One of the biggest ironies of the Satyam saga in India was that the small and marginal shareholders in India did not seem to have any recourse to legal remedies against the managements’ self-declared financial misadventures.

They were left holding the baby, while their counterparts abroad could get to file class-action suits seeking damages, compensation et al . This could have been due to a fuzzy company law which ensured that the small shareholder never got to participate in the action.

The new Companies Bill seeks to redress this situation by providing for class-action suits. By definition, a class-action suit is a lawsuit brought by one party on behalf of a group of individuals all having the same grievance. The utility of class-action suits was proved recently in the case of Hewlett Packard (HP).

The company announced that one of its billion-dollar acquisitions — Autonomy was mired in accounting irregularities and false statements, resulting in it having to take $8.8 billion impairment charge. HP was hit by the first of a number of class-action lawsuits seeking damages for shareholders, within a week of its announcement in November.

Their claims include allegations that HP issued false and misleading statements on its financial performance and prospects since August 2011, when the Autonomy deal was first announced, and November this year, when it reported the write-down.

The company puts up a brave face and optimistically states that it has valid defences with respect to legal matters pending against it, but that seems to be a typical corporate safeguard announcement.

Companies Bill

Clause 245 of the Companies Bill is the one to look up to for class-action suits (CAS).

Class actioners can, among other things stated in the Bill, restrain the company from committing an act which is ultra vires the articles or memorandum of the company, declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts, restrain the company from taking action contrary to any resolution passed by the members, demand any other suitable action from or against the company or its directors for any fraudulent, unlawful or wrongful act.

The auditor, including audit firm of the company, can be taken to task for any improper or misleading statement of particulars made in his audit report.

A minimum of 100 shareholders or a percentage that may be prescribed (this would come in the much-awaited Rules) can get together and file a CAS for a company that has share-capital, whereas the number is 1/5 for a company without share capital.

In a significant move, the provision states that where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report, or who acted in a fraudulent, unlawful or wrongful manner.

frivolous litigation

Once an application is filed, the Tribunal has vast powers of discretion to admit the application and pass orders in accordance with the provisions of law.

To prevent a group of people from going hammer and tongs at companies on trivial issues, a proviso in the Bill states that where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

For a group of 100, this amount appears too small (Rs 1,000 per head if everyone contributes equally) to deter frivolous litigation and has to be high enough to serve as a deterrent.

The provisions on CAS in the Bill seem to serve the purpose and are stronger than the erstwhile Section 374 of the Companies Act on oppression and mismanagement.

One awaits the rules that would accompany the Bill to ascertain other requirements that need to be met. If there could be a way to reduce the turnaround time for cases to be disposed of at the Tribunal, one would have a robust company law in India. As always, the key lies in implementation.

(The author is Director, Finance, Ellucian.)

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