Class Action Litigation in India

Class Action Suit means a law suit filed collectively by a particular class of people. The word class here refers to a class of stakeholders and not social class. For example, a lawsuit filed collectively by shareholders of a company against its promoters or directors or management, would be called a Class Action Suit.

The term had come into highlight in context with a multi-crore fraud by the management and auditors of Satyam Computer Services. In that scam, the shareholders had suffered a massive fall in the value of their investments and had no recourse to seek damages unlike their counterparts in the US. Thus, for the first time, Companies Act 2013 had made elaborate provisions for such suits in India which allowed the stakeholders {shareholders, employees} of a company to directly sue the management and the advisors.

Recent Events

• A class action suit was filed against Nestle {maker of Maggi noodles} on behalf of its consumers by the Government. {April 2016}
• Every now and then, companies in USA keep facing such law suits. Indian companies are no exception to this.

Key Facts

• Although class action suit provisions were made in Companies Act 2013, such suits can also be filed under Section 12 (1) (c) of the Consumer Protection Act, 1986. Under this section, the government can take action either in its individual capacity or on behalf of the complaining consumers. Recently, the government filed a class action law suit against Nestle under Consumer Protection Act, 1986. Further, such suits can also be filed under Section 91 of the Civil Procedure Code, 1908.
• As per provisions of the Companies Act, 2013, at least 100 members/depositors are required to file a class action suit. The grounds for such lawsuits include inactions or wrongdoings on part of members of a company, its auditors, its directors or any experts, advisor or consultants.
• Class action law suits cannot be filed against banking companies.
• To reduce the multiplicity of litigation on the same subject matter, all similar applications in any jurisdiction are consolidated in to one single application.
• The suits are filed in National Company Law Tribunal (Tribunal) and the company is bound to obey its order in any class action suit. If the company fails to implement the order of the tribunal, then the company is liable to pay fine in the range of Rs. 5 lakh to Rs.25 lakhs. Every officer who is responsible to such a default is liable to be imprisoned and fined.
• In case of frivolous class action suit, a fine of 1 lakh will be imposed on the applicant.

Questions for Analysis

• What are the benefits of Class Action Suits for stakeholders?
• When judiciary is already overburdened, will class action law suit put further pressure on it?
• What are fears of the industry regarding class action suits in India? Are such fears valid?
• To what extent the Class Action Suits have been successful in India {in comparison to west such as US}? What is needed?

What are the benefits of Class Action Suits for stakeholders?

Such concepts undoubtedly carry the benefits for investors and provide them an instrument to fight as one unit against the errant company or management. Earlier, the investors had no other option than to file a civil suit.  Class Action Lawsuits act as a potent tool to fix accountability to check any likely prejudice against a minority on a company/management. The investors can use it as a tool to put up a unified fight against an errant company/management. It reduces the multiplicity of law suits, litigation costs and burden on the courts. Class action suit can also be filed to prevent the company from making any misleading statements and from making inclusion or omission in the prospectus which is in contrary to the articles or memorandum of a company. It can be filed to restrict the company from doing an act which is contrary to the provisions included in the company law. It can also be filed against the auditors for making any misleading statement of particulars in the audit report.

When judiciary is already overburdened, will class action law suit put further pressure on it?

No. It will not. Why? Firstly, the companies law provides that such lawsuits are to be filed in NCLT and the decision of the NCLT is binding upon the company, though it can appeal in higher judiciary. Secondly, such suits are good for small and minority shareholders who cannot afford highly competent attorney own their own. Thirdly, such suits also increase the efficiency of the legal system by reducing the number of rulings for the same issue and thereby save time and resource both. Fourthly, since auditors and advisors have also been kept in loop of this law, they would need to think twice before making any advice to company or management {thus further bringing down the chances of litigation}.

What are fears of the industry regarding class action suits in India? Are such fears valid?

Industry fears government has not fully understood how class-action suits work and has provided the provision under pressure from investor protection groups.

The provision can be of nuisance for companies if a small group of investors sues for flimsy reasons. The legal process in India is time-consuming. Conversely, in genuine cases, not enough shareholders or creditors may come together to sue the company.

To what extent the Class Action Suits have been successful in India {in comparison to west such as US}? What is needed?

Class action law suits are very successful globally, especially in the US. According to the legal experts, class action law suits are not very successful in India. It is very much needed to promulgate this concept at grassroots level and bring about required awareness among all stakeholders. Further, to ensure that benefits of the medium of class action are received by small shareholders, the Tribunal must pass effective and timely decisions. The courts / tribunals also need to exercise at most caution in handling such cases to ensure effective functioning of the companies while safeguarding the interests of the minority shareholders.