A tool for ensuring accountability

Written by Indu Bhan | Indu Bhan | Updated: Sep 24 2014, 07:52am hrs
The Companies Act, 2013, has introduced a new regime of the class action suits for India Inc, a first in the country, though multinationals operating in the US, the UK, and parts of Europe are familiar with it.

These class action suits will not only bring together people with common interests, but will prevent multiplicity of litigations, increase the efficiency of the legal process and reduce the litigation costs. Besides, they will bring in a sense of responsibility and accountability towards the interests of the stakeholders. Higher penalties and mandatory imprisonment would deter companies and their representatives from committing any fraudulent, unlawful or wrongful acts or from making any improper or misleading statements.

The class action suit assumed importance in India when the Satyam scam broke out in 2009. While the small investors in India were unable to seek effective relief against Satyams management, their counterparts in the US were able to claim $125 million (about R675 crore) from Satyam Computer Services (now Mahindra Satyam) after filing class action suits.

At present, such representative suits in India are in the nature of public interest litigations, which cater to the needs of those who dont have enough financial capacity to seek remedy for infringement of their rights.

Section 245 of the 2013 Act deals with these class action suits. Such lawsuits can be filed before the National Company Law Tribunal (NCLT) by members or depositors or the central government against the company or its directors including auditors of the company, expert or advisor or any other person for any fraudulent or unlawful or wrongful act or conduct of the affairs of the company. However, other stakeholders such as creditors, bankers, debenture holders, etc, are deprived such rights. Even regulatory authorities are not empowered to file such suits against companies and these provisions do not apply to a banking company.

NCLT will have to take sufficient safeguard measures before admitting any such suit to ensure that the member or depositor is acting in good faith and is not filing frivolous cases. Any order passed by the quasi-judicial body will be binding on all the parties, otherwise a company or its official will be punishable with a fine ranging from R5-25 lakh and imprisonment which may extend up to 3 years.

NCLT under Section 425 has also been conferred the same powers and authority in respect of contempt of its orders as conferred on a high court under the Contempt of Courts Act, 1971.

To further empower consumers, the government is proposing to bring amendments to the Consumer Protection Act, 1986, and also put in place by 2015 the Consumer Protection Authority, a body similar to the US Federal Trade Commission, to protect consumers from unfair trade practices and allow them to take class action against goods or services providers.

Still, legal experts hail this as a milestone and feel it is a step in the right direction, and shareholder bodies can play a leading role. So far, filing a case of oppression and mismanagement was the only recourse available to aggrieved shareholders. Class action suits give them additional rights to fight against any abuse of powers by the company, its management or to that matter even the auditor and consultant.

However, class action suits may prove to be a potent tool to keep the company or management accountable and to contain any likely prejudice against the minority stakeholders, but they may also allow misuse by unscrupulous minority shareholders in furtherance of their vested interests.

Therefore, courts and the tribunal may need to exercise caution. They will have to ensure that a company against which such suits are filed is allowed to function effectively while balancing the interests of minority investors.