal is to be filed “on behalf of the members or depositors…” This again raises interesting questions: particularly because the application may be one to claim damages. The damages in such a case will presumably be awarded to all those on whose behalf the application is filed. When the section states “on behalf of the members”, does it mean on behalf of all members? If not, how is one to decide what the ‘class’ is in respect of which the class action is brought? If one were to say “all members”, what would happen if some of the members are also the actors behind the wrongs complained of? How will principles of ex turpi causa etc. apply in such a case? What principles will the Tribunal apply to ensure a proper distribution of any monetary award? These questions do not seem to have any easy answers on the basis of the language of the sections.
Amongst the orders which can be sought in a proceeding u/s 245, one is [s. 245(1)(g)] as follows:
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 actor 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…

This apparently gives a right to members or depositors to claim damages from third parties: one wonders what the cause of action is in such cases. The cause of action cannot be on the basis of a contract with the alleged third party – the contract will be between the company and the third party, not the members. If one were to say that there is a liability in tort, one would be saying that the common law position on duties of auditors etc. is modified. The implications – indeed, the need or desirability for this – is not clear. The other way of looking at this would be to say that the statute is effectively allowing a type of derivative action, and is providing that the Tribunal shall be the forum for such an action. Again, a difficulty arises: clause (i) allows claims from the company itself: that can barely be a derivative action in the true sense. Some of the rules governing common law derivative actions do not seem to find a place in s. 245. In any case, another question which arises is what the impact of s. 245 would have on the classic derivative action. One could conceivably argue that given extensive codification, a separate derivative action should no longer be possible. (This argument was made – and rejected – in England in respect of a double derivative action: the English statute however was far clearer than the mix-and-match solution in sections 241-245.) In sum: what is the jurisprudential nature of the s. 245 remedy? What does “class action” really mean in this context? One will have to wait and watch how the Courts make sense of these provisions.

The breadth of clause (iii) will also need to be examined: liability is apparently created when an expert makes an “incorrect” statement. One assumes that this is not a strict liability test; nor does it apply in the case of advice given to the company which is not meant to be acted upon directly by the members. The language leaves all possibilities open. These issues all seem to arise from the statute introducing class actions without at all seeing how this would fit in with existing remedies recognized in company law. The result is a bunch of sections likely to give rise to serious analytical and interpretative difficulties.

We will discuss these issues arising from these provisions (and other provisions of the new Act) over future posts.


vswami said...

IMPROMPTU (in a different stroke):
"... a Recipe for Confusion"-
If intelligently perceived, especially in the light of decades- old history of Indian legislation, anyone who allows self to believe that the recipe spoken of i.e. "Class Action" is a new one, - or the one and only, or a rare, instance of its kind, brimming with confusions,- not to put it wildly, will be making a serious mistake. So serious that he will be unkind to self by offending own intelligence and integrity.
As quite rightly underlined, any such enactment, framed and brought on, though claimed to being made for the benefit of so called 'minority' of the stakeholders, are bound to be eventually faced with long drawn controversies, hence entailing inevitable litigation. At best, that might defeat the very object; at best, might only prove an added lucrative field, to the advantage and delight of the 'law men' (in its natural sense) at large, for simply proving individuals’ prowess / mettle, nothing more or less.
Loudly, rather sadly, wondering: Could it at all provide a welcome reprieve or respite, if not a lasting solution, if the nation were to conceive and bring about a drastic change in, to begin with, the basic set-up / constitution of the law ministry itself. Do so by having in mind and adopting sincerely, with no qualms or personal prejudices influencing or coming in the way, some of the ideally efficacious remedies/measures , which the great humanitarian and social activist of our times, -late N A Palkhivala used to tirelessly keep advocating for (To hint at, - look up his thoughts -/ wisdom- rich published speeches /articles).
<Intend to continue

Anonymous said...

I think the basic problem is that the Companies Act is the wrong place to introduce the mechanism of class action. This mechanism evolved to overcome the well known `collective action' problem, where suits by smaller stakeholders are not cost effective, and so may never get filed . As such, this is applicable not just in corporate law, but across the board. This subject really belongs to CPC (in US, it's laid out in the Federal Rules of Civil Procedure). The CPC could be amended to deal with issues such as the definition of class, the criteria and procedure for class certification etc. Its application to different contexts can then be left to judicial innovation (e.g. the fraud-on-the-market- theory evolved by the US SC in the context of securities class action suits).
Mangesh Patwardhan

vswami said...

To share more thoughts:
Here is a random selected specimen remedy prescribed by the renowned humanist:
(UPPERCASE for emphasis)
He spake thus on The Union Budget 1958-59.
(Source: WE, THE PEOPLE )
Point of poser is,- even if that be so, should not these apply and be ideally followed, with greater justification, also with respect to corporate and other man-made laws; further, as a guiding or model rule for a re-approach and freshly deciding on the framework/constitution of the Law ministry /attached departments.

vswami said...
This comment has been removed by a blog administrator.
vswami said...

Comment posted not appearing fully ?!; for the missing portion,if interested, need to go that extra mile, to look up the related personal Blog@swamilook.
Also read the cited Source Book, pg.124, 125

vswami said...

In a helpful gesture,indicated Blog@

Anonymous said...

Authors of this blog should consider writing a book on various aspects in Indian Company Law: a book which is not a mere collection of essays, but offers a sound analysis! Indeed, such a book will be of great use to all commercial lawyers concerned with Indian law advising on transactions outside India, or litigating Indian law disputes outside India!

Anonymous said...

Can anybody tell me whether section 245 of the Companies Act, 2013 is copied from somewhere or the text of the section is taken from laws of other country..??