ILS LAW COLLEGE, PUNE

Seminar Paper

Title-Class Action Suit:How it is distinguish from Oppression

And Mismanagement

Subject- Corporate Finance

Submitted to Mr. Amogh Diwan

SUBMITTED BY:

Rewati Sinha

Roll no.-846

LLM 2ND YEAR

1
CLASS ACTION SUIT

A class action, a class suit, or a representative action is a form of lawsuit in which a large
group of people collectively bring a claim to court and/or in which a group of defendants is
being sued.

This is the new provision inserted under the Companies Act,2013. The Companies Act,2013
provides for class‐action lawsuits, which can allow a large number of people with common
interest in a matter to sue or be sued as a group. Sections 245 and 246 of the Act contain
these provisions. Under these, class‐action suits may be filed by investors if they are of the
opinion that the affairs of the company are being conducted in a manner prejudicial to the
interest of the company, its shareholders or depositors.

An application may be made by the prescribed numbers of members before the Tribunal
under section 245 seeking certain reliefs on the ground that the affairs of the company are
been conducted in a manner prejudicial to the interest of the company or its members. the
Tribunal may grants such reliefs as may me appropriate including restraining the company
from committing an act that is ultra vires the articles or memorandum or in contrary to any
law1.

Class suits have several advantages, essentially the economics of aggregation. Presumably,
class suits minimize litigation by avoiding multiple suits. The amount of compensation being
claimed by each claimant may be too small to warrant individual pursuit.

Background

At the time of Satyam scam, the Indian investors, as opposed to their counterparts in USA,
could not file litigations against the fraudulent company. Owing to the peculiarity of weighty
financial scam of Satyam in 2009, the need for class action suits was conceived and put into
limelight in India. The intention behind this provision was to enable any group of investors to
take legal action and claim damages against the deceitful actions of any defrauding company
and its auditors.

The concept of class action paved its way in the Indian legislation through the means of
Section 245 of the Companies Act, 2013. A class action suit is a representative law suit which
allows a group of people with common interests and grievances to lodge a complaint or sue

1
Dr. G.K. Kapoor & Dr. Sanjay Dhamija,Taxmann's Company Law and Practice (23rd ed.2018)

2
the accused party. Here, one or more plaintiffs prosecute legal proceedings on behalf of the
group. Section 245 of the Companies Act, 2013 was inserted to introduce the concept of class
action suit.

ADVANTAGE

• Overcomes the disincentive - a small recovery that an individual may get by pursuing
his single action
• Avoids different court rulings allowing the defendants to follow the rulings easily.
• Ensures all the interested persons receive relief and the early bird alone do not get the
relief
• Reduction in no. of lawsuits
• Reduces litigation costs
• Aggregation increase the efficiency of legal process
• Avoids repetition of same witnesses, documents and trial time and again.

DISADVANTAGE

• Ruling by the court operates as res judicata for the members of the class
• High costs – huge amount is spent on attorney fees; sometimes cost benefit ratio is
negligible
• If the claims are arbitral, whether can be brought before the Tribunal

section245 provides an alternate remedy to the members or the depositors of a company or

any class of them by way of class action before the tribunal. Class action is suitable where the
issues in question are common to all effected and the number of person effected is very large
making it impractical for all of them to join hands. Section 245(1) permits class action to be
brought by the prescribe number of member or members, depositor or depositors or any class
of them before the tribunal on behalf of members or depositors. Such an application may be
filed if they are of 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 or its members or
depositors. Remedy under section 245 is not available in case of banking company.

3
The 2013 Act lays down the following situations where class action suit could be filed:

 To restrain the company from committing an act which is ultra vires its
articles/memorandum
 To restrain the company from committing breach of any provision of its
memorandum/articles
 To declare a resolution altering its memorandum/articles as void if the resolution was
passed by suppression of material facts or obtained by miss-statement to the
members/depositors
 To restrain the company and its directors from acting on such resolution
 To restrain the company from doing an act which is contrary to the provisions of the
2013 Act or any other law for the time being in force

 To restrain the company from taking action contrary to any resolution passed by the
member

 To claim damages/compensation or demand any other suitable action from/against the

following:

1. The company/its directors: For any fraudulent, unlawful, wrongful act, omission,
conduct, any likely act/omission/conduct on its/their part
2. The auditor including audit firm of the company: For any improper/misleading
statement of particulars made in his/her audit report or for any
fraudulent/unlawful/wrongful act/conduct
3. Any expert, advisor, consultant or any other person: For any incorrect or misleading
statement made to the company or for any fraudulent, unlawful or wrongful
act/conduct, any likely act/conduct on his/her part

 To seek any other remedy as the National Company Law Tribunal (NCLT) may deem
fit.

4
Requisite number of members/depositors needed to file class action suit: The number of
members/depositors required to file class action suits are as follows:

Type of company Members Depositors

Company with share capital The number of members The requisite number of
would be lower of (A) or (B) depositors provided would be
as follows: lower of the following:

A. (a) 100 members or A. (a) 100 depositors or

(b) prescribed percentage of (b) prescribed percentage of

the total number of its the total number of its
members, whichever is less depositors whichever is less,
or
B. Any member(s) holding
not less than prescribed B. Any depositor(s) to whom
percentage of the issued the company owes prescribed
share capital of the company percentage of its total
(subject to the condition that deposits.
the applicant(s) has (have)
paid all calls and other sums
due on his/her (their) shares).
Company without share Not less than one-fifth of the Same as above

Capital total number of its members

5
On 8 May 2019, the Ministry of Corporate Affairs (MCA) has notified requisite
percentage of the members/depositors who may apply for a class action suit. The
percentages are as follows:

Type of company Members Depositors

Company with share The requisite number of The requisite number of

capital members would be lower of depositors would be
Listed company (A) or (B) as follows: lower of the following:
A. (a) At least five per cent A. (a) At least five per cent
of the total number of its of the total number of its
members or depositors
(b) 100 members, (b)100 depositors, whichever
whichever is lower or is less, or

B. Member(s)holding not B. Depositor(s) to whom a

Company with share
capital
Unlisted company
less than two per cent of its company owes five per cent
issued share capital of its total deposits.
The number of members Same as above
would be lower of (A) or (B)
as follows:
A. (a) At least five per cent
of the total number of its
members
(b) 100 members, whichever
is lower or
B. Member(s) holding not
less than five per cent of its
issued share capital.

The application needs to be made in Form No. NCLT-9 of the NC capital rules along with
documents and fees. A copy of application is required to be served on the company, other
respondents and other persons as directed by Tribunal (Rule 84 of NCLT rules).

6
Against whom an application may be filed

A class action application may be filed with the tribunal against the company, its directors,
auditor or any expert or adviser or consultant or any other person who has made any incorrect
or misleading statement to the company for or any fraudulent, unlawful or wrongful act or
conduct or any likely act or conduct on his part.

What are the Reliefs

Section 245(1) sets out the kinds of relief that the Tribunal can grant in a Class Action:

 Restrain the company from committing an act, which is ultra vires the Articles or
Memorandum of the company.
 Restrain the company from committing breach of any provision of the company
Memorandum or Articles.
 Declare a resolution altering the Memorandum or Articles of the company as void if
the resolution was passed by suppression of material facts or obtained by mis-
statement to the members or depositors, and thus restrain the company and its
directors from acting on such resolution;
 Restrain the company from doing an act which is contrary to the provisions of the Act
or any other law for the time being in force;
 Restrain the company from taking action contrary to any resolution passed by the
members;
 Claim damages or compensation or demand any other suitable action or remedy that
the Tribunal may deem fit.

Oppression and Mismanagement

The management of a Company is based on the majority rule, but at the same time the
interests of the minority can’t be completely overlooked. While talking of majority and
minority, we are not talking of numerical majority or minority but of majority or minority
voting strength. The reason for this distinction is that a small group of shareholders may hold
the majority shareholding whereas the majority of shareholders may, among them, hold a
very small percentage of share capital. Once they acquire control, the majority can, for all
practical purposes, do whatever they want with the Company with practically no control or
supervision, because even if they are questioned on their acts in the general meeting, they

7
always come out winners because of their greater voting strength. So, the modern Companies
Acts contain a large number of provisions for the protection of the interests of minorities in
companies.

Oppression

The term ‘oppression’ has been explained by Lord Cooper in Elder v. Elder & Watson Ltd 2.
as, “The essence of the matter seems to be that the conduct complained of should at the
lowest involve a visible departure from the standards of fair dealing, and a violation of the
conditions of fair play on which every shareholder who entrusts his money to the company is
entitled to rely.

The expression oppression has not been defined by the Company Act 2013. In general
oppression means causing hard and injury by unjust exercise of power or discretionary
authority especially with unjust motives. In the context of a Company it may mean depriving
of one or more shareholders of their legitimate expectation or other unfair treatment by the
controlling shareholders.3

Supreme Court of India in Shanti Prasad V. Kallinga Tubes4, "the essence of the matter
seems to be that the conduct complaint of should, at the lowest, involve a visible departure
from the standards of their dealing, and a violation of the conditions of fair play on which
every shareholder who entrust his money to the company is entitled to rely." The complaining
shareholder must be under a burden which is unjust or harsh or tyrannical . 'Legitimate
expectation ' in the capacity of shareholder can also constitute a basis to construes act or acts
as oppressive.

Acts held as Oppressive

1. Not calling general meeting and keeping shareholders in Dark.5

2. Non-maintenance of statutory records and not conducting affairs of the company in
accordance with the Companies Act.
3. Depriving a member of the right to dividend
4. Refusal to register transmission under wil

2
1952 SC 49 Scotland.
3
http://www.businessdictionary.com/definition/oppression.html#ixzz3YD9guli8
4
(1965)1 comp. LJ193, 203;204; AIR 1965 SC 1535/(1965) 1 SCA 556
5
Hindustan co-operative Insurance Society Ltd, In re(1961)31 comp.cas.19(Cal.)

8
 5. Failure to distribute the amount of compensation received on nationalisation of
business of company among members, where required to be so distributed

Acts held as not Oppressive

1. An unwise, inefficient or careless conduct of director.

2. Non-holding of the meeting of the directors
3. Not declaring dividends when company is making losses.
4. Denial of inspection of books to a shareholder.
5. Lack of details in notice of a meeting.
6. Non-maintenance/Non-filing of record.
7. Increasing the voting rights of the shares held by the management.

Mismanagement

Mismanagement is said to be done if the affairs of the company are being conducted in a
manner prejudicial to the interests of the company; or a material change (not being a change
brought about by, or in the interests of, any creditors including debenture holders, or any
class of shareholders, of the company) has taken place in the management of control of the
company, whether by an alteration in its Board of directors, or if its managing agent or
secretaries and treasurers, or in the constitution or control of the firm or body corporate acting
as its managing agent or secretaries and treasurers, or in the ownership of the company's
shares, or if it has no share capital, in its membership, or in any other manner whatsoever,
and that by reason of such change, it is likely that the affairs of the company will be
conducted in a manner prejudicial to the interests of the company.

Acts held as Mismanagement

The following acts have been held as amounting to mismanagement:-

1. Where there is serious infighting between directors resulting in serious prejudice
being caused to the company.6

6
Suresh kumar singh v. Supreme Motors Ltd.[1988]54comp.Cas.235(Delhi).

9
 2. Where Board of Directors is not legal and the illegality is being continued.
3. Where bank account(s) was/were operated by unauthorised person(s).
4. Where directors take no serious action to recover amounts embezzled.
5. Continuation in office after expiry of term of directors.
6. Sale of assets at low price and without compliance with the Act.
7. Violation of statutory provisions and those of Articles. Company doomed to trade
unprofitably.

Acts held as not Mismanagement

The following acts have been held to not to amount to Mismanagement:-
1. Building up of reserves or non-declaration of dividend especially when it does not
result in devaluation of shares.
2. Merely because company incurs loss, mismanagement can’t be alleged.
3. Arrangement with creditors in company’s bonafide interest.
4. Removal of director and termination of works manager’s services.

Differences between application under Section 241/244 and class action under Section
245

Prevention of oppression and Class Action Suits Section

mismanagement u/s 241 to 245
244
Who can file application? Members of the Company; Members as well as deposit
Central Government holders of the company
Matters for which application Oppression, mismanagement, Acts involving violation of
can be filed prejudicial to any member, law, ultra vires the articles or
members or interest of the memorandum. Fraudulent,
company or prejudicial to unlawful or wrongful act or
public interest, both past and omission or improper or
continuing. misleading statements.
Public Notice Not required Required in the prescribed
manner.

10
Class action is an important feature of the 2013 Act and is a useful tool in protecting the
interest of the minority shareholders. It has significantly moved the needle of corporate
governance in the 2013 Act. A company, its directors, auditors, experts and consultants fall
within the purview of the class action suit. Earlier, the 2013 Act was silent on the
‘percentage’ of members/depositors who could file a class action suit against the company.
The recent amendment to the NCLT rules has brought about clarity in the number of
members/depositors that need to come together to file a class action suit. Those thresholds are
as follows:

 Five per cent of members or 100 members, whichever is less, for both listed and
unlisted companies with share capital.
 Members of a listed company with share capital that hold two per cent of its issued
capital
 Members of an unlisted company with share capital that hold five per cent of its
issued capital
 Five per cent of the depositors or 100 depositors, whichever is less
 Depositors to whom the company owes five per cent of its total deposits.
As is evident from the thresholds, not a very large number of shareholders are required to
come together to file a class action suit. If, for example, only two shareholders in a listed
entity hold two per cent of the share capital, which is common amongst institutional
investors, then the two shareholders could file a class action suit.
From the above stated information we can distinguish class action suit with oppression and
mismanagement. In case of oppression and mismanagement matters for which relief may be
requested are oppression, mismanagement, prejudicial to any member, members or interest of
the company or prejudicial to public interest, both past and continuing but in case of class
action suit Acts involving violation of law, ultra vires the articles or memorandum.
Fraudulent, unlawful or wrongful act or omission or improper or misleading statements
application may be filed for reliefs.

11
SELECT BIBLIOGRAPHY
BOOKS
1. Taxmann's Company Law and Practice by Dr. G.K. Kapoor & Dr. Sanjay Dhamija
2. Company Law by Avtar Singh
3. Taxmann's Companies Act with Rules as amended by Companies (Amdt.) Act 2019.
4. Elements Of Company Law by N.D. Kapoor
WEBSITES
1. http://www.jstor.org
2. http://www.un.org
3. http://www.manupatra.com
4. http;//www.scconline.com
5. ebook.mca.gov.in
6. ibbi.gov.in

12