|
Powered by AltAlpha AI
|
Author: Ms. Simran Bherwani is a fifth-year B.A., LL.B. (Hons.) student in National Law University, Jodhpur.
Introduction
After the Satyam scandal, India’s own Enron, the need for the concept of class action suits were felt. While the Indian regime had the concept of “representative suits” in Order 1 Rule 8 of the Civil Procedure Code, 1908 (CPC), which are of a similar nature, there was nothing specific in place to protect the interests of the members of a company. In 2013, the Companies Act (CA2013) had Section 245, which dealt with class action suits. However, this provision remained a mere dead letter as the judiciary did not witness any successful class action suits. This changed in 2024, when the minority shareholders of ICICI Securities and Jindal Poly Films initiated a class action suit against the company before the National Company Law Tribunal (NCLT). Both these cases will be taken up by the NCLT in July, 2024. As we approach the month, it is essential to understand the significance of class action suits. Of even more concern is the fact that there exists a procedural loophole in the provision, which allows misuse of the mechanism. This article seeks to explore the loophole and provide a way forward for the protection of Indian minority shareholders.
Beneath the Headcount? Playing Truant in Section 245
Section 245 of the CA2013 lays down situations which may be prejudicial to the interests of the company, on the occurrence of which, members can file a class action suit. But, to file a suit, the requisite numbers are:
- 100 members or a minimum of 5% of the total members of the company, whichever is less, in case of a company having a share capital, or
- Member(s) holding a minimum of 5% of the issued share capital of the company, in case of an unlisted company, or
- Member(s) holding a minimum of 2% of the issued share capital of the company, in case of a listed company, or
- A minimum of 1/5th of the total number of members, in case of a company not having share capital, or
- 100 depositors or a minimum of 5% of the total depositors of the company, or
- Depositors being owed a minimum of 5% of the total deposits of the company.
It is pertinent to note that these numerical requirements come into play at the time of filing the suit. However, the provision does not envisage a situation like the following:
Let us assume there are 90 members of the company interested in filing a class action suit. They do not meet the procedural requirements of Section 245 of the CA2013. Hence, they transfer their shares to other shareholders, who then become members of the company. Thus, the class is now eligible to file a class action suit.
In such a scenario, the existence of a procedural ground is rendered superficial, with members of the company readily flouting the requirements. Hence, allowing members who were not affected by acts of the company to proceed against the company in the court of law is egregious. The intention of the legislature behind the procedural ground is to ensure that there is an accessible mechanism in place to address the genuine interests of a large group of shareholders at once. However, this is a grave misuse of the provision.
To avoid this, Section 245 of the CA2013 has potential safeguards in place. The NCLT is required to take into consideration whether the member or depositor is acting in good faith and whether there is any evidence of the views of the members or depositors coming from a personal interest. Despite the existence of such safeguards, there is scope for bypassing the procedural grounds.
This issue was taken up for consideration by the judiciary in the case of Jodh Raj Laddha v. Birla Corporation Limited. The facts of the case were such that a member of the company had transferred his shares to others, in order to meet the threshold for filing a suit against the company. The Company Law Board stated that:
“I agree that Section 399 does not deal with the qualitative aspect. Yet, since in a proceeding under Sections 397/398, this Board exercises equitable jurisdiction with enormous powers, I am of the firm view that while examining the eligibility under Section 399, the qualitative aspect of a member should also be taken into account. It is more so in case of listed companies, as with no marketable lot now in force, any one holding shares could transfer a part of his shares and create 100 members, and file a petition on flimsy grounds just to harass the management or for publicity.” (emphasis supplied)
However, the High Court did not dismiss the case on procedural grounds. The reasoning of the Company Law Board is of utmost importance in recent times, considering the rise in class action suits. As a result, there is a dire need to seal the gap in the law.
Way Forward: Syncing Ownership
In order to put forth a potential solution, the author intends to draw a comparative analysis to the American jurisprudence. This analysis is of particular relevance to India as Rule 85 of the NCLT Rules, 2016 states additional grounds to be considered by the NCLT. This Rule is pari materia to Rule 23 of the Federal Rules of Civil Procedure of the USA. This indicates that inspiration from the American jurisprudence was taken in the formulation of the Indian regime for class action suits.
As per Rule 23.1(1) of the Federal Rules of Civil Procedure, a shareholder can only file a derivative action if they were a part of the company at the time of the occurrence of the transaction. This is known as the contemporaneous share ownership doctrine. This principle originated in the case of Hawes v. Oakland of the American Supreme Court. The case acknowledged the ease by which new shareholders were made plaintiffs of derivative action suits, which would not be the case otherwise. Hence, it arose as a doctrine in American jurisprudence, which has been applied consistently in class action suits.
In such a scenario, the time of the completion of the allegedly wrong transaction has to be noted. If the shareholder became a part of the company prior to the alleged wrong, they will not be entitled to consent to the derivative action suit. Incorporation of the said doctrine into the Indian regime will prevent the colourable device that may be employed by most shareholders to move a class action suit against the company.
While there does exist a difference between class action and derivative action suits, the nature of both the suits are similar. Moreover, analogies can be drawn with the Indian conception of class action suits as per the CA2013 and the definition of derivative action suits in terms of Rule 23.1 of the Federal Rules of Civil Procedure. Additionally, India does not have a specific framework in place for derivative action suits. Unlike USA, class action suits are the only recourse available.
Furthermore, there are certain interpretational concerns with the doctrine. For instance, in the case of Lavine v. Gulf Coast Leaseholds, an allegedly wrongful purchase was being negotiated between the company with another entity. One of the shareholders became a part of the company after the conclusion of the negotiations, but prior to the signing of the agreement. Here, he was allowed to proceed against the company. Thus, the conclusion of the allegedly wrong transaction has been given precedence.
Furthermore, there have been cases where the shareholders claimed the existence of a “continuing wrong” by a company, in order to enable themselves to be a part of the suit. In such cases, the American courts have applied a flexible view to prevent an unnecessarily harsh application of the doctrine. Weighing the ramifications of the aforementioned, even a flexible view of the doctrine would not lead to consequences as adverse as the result of non-existence of the doctrine. Hence, the incorporation of this doctrine would be instrumental in the process of class action suits.
Conclusion
The introduction of class action suits in India through Section 245 of the CA2013, was a significant step towards protecting minority shareholders. However, the loophole allowing procedural manipulation undermines the intent of this provision. Drawing from American jurisprudence, particularly the contemporaneous share ownership doctrine, can be a viable solution. Incorporating this principle into Indian law can prevent abuse and ensure that only genuinely affected shareholders can initiate class action suits, thereby safeguarding the interests of minority shareholders and maintaining the integrity of the legal process. As India continues to refine its legal framework, it is crucial to strike a balance between accessibility for shareholders and protection against frivolous litigation.
