Permitting class action suits by investors or shareholders in New Companies Bill 2008 is a welcome step towards safeguarding their interests. A comprehensive look at pros and cons of class action suit…
The scams of Enron, Andersen, WorldCom and Satyam, involving fraud worth of crores of rupees of the shareholders, had eroded the national image. However, it has brought to fore the need to curb the power of the promoters and the directors in the boards of such corporations.
Class actions are most prominent in the U.S. and Europe, which have led to social reforms. The use of the class action mechanism in the U.S. became so dominant that Congress had to enact the Private Securities Litigation Reform Act of 1995 to curtail frivolous actions, also known as ‘strike suits’.
Indian government is planning to include the concept of class action suit in Section 216 of New Companies Bill, 2008 to help investors claiming damages from fraudulent companies. Once enacted, the provision will empower shareholders to hold companies and their managements responsible for fraud as well as wrong-doing.
The ministry has been working on the new law, which aims to update India’s corporate laws and to make them globally competitive, transparent and investment-friendly.
“Class Action Suits’ will have sobering effect on the errant management and would even help office of the ‘Serious Fraud Investigation Office’ (SFIO) under the proposed law, which is established by the Ministry of Corporate Affairs in punishing the defaulters. In fact, it will be very appropriate that the associations or the individuals filing class action suits should closely interact with the office of SFIO and vise versa.”
Senior Advocate, U K Chaudhary, Delhi High Court opines that “‘Class Action Suits’ will have sobering effect on the errant management and would even help office of the ‘Serious Fraud Investigation Office’ (SFIO) under the proposed law, which is established by the Ministry of Corporate Affairs in punishing the defaulters. In fact, it will be very appropriate that the associations or the individuals filing class action suits should closely interact with the office of SFIO and vise versa.”
The system is being introduced to protect the interests of majority and minority shareholders. However, on the other hand, this system may turn out to be the cause of excessive lawsuits, which deplete the firms’ resources.
Class action suits will check the manipulating nature of corporations as seen in the latest case of Satyam Computers. As reported, two US-based law firms, Izard Nobel LLP and Vianale & Vianale LLP, have filed class action lawsuits against Satyam Computer on behalf of shareholders of the software services firm, American Depository Receipts. Such action will act as a check to control violations, as the risk of image erosion caused by such litigation in the minds of prospective buyers will deter the promoters and directors from acting against law.
Association and Investor Rights Activist “We filed a petition, under the Consumer Protection Act, 1986 (CPA), with the National Consumer Disputes Redressal Commission (NCDRC) asking for compensation on behalf of and for the benefit of 3 lakh retail Indian investors of Satyam.We have alleged that they were deceived by misleading statements, including fudged audited financials results for last several years stated by the IT firm and duped into buying its shares at an artificially inflated and manipulated price. The NCDRC dismissed the plea and held that the CBI and the Company Law Board are already seized of the matter and the issues in complaint cannot be examined in summary jurisdiction under the CPA by the Commission.We, Midas Touch Investors Association, filed an appeal before the Hon’ble Supreme Court against that order, which was dismissed “with liberty to take appropriate steps”. There are presently no provisions in the Companies Act, 1956 and SEBI Act empowering the investors to claim compensation for the losses suffered due to fraud or unfair trade practice or in any other manner.” “The proposed Companies Bill, 2008 has not addressed issue of empowering investors to seek and get compensation (individually or as a group) and filing of class action suits per se. Section 216 of the Bill provides only for restraint orders by NCLT in case of oppression and mismanagement by the company. It is a measure to prevent continuation of further mismanagement or fraud and not a redressal measure. This Bill was drafted before the Satyam Scam came to light and it appears that such an eventuality was not taken into consideration. It lapsed and was re-introduced in July 2009 in Lok Sabha again. In our meeting with the Minister of Corporate Affairs, Shri Salman Khurshid, we had requested him for incorporation of a provision for compensation and class action suit in the Companies Bill, 2008.”
It will activate the legal fraternity by bringing together the lawyers, who take public cause actions against rich and big business houses. Furthermore, the incentive will be group presentation, reducing chances of harassment at any level or even at the hands of the attorney. When such large number of people are concerned, they are always better heard and less exploited. The deterrent effect of a class action can be substantial, forcing the defendant to change its product or procedures.
However, class action suits may be used as a tool to malign or defame a legitimate and powerful market competitor to eradicate its market standing. It may also lead to corporatisation of lawyers to take up even trivial cases in the hope of making some quick money from dubious merit.
Also, since the lawyers will stand to benefit from the outcome, they will be eager to distort the case and will present it in the most favourable circumstances for their side. Also, the chances of collusion between the attorneys for the two sides can not be ignored.
Private enforcement through a class action reduces the accountability of the law enforcement effort and delegates to the plaintiffs’ attorney control over enforcement priorities.
However, Senior Advocate U K Chaudhary, Delhi High Court asserts, “Though the present proposed Companies Bill, 2008 does not provide stricter penalties for invoking class action litigation, the same can be dealt by making the law provision for imposing heavy cost on habitual litigants and compensating the victims of such vexatious and frivolous litigation.” Further, he opines that ‘Class Action Suits’ should be dealt by specialised corporate and commercial benches.
When both the benefits and costs are great, misuse of the system may lead to high risks. It will have to be checked and implemented only after analysing the response in other countries; where it has been in practice for long, so as to imbibe maximum benefits into the system and more importantly, to avoid the maximum benefits.
Yes, as it will enable shareholders and consumers to unite together and claim damages for wrong-doing. Lower litigation costs will overcome the problem of small recoveries, which discourage an individual from filing a solo action to protect his or her right. Collective strength of investors will also act as a deterrent against companies.
The proposed provisions of the New Companies Bill 2008 are undoubtedly a step ahead in safeguarding the interest of investors in case of corporate crimes. It explicitly allows class action suit by the shareholders association against the fraudulent action on part of the company.
The Companies Act is not a standalone statute. There are other statutes and legal principles also prevailing in the system to deal with the problem of vexatious and frivolous actions, i.e. payment of court-fees, locus standi rule and equity jurisdiction of courts to decide such issues. These issues are based on sense of justice, equity and good conscience. However, care needs to be taken to avoid frivolous litigation.
SEBI’s scheme of ombudsman is cheap, fast, informal and efficient but is limited to the issues or grievances relating to securities of the listed companies. Further, the Company Law Boards and the courts are overburdened. Therefore, special or fast track court should be constituted to deal with corporate fraud cases.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
