An Account of Class Action Suits in India
This article by Sakshi Jha endeavours to peruse the dimensions of the class action suits in India from the genesis. It first discusses the meaning, purpose and emergence of the term at length. The next chapter discusses the nature of the class action suit, its framework as well as its standing under oppression and mismanagement under Sec 241.… Read More »
This article by Sakshi Jha endeavours to peruse the dimensions of the class action suits in India from the genesis. It first discusses the meaning, purpose and emergence of the term at length. The next chapter discusses the nature of the class action suit, its framework as well as its standing under oppression and mismanagement under Sec 241. It further goes on to discuss the importance and need for it. The next chapter discusses the overview of the provision and role of the NCLT. The last chapter enumerates the extent of advantages to the aggrieved members along with critical analysis for the same.
Introduction
The Companies Act of 2013 could be considered an overhaul of the previous 1956 provision. There were certain exceptional changes that were brought under the new Act and it includes the rights of a representative suit by the shareholders or depositors of the class action suit.
“Class Action” Suits finds its place in Sec 245 of the Act. It is a new development in the Indian jurisprudence as it wasn’t present in the earlier law. The absence of such provision has cost the stakeholders immensely in cases such as that of the M/S Satyam Computer v. Directorate of Enforcement[1]. This case had put a huge impetus on the demand of the provision for a collective suit.
Meaning
“Class Action” suits are governed under Sec 245 of the Companies Act, 2013. It allows a group of individuals to collectively bring or defend as a suit. Such suits can be brought by the investors (shareholders and depositors) where they have reasons to believe that the “affairs of the company are being conducted in a manner prejudicial to the interests of the shareholders or depositors”
The literal meaning of Class Action as has been defined by the Oxford dictionary to be “a lawsuit filed or defended by an individual acting on behalf of a group”. It is also known as a “representative action”. This is because the class action suit is brought in for the purpose of a group of members but is represented collectively in the suit by one or more members.
In this kind of suit, the defendant is sued by a class of plaintiffs, represented by one. As a concept, it arose in the USA somewhere around the mid-eighteenth century. In India, class action has been recognised in various laws such as the Companies Act, CPC, Competition Act and the Consumer Protection Act. For the purpose of this discussion, we’d restrict it to the concept under the Companies Act. In the said law, such a suit can be brought in cases of “Oppression and Mismanagement”. However, it excludes Banking Companies. For instance, security holders of the company may bring such a suit against the depriving members.
Genesis
In India, it is often associated with the growth of Public Interest Litigations. The basic concept which underlies the PILs is social justice. The “jurisprudence of masses” argues that social justice is engrained in the idea of individual justice. It is only through the realisation of individual rights can justice be served to those who are incapable or deprived. There arises a question in the case of PIL that whether the person seeking redressal has suffered any injury.
This is known as the problem of locus standi. But in recent times, we have seen tremendous liberalisation in this area and a dilution of locus standi.
In SP Gupta v. UOI[2], the Court held that “whenever there is a public wrong or public injury caused by an act or omission of the State or a public authority which is contrary to the Constitution or the law, any member of the public acting bona fide and having sufficient interest can maintain an action for the redressal of such public wrong or public injury”.
Class Action Suits are based on the same tenets. It creates a redressal mechanism for a group of those who are deprived, in case of an injury. The nature of the class action suits is representative and thus, the problem of locus standi stands resolved.
Purpose of Class Action
The purpose of Class Action suits can be derived from their origin in the Common Law. The claim which has a common cause of action were merged together forming a common proceeding. A few key purposes of this are:
- Clubbing of multiple suits saves time, energy and procedural encumbrances of multiple suits.
- It provides for opportunity to pursue the causes which are not worth pursuing individually.
Where the question of law and the interests of the members are the same, it was considered more convenient, monetarily and otherwise, for it to be represented as one. Although, it was considered important to realise the relationship of the member representing the class represented as was held in Cockburn v. Thompson[3].
Emergence in India
Class Action as a concept was first deliberated upon in the 2005 Dr Jamshed J Irani Report. The report stated that where there has been a fraud committed upon the minority by those who hold the control of the company and thereby do not allow a suit to be instituted by the company in its own name, “derivative action” for redressal of the same are acceptable by the judiciary.
The member who brings the suit for redressal of the wrong does it on behalf of the company. In a similar fashion, the “Class/Representative Action” by one member representing the interest of other members of the same mind is acceptable. The representing member is considered to have the same locus standi.
The history behind the inclusion of class action by the 2013 Act is broad. There were many factors that led to the statutory recognition of the representative action in India. The ratio given by the Ministry of Corporate Affairs was “the shareholder feels like a king in matters such as managerial remuneration”. One of the most important factors was the Satyam Scam.
Nature of Class Action Suits
The nature of Class Action is “representative”. This is why it is also known as a representative action suit. Prior to the 2013 Act, such suits were brought under the CPC, 1908 as “representative suits” or as PILs. The 2013 Act had brought in the provisions for such suits in order to empower shareholders to bring action against fraudulent conduct of the company. To further understand the nature of the class action suits, we would determine the institutional framework of such suits and identify its position in oppression and mismanagement.
Framework of Suits
In order to bring in a class action suit, the following are to be ensured:
- Identification of the Member: Members for the purpose of the suits are to be identified by the plaintiffs. The Court later certifies the identification. Although it seems easy to identify members who have a transactional nexus, the identification varies from case to case. Due to the complexities involved, the Court may ask the parties to draft a working definition of such members.
- Clubbing of Claims: The claims so clubbed shall be a representative of the “adequacy of class”. This means that the aggregate claim should represent a substantial portion of the whole identifiable group. It is an important aspect as the whole class action is based on the common substantial claim.
- Expenses: Where the interests of the parties are aligned in the manner expressed in the aggregation of suits, the expenses are duly reduced due to the elimination of multiplicity of suits.
Class Action v. Oppression and Mismanagement
The shareholders have been provided with an option to seek redressal under Sec 241 by making an application to the tribunal in certain cases. These cases include such conduct of the affairs of the company which are “prejudicial to the public interests or oppressive to any other member or in a manner prejudicial to the interests of the company”.
The major difference between Sec 241 and Sec 245 is that Sec 241 provides a cause of action only to the shareholders and not the depositors whereas Sec 245 includes both. Further, the remedies available under Sec 245 are wider as it binds even those who are not a party to suit. In Cyrus Investments Pvt Ltd v. TATA Sons[4], the NCLAT held that “the court shall first assess as to whether the thresholds are fulfilled under both sections (241 and 245) and only then proceed to assess whether any conduct is prejudicial to the interests of a class of members/ depositors, as applicable.”
In Shanta Prasad v. Boachapathar Tea Estate[5], the NCLAT observed that “while a petition under section 241, 242 and 244 of the Act may be preferred only against the company, board of directors, shareholders or its members, under section 245, one may proceed against the statutory auditors and/ or advisors as well.”
Importance of Class Action Suits
The importance of Class Action suits can be determined from the fact that it is a part of actions against oppression and mismanagement. This is a provision that was brought in the best interests of the minorities. They do not possess equal bargaining power with that of the majority. It thus empowers the minority stakeholders to come together and seek action against the management, advisor and auditors of the company for any oppression or mismanagement.
In the case of small claims, it is not feasible for the stakeholders to seek individual suits. In such cases, class action suits help them to have a better representation and redressal. This helps in the distribution of evidentiary and financial resources which reduces the burden on the individual plaintiffs. Further, it acts as insurance for the minority stakeholder who couldn’t proceed individually for his rightful claims. The further importance of the class action suits could be understood by the discussion of its need.
Need for Class Action Suits
The need for class action suits was not a sudden development, but one having backed by several factors. One of the most important push for the same was the Satyam Scam. Following are particulars of the scam:
Satyam Computers Services Ltd. was an information and communication tech company. It had a clientele based in the US and it was listed on the NSE, BSE and NYSE. The scam unfolded after the company took the decision to go with a related party transaction of acquisition of the Matsya group. The resolution was passed by the majority unanimously post which the shareholders retaliated and the share prices plummeted.
Only after this, the Chairman confessed to the mismanagement in the company’s financials. First of the particulars of the scam was the fraud of fictitious assets and inflated profits. This led to further immiseration of the share prices. This led to a huge loss to the shareholders. Following are the particulars of the debacle which highlighted the importance of class action suits:
- Failure of redressal: There was no statutory provision which could rescue the shareholders from the loss. In their approach to the NCDRC as well the Apex Court, the shareholders lost their suit due to the absence of such provisions. The NCDRC stated that “We do not have the infrastructure to deal with such kind of petition. CBI and CLB (are) already seized with the matter”.
They faced rejection from the SC as well. At the same time, the holders of the “American Depository Scheme” were successful in their claims of worth $125 Mn. This uncovered the vulnerability of Indian laws to save the shareholders of the company from a huge loss. Had there been a provision of class action suits, the shareholders would have been successful in their claims against the company for their loss. - Absence of redressal against the third party: Another aspect of the scam was the misfeasance of the auditors of PWC in the detection of fraud and financial mismanagement in the company. There were series of fake invoices and identities, all passed through the audit. Many have accredited this to the fact that Satyam was a significant client of PWC which provided it with a significant share of their revenue. Such fraud was never detected by the auditors and it had a significant suggestion of collusion between the two in this scam.
Despite substantial allegations against the auditors, expert advisors and various other professionals, they couldn’t be prosecuted because of the absence of privity with the shareholders. At the same time, the ADR holders had made them a party and were successful in that claim as well. This provided the impetus to the lawmakers to make provisions in relation to these third parties as well.
Therefore, from this scam, India had seen the repercussions of the lack of statutory provisions in this regard. On the other hand, their American counterparts were thoroughly successful in their claims. Such a setback starkly portrayed the need and importance of class action suits in India. And from the learning of the scam, the liability of auditors also found a place in the new law.
Particulars of the Provision and Role of NCLT
Sec 245 of the Act has tried to encompass every aspect of the class action suit, against the company as well as the audit firm. It has also provided for the responsibility of the NCLT in such case. Sec 245(1) has enumerated for the several remedies to be sought in case “member or depositors…are of the opinion that the affairs of the company are conducted in a manner prejudicial to the interests of the company, its members, or depositors (with an application) before the Tribunals”. Sec 245(2) addresses redressal against the “audit firm… (if their conduct is found to be) fraudulent, unlawful or wrongful”.
Sec 245(3) states the number of required members for the institution of such a suit. Sec 245(4) and Sec 245(5) state an extensive account of measures for the Tribunal in the suits instituted under the first two sections.
Role of the NCLT
The role of NCLT as the forum for class action suits has been thoroughly prescribed in the provision. The responsibility of the Tribunal is plenary. The extent of responsibility could be assessed from the obligation under Sec 245(4) where the Court is to assess whether the application is made in “good faith”.
There is no such definition of “good faith” and can only be determined by the diligence of the Court. Further, the assessment of the application to be worthy under this Section and not individual pursuance (Sec 245(4)(c)) and scrutiny of the evidence to identify “personal interest or gains” (Sec 245(4)(d)) also act as an obligatory responsibility of the Tribunal. These provisions convey the fact that the role of NCLT is very substantial from the beginning of the suit which includes eligibility of the applicants, liability of the defendants and procedural conformity of the proceedings.
Advantages of Class Action Suits for the Aggrieved Members
The first utility of the class action suit lies in its reducing numerous suits having the same issues involved. The most important aspect of it is the redressal of grievances of the minority. This not only reduces the financial burden of the stakeholders; it also helps a speedy redressal due to reduced burden on Tribunal. The provisions are surely beneficial for the aggrieved members. But the extent of benefits is not infinite. The following section includes the shortcomings of the same.
Critical Assessment
The advantages of class action suits are undeniable but because these kinds of suits are at a very nascent stage in India, there aren’t many developments that could address the shortcomings. From the discussion above, it could be understood that the class action suits provision in India is neither purely “class action” nor “derivative”. Further, it also faces certain overlaps with the remedies available in Sec 241. This leads to an added burden on the Tribunal to scrutinise it and put it through the sieve of Sec 241.
This Section has given exclusive jurisdiction to the NCLT in the matter but where the provisions are ambiguous, it could only be addressed by the Courts. The funding of “class litigation” is also a missing key provision. Unlike the US model, which provides for settlement accrual liabilities, Indian laws have left such encumbrances on the applicants themselves. Another significant lacuna in the provision is the exclusion of creditors as an eligible claimant. If the stakeholders are provided with an exclusive remedial measure under the provision, it would only be fair to include the creditors as well.
Conclusion
The provision is a potent weapon in the hands of the applicants. But its shortcomings might hinder its potential. Despite the shortcomings, its importance is undeniable. This provision would work as a deterrent for scams and mismanagement. By the virtue of the provision, the load on the judiciary is also reduced and the role of NCLT is strengthened.
[1] Writ Petition No. 37487/2012.
[3] 16 Ves. Jr. 321.
[4] 2017 SCC OnLine NCLAT 261.
[5] 2017 SCC OnLine NCLAT 3335.
