December 2, 2020

Class Action Suits and Rights of a Shareholder

INTRODUCTION

A class action may be a proceeding during which one or several plaintiffs bring a lawsuit on behalf of a larger group, referred to as the class. The judgment or settlement agreed to arise from the suit covers all members of the group or class, where penalties paid by the defendant are divvied up among class members.

Class Action is stated in Section 245 of The Companies Act, 2013. This is a representative or derivative action for an ultravirous Act. Representative action is a class action where few shareholders file a suit if their individual rights have been opposed and they can file a suit if oppression or mismanagement happens. If with the individual, other shareholders are facing the same problem then it is defined as a Representative Action or Class Action.

The main purpose of the Section 245[1] of the Companies Act, 2013 is to make sure there are more powers being given to the shareholders.

GUIDELINES TO BE FOLLOWED FOR A CLASS ACTION

There are certain guidelines to be followed before proceeding for a class action suit. They are as follows:

(a) To restrain the company from doing any Act which is Ultra Vires in nature

(b) To restrain the company from committing breach of the company

(c) To declare a resolution altering

(d) To restrain the company and directors from acting on behalf of the company

(e) To restrain the company from doing anything contrary of the company’s law or any other law for the time being in force.

(f) To claim damages or compensation for any fraudulent action that can be claimed from the auditors, mangers etc.

(g) If the expert opinion is wrong, then the export will be held liable

(h) To seek any remedy as the tribunal thinks fit.

CONDITIONS TO BE FOLLOWED BY THE TRIBUNAL

If an application is filed and the court accepts the same, the tribunal shall have to be in regard to:

(a) Public notice shall be sent and served to all members and depositors

(b) All similar applications prevalent in any jurisdiction should be made into one combined suit. The tribunal shall have power to appoint lead application to be a representative if no consensus by members tribunals can be made.

(c) Two class action suits can not be made and should be combined into one single one

(d) Cost or expense for the application of class action will be made by company or people of a company.

RULE OF MAJORITY

The underlying principle of the company law that existed before the companies Act 1956, states that each member holds equal right with other members within the same class and any differences amongst the members is to be decided by a vote of the majority. This is called as the Rule of Majority or Supremacy of Majority, this was upheld in the case of Foss v Harbottle[2] Court had observed that: “Courts are reluctant to interfere within the internal management affairs of the corporation”.

The protection to minority shareholders is generally not available within the statute, when the majority does anything in exercise of the powers for the internal administration of the company. It is often ratified by the majority at the general meeting.

EXCEPTIONS TO THE RULE OF MAJORITY

The principle of majority rule has certain well-established exceptions and these are generally said to be the exception of rule laid down in Foss v Harbottle. When Minority shareholder can intervene:

1. Ultravires and Illegality Acts: Directors cannot take any action which is Ultravires the company or which is prohibited. In such cases, every shareholder features a right to restrain company from doing such an act, by bringing an injunction suit against the majority acts.

2. Breach of Fiduciary Duties: Actions are often brought against promoters or directors for breach of their fiduciary duties to the company; if they will prevent the company from suing them.

3. Fraud on Minority: Majority shareholders cannot sue their powers to defraud the minority. “Fraud on minority” means taking decisions and passing resolutions which might discriminate between majority and minority shareholders, so on give undue advantage to the majority shareholder.

Prior to the introduction of the class Action, the idea of Oppression remedy was only prevalent in India. The Act doesn’t define what oppression is. Normally, oppression means violation of conditions of fair play. The complaining members must be under a burden which is unjust, harsh or tyrannical. It involves lack of probity or fair dealing to a member within the matter of his right as a shareholder.

There must be unfair abuse of powers and impairment of confidence within the probity with which the company’s affair are being conducted. The scope and meaning of the “oppression” with regard to the corresponding Section within the English Act, Section 210, within the famous case of Harmer(HR) Ltd Re[3], the court held that, “It is to be observed first, that the person permitted to use to the court under Section 210 is any member of the company.

The important speciality of this section is that oppression of an individual as a director and not as a member is thus outside the purview of the section. For instance, if the majority of the Board over rides the minority directors the latter cannot resort to say under the oppression remedy. The complaint was by a director and related to not holding the board meeting; held director cannot invoke this section.

DRAWBACKS OF THE OPRESSION REMEDY

One of the main limitations of the oppression remedy is that the minority shareholders cannot bring a representative suit on behalf of the company, rather they can only file an individual remedy namely oppression suit.

In order to bring a collective action by the minority shareholder against the company, there was no such provision till 2013, the idea of protecting minority shareholder rights as a class, when their rights are infringed and many cases where small investors/ shareholders gets easily defrauded; one such example is the Satyam scam where over 3 lakhs small investors and minority shareholders got defrauded and they could not get back the money, but whereas the investors in the USA, who filed a class action against Satyam and because of such suit they could able to get a compensation of $125 million dollars which is around 675 crores.

Therefore, there is an alarming need to bring a class action suit in India, in order to protect minority shareholder rights and also by ensuring that the minority shareholder, has the right to bring collective representative suit, on behalf of the company, in order to make sure the company does not act which is outside the object clause.

CONCLUSION

It is concluded that the class Action suit is a better platform the minority shareholders, investors and depositors to raise their grievances against the management of the company. The introduction of concept like class action is certainly beneficial for the investors of the company. It provides them with a medium to fight as one unit against the errant company, thereby ensuring less cost of litigation, reducing multiple suits on same subject matter and increasing their chances of success in the process.

Especially, the depositors, who had no option but to file a civil suit thus far now, can take class action suit as a defence for any wrongful act by the company or the members of the company.

These help in increasing the accountability of a company or its management towards its stakeholders and in containing any likely prejudice against the minority. In order to make the class action more effective in India, it is necessary to modify it to fit into the Indian Legal and Procedural system.

References

[1] Section 245, Companies Act, 2013

[2] Foss v. Harbottle 67 E.R.189; 2 Hare 461 (1843, House of Lords)

[3] Harmer (HR) Ltd Re 1 WLR 62 (1959, House of Lords)


Author Details: Chandana Pradeep

The views of the author are personal only. (if any)

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