A class action is a type of lawsuit in which one or several persons sue on behalf of a larger group of persons, with two common factors i.e. (i) the issues in dispute are common to all members of the class, and (ii) the persons affected are so numerous as to make it impracticable to bring them all before the court.
Collective law suits/ class actions first originated in 1938 in the United States and are still predominantly practiced there. In several European countries where civil law is different from the English common law principle, changes have in recent years been made that allow consumer organisations to bring claims on behalf of large groups of consumers. Class actions suits are allowed in European Countries such as Austria, Germany, France, Netherlands, and Spain.
The rule of supremacy of majority was judicially recognized in 1843 in the leading case of Foss v. Harbottle (1843) 67 ER 189, which left the minority in an unprotected position.
In Foss v. Harbottle case, the English Court held that action cannot be brought by the minority shareholders and established “proper plaintiff rule” i.e. if a wrong has been done to the company then proper claimant in such an action is the company itself and where the company is competent to settle the alleged wrong itself or, the company is competent to ratify or condone an irregularity by its own internal procedure, then no individual member may bring action and “majority rule principle” i.e. decisions and choices of the majority will always prevail over those of the minorities.
Thereafter several important exceptions have been developed and described as “exceptions to the rule in Foss v. Harbottle”. The rule in Foss v. Harbottle is best seen as the starting point for minority shareholder remedies.
The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. CompCas 238 Delhi, 71 (1998) held application of Foss v. Harbottle in India context as improper and misleading. India corporate sector does not involve large number of small individual investors and funding upto at least 80% is done by financial institutions. If the Foss v. Harbottle rule applied it would amount to giving the company in the hands of majority of the shareholders who notionally hold more percentage of shares than the financial institutions, which may own a small percentage of shares but contributed 80% or more in terms of the finances to such companies. Thus, excluding such financial institutions or rendering them voiceless on basis of Rule of Foss v. Harbottle would be unjust and unfair.
One of the exceptions to the majority rule laid down in Foss v. Harbottle is the right of the oppressed minority to get relief against the wrongful conduct of majority. This is one of the statutory protections to the investors and is provided in Chapter XVI (section 241 to 246) of the Companies act, 2013 (“CA, 2013”) which includes Class Action Suits that was not included in CA, 1956.
In India, the need for a change in law arose after the Satyam scam. Investors in the US successfully won damages worth thousands of crores of rupees whereas India investors had no remedy in hand. Options available were filing civil cases, filing a representative action, get into the civil court, rigours of the civil jurisprudence or go in the consumer forum which had its own challenges of satisfying whether it was a contract of goods or services. There was no real viable option, unlike option of class action suit available overseas.
If 100 shareholders or depositors or such percentage of total number of prescribed members or depositors prescribed, whichever is less, in case of company having share capital and not less than one fifth of total number of members in case of company not having share capital, 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, they may file a class action suit before the National Company Law Tribunal (“Tribunal”).
The provisions of class action are added under the chapter “Prevention of Oppression and Mismanagement” under CA, 2013 whereas CA, 1956 had no provision for class action. Remedies sought under class action under Sec. 245 of the CA, 2013 and under the provisions of oppression and mismanagement under Sec. 242 of the CA, 2013 are different. Under Sec. 242 of CA, 2013 the Tribunal can order acquisition of the company’s shares, restrict transferability or allotment of shares, removal of managing director and other directors of the company, whereas, in class action, the orders sought are restraining orders and also gives option of getting monetary compensation or damages owing to the fraudulent actions of a company.
The reach of a class action as opposed to a suit filed under Sec. 242 of the CA, 2013 is much wider, as it gives right not only to members but also depositors to file an action against a fraudulent, unlawful or wrongful act committed not merely by the company or its directors alone but also against the auditor including audit firm, any expert or advisor or consultant or any other person for misleading statement made to the company. Further, under Sec. 242 of the CA, 2013, applications can be filed only against a past or a current activity or prevent the recurrence of an established fraudulent, unlawful or wrongful act. However, under Sec. 245 a suit for class action can be filed against a future activity proposed to be taken by the company in addition to any past or a current activity which is fraudulent, unlawful or wrongful. Thus, the provisions of class action will serve as a warning for the people running, controlling and advising the company.
Further, since under a class action, the Tribunal has to issue a public notice with respect to the same, this provides options to others in joining the suit, who, may or may not have qualifying shares otherwise.
Class action suit may result in increasing the efficiency of the legal process and ensure reduction in the costs of litigation. It is an incentive to the individuals prosecuting to claim small recoveries. Class action will help in centralization of claims into one place where a court can equitably divide the assets amongst all the plaintiffs. It would help in avoiding the situation where different court rulings could create incompatible standards of conduct for the defendant to follow. Class action suits will facilitate in promoting better and transparent corporate governance.
Class action is a welcome step towards enhancing corporate governance and ensuring minority member and depositor protection. However, other stakeholders of a company such as creditors, bankers, debenture holders etc are excluded from the ambit of class action. The inclusion of these relevant and high stakeholders is necessary to make class action more robust and meaningful.
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