In a major turn of events after the Supreme Court on Monday referred the class action lawsuit against Jindal Poly Films to arbitration, minority shareholders have alleged that they were kept in the dark about the petition for an out-of-the-court settlement, as per a joint statement from petitioners seen by FE. Monet Securities, the new shareholder that substituted the previous lead petitioner Ankit Jain in May, is alleged to have joined hands with the company, thereby subverting the statutory scheme.
They also alleged that the entire sequence – acquisition of shares by Monet Securities, substitution into proceedings, and immediate consent to arbitration – bears the unmistakable hallmarks of a pre-arranged strategy to defeat the class action.
“Approximately 40,000 public shareholders, whose interests were at the heart of the class action proceedings, were neither consulted nor informed before the matter was referred to private arbitration,” minority shareholders said in the statement. They also said their rights have been “devastatingly snatched away” and need immediate protection.
The unprecedented step, where a company facing a class action and the very petitioner who was supposed to prosecute it on behalf of the shareholder class join hands to have the matter taken away from the statutory forum and referred to a private, confidential arbitration constitutes a grave abuse of the legal process, they said.
“The failure to consult or inform co-petitioners of material developments, violates the fundamental principles of natural justice and procedural fairness,” said Abeezar Faizullabhoy, senior partner at CMS INDUSLAW. A settlement or referral to arbitration by some petitioners, without the knowledge of others, may reflect conflicting motivations, including undisclosed commercial arrangements, personal settlement negotiations, or strategic decisions taken by a dominant group within the petitioner class, he added.
First Admitted Class Action Lawsuit
This was the first-ever class action lawsuit admitted by an Indian Tribunal against a listed company. Though Jindal Poly had approached the National Company Law Appellate Tribunal to challenge the case, it had upheld the National Company Law Tribunal’s admission of the matter.
The group of minority shareholding having a 5% stake had alleged ₹2,500-crore financial fraud by the company. However, the company, on multiple instances had declined the allegations and said all transactions were made following due processes and regulatory approvals.
The shareholders, then led by Jain, had claimed that Jindal Poly and its promoters transferred funds and assets at significant undervaluation, unfairly wrote off loans, and made consultancy payments to unqualified entities. However, in April, Jain surprisingly exited the lawsuit as he sold his entire stake to Monet Securities who then became the new petitioner in the case.
“There is a high risk that the settling shareholder(s) may prioritize their personal or individual benefit over the collective relief sought for the entire class,” said Sohil Shah, partner at Pioneer Legal. Class actions are designed to consolidate small, disparate claims into a powerful collective voice. If individual members settle privately, the overall class is weakened, he said, adding that other shareholders are deprived of the opportunity to evaluate whether out of court settlement is fair, equitable, or sufficient.
Potential Legal Remedies
However, there is still room for relief for the petitioners if their allegations are true. The Supreme Court order does not record whether any resolution was passed by either company following due procedure under the Companies Act, 2013. “In this regard, any such settlements without shareholder approval cannot stand on firm legal ground and validity of such settlements are highly questionable,” said Kavita Brid Chavan, partner at Rajani Associates. The order itself noted that all contentions of the parties are kept open, which suggests that non-consenting shareholders retain the right to challenge, she added.
Legal experts said there are a series of actions the shareholder group can explore if they were not consulted for the private arbitration. Seek clarification regarding the scope and binding effect of the settlement, challenge the settlement’s applicability to non-consenting shareholders, or pursue independent proceedings if their rights and grievances were not adequately represented, said Supreme Waskar, managing partner at Supreme Law Partners. They can also examine the possibility of initiating a fresh action where a distinct and surviving cause of action remains available under law, he added.
Non-consenting shareholders may also consider invoking Section 241 of the Companies Act, 2013, for relief on grounds of oppression and mismanagement, said Faizullabhoy. This remedy is available to members fulfilling the criteria under Section 244, he added.