This article is written by Yashika Kapoor, pursuing Certificate Course in Advanced Civil Litigation from LawSikho.

Introduction 

On bifurcating the term class actions suits, three separate words are derived. ‘Class’ implies a set or category of things having some property or attribute in common. ‘Action’ means the fact or process of doing something and ‘suit’ is a generic term used for any filing of a complaint or petition asking for legal redress by judicial action. Hence, when a number of people, feeling aggrieved and having common interest/rights/grievances collectively file a single suit against the same defendant that caused similar harm/injury to the entire group of individuals, then it is termed as class action suits. 

Class action suits are also recognised by the term multi-district litigation or mass-tort litigation. In legal parlance, when one or more than one plaintiff on behalf of a large number of aggrieved individuals either files a suit or defends it, then such suits/cases come under the ambit of class action suits. The rudimentary objective behind the introduction of class action suits was to secure the interest of minority shareholders. Thus, the class action suit works as a medicine for abusive and arbitrary conduct of the management of the company. In a class-action suit, the value of the claims of the individuals is summed up. Furthermore, claiming as a group assists in combining the counsels, evidence, witnesses, and other crucial facets of the litigation. 

All about class action suits 

Class action suits originated in the United States in 1938. In India, it came into existence over the Satyam scandal case. However, statutory recognition was given in the Companies Act, 2013 as there were no provisions with respect to class action suits in India in the Companies Act, 1956. Hence, post-Satyam scandal, the Indian parliament felt the need to introduce the concept of class action suits in India. Resultantly, the Companies Bill, 2009 was drafted. Following which the ‘Class Action Suit’ came into being. 

All the provisions of class action suits enabling affected shareholders were incorporated under Section 245 and 246 of the Companies Act, 2013. Most of the provisions of the Companies Act in India have been adopted from the relevant laws applicable in the US and UK. The concept of the class action suit is also one of them. These enabling provisions allow not only the members but also the depositors to approach the National Company Law Tribunal (‘NCLT’) in case if they consider that the affairs of the company are being conducted in a way that is detrimental to the interest of the company and its shareholders. Class action suits are also relatable to representative suits. The representative suits find a place in Order 1 Rule 8 of Code of Civil Procedure, 1908. The same is discussed at length below.

Illustration 

“X’ is a real estate company. Its main function includes helping clients in purchasing, selling, and managing things related to real estate. “X” company introduced a project wherein it invited investors to invest in huge numbers. The project involved purchasing land and plotting buildings/houses on it. Approximately, 235 individuals invested their hard-earned money in this project of X company. However, the X company failed in completing the project timely. Following this, X company became negligent in returning the said amounts. This led to the creation of a ruckus among investors (now creditors) seeking the return of their invested amounts. Later, Y, one of the aggrieved creditors, with the leave of the court filed a suit on behalf of himself and all other creditors. Here, Y filed a class-action suit on behalf of all other creditors as all creditors shared a common interest. This also avoided the multiplicity of suits. 

Who can file class-action suits?

As per the Companies Act, 2013, Section 245 empowers two classes of persons to file class-action suits on behalf of the members or depositors before the Tribunal:

• Member/Members,
• Depositor/Depositors, and 
• Any class of members or depositors. 

Against whom can a class action suit be filed?

A class-action suit can be filed against:

• Company,
• Directors of the Company,
• Auditors of the company, and
• Experts, advisors, consultants.

When can one file a class action suit?

If the member/(s), the depositor/(s), or any class of members or depositors believes that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or company’s members or depositors, then in such case an application may be filed before NCLT. According to Rule 84 of NCLT (First Amendment) Rules, 2016 such application is required to be made in Form No. NCLT9 and a copy of the application shall be given to the company against whom such an allegation is made, respondents as well as people whom the tribunal may direct. 

Situations where a class action suit subsists

The application under Section 245 of the Companies Act, 2013 may be filed before NCLT for seeking any of the following orders: 

1. To restrain the company from committing an act which is ultra vires the articles or memorandum of the company.
2. To restrain the company from committing a 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.
4. To restrain the company and its directors from acting on such resolutions.
5. To restrain the company from doing an act that is contrary to the provisions of this Act or any other law for the time being in force.
6. To restrain the company from taking action that is contrary to any resolution passed by the members.

To claim damages or compensation or demand any other suitable action from or against:

1. The company or its directors for any fraudulent, unlawful, or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part.
2. The auditor including the 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
3. 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;
4. To seek any other remedy as the Tribunal may deem fit.

The minimum required number of directors/depositors required to file a class-action suit

According to Rule 84 of NCLT (Second Amendment) Rules, 2019, for a company having a share capital, the requisite number of member or members to file an application under sub-section (1) of Section 245 shall be –

1. A. At least 5% of the total number of members of the company; or 

    B. One hundred members of the company,

Whichever is less; or

2.  A. Member or members holding not less than 5% of the issued share capital of the          company, in case of an unlisted company;

    B. Member or members holding not less than 2% of the issued share capital of the company, in case of a listed company.

The requisite number of depositor or depositors to file an application under sub-section (1) of Section 245 shall be –

1. (a)  At least 5% of the total number of depositors of the company; or 

   (b) One hundred directors of the company,  

whichever is less; or;

2. Depositor or depositors to whom the company owes 5% of total deposits of the company 

The Satyam scandal case 

A brief background of the case

• Satyam scandal was one of India’s biggest fraud cases. This particular case being India’s biggest corporate scandals brought immense changes in the Companies Act, 1956. 
• In fact, the institution of class action suits in India was due to this largest financial scandal. 
• In the year 1987, Mr. Ramalinga Raju (herein referred to as Mr. Raju) incorporated an IT-based Company namely, “Satyam Computers Services Limited” in Hyderabad.
• The company dealt with providing services related to information, technology, and communication. 
• In the year 1991-1992, the company was listed on the Bombay Stock Exchange (BSE). Following which the company also got listed on the New York Stock Exchange (NSYE). 
• The Satyam Company became one of the fastest-growing companies in India. The company’s business was growing at a faster pace such that the clients were not only limited to India but also included the shareholder from the US.  
• As the real estate business was at its peak, Mr. Raju started investing in the business. He started purchasing lands in his own name, relatives, and his other companies namely, Maytas Infrastructure and Maytas Properties. 
• With the intent to invest in the real estate business, Mr. Raju started manipulating the financial statements of Satyam Computers 
• For instance, the profits of the company were manipulated to the extent that the actual profit of Rs.60 Crore has misrepresented as Rs.600 crore. The motive behind such fraud was to attract investors. 
• This increased the share price of Satyam Company, seeing which, Mr. Raju along with his brother kept on selling the shares. Whereas some shares were kept in the bank as collateral for availing the loan facility. The number of such loans was utilised towards purchasing properties. 
• To purchase these properties, 365 companies were incorporated and the properties were purchased in the names of Mr. Raju’s friends, family, and relatives. Even the workers that worked in Mr. Raju’s farms were made directors of such purchased properties. 
• The perpetrator made 7500 fake sales invoices to misrepresent the sale To present the profits earned by Satya Computers, Mr. Raju made false/fake financial statements thereby showing that the invested amount is secured in the banks. In 2008, a recession badly hit the real estate business. Hence, Mr. Raju’s plan of filling the gaps between misrepresented/fake figures and actual figures by selling the real estate properties failed miserably. 
• In order to fill the gap between misrepresented/fake figures and actual figures, Mr. Raju devised a new plan. According to his new plan, Satyam computer thought of purchasing 51% stocks of Maytas Infrastructure and 100% of Maytas Properties (companies incorporated by Mr. Raju) and he further added that such amount will go to the promoters of Maytas. By execution of this plan, Mr. Raju wanted to portray that the amount involved in these falsified transactions was utilised towards purchasing the companies namely Maytas Infrastructure and Maytas Properties. 
• However, in reality, no cash transaction would take place as these businesses belonged to the families of Mr. Raju himself. Thereafter, a meeting of the Satyam board was called upon to ruminate a proposal for the acquisition of Maytas Properties and Maytas Infra Limited. This plan was approved by BOD of Satyam Computers on 16 Dec 2008 and the said deal was sanctioned without the permission of shareholders. The family of the promoter held a 30% share of the Maytas firm. 
• The investors, particularly the institutional investors, were quite doubtful about the execution of the plan. After this decision, the stocks of Satyam Computers collapsed to 55% at NYSE, followed by a US investor filing a lawsuit against the company.
• Thereafter, the plan of acquiring the two companies by Satyam Computers was canceled, and the four independent directors resigned. 
• On 07.01.2009 Mr. Ramalinga Raju, with no other option left, confessed to SEBI that Satyam Company was indulged in manipulating its financial statement by inflating the figures at various junctures. The fraud of the company amounted to Rs.7800 crore. He admitted to the fact that Satyam Company had done financial mismanagement and the deal with Maytas was to cover up the plan. However, the shareholders of the company suffered a huge loss. The company was engaged in Money Laundering, Accounting Fraud, and Insider Trading.

The aftermath of the scandal 

Some of the aggrieved investors approached the National Consumer Dispute Redressal Commission (NCDCR) and Supreme Court. However, their claim was rejected due to the absence of any relevant law to deal with it. It is pertinent to mention here that these aggrieved class of investors who approached the NCDCR to pursue the litigation on behalf of all other investors actually claimed for class action suits. However, at that time, no such provision regarding class action suits was available in India. 

Thereafter, Indian shareholders filed a petition before NCDRC. However, the claim was rejected. Again, the appeal was made before the Supreme Court, but the decision was the same. The auditors of Satyam Company, namely, Price Water Coopers (PWC) were questioned on their involvement in the scandal. However, PWC India failed in detecting the fraud committed in the financial accounts of the company. Moreover, the board resolution was altered and loans were issued illegally. The amounts received from the American Depository Receipts were not mentioned in the balance sheet. Hence, PWC India was alleged to overlook 1.4 billion dollars, as claimed by the company in its balance sheet as “non-interest-bearing.”

Issue

Satyam Computers and Price Water Coopers claimed that the place of scandal should be India. India was the place where the case must be heard and decided upon for forum non-conveniens. Consequently, the issue that came before the court was whether India was suitable for dealing with such suits involving investor class action and whether laws in India can deal with such a measure. 

Judgment

It was held in the judgment that India was not a suitable place for filing class-action suits. This statement was further supported by the below-mentioned justifications:

• There was no possibility of conducting the class action suit in India under the provisions of the SEBI Act, 1992 and Securities Contract (Regulations) Act, 1956.
• The judicial body of India, rejected the claims of investors, as there was a lack of provision to deal with such issues.
• The other option of filing a representative suit was available at that time. However, in the present case, there was no scope for filing a representative suit. The reason being that it was a procedural remedy given under the Code of Civil Procedure. There is no right to sue when there is a bar provided by a statue. 
• If at all the filing of a representative suit was considered a valid option, then the problem of enforceability of award would arise. In case if the aggrieved resorted to filing a representative suit, then a question came before the court that how would such party (investor) get his claim enforceable to which he (investor) is not a party to suit. 
• The Enforcement Directorate alleged Mr. Raju along with 47 others and his 166 companies for indulging in the act of money laundering. Charges were framed against them for money laundering and all the properties that belonged to Mr. Raju and his family were seized. 
• SEBI imposed charges of insider trading on Mr. Raju’s family and demanded a return of the profit generated by Satyam Computers through SEBI that amounted to Rs. 1850/- crore along with 12% interest. Further SEBI banned the perpetrators from investing in the securities market for 14 years. 
• On 10th April 2015, the Special CBI Court punished Mr. Raju, Mr. Raju’s brother, CFO of Satyam Computers, 2 partners of Price Water Coopers, and 5 other people with rigorous imprisonment of 7 years and a fine of Rs. 5.5/- crore was imposed on Mr. Raju and his brother. These investors of Satyam Computers suffered a loss of Rs. 14,162/- crores, out of which LIC, one of the institutional investors suffered a loss of approximately Rs. 950/- crores. 

Fabricated balance sheet and income statement of Satyam: as of September 30, 2008. (Items Rs. in crore)	Actual	Reported	Difference
Cash and Bank Balances	321	5361	5040
Accrued Interest on Bank Fixed Deposits	Nil	376.5	376
Understated Liability	1230	None	1230
Overstated Debtors	2161	2651	490
Total	Nil	Nil	7136
Revenues (Q2 FY 2009)	2112	2700	588
Operating Profits	61	649	588

 

Although the perpetrators were arrested, it was crucial to maintain the interest of shareholders and investors. Resultantly, the new Board of Directors was appointed by the government to protect the company from collapsing. Finally, Tech Mahindra purchased Satyam Company. In 2009, Tech Mahindra purchased a 51% stake in Satyam Company and the company was called Mahindra Satyam. Later, in 2013 Mahindra Satyam merged into Tech Mahindra. 

As such no provision of class action suits was present in India due to which no compensation was provided to the investors. However, in the US, a sum of 125 million dollars was paid as compensation by Mahindra Satyam to United States investor Tech Mahindra, which overtook Satyam, was directed to settle all pending litigation with the investor that claimed loss due to depreciation in the value of the share. Thus, after the Satyam case, it is quite evident that the need for the introduction of class action suits was so pressing and critical in India.

Representative suit 

As already discussed, when there was no provision available concerning the class action suits, the aggrieved shareholder possessed the following redressal alternatives:

• Filing a suit under Order 1 Rule 8 of the Code of Civil Procedure, 1908
• Filing a suit for derivative action against the management of the Company
• Filing a suit for oppression and mismanagement 

However, the aforesaid alternative had its own set of lacunas. The first being that the suit filed for oppression and mismanagement is limited only to provide a substantive right to the aggrieved shareholders. On the other hand, the extent of class action suits is only providing a procedural means for substantive relief. Hence, the shareholder did not have appropriate provisions along with an appropriate forum for redressal of its grievance.  

Now, filing a representative suit under Order 1 Rule 8 of the Code of Civil Procedure, 1908 seems to be the most relevant option. However, the civil courts do not possess the power in resolving cases where the statutes bar the jurisdiction. Thus, even this option is not relevant. It was also held in Kesha appliance v. Royal Holding Services Ltd. 2006 that Indian securities law is one of the areas in which civil courts have no jurisdiction and is barred by SEBI.

Other legal recourse available 

Public Interest Litigations (PILs)

The concept of Public Interest Litigation was evolved by the Indian courts. Either the Public Interest Litigation is commenced by the court’s  suo moto action or by public-spirited individuals who symbolise a class/category of individuals. A PIL is filed against the state or public authorities. It can be filed either in the High Court under Article 226 or in the Supreme Court under Article 32 of the Constitution of India 1950. 

Consumer Protection Act

 A complaint can also be made under the Consumer Protection Act. However, depending on the value of the claim, the aggrieved can file before the:

• District Forum
• State Commission
• National Commission

Competition Act

Applications can be made under Section 53(N)(1) of the Competition Act before the Competition Appellate Tribunal (COMPAT). Section 53(N)(1) of the Competition Act states: “where the Central Government or a State Government or a local authority or any enterprise or any person makes an application to the Appellate Tribunal to adjudicate on the claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal in an appeal against any finding of the Commission or under section 42A or under sub-section (2) of Section 53Q of the Act and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered, by the Central Government or a State Government or a local authority or any enterprise or any person as a result of any contravention of the provisions of Chapter II, having been committed by the enterprise.”

Conclusion 

The objective behind the introduction of class action suits was to secure the interest of minority shareholders. The class-action suits enabled the shareholders to keep a check on such fraudulent companies gaining tremendous heights in a short span. There can be the slightest possibility of the shareholders of any company misusing this provision. Thus, the courts are bound to take into consideration the fact that such suits are brought in good faith. Discussing the success rate of class action suits in India, it is observed that the class action suits have not been much successful in India. Satyam scandal was an example to bring such a suit in being. Consequently, provisions regarding the class action suits were incorporated in the Companies Act, 2013.

The name of the company i.e. “Satyam” in Sanskrit means truth. However, ironically the company was far from practicing any truthful activities. Instead, the company was indulged in misrepresenting the financial statements and committing fraud. Thus, one must keep in mind that whenever the promoters of the company sell their shares, then, as a shareholder/investors, we must check the reason behind such sale. After this case, there has been a drastic change in Indian statutes not only with the introduction of class action suits but also regarding the responsibility of auditors. Henceforth, the auditors are mandatorily required to take caution and care while certifying an account.

Satyam has been awarded the “Golden Peacock Award” for the best-governed company in the years 2007 and 2009. Hence, the company from being India’s IT “crown jewel” as well as the country’s “fourth-largest” company having high-profile customers, to be now known by a renowned corporate scandal case have made us all ponder upon certain points before investing in a company: 

• Investigate all inaccuracies of a company.
• Look if there’s any record of the ruined reputation of the company.
• Need for stronger corporate governance.

References 

• http://jcil.lsyndicate.com/wp-content/uploads/2018/03/An-Analysis-of-Class-Action-Suit-Rajvansh-Singh-2-ors..pdf
• http://jcil.lsyndicate.com/wp-content/uploads/2018/03/An-Analysis-of-Class-Action-Suit-Rajvansh-Singh-2-ors..pdf
• http://jcil.lsyndicate.com/wp-content/uploads/2018/03/An-Analysis-of-Class-Action-Suit-Rajvansh-Singh-2-ors..pdf
• https://content.next.westlaw.com/Document/I9dd07e50410011e598dc8b09b4f043e0/View/FullText.html?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
• http://www.nja.nic.in/P-948_Reading_Material/P 948_Audit_of_Fraud_in_economic_crimes/ACCOUNTING%20FRAUD.pdf

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