Sep 14, 2013

Class Action Suits: Finally an effective weapon in the hands of the Stakeholders

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A Class Action or a Class Suit means a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. The concept has been prevalent in the developed jurisdictions of USA, UK and Singapore but has not had existence in India till date. A provision relating to class suits in the legal veins of an economy gives certain edge to the stakeholders for the retrenchment of their rights.

Salient Features of ?Class Action Suits?

The Act provides that a suit under this clause pertaining to Class Suits may be filed by members or depositors or any class of them, 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 interest of the company, its members or depositors.

The Act provides for the requisite number of members empowered to file class action:

  • In the case of a company having a share capital, more than
    • one hundred members of the company or;
    • such percentage of the total number of its members as may be prescribed,
    • any member or members holding more than such percentage of the issued share capital of the company as may be prescribed.
      This would be subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
    Whichever is lesser
  • In the case of a company not having a share capital, more than one-fifth of the total number of its members.

The requisite number of depositors empowered to file class action should be: More than one hundred in number or more than such percentage of the total number of depositors as will be prescribed in the Rules, whichever is lesser, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as will be provided for in the Rules in that regard.

The Companies Act 2013 provides that a Class Action Suit may be filed to the Tribunal seeking orders against a Company in the following matters:-

– 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;

– the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report;

– any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company.

  • Restraining from committing an act which is ultra vires the Articles or Memorandum of the Company;
  • Restraining from committing breach of any provision of the company?s Memorandum or Articles;
  • Declaring a resolution altering the Memorandum or Articles of a company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors;
  • Restraining the company and its Directors from acting on such resolution;
  • Restraining from doing an act which is contrary to the provisions as provided in the Act or any other law for the time being in force;
  • Restraining from taking action contrary to any resolution passed by the members;
  • Claiming damages or compensation or demanding any other suitable action from or against?

Further, the Act provides that the Tribunal shall, while admitting a class action suit, take into account that all similar applications prevalent in any jurisdiction have been consolidated into a single application and a lead applicant is appointed amongst them

Comparison of ?Class Action Suits? with ?Oppression and Mismanagement?

Section 397 and 398 of the Companies Act, 1956, deals with the filing of petition before the Hon?ble Company Law Board in the cases of oppression and mismanagement. One major practical difference between the concepts of oppression and mismanagement and that of class suits is that the latter also allows depositors to take an action against the company whereas no such provision is there in the former. Also noteworthy is that, in the case of suit for oppression and mismanagement, where action can be taken only against the company and its statutory appointees, the Act allows that a class suit can be filed even against an expert or advisor or consultant or any other person for any incorrect or misleading statement to the company and also against an auditor for any improper or misleading particulars.

Besides theses, class action suit can be filed against the management or directors of company for restricting them to do one or more particular action, however petition u/s 397 & 398 is filed against management for various instances of past mismanagement and praying not to indulge in future mismanagement of functions of company.

Impact of Change

Discussing the impact of this provision relating to class action suits having on the stakeholders: As far as stakeholders are concerned, the provision seems to definitely be an advantageous one to this segment. While earlier the only recourse available to the shareholders of a company was that of filing of a petition for oppression and mismanagement, now class action suit gives the stakeholder an additional right and several more grounds to fight for their rights on any abuse of powers by the company, its management or for that matter even the auditors and consultants.

Including auditors and consultants of a company within the ambit of class action suit, besides the company and management, has provided additional empowerment to the stakeholders to take a call against such persons including the company for the specified list of wrongful acts which may be conducted by them. Another impact of this will be that experts, advisors and auditors of a company will now act more carefully and diligently before advising anything to the company and its management.

The deposit holders who earlier had no other alternative than to file civil suit, are also now enabled to take action against any wrongful acts of the company or other specified persons, which means that they may find themselves in more secured territory now.

This provision will encourage faster action and speedy disposal of matters calling immediate attention and it is a good provision for combining all similar applications filed anywhere against the specified person for stated misconduct.

The provision to enable stakeholders to claim damages from the company or its directors and other specified person with reference to the expenses of class suit is also a positive and encouraging move for stakeholders. Higher penalties and mandatory imprisonment, if proved wrong would act as a deterrent to any fraudulent, unlawful or wrongful act or for any improper or misleading statement through.


The lack of enablement of Class Action suits in India was largely felt in the recent past when the country was jolted by some corporate scams, mincing the trust, confidence and sentiments of the stakeholders. At that time need for provisions which could protect the interests of and fight for the rights of innocent stakeholders by empowering them was felt. The enactment of the Companies Act will thus open vistas of recourse options for the stakeholders of the company.


Mr. Manoj Kumar

Partner & Head – M&A & Transactions



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