Company Law: Class action, a class apart

The concept of class action originated in monarchical England during the 13th century as “group litigation”.

However, its use and practice became more popular and definitive in corporate America, with the first class action suit in 1820 (West v. Randall). Class action allows a group of persons to collectively address a common grievance against a large corporate or even a group of corporates in a court of law.

How does it help the small investor?

A strong need was felt for protecting the rights of individual investors, who often lost out because of not having bargaining power. The situation is quite different in other countries.

For instance, while the Indian investor who lost is yet to get any meaningful compensation even three years after the Rs 8,000-crore fraud allegedly committed by the promoters of the erstwhile Satyam Computer Services, some of their American counterparts, who owned American Depositary Receipts (ADS) made the company pay $125 million (over Rs 625 crore) in settlement due to a strong class action framework in the US.

The only way individual and small investors could address their grievance was to singly approach the Company Court / Company law board. The concept of “representative action” in corporate India was non-existent. And the Companies Bill 2011 hopes to remedy that.

The changes brought by the Companies Bill, 2011

According to Clause 245 and 246 of the Bill, lawsuits “may be filed by members or depositors or any class of them, if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interest of the company, its members or depositors.”

Also, the previous act omitted depositors who are not shareholders from the definition of “minority stakeholders”. The new Bill remedies that as well.

In the class action the investor/depositor can:

a) Claim damages or compensation or demand any other suitable action against the company or its directors

b) Restrain the defendant from committing an act ultra vires articles or memorandum

c) Restrain the defendant from committing breach of memorandum or articles

d) Declare a resolution altering the memorandum or articles of the company as void

e) Restrain the company and its directors from acting on such a resolution

f) Restrain the defendant from doing an act which is contrary to the provisions of this Act or any other law in force for the time being

g) Restrain the defendant from taking action contrary to any resolution that has been passed by the members

Criticism

However, the provision comes with some tough restrictions. For an appeal to amount to a class action a minimum of about 100 shareholders, if the company has a share capital, or one-fifth of the total members if the company has no share capital, have to come forward with the suit. Some see this as a steep requirement for a fairly new concept.

Besides, the law also requires that all the persons filing such a suit are eligible only if they have paid all calls and dues on their shares. Hence, it is unclear that if a class of people who are in dispute regarding the payment of dues on shares itself are eligible or not.

Playing the devil's advocate, if these class actions are not made in good faith, they may end up becoming a nuisance.

Well managed and important industries may find their time and resources wasted in class action suits, deterring the overall growth of our economy.

(To be continued)

(This column has been contributed by vakilsearch (www.vakilsearch.com), an online legal guidance and legal solutions provider.)

COMMENT NOW