Class Action under the Companies Act 2013

Class Action under the Companies Act 2013: King of Torts, The Litigator or an Indian trick?

In King of Torts or The Litigator we believed that an individual with right cause can beat the system and emerge as a winner. We all love the hero that beats the system. Amongst the lawyers, US Class Action regime has many heroic stories. Now that 98 Sections of the Companies Act 2013 have been notified we can analyze with benefit of hind-sight, about much-talked-of Companies Bills (these were traveling from desk to desk, ministry to ministry, committee to committee and seminar to seminar) from 2008 onwards. What was introduced by JJ Irani Committee as Class Action in 2008 is different from what has come out as the Companies Act 2013, passed by both houses, that received President’s assent and is partly notified as we speak. ( herein ‘New Act’).

India Inc is debating whether the New Act is “old wine in new bottle” or “a game changer”. As the argumentative Indians we will keep on arguing about these things even after corporate life in India changes. While all of us (including the Courts) had problems with the Companies Act, 1956, all of us wanted new legislation and all of us said right things to bring out the change (It is reported that during Hutch-Voda Tax case hearing the then CJI Justice Mr. S. H. Kapadia while enquiring the status of the pending Bill with Mr. Abhishek Manu Singhavi ( who was then the chairman of the Standing Committee) in despair said “ Many Scams would have been avoided but for certain hazy definitions in the extant Companies Act” ). Change is what we all wanted and always resist. However, when debates started happening, everyone wanted the change in his favor. In this entire process of taking into account everybody’s interest what has finally come out on Class Action from Clause 216 of the JJ Irani Committee Report to Section 245 of the New Act reflects either (i) a state of confused mind of the legislators; or (ii) a magic trick to ensure no body’s interest is taken care of but seemingly we can talk about enabling provisions “in the overwhelming public interest”.

In order to account for all stakeholders interests (all of them who had say in the Companies Act related matters) the legislators (in their wisdom, the term often used in the Courts and I have never understood whether it has been used with sarcasm or sincerity) thought it fit to remove ability of an individual shareholder or stakeholder (who is aggrieved by the actions of the company) to file for Class Action. Unlike in the John Grisham’s America, in India, Class Action cannot be initiated by any person affected by the act of a corporate. It has to be a class of shareholders or depositors. (mind you Mr. JJ Irani said we must give all shareholders & creditors the ability to file for Class Action). Who can file such action would now be largely prescribed under the Rules unless you are able to get requisite numbers or value in respect of shareholders or depositors to file such action. As the sayings go “God resides in Details” also “Devil is in Details” and further “Money is in Details”. Whatever, the God, the Devil or the Money is now in the rules prescribed under Section 245 (3) (i) as to who can file for Class Action. If we believe that the draft rules become final than 100 members or depositors or 10% in value of shareholders or depositors can file for Class Action. The remedy for minority shareholders in Section 397 to 402 of the old Act was wide enough to cover these shareholders. Also, there is always a common law redressal under Civil Procedure Code ( Order 1 Rule VIII) for a Class Action against any person and the courts have to some degree developed shareholders’ derivative action as another remedy.

However, we have become such an impatient society that even before the New Act has come into force we have some trailer of how the movie will be. In November 2012 TCI Cyprus Holding a company that holds some 1% + shares of Coal India Limited filed an action in Calcutta High Court. This has been technically termed as Representative Action. Even before the New Act, the Civil Procedure Code laid down procedure for Representative Action under Order 1 Rule VIII. Minority protection against oppression was before Company Law Board under Sections 397 to 402 of the Companies Act, 1956 and under common law a shareholder could file a derivative action against some wrong-doings ( lawyers love this derivative action. It is a lawsuit by shareholder of a corporation on behalf of a corporation against corporation and its management and officers and of course it comes from rule of exception on proper plaintiff from historic case of Foss v Harbottle doctrine). Coming back to TCI Cyprus representative action, the shareholder claims that the Government ( being managing shareholder) mis-managed the affairs of Coal India and put it to loss estimated to be of Rs. 2,15,250 Crores. The lawyer for TCI is reported to have said “Additionally, in our plaint, we have sought a decree for a sum of Rs 9,942.18 Crores for the loss in the value of holdings of TCI and perpetual injunction restraining the government from interfering with the administration of the company.” This case has come up for hearing a couple of times last year. When last heard, RPG’s CSEC had intervened to enlarge the scope of litigation. It is probably too early to draw any learning from Coal India (so called) Class Action but one thing is for sure, lawyers will now tend to be very innovative in their approach. We are already experiencing how sector specific regulators are being targeted for filing complex legal actions ( that at times foxes experienced judges as well), how new forum like Competition Commission is being used to scare settlements of contractual disputes, how RTI is being used by corporate sector derive information so that tenders can be effectively challenged. Similarly the new Class Action provision will be used for various purposes and one of the purposes could be what the legislators in their wisdom desire to achieve (whatever that is).

While we wait for the rules to be notified, learn from what is happening in Coal India matter, innovative litigators will be working overtime to decipher the Class Action provisions for their interest.

One thought on “Class Action under the Companies Act 2013

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