CLASS ACTION SUITS

I. Introduction and Historical Perspective:

The scope of this paper is to discuss the novice concept of class action
incorporated in Companies Act 2013 particularly in the Indian context.
Class Action law suit is a suit where a person or small group of persons
represents the interest of a larger group before courts who have an
similar interest. It is a procedural device where one person can
represent the interest of a larger group while prosecuting or defenfding
a suit. The mechanism of class action though has been a subject matter
craving attention from many corners of the world including the U.K.,
U.S., Australia and other jurisdictions but credit has to be given to
American jurisprudence as being the originator of this concept which
gave recognition to this concept way back in mid19th century for
furthering better corporate governance.

Class action suit by representative parties are allowed under the US

Federal Rules when (1) the class is so numerous and the joinder of all
members is not practicable, (2) the question of law or question of fact
are common to class, (3) the claims or defence of the representative
parties are typical of the claims and references of the class, (4) the
Representative parties will fairly protect the interest of the class1.
Further, it may be seen that in United States Class Action Suits

Though Class Action Suits in Corporate Jurisprudence is a novice

concept in India yet Class Action per se is not a new concept. It can be
seen that concept of class action was had been in vogue India since
long. In Consumer Protection Act, 1986, there is given an ample scope
for class action as a complaint with respect to any goods sold or
delivered or agreed to be sold or delivered or any service provided or
agreed to be provided can be filed beside the consumer himself2, by
ther the consumer to whom the goods sold or delivered any recognized
consumer association whether the consumer in question was a part of

1
See Rule 23(a) of the US Federal Rules of Civil Procedure
2
See section 12(1)(a), Consumer Protection Act, 1986
that assosiation3; or by one or more consumers, where there are
numerous consumers having the same interest with the permission of
the Forum, on behalf of or for the benefit of, all consumers so
interested4; or even by the Central or State Government as the case
may be5. Similarly, representative suits have also been allowed under
our Code of Civil Procedure6 by the leave of the Court if the parties
affected have a common interest in the suit. A fortiori, a defendant is
allowed to defend a suit on behalf of other defendants having a
common interest with the permission of the court. Similarly, there has
been in existence a judicially evolved concept of class action in cases
of judicial review since the Sampath Kumar case wherein the hon,ble
Supreme Court held that Public Interest Litigation may be filed by a
person or group of persons on behalf of victims in cases of public
injury though such person or group of persons may not have locus
standi in the case7.

Even in Corporate jurisprudence though there was no statutory

recognition for class action under Companies Act before 2013 yet
courts had been recognizing class actions even before Act of 2013. It is
therefore relevant to quote here the relevant portion of the Irani
committee report8. To wit:
“In case of fraud on the minority by wrongdoers who are in control and
prevent company itself from bringing an action in its own name,
derivative actions in respect of such wrong non ratifiable decisions
have been allowed by courts. Such derivative actions are brought out
by shareholders on behalf of the company and not in their personal
interest and not in their personal capacity(ies), in respect of the wrong
done to the company. Similarly the principles of ‘Class/Representative
Action’ by one shareholder on behalf of one or more shareholders of
the same kind have been allowed by the courts on the grounds of
persons having locus standi. Though these principles have been upheld

3
See section 12(1)(b), Consumer Protection Act, 1986
4
See section 12(1)(c), Consumer Protection Act, 1986
5
See section 12(1)(d), Consumer Protection Act, 1986
6
See Order-1, rule-8, Code of Civil Procedure, 1908
7
See S.P. Gupta Vs. Union of India AIR [1982] SCR 365
8
See The JJ Irani Report on Company Law, 2005
Available at : http://www.mca.gov.in/Ministry/chapter1.html last accessed on 19.03.2014
by courts on many occasions, these are yet to be reflected in law. The
committee expresses the need for recognizing these principles.”

From the aforementioned discussion it would be clear that though class

action has been recognized in India in various areas including
Corporate Jurisprudence but however, it is for the first time that
statutory recognition has been given to ‘Class Action Suits’ by the
Companies Act of 2015.

II. Need For incorporating Class Action suits:

The immediate need for incorporating the concept of class action suits
was felt after the Satyam scam. The Satyam scam involved a massive
fraud wherein the net worth of Satyam Computers Services Ltd. was
highly overstated by showing false invoices to the tune of million of
dollars with respect to hypothetical consumer products which did not
exist. Since the Satyam’s American Depository Shares were listed on
the New York Stock Exchnage, several class suits came to be filed in
United States against Styam and itgs officers including its Managing
Director. In this case the Indian Investors failed to take proper recourse
to legal action against the wrong doers due to non-recognition of class
rights whilst their American counterparts successfully claimed
damages through the mechanism of class action. Apart from that it was
also realized that there was no remedy against auditors and
accountants. This gap was realized by our legislature and thenceforth
in 2013, concept of class action suits has been added therein. Further,
Section 245 of the new act which deals with class action also provides
for liability of accounting firms and its partners who are proved to be
involved in malpractices and fraud. As stated hereinbefore that the
most proximate motivation for embodying the concept of class action
was the biggest Corporate scam of India in 2009 yet the opinion was
already building in favour of class action due to other reasons
including lack of shareholders activism and reluctance on the part of
individual shareholders to bring action against the wrongdoers given
the limited resources of the shareholders and delay and technicalities of
adjudication. If we see the Indian scenario closely, lack of participation
of retail investors in the affairs of the companies is one of the biggest
hurdle in the way of Corporate governance. Most of the big Companies
in India including listed companies are controlled by families and
promoters thus giving a few members of the company controlling
rights by virtue of their large shareholding in companies9. Thus
management of the companies becomes a prerogative of a few
controlling insiders. Retail investors having limited voting powers
lacks motivation to participate in the management of companies and
are just reduced to passive owners. Verily, every equity shareholder
has a proprietory interest in the company but given the rule of majority,
their dissent with the controlling interest is not to be survived and
therefore in situations of discourse, they would like to exit the
company by selling of their shares rather than making futile attempt to
contest the decision of majority. Therefore, opinion was building that
the protection given to minority shareholders under erstwhile
companies act left much to be desired and there was a need for giving
statutory recognition to class action as was also recommended by JJ
Irani Report on Company Law in 2005, as has been quoted supra.

III. SCHEME OF CLASS ACTION SUIT UNDER

SECTION UNDER SECTION 245 OF COMPANIES
ACT 2013:
The scheme of class action has been comprehensively given in section
245 of the Act wherein section 245(1) provides that certain number
(number being given in subsection 3) of member(s) or depositor(s)
may file an application before the Tribunal under two conditions viz.
when they are of the opinion that the management of the affairs of the
company are being carried on in the manner prejudicial to the interest
of the company or that of the members or the depositors, as the case
may be10. Thus, it takes into account both the interest of the company
and the interest of the members or the depositors. This makes the
Section wide enough to encompass both the derivative action and
action for harm caused to a class of members or depositors. Such
application may be filed to obtain relief in the form of any or all of the
orders given in subsection (a) to (h). To wit:
“(a) to restrain the company from committing an act which is ultra
vires the articles or memorandum of the company;
9
Varottil Umakanth, “ Evolution of Independent Directors in the Indian Corporate Governance, 6
Hastings BUS.L.J 281(2010)
10
See Section 245(1), companies Act, 2013
(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 mis-statement to the members or
depositors;
(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;
(g) to claim damages or compensation or demand any other suitable
action from or against—
(i) 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;
(ii) the auditor including 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
(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;
(h) to seek any other remedy as the Tribunal may deem fit.”11
Thus it can be seen that the relief is provided by under the section in
very broad terms. Company is restrained from doing anything
ultravires the Memorandum or Aricle of Assosiation or anything
inconsistent with the provisions of the Act. Further, resolutiuon passed
by the company can be declared void if it has been passed through
misstatement concealment of material facts and the company and its
directors may be restrained from acting on such resolution. A peculiar
feature to be seen in this section is that compensation or damages or
11
ibid
any other suitable relief may not only be claimed against the company
or its directors but also against the auditors and/or any expert or
advisor or consultant or any other person for their wrongful acts.
Further, Section 245(2) states that for wrongful acts of auditor, viz.
giving improper misleading statement of particulars in the auditreport
or for any fraudulent, unlawful or wrongful act, the audit firm as well
as its partners are liable12This seems to be a direct reaction to the
Satyam scam where fraud was committed in connivance with the
auditors. Even further, while considering the application under section
245(1) the Tribunal has to take into consideration any evidence as to
the involvement of any person other than directors or officers of the
company on any matter provided in sub clause (a) to (f) of sub-clause
113.Behind these reliefs specifically provided for in the section 245(1),
the Tribunal has been given wide discretion to pass any other order
under Sec. 245(1)(h) thus keeping in repository the power to pass order
on equitable consideration.
As stated earlier the requisite numbers to file class action is given in
Section 245(3) in accordance with which in the case of a company
having a share capital, the class action may be instituted by 100 or
more shareholders or at least such numbers of members as may be
prescribed, whichever is less or by any members or member holding
not less than such percentage of the issued share capital of the
company as may be prescribed, provided that calls and other sums due
on shares have been paid14. Akin to this, class action may be instituted
by 100 or more of the depositors or at least such percentage of the total
number of depositors, whichever may be less, or by any derpositor or
depositors to whom the company owes such percentage of the total
deposits as may be prescribed15.
When any benevolent provision or any statue comes into being, there is
always the apprehension that the said provision or statue is not
misused. This provision of class action might have raised the said
apprehension, so to curb the misuse of the section owing to corporate
rivalry or other vested interest, the section contains also incorporates
mechanism for checking frivolous complaints. The Tribunal while
12
See Section 245(2), companies Act, 2013
13
See Section 245(4)(b), companies Act, 2013
14
See Section 245(3)(a), companies Act, 2013
15
See Section 245(3)(b), companies Act, 2013
dealing with the application under section 245 has to consider the
member or depositor is acting in good faith in making the application16.
Further, the tribunal has also to take into consideration any evidence
before it as to the views of the members or the depositors of the
members of the company who have no interest, whether direct or
indirect, in the matter under section17. Thus, it provides for the taking
of independent view of the matter, if so is available, before proceeding
with the application under the section. What is more, if the application
filed under the section is found to be frivolous or vexatious, the
tribunal may reject the application after recording its reasons in writing
and impose cost on the cantankerous litigant not exceeding one lakh
rupees to be paid to the opposite party18. Further, it may also be seen
that the Tribunal also whether the cause of action complained of is
such that that the personal action could have been taken rather than
class action under this section19. What remains to be seen here is how
the availability of this alternate remedy would be seen by courts, that
is, would it has to be considered as a bar or not and if yes than to what
extent.
It can also be seen that while incorporating class action under the act,
care has also been taken to avoid multicipility of proceedings. When
any complaint under the Section is received notice shall be served on
the admission of the application to all members or the depositors of the
concerned class in such manner as may be prescribed20. All application
of similar nature pending in any jurisdiction have to be consolidated
into one application and the depositors and class members or
depositors should be allowed to choose the lead applicant and if the
members or depositors fail to develop a consensus then in that case the
tribunal shall have the power to select the lead applicant who shall be
in charge of the proceedings from the side of the applicants21
The Act also provides for enforcement of the order of the Tribunal by
laying down that any order passed under the section shall be binding
on the company and all its members, depositors and auditors including

16
See Section 245(4)(a), companies Act, 2013
17
See Section 245(4)(d), companies Act, 2013
18
See Section 245(8), companies Act, 2013
19
See Section 245(4)(c), companies Act, 2013
20
See Section 245(5)(a), companies Act, 2013
21
See Section 245(4)(b), companies Act, 2013
audit firm or expert or consultant or advisor or any other person
involved with the company22. Stringent penalty has been provided for
contempt of the order passed by the Tribunal23. Any company which
disregards the order of the company shall suffer the fine which shall
not be less than five lakhs rupees but which may extend to twenty five
lakhs rupees24. However, it is to be seen that though section 245(7)
provides for the personal liability of the officers of the company by
making the officer liable to be punished with imprisonment which may
extend to three years along with fine which shall not be less than
twenty five thousand but which may extend to one lakh rupees, but
does not provide for similar penalty for other persons associated with
the company though the order may very well be against persons other
than the officers of the company25.
IV. CONCLUSION:
Thus, it can be seen from the discussion made hereinbefore that there
was necessarily a need for incorporating the concept of class action in
our corporate jurisprudence for better corporate governance more so
because of lack of shareholders activism and reluctance on the part of
small investors to engage in legal battle with the company given he
high cost of litigation and delay in adjudication. Further, it can be seen
the scheme of class action is very broad and comnprehensive. It gives
the Tribunals wide power to pass various kind of orders and also the
power to punish for its contempt. Further, it encompasses both wrongs
against the company and against the members or depositors.
However, no novice concept can be free from defects and therefore it is
open to criticisim. So, let it be with the Class Action. First of all, under
Act benefit of class action is provided only to members and depositors
and therefore other stakeholders has been left out of the scheme. It can
be seen that even creditors have been kept out of the purview of class
action hitherto. Further, it can be seen that though the Act provides for
award of compensation or damages in favour of members or depositors
but does not provide any mechanism regarding how the said
compensation has to be distributed among the members or depositor.

22
See Section 245(6), companies Act, 2013
23
See Section 245(7), companies Act, 2013
24
ibid
25
Another important problem is that though the order may be passed
against, apart from the company and its directors, its auditors and
experts or consultants or advisors or any other person associated with
the Company and as per Section 245(7), it shall be binding on
company and persons mentioned hereinbefore, but it does not provide
for contempt of the order of the Tribunals specifically under Section
245(8) as has been provided for, against the company and it officers.
However, with all the pitfalls, the step to incorporate class action
should be hailed as a positive step towards the way of better cororate
governance.