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17 | P a g e Journal on Contemporary Issues of Law [JCIL]

Volume 4 Issue 2

AN ANALYSIS OF CLASS ACTION SUIT

Rajvansh Singh*

Shreeansh Shahi**

Rishabh Tiwari***

* 2nd BA year law student, National Law University Odisha

** 2nd BA year law student, National Law University Odisha

*** 2nd BA year law student, National Law University Odisha

INTRODUCTION

The introduction of class action suit is one of the major changes, which took place in CA, 2013.

Class action is a representative action in the form of suit by a large number of people bring a claim

.The major objective behind this was to secure the interest of minority shareholder. Thus class

action suit is expected to be a medicine for abusive and arbitrary conduct of the management of

the company. Class action is

“Shareholder activism” is a concept, which is new to India and still developing, which means that

the shareholders of the company taking part actively in every aspect of the company. Generally,

individual shareholders do not take legal action against the company because of certain reason,

which may include – lack of motivation, economically unaffordable for the individual or statutory

hindrance. Thus, it is feasible, when a group of shareholders come together to take legal action

against the company, which in simple word is know as “class action suit”. It is a process by which

few people can sue for the benefit of large group. The concept of class action is not a new concept

in India; it can be found in Code of Civil Procedure, 1908 in the form of representative suit and

Public Interest Litigation, each one of them having their own limitation.

The concept of class action suit came into picture in early 18th century in United States. The history

of Class Action Suit with respect in India can be traced to the Satyam case, but the statutory

recognition was given in Companies Act, 2013. The shareholders were not able to claim as there

was no provision under CA, 1956. This project explores the section 245 of CA, 2013 with depth

analysis. Majority of the provision of companies act have been taken form US and UK and class

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action suit is also one of them. Thus aims to compare the difference of class action suit present in

India and US and highlights the lacunas.

NEED FOR CLASS ACTION SUITS

Facts: Satyam computer services limited was a leading company dealing in information,

communication and technology. The clients of the company were spread in India as well as United

States. The company was listed in NSE, BSE and New York Stock Exchange.

A meeting of Satyam board was called to consider a proposal for acquisition of Maytas Properties

and Maytas Infra Limited. The family of the promoter held 30 % share of the Maytas firm and thus

it was a related party transaction. Shareholders of the company were against the decision and the

price of the share felt down.

In the meantime Mr.Ramalinga Raju, the chairman admitted of financial mismanagement and

Maytas deal was to cover for it. Satyam board withdraws its decision to acquire Matyas firm. It

was discovered that Matyas acquisition was to carry to manipulate past financial fraud that is

Satyam was inflating profit. Thus, the price of the share felt to 54.05 from 304.80 with in the span

of two month. As a result, the shareholders of company suffered a huge loss.

A group of investor approached National Consumer Dispute Redresssal Commission and Supreme

Court but it was rejected, as there was no law to deal with it. Indian shareholder along with Midas

touch also filed petition before NCDRC but the claim was rejected and said, “We do not have the

infrastructure to deal with such kind of petition CBI and CLB (are) already seized with the matter”.

When the appeal was made before Supreme Court, the decision was same.

Also, Prince Water Coopers India failed to detect the fraud of financial accounts. Also, Satyam

would have given incentive to PWC India to get the required treatment. Fake customer identities,

false invoice1 were created to inflate the revenue amount. Also, the board resolution was molded

and loans were issued by illegal means. Even the money, which was received from the American

Depository Receipts were not shown in the balance sheet. PWC India overlooked 1.4 billion dollar,

1Madan Lal Bhasin, ‘Corporate Accounting Fraud: A Case Study of Satyam Computers Limited’ [2013] OJA 26.

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which was claimed by the company to be in its balance sheet as “non- interest bearing”. This

conduct of PWC raised question as to whether it was involved in the scam.2

Issue: As PWC and Satyam computer held that India is the place, where the case should be heard

and claimed for forum non conveniens. Therefore the issue arose whether India was a suitable for

a for investor Class Action, and whether laws in India can deal with such a measure

Judgement: It was held that India was not suitable for Class Action Suit because of the following

reasons

Class Action Litigation was not possible in India due to provision listed in SEBI Act, 1992

and Securities and Contract Act, 1956.

There was no scope of representative Suit. Representative suit is just a procedural remedy

given under CPC. There is no right to sue, when there is a bar provided by a statue.

In case representative suit was valid, a new problem of enforceability of award came into

picture. A investor, who is not a party how will he / she get the claim enforceable.

The judicial body of India, itself has rejected the claims of investor, as there was lack of

provision to deal with such issues.

Whereas, in United States, a sum of 125 million dollar was paid compensation by Mahindra

Satyam to united state investor.3 Tech Mahindra, which overtook Satyam, was directed to settle

all pending litigation with the investor, who had claimed loss because of depreciation in the value

of share.4

BEFORE: CLASS ACTION SUIT

When the provision of Class Action Suit was not there, the grievance redressal mechanism, which

could be used by the shareholder were: 1) A suit against the company for oppression and

mismanagement5 2) a suit for derivate action the management of the company6 3) A suit under

Order 1 Rule 8 of CPC. The suit, which is made under oppression and mismanagement, provide

2 Varottil Umakanth,‘Evolution and Effectiveness of Independent Directors in Indian Corporate Governance’ Hastings

Business Law Journal, Vol. 6, No. 2, p. 281 3ArjyaMajumdar, ‘Class action suit – Genesis, Analysis and Comparison’ [2014] HNLUJ 23. 4 Minny Narang & Gunjan Jain, ‘Class Action Suits, a Measure of Progressive Activism in India’ [2013] IJR, 49-51, 5 Companies Act 2013, s 241.

6Nagappa Chettiar v. The Madras Race Club (1949) 1 MLJ 662.

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for “substantive right” to the shareholder whereas class action is only procedural means for

substantive relief. Thus, shareholders were left with no option of provision under which they can

claim. Indian civil courts have no authority over cases where the statute bars their jurisdiction and

it was held in Kesha appliance v. Royal Holding Services Ltd. 72006 that Indian securities law is

one of the area in which civil courts have no jurisdiction and is barred by SEBI. The money

collected through penalty will be deposited in consolidated fund of India. This result in double

burden on the company, which commits.

CLASS ACTION SUITS – A COMPARISION OF USA AND INDIA

Class Action Suits in USA

This theory for the first time got its inception in the Federal Rules of Civil Procedure of the USA

under Rule 23 in 1938. The prerequisites for class action suits are:

The whole of the class is in itself is so large that joinder of every members is not possible;

Then there are some question of laws and facts common for the classes;

If claim and defenses of the said parties are of the claim and defenses of the classes;

Can the parties that are representing will be properly able to protect the interests of the

class.

Later, the Federal Jurisdiction was increased by upon many class action lawsuits by the

introduction of Class Action Fairness Act of 2005. There are various reasons due to which class

action suits related to a company arises like when - a company breaches the employment terms, is

involved in unfair labor practices, affairs of the company are mismanaged etc8. There has been

such a large growth in USA of these kind of lawsuits that many firms are now specialized in class

action law suits. The lawyers that represent the class are called Contingency lawyers and based

upon how well they perform and the outcome of the case, they charge their fees9.

7 Kesha appliance v. Royal Holding Services Ltd 2006 (1) BomCR 545. 8 'Class Action' (LII / Legal Information Institute, 2018) <https://www.law.cornell.edu/wex/class_action> accessed 20

February 2018 9 'Class Action Suits' (Lawyersclubindia, 2018) <http://www.lawyersclubindia.com/articles/Class-Action-Suits--

5384.asp> accessed 20 February 2018

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As has been already discussed above that shareholders are involved in various claims. These claims

are generally involved around the violation of rules made by the Securities Exchange Commission

and to be specific, around the violation of Rule 10b-5 which provides that:

“It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality

of interstate commerce, or of the mails or of any facility of any national securities exchange,

a. To employ any device, scheme, or artifice to defraud,

b. To make any untrue statement of a material fact or to omit to state a material fact necessary

in order to make the statements made, in the light of the circumstances under which they

were made, not misleading, or

c. To engage in any act, practice, or course of business which operates or would operate as a

fraud or deceit upon any person, in connection with the purchase or sale of any security.”

In the case of Dura Pharmaceuticals V. Broudo10, it was held by the Supreme Court of the USA,

that a case can be established under Rule 10b-5 only if the Plaintiff pleads that:

The defendant has made material representation.

The sale or purchase of the securities is connected with misrepresentation.

He or they relied on the misrepresentation

Scienter.

But the above rule is criticized for not providing adequate compensation and necessary deterrence.

Also Private Securities Litigation Reform Act, 1995 has unnecessary procedures, which result in

becoming a hurdle for cases that come under the ambit of Rule 10b-511.

In Europe12, class action suits can only be brought by consumer associations and not by any

individual, as their main objective is to delimit the ambition of companies.

10 'Dura Pharmaceuticals, Inc. V. Michael BroudoCasebriefs' (Casebriefs.com, 2018)

<https://www.casebriefs.com/blog/law/dura-pharmaceuticals-inc-v-michael-broudo/> accessed 20 February 2018 11 'Lawsuits, Legal News & Issues, Lawsuit Settlements, Class Action Lawsuits' (Lawyersandsettlements.com,

2018) <https://www.lawyersandsettlements.com/> accessed 20 February 2018 12 'Google Books' (Books.google.co.in, 2018) <https://books.google.co.in/books> accessed 20 February 2018

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UNDER INDIAN LAW

In India the company law gives a lot of importance to the minority shareholders for protecting their

rights against the mismanagement and oppression of the company and at the same time it follows

a very important rule which was laid down in the case of Foss V. Harbottle13 which states that

majority should be given more importance than minority. Also recent amendments can be

considered as a positive step towards making the company accountable in case of violation by it.

Order 1 rule 8 of the Civil Procedure Code14 provides that when a large body of people are against

the same party then they will be able to bring action as a group and one of them or several of them

will be allowed to act as a representative of that group. But parties generally refrain from exercising

their claim under this provision because of the long and hassling procedure. Therefore a need for

a more pragmatic provision was felt particularly during the Satyam case where the American

investors were able to receive back their money because of a strong framework for class action

suits in the United States of America whereas the Indian investors were left with nothing but to

follow the same old lengthy procedure as discussed above.

Then the J.J Irani Committee established for the company law while talking about class

action suits said that:

“In case of fraud on the minority by wrongdoers, who are in control and prevent the company itself

bringing an action in its own name, derivative actions in respect of such wrong non-rectifiable

decisions have been allowed by courts. Such derivative actions are brought out by shareholder(s)

on behalf of the company, and not in their personal capacity (ies), in respect of wrong done to the

company. Similarly the principles of “Class/Representative Action” by one shareholder on behalf

of one or more of the shareholders of the same kind have been allowed by courts on the grounds

of persons having same locus standi15.”

13 'Foss V Harbottle Rule: Defined And Explained - Gilesfiles' (GilesFiles, 2018) <https://www.gilesfiles.co.za/foss-

harbottle-rule-defined-explained/> accessed 20 February 2018 14 'Code Of Civil Procedure, 1908 | Bare Acts | Law Library | Advocatekhoj' (Advocatekhoj.com, 2018)

<http://www.advocatekhoj.com/library/bareacts/codeofcivilprocedure> accessed 20 February 2018 15Researchersclub V, 'JJ IRANI COMMITTEE: A COMMENT' (RESEARCHERS CLUB, 2018)

<https://researchersclub.wordpress.com/2015/04/21/jj-irani-committee-a-comment/> accessed 20 February 2018

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It also said that although the courts have upheld these principles from time to time but they should

be expressly brought down in law. The Company Law Bill, 200916 provided that:

“(1) Any one or more members or class of members or one or more creditors or any class of

creditors may, if they are of the opinion that the management or control of the affairs of the

company are being conducted in a manner prejudicial to the interests of the company or its

members or creditors, file an application before the Tribunal on behalf of the members and

creditors for seeking all or any of the following orders, namely:-

(a) To restrain the company from committing an act which is ultra vires the articles or

memorandum of the company;

(b) To restrain the company from committing breach of any provision of the company’s

memorandum or articles;

(c) 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 creditors;

(d) To restrain the company and its directors from acting on such resolution;

(e) To restrain the company from doing an act which is contrary to the provisions of this Act or

any other law for the time being in force;

(f) To restrain the company from taking action contrary to any resolution passed by the members.

(2) Any order passed by the Tribunal shall be binding on the company and all its members and

creditors.

(3) Any company which fails to comply with an order passed by the Tribunal under this section

shall be punishable with fine which shall not be less than five lakh rupees but which may extend

to twenty-five lakh rupees and every officer of the company who is in default shall be punishable

with imprisonment for a term which may extend to three years and with fine which shall not be

less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.”

16 'PRS | Bill Track | The Companies Bill, 2009' (Prsindia.org, 2018) <http://www.prsindia.org/billtrack/the-

companies-bill-2009-741/> accessed 20 February 2018

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The above stated provision though provided for bringing the class action suits by the creditors and

the depositors but it failed to address some major issues such as these actions will be funded, how

the claim will be distributed among the class members, compensation that is to be given to the

creditors and the shareholders.

In an affirmative step, Securities Exchange Board of Regulations17 was notified by the SEBI in

2009 which established an education and investor protection fund for helping the investor’s

associations which have been recognized by SEBI to pursue legal proceedings for the investors

involving securities which are either listed or have been proposed to be listed but it is to be subject

to the limitations that have been laid down by the said regulation. Moreover, some guidelines have

been given for the funding of the NGO’s to pursue class action suits under the Companies Act

195618, and in particular under section 250C.

Under section 245, of the new company law it has been provided that any member or any number

of members or as it has been provided under sub section (2) of the section, if they think that the

management of the company has been conducted in such a manner that they are against the

interests of the members of the company they can file an application for getting all or any of the

following orders-

(a) To control the organization from conferring a demonstration which is ultra vires the

memorandum or articles of the organization;

(b) To control the organization from conferring rupture of any arrangement of the organization's

notice or articles;

(c) To proclaim a determination adjusting the update or articles of the organization as void if the

determination was passed by concealment of material certainties or got error to the individual’s

contributors;

(d) To limit the organization and its executives from following up on such determination;

17 Staff I, 'Securities And Exchange Board Of India - SEBI' (Investopedia, 2018)

<https://www.investopedia.com/terms/s/sebi.asp> accessed 20 February 2018 18 'The Companies Act, 1956' (Indiankanoon.org, 2018) <https://indiankanoon.org/doc/1353758/> accessed 20

February 2018

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GAPS IN THE PROVISIONS OF CLASS ACTION SUITS

Provisions under the companies act, 2013

The provision governing class action suits under the Act is Section 245. The substantive provision

reads:

“Such number of member or members, depositor or depositors or any class of them, as the case

may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or

conduct of the affairs of the company are being conducted in a manner prejudicial to the interests

of the company or its members or depositors, file an application before the Tribunal on behalf of

the members or depositors for seeking all or any of the following orders…”

Overlapping of provisions

As per Section 245(1) read with Section 245(3), a Class Action Suit may be filed by:

(3) (i) The requisite number of members provided in sub-section (1)shall be as under:—

(a) in the case of a company having a share capital, not less than one hundred members of the

company or not less than such percentage of the total number of its members as may be prescribed,

whichever is less, or any member or members holding not less than such percentage of the issued

share capital of the company as may be prescribed, subject to the condition that the applicant or

applicants has or have paid all calls and other sums due on his or their shares;

(b) in the case of company not having a share capital, not less than one- fifth of the total numbers

of its members.

(ii) The requisite number of depositors provided in sub-section (1) shall not be less than one

hundred depositors or not less than such percentage of the total number of depositors as may be

prescribed, whichever is less, or any depositor or depositors to whom the company owes such

percentage of total deposits of the company as may be prescribed.

In the opinion of the author, as far as depositors are concerned, the Act does not provide any

definition of the same. Even though, a definition of ‘deposits’ is available, the same is not very

helpful in determining who are depositors. The Ministry of Corporate Affairs has passed

Companies (Acceptance of Deposits) Rules 2013, under which a depositor is defined as:

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I. Any member of the company who has made a deposit with the company in accordance

with sub-section (2) of Section 73 of the Act; or

II. Any person who has made a deposit with a public company in accordance with section 76

of the Act.

This is a circuitous definition and brings us back to the Act itself. Further, in the context of class

action suits by depositors, it is observed that there is an overlap between Section 754 and Section

245 (1) (g) (i). The former provides for damages for fraud and the latter for damages, compensation

or any other suitable action against 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.

Thus, there is possibility of duplicity of suits on the same cause of action.

Further, the Act does not provide any remedy to other stakeholders under the provision for class

action. Thus, creditors, consumers, employees etc. cannot organize themselves as a group and

demand for compensation or damages from the company. In the USA however, the different

stakeholders too can file class action suits against incumbent companies.19

Distribution of damages and compensation

Under Section 245(1) (g), class action suits can be filed for claiming damages or compensation for

certain acts or omissions of directors, auditors, consultant or any other person. Although this is a

noble endeavor, the problem lies in the fact that the Act does not provide how these damages and

compensations will be distributed amongst the claimants. As far as members are concerned, some

may claim to have suffered more injury due to the high percentage of their holdings in comparison

to the others. There is no guideline in the Act that would help the Tribunal to determine how to

distribute the monetary rewards.

Further, it has been noted in various class action suits that that victims receive no compensation or

benefits for their association. Sometimes it is felt that the compensation awarded may have been

greater if an individual rather than a group pursued the case.

A possible solution to the same could be coming out with a formula that would divide the damages

and compensation on the basis of the shareholdings of the aggrieved parties. This would ensure an

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equitable distribution of damages is made and each member is compensated in proportion to her

holding.

Wide application

Amongst the orders which can be sought in a proceeding under Section 245(1)(g) as follows: “To

claim damages or compensation or demand any other suitable action from or against— (iii) 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…”

In the opinion of the author, this casts a very wide net on the persons who can be implicated in a

class action suit. Common sense does not allow one to say that any other person would mean any

person even remotely related to the impugned action. However, the Act does not make it clear

what could be a possible cause of action in case such a person is made a defendant.

Other problems

Unscrupulous Minority Shareholders

Such actions are open for misuse by unscrupulous minority shareholders in furtherance of their

vested interest thereby hampering the efficacy of the entire corporate and legal system of a country.

At 100, the Act sets a low limit for the number of people required for a class action suit. This

number can even reduce, if the percentages required to be set by the Act itself, lower the number

of shareholders. Thus, very few shareholders could join hands, and seek judicial remedy in the

form of class action, even though the transaction might actually be beneficial for the company as

a whole.

Contingency model

In the US, plaintiff law firms work on a contingency model, where they take no fees upfront and

usually collect a third of the settlement amount. In India, the Bar Council prohibits a contingency

model. It is therefore, unlikely that law firms would have any incentives to fight cases.

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Class Action versus oppression and mismanagement

The investors of an organization can likewise benefit a remedy under Section 241 (Application to

Tribunal for relief in instances of mistreatment and so on.) of the Companies Act, which permits

help in situations where the undertakings of the organization have been directed in a way biased

to public interest or harsh to some other member or in a way biased to the interest of the

organization. However, Section 241 limits its assurance to the investors of an organization, while

Section 245 likewise incorporates depositors in its domain. In spite of the fact that, when compared

with Section 245, the extent of remedies accessible under Section 241 is considerably more

extensive, (for example order of purchase of shares by any members by any part, limitations on

exchange or allocation, end or adjustment of an agreement, evacuation or arrangement of director

and so forth.), Section 245 is significantly more liberal with a award for harms and remuneration

to the candidates. Any request made under Section 245 is in nature of rem and is restricting even

on those individuals or investors who are not party to the application instead of a request of

oppression and mismanagement which is just authoritative on the parties to the application. While

a Class Action can be invoked if there should be an occurrence of any demonstration biased to the

interest of the individuals, the investors or the organization; on the off chance thatof mistreatment

and administration, public interest additionally considered.20

The Companies Act has furnished the investors with solid weapons as Section 241 to Section 245

which can be utilized to make the reprobate officers responsible for their choices and for

implementation of the corporate law. In wake of this new strengthening of the partners, the

corporate officers should turn out to be more reasonable with their activities to secure themselves

against a Class Action.

The idea of class action is at an extremely beginning stage in India. The idea is yet to be advanced

and adjusted according to the functional application and the changing business sector patterns.

Albeit different remedies under the Companies Act have plenty of precedents of reference to direct

the applicants, India is yet to build up its own library of judgments to depend on, with the end goal

of Class Action. One may need to allude the judgments of foreign nations on this idea for some

direction till that time.

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CONCLUSION

The provision of class action suit makes sure that the management of the company prioritize the

interest of shareholder. Before CA, 2013 there was no judicial recourse to a condition like Satyam.

Under the virtue of this section, small shareholder can claim their investment, if the management

act arbitrarily and against the interest of shareholder. However, such a provision can be used with

a mala fide intention by the shareholders. Thus, courts should make sure that the suit brought under

this provision is in good faith and should have a good possibility of success.

Apart from this to make class action suit a successful one, a lot of change needs to be made in

securities law, mostly in price manipulation and insider training. Although class action suit marks

for the uplifting the rights of small shareholder, but we should not forget that our judiciary is very

slow in giving decision, which again leads to the harassment of shareholders. Thus, Parliament

and Ministry of Corporate Affair need to take certain steps to refine and further improve the

provision to make it more and more and effective.

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