The Class Action Suit is a new regime introduced in the New Companies Act, 2013. The concept of Class Action Suit, although it’s new in Indian context, is not a new concept as it is prevalent in one form or the other in countries such as Austria, US, UK, Netherlands, Spain, Switzerland, Italy, Germany, France, Canada etc. In simple words, Class Action Suits are nothing but ‘representative actions’ or ‘group litigation’ where a single person or a small group of persons files a suit, as representative plaintiff on behalf of a large group or persons or a particular class having common rights and grievances. These kinds of lawsuits are applicable in situations where one or more members of a class or a large group proceed on similar grounds, have common cause of action or defences as the case may be and most importantly they will fairly and adequately represent and protect the interests of other members of the class or group.
Class Action Suits may prove advantageous in the sense; they are potent tools for making the company or its management more accountable towards the shareholders and helpful in increasing the investors’ confidence. These lawsuits can become the strength of ‘minority shareholders’ against the insiders of the company: the directors, executive officers, the board or the majority shareholders to protect themselves from oppression, mismanagement, void or illegal acts (ultra vires the company), breach of fiduciary duty by the management, fraud committed by the ‘majority shareholders’ on ‘minority shareholders’ etc. These lawsuits will also prevent multiplicity of litigations thus, saving the valuable time of the courts and also the valuable time, money and energy of shareholders. If different litigations will be instituted for the same cause of action it will be a cumbersome situation for the courts and also the company will be involved in endless litigations without any conclusive and definite results.
The concept of Class Action Suit which originated in 1938 in form of Rule 23 of Federal Rules of Procedure and is predominant in US was sought to be introduced in India in the Companies Act, 2013, in the aftermath of the ‘Satyam Scandal’. Glory goes to the Satyam scam case for bringing the concept of Class Action Suits in India. The legislature addressed the problems and difficulties of Indian investors who were unable to seek relief against massive fraud committed by the management of the company as their counterparts in US filed class action suit against the Satyam company and its management and obtained compensation for final settlement of their claims.
The researcher mentioned earlier in this article that Class Action Suits are in the nature of ‘representative suits’ or ‘group litigation’ where a number of persons claim through a group action. In Indian context, we see the development of group litigation or representative suits in several forms. Firstly, representative suits under Order 1 Rule 8: which provides that if there are numerous persons having same interest then one or more of such persons with due permission of the court may sue or be sued or defend such suit. It further provides that the court even suo – moto direct any one or more of such persons to sue or be sued or defend such suit. Representative suits serve many purposes. Secondly, representative suits in the nature of Public Interest Litigation or Social Interest Litigation. The main objective of PIL is to cater to the needs of those persons who don’t have enough economic resources to redress the remedy for infringement of their right in order to make sure that justice is not denied to anybody on account of financial incompetency. For this purpose, the courts have liberalised the principle of locus standi in these cases. Another recent and still developing area and form of representative suits are class action suits for the benefit of the share holders of a company, most particularly.
In US the Class Action Fairness Act of 2005 expanded the horizon of class action suits in the sense that it has wide applications. Now, class action suits are filed by the consumers in case of any defect or deficiency in any product or services, shareholders for destruction of wealth due to mismanagement and employees for breach of employment terms or unfair trade practices[1]. It is an effective tool in the hands of the minority shareholders against oppressive acts or practices of the management of the company. The interests of minority shareholders must be balanced with those of the majority shareholders so as to make their opinions known at the decision – making level[2]. They must also participate and contribute in the management of the affairs of the company. They must have a say in every matter of the company. This will ensure protection from any prejudice to the company or to the public interest. It will avoid destruction of wealth and ensure the capital of the company is applied only to the legitimate purposes of the business so that the prosperity and profitability can be increased. Their opinions if taken into consideration while taking any decision in any company’s matter, it will ensure merit in the decision and that decision can never be questioned.
The general principle for maintaining democracy in a company is that matters pertaining to the management of the affairs of the company shall be decided by majority rule. In practice, the majority shareholders also share great space in the management of the company i.e. the Board of Directors. Generally, it is they who control of the company. Although they stand in a fiduciary relation to the company but there is every chance of abuse of their power and position. It may result in oppression of the minority and mismanagement of the company. It is therefore necessary that law should provide an effective redressal mechanism to enable minority shareholders to protect their interests as well as those of the company in a case of every possibility where the Board (comprises mainly the majority shareholders) will decide that no action could be initiated by the company against the wrongdoers.
Section 245 of the Companies Act, 2013 deals with Class Action Suits which is now notified. This section provides that the Class Action Suits may be filed 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.
Eligibility Criteria: In case of a company having a share capital, i) 100 or more members of the company or members equal to or exceeding 1/10th of the total members of the company, whichever is less, ii) member or members either singly or jointly holding at least 10 percentof shares of the company. In case of a company without share capital, i) members equal to or exceeding 1/5th of total number of members of the company. For depositors the requirement is – i) 100 or more depositors or depositors equal to or exceeding 1/10th of the total number of depositors, whichever is less, ii) depositor or depositors either singly or jointly holding at least 10% of the total value of outstanding deposits of the company. The Central Government is also entitled to file a class action suit if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest.
NCLT: On receipt of Class Action Suit application the Tribunal (NCLT) will ensure whether the members or depositors are acting in good faith in pursuing the Class Action Suit and whether the members or depositors are not having any personal interest in the matter being proceeded under the Class Action Suit. After the application for Class Action Suit has been accepted by the Tribunal then it shall issue public notice to all the members of the class. It will consolidate all similar applications prevalent in any jurisdiction into a single application and the class members or depositors shall be allowed to choose their lead applicant and in the event of their failure to arrive at a consensus over the lead applicant, the Tribunal shall appoint a lead applicant who shall be in charge of the proceedings from the applicant’s side. The costs or expenses connected with publication of public notice in a vernacular and English newspaper circulating in the district where the registered office of the company is situated, shall be borne by the applicant and is defrayed by the company or any other person responsible for the oppressive act.
Conclusion: The researcher strongly believes that Class Action Suits are nothing but representative suits for Corporate. Rule 8 of Order 1 of Code of Civil Procedure, 1908 could not cater to the interests of the shareholders of the company vis – a – vis Section 245 of the Companies Act, 2013. There were procedural difficulties as shareholders were required to take prior permission of the court before proceeding with the suit. Also, the courts were reluctant to interfere in the matters of the company and to entertain a group litigation initiated by shareholders under the above – mentioned provision of Code of Civil Procedure, 1908.
The numerous parties can seek redressal of their grievances in one single suit without each party taking the pain of filing a fresh suit and defending it on the same matter. It avoids filing of a fresh litigation on the same matter time and again by different persons. As a result, it saves the valuable time and energy of both the courts as well as the litigants.
Class Action Suits are now entertained by the Tribunal (NCLT) specifically which has the necessary expertise to deal with the company matters in comparison to regular courts. The Tribunal take sufficient safeguards measures before admitting the application for Class Action Suit in order to ensure that no futile or frivolous cases come up before it. Due to inclusion of Section 245 in the new Companies Act, 2013, an effective legal mechanism has been provided to the members of the company to protect their interests as well as that of the company against oppression, mismanagement, fraudulent, unlawful or wrong act or conduct of the affairs of the company and save the corporate world.
Suggestion: In India, the Class Action Suits are confined to the shareholders of a company against oppression or mismanagement. The regime of the Class Action Suits may be extended to protect the consumers against any defective product or services as well as to protect the employees against breach of employment terms or unfair trade practices.
By: Akriti Gautam, 4th Year, 8th Semester, Chanakya National Law University, Patna.
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