Class Action Suits The Indian Version


A concept such as class action suit carries several benefits for investors of a company, as it provides them with a medium to fight as one unit against the errant company or management thereby reducing multiplicity of suits and costs of ligation, and increasing their chances of success in the process, maintains Tribuwan

Shareholders activism is an evolving term in India, which means an active participation of shareholders in all the aspects of good corporate governance and fighting against the deceitful and incorrect acts of a company. Individual shareholders generally do not take legal action against a company, either on account of lack of enough motivation or finding it economically unaffordable, or because the law requires a certain percentage of shareholding for proceeding against a company. Thus, small and retail investors generally find it difficult to be heard and instead their grievances are redressed either from the company or courts in general.

Class action suits seem to provide an answer to this problem by bringing together similar individuals under a single lawsuit, thereby supporting the cost of litigation and inspiring the required confidence.

In a class action suit, a large number of claimants with a common grievance against a company may file a case before the concerned court of law. By doing this, the claimants can save time and costs of expensive and unfeasible cases. Class action suits have healthy recognition in the US and have been used even by employees to file against the favouritism and undue policy of a company. In other words, a class action suit is a set of claims filed on behalf of a certain group of people who have been injured or negatively affected by the actions or negligence of a particular company or agency.

Genesis of the Concept in India

India has recently introduced the concept of class action suit vide the new Companies Act, 2013 (2013 Act) empowering shareholders to take action against the company, its directors, management, auditors and consultants engaged in misleading and fraudulent practices. Under Section 245 of the 2013 Act, shareholders or depositors may file an application with the National Company Law Tribunal (Tribunal) alleging that the management or conduct of the affairs of any company are conducted in a manner prejudicial to the interests of the company, its members or its depositors. Such class action may include suits against the company, its directors, as well as experts or consultants or any other person for any wrongful or fraudulent act. Class action suits may also be filed against the auditors as well as the partners of the audit firm who are responsible for any deceptive statements in their reports or any misbehaviour or fraud by act or omission. It is noteworthy that the Investor Education Protection Fund (which is a mandatory fund to be created by a company as per the provisions of the 2013 Act) shall reimburse the legal fee of such class action.

The Tribunal, while considering an application, shall consider whether the members or depositors are actually acting in good faith, and whether the cause of action is one that could be pursued individually instead of class action. It shall also consider evidence relating to involvement of persons other than directors or officers and views of those members having no personal interest in the derivative action.

A separate provision has also been made for ‘Securities Class Action’ under Section 37 of the 2013 Act. An interesting point to note here is that if a misleading statement or the inclusion or omission of any matter is made in the prospectus affecting any group of persons, a suit instead of an application with the NCLT shall be filed for seeking appropriate remedy. The said provision also states that ‘any other action’ may be taken imposing civil or criminal liability on persons responsible for such misleading statements made in the prospectus, which highlights the seriousness of legislators towards tackling erring statements in prospectus.

Criterion for Initiating Class Action

The 2013 Act provides the following criterion for bringing about a class action.

The 2013 Act allows waiver of the requirements related to number of persons eligible to make an application for oppression and mismanagement. However, no such relaxation has been provided in case of class action.

Grounds of Action and Prosecution

The 2013 Act provides the following grounds for initiating a derivative action by the members of a company, auditor, any expert or advisor or consultant of a company: 1] Misleading statement or the inclusion or omission of any matter in the prospectus to restrain the company from committing an act, which is ultra-virus the articles or memorandum of the company; 2] To restrain the company from committing breach of any provision of the company’s memorandum or articles; 3] To declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors and to restrain the company and its directors from acting on such resolution; 4] To restrain the company from doing an act which is contrary to the provisions of the 2013 Act or any other law for the time being in force; 5] To restrain the company from taking action contrary to any resolution passed by the members; and, to claim damages or compensation or demand any other suitable action from or against wrongful act or omission or conduct or any likely act or omission or conduct on its or their part; 6] The auditor, including audit firm of the company, for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part.

The orders passed by the Tribunal shall be binding on a company and in case of failure to implement an order of the Tribunal; a fine in the range of `5 lakh to `25 lakh may be imposed on such defaulting companies. Further, every officer responsible (for such default) shall be liable for imprisonment besides a personal fine. It is important to note that if the Tribunal finds that the application has been filed on frivolous grounds, it may, in addition to dismissing an application, also impose a fine of `1 lakh on the applicants. It would be interesting to analyse whether the amount of the fine will actually act as an adequate deterrent against vexatious applications.

Benefits of Class Action

The recent collapse of a number of major corporations worldwide has created an environment requiring much greater vigilance with regard to corporate governance and the actions of key managerial personnel within companies. Companies are likely to face increased threat of litigation posed by ‘class actions’ and other multi-claimant proceedings seeking significant relief against companies, their directors, officers as well as external auditors and experts. There is also a trend worldwide for shareholders to bring class actions against companies and their directors for compensation claims associated with their investment in the company’s shares, a recent example in India being the Sahara case. It is unclear if the powers to decide such securities class actions of listed companies will be delegated to the Securities and Exchange Board of India.

Class actions are particularly good for all small and minority shareholders who may not be able to afford experienced and highly competent attorney on their own. At the same time, they increase the efficiency of the legal system by reducing the number of rulings for the same issue, thereby saving time and resources. Since the auditors and consultants of the company are also included within the ambit of class action suits, it will also ensure that such auditors, experts and advisors of the company act carefully and diligently before advising the company and its management.

A concept such as class action suit certainly carries benefits for investors of a company. It provides them with a medium to fight as one unit against the errant company or management, thereby reducing multiplicity of suits, costs of ligation and increasing their chances of success in the process. Deposit holders, who had no option but to file a civil suit so far, can also take action against any wrongful act by the company or other specified persons. This helps in increasing the accountability of a company or its management towards its stakeholders and in containing any likely prejudice against the minority. However, it has been observed in various class action suits (particularly in the US) that victims receive no compensation or benefits for their association. Sometimes, it is felt that the compensation awarded may have been greater if the case was pursued by an individual rather than a group. Also, a majority of people are not really aware of the concept in its entirety and the nature and amount of compensation that they are entitled to receive.

In India, it is very important to promulgate the concept of ‘class action’ at the grassroots level to bring about the required awareness among all stakeholders. Further, to ensure that benefits of the medium of class action are received by small shareholders, the Tribunal must pass effective and timely decisions.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.