This article is written by Bhumika Dandona from School of Law, Sushant University (erstwhile Ansal University), Gurgaon. In this article, she lays down the concept of class action suits and their institution under the Indian Company Law. She also talks about its usefulness and present scenario in India.
Table of Contents
Introduction
It was the US that introduced the world to the concept of class action suit in 1938. Over the years, several countries adopted it within their legal systems. In India, the need for a class action suit first came on the scene with the emergence of one of the biggest accounting frauds known as the ‘Satyam Scam’. Back in 2009, Satyam Computers Services Ltd. became the talk of the news for misrepresenting its financial accounts and subjecting its board members, stakeholders, and investors, amongst others, to deception. Around three lakhs in number, they were unable to claim redressal for the losses endured because of the then absence of the provision of class action suit under the Companies Act, 1956.
On the other hand, the American investors and stakeholders had successfully obtained their part of damages against the company by filing a class-action suit in the US courts. Now, after reading the preceding paragraph, you must have understood that the class action suit is significant. But you have little to no idea about what it is. This article seeks to provide an overview of the class action suit, its status under the Indian company law, how it can benefit the aggrieved members of a company, and its current position in India.
Meaning, nature, and importance of a class action suit
A class action suit, also known as the representative action, refers to a lawsuit filed by a group of individuals affected by the same or similar injury. It lets people come together and approach the court of law to acquire a joint remedy against the unlawful activities carried out by some entity that has caused them common financial or legal trouble. People generally file class-action suits against retailers, manufacturers, corporate companies, or government organizations. Illegalities committed by any of these impact everyone at large, and it is impossible to deal with them individually. Moreover, it would also not be feasible for the courts to decide upon several identical matters one by one. Here is when the class action suit comes to everyone’s rescue. With its help, the impacted people can, without any difficulty, come up with a strong case against the offender, and it would also increase their chances of getting the courts to decide in their favour. Thus, the remedy would become available to them at once and without any delay.
Types of class action suits
There are numerous types of class action suits that prevail. But the one that correctly fits in any particular situation is something that only an attorney can suggest. Although in the context of this article, we are supposed to concern ourselves with just employment class action, nevertheless, going through the rest would add to our knowledge and help us understand the differences between them all. Following are the main types of class action suits:-
Consumer class action
Sellers often sell a product that tends to violate the respective regulations. The sale may be affected by misleading marketing activities, or the sellers may refuse the consumers to bargain upon the payment. Every country around the world has its own law to protect consumers from such unethical practices. Under those laws, they can file a consumer class-action suit against the seller. For example, a breakfast cereal manufacturing company claims in its advertisement that experts recommend its edible products to those looking to lose weight. But in reality, no such recommendations exist. The consumers who bought such edible products can file a consumer class-action suit against the company for being dishonest.
Product liability class action
Consumers come across several such instances wherein they receive a faulty product. Even the sellers sometimes fail to warn them about the safety issues. Recipients of those products can always file a product liability class action suit to acquire compensation for the trouble they bore.
Securities class action
In cases where companies induce the potential investors to procure their securities by misrepresentation of facts or fraud, the aggrieved may sue the company by filing a securities class action to obtain reimbursement for the losses so suffered. For example, there is a company that deliberately misreports its revenues in the financial statements. After going through the same, a few investors buy its securities and later on, whenever they realize the fraudulent practice, they can file a securities class action suit against that company.
Employment class action
There may occur situations where a company indulges in illegal or unethical activities, because of which it suffers from penal consequences. It also sometimes causes its employees to bear the brunt of such doings. If these incidents happen, the aggrieved employees may file an employment class action suit to avoid detrimental impact upon themselves.
Class action suit under the Indian Company Law
After the Satyam Scam took place in India, the Central Government drafted the Companies Bill, 2009. The Bill sought to introduce the provisions for the class-action suit, enabling the shareholders or the investors of various companies to gain compensation for the expenses suffered at the hands of those companies. Section 245 of the Companies Act, 2013 specifically covers the concept of class action suit. It contains ten sub-sections that lay down the procedure and requirements for initiating such lawsuits.
Before proceeding any further, it is to be noted that the National Company Law Tribunal (NCLT) deals with grievances common to a large number of members of companies. The NCLT is governed by the National Company Law Tribunal Rules, 2016. Introduction of these rules was primarily driven by the fact that it would help to lessen the burden of high courts in dealing with cases relating to company law.
Who can file a class action suit
As per Section-245(1), which is to be read along with Section-245(3), the following individuals can apply for a class action suit:-
- In the case of a company having a share capital, a hundred or more members, or at least 10 per cent of total members of the company, subject to the condition that they have paid all the dues on their part.
- In the case of a company not having a share capital, at least one-fifth of the total number of members of the company.
- In case the applicants are the depositors of the company, hundred or more such depositors, or exceeding at least 10 per cent of their total number in the company.
Against whom can a class action suit be filed
The aggrieved members or depositors can make an application for a class action suit against:-
- The company
- Directors of the company
- Auditors or the auditing firm of the company, along with the partners involved in misleading financial statements, if any.
- Expert or the advisor of the company
Reliefs that can be obtained
Section-245(1) states that if any of the members or depositors believe that the conduct of the company’s transactions has dangerous implications for them or the company’s interests, they may apply for a class action suit before the NCLT:-
- To prevent the company from committing such acts that run contrary to its articles or memorandum.
- To prevent the company from violating the provisions of its articles or memorandum.
- To declare a change to those provisions as invalid because it took place through concealment of the facts from the members or depositors.
- To prevent the company’s directors from acting on such a change.
- To prevent the company from committing acts that are against the provisions of the company in force for the time being.
- To prevent the company from taking any action against the decision of its members.
- To appeal for compensation from or against:-
- The company or its directors for any corrupt activity on their part.
- Auditor or the company’s auditing firm for misrepresenting financial statements.
- Any expert or advisor misleading the members or depositors.
- To appeal for any such remedy as the tribunal thinks fit.
Binding effect of the order and penalty for non-compliance
As per Section-245(6), any order passed by the tribunal regarding the class action suit would be obligatory for all the members of the company involved to follow. Section-245(7) provides that if the company fails to obey the order passed by the tribunal, it would have to pay Rs.5,00,000 as a penalty, which the tribunal can also extend to Rs.25,00,000. Further, an officer of the company not following such an order shall be subject to punishment of up to three years in prison. Also, he will have to pay a penalty of Rs.25,000, which is extendable by Rs.1,00,000.
Penalty for baseless application
Section-245(8) states that if the tribunal finds that an application for the class action suit is frivolous or vexatious, it may dismiss the same and pass an order directing the applicant to pay such an amount as it thinks fit to the opposite party. However, this amount shall not exceed Rs.1,00,000. Section-245(9) asserts that this whole procedure shall not apply to any company that does business in the banking sector. Lastly, as per Section-245(10), an individual applying under Section-245(1) must comply with all the requirements mentioned above.
How can a class action suit be useful for the aggrieved members of a company
Class action suits have a number of benefits that the aggrieved parties can avail. These are as follows:-
Lower cost of litigation
Since such lawsuits involve many individuals as plaintiffs, they may divide the cost of litigation amongst themselves adequately. In this way, they would be able to bear the expenses of litigation more effectively. Also, in some cases, the process of litigating depends on contingent fees. It means that if, for example, the plaintiffs’ side wins the case, only then they will have to make the required payment. This arrangement would save them from significant financial losses.
Consistency in recovery
Filing a complaint in the court of law together would ensure a similar recovery to all the plaintiffs. Class action suits would allow them to get their grievances resolved in a consistent manner. It is also advantageous for the defendants, for if the decision is in their favour, they will reap similar merits.
Greater efficiency
Adjudicating the same issues at the same time would prevent a backlog of suits and reduce the burden of the judicial system. In the future, it would be able to solve similar cases quickly as well. Thus, class action suits allow the courts to function more efficiently. It would, in turn, lead the people to receive a solution to their problem as soon as possible.
Effective legal representation
Usually, class action cases involve a lot of complications in terms of documents, evidence etc. They require competent legal representation. As class action suits allow the plaintiffs to share the cost of litigation, they have a chance at hiring an experienced attorney to increase their probability of winning the case.
Present position of class action suit in India
Despite being highly beneficial for the aggrieved members, and their colossal demand, class action suits have not caught up that well in India. There is a multitude of explanations for it:-
- As stated by Section 245 of the Companies Act, class action suits do not apply to the companies involved in the banking sector. It is because the banks in any country play a significant role by contributing to the economy. Thus, the ones who hold shares in the banks cannot move the court against them. It is a setback accompanying the concept of class action suits because bank employees remain unassisted in their troubles.
- The civil courts cannot hear the matters that come within the ambit of the Securities and Exchange Board of India. This prohibition is placed upon them by Section-20(A) of the SEBI Act, 1992. It was the basis of giving the NCLT the responsibility of handling cases on company law. But to this date, the tribunal has not heard a single class-action suit.
- Unlike American law, Indian law does not permit the idea of third party funding for filing a class-action suit. Even though it allows for flexibility in the payment of the litigation process, the majority of the people in India belong to the average income earners category. Class action suits require a large sum of money to be able to be in effect. Most people can not afford it and need financial support to help themselves. It discourages them from filing class-action suits.
- The courts have closed the route of writ petitions to file a class action suit against private companies. It is what had happened in the Satyam Scandal case. The investors filed for action by writ petition, but the Supreme Court rejected the same, stating that their application was groundless and vague.
Conclusion
The future of class action suits in India entirely depends upon the desired amendment and clarification of the confusing concerned laws and initiation of generating funds for financing them. As seen before, these are the major problems standing in the way of the concept of the class-action suit. Otherwise, it would have been the most sought after remedy for the aggrieved members of a company. Apart from that, class action suits are necessary for stringent enforcement of corporate governance. It would minimize the number of instances of misrepresentations and frauds in the corporate world. Thus, the need right now in respect of such lawsuits is the introduction of appropriate actions by the related authorities
References
- https://www.samistilegal.in/class-action-suits-in-india-under-companies-act-2013/
- https://blog.ipleaders.in/class-action-suits-in-india-what-has-to-change/
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