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Class Action Suit

A class action lawsuit, also known as class suit or representative action, is a type of lawsuit filed on behalf of a group of persons, who are represented collectively by a member of that group, generally called a “lead plaintiff”, against a defendant or a number of defendants. This suit differs from a traditional lawsuit, where one party sues another party, and all the parties are required to be present in the Court.

It is believed that the concept of class action or group litigation originated in England in 1200s. However, by the 1850s, the concept was almost dead in England. In the 1800s, the concept of class action surfaced in the USA, and continues to be a predominant USA concept. Over the years, several countries have provided for class actions, mostly to allow consumer organisations to bring claims on behalf of consumers.

In India, the need for having a provision of class action in company law was felt after the Satyam scam in 2009. While Satyam investors in the USA successfully claimed damages, the investors in India were not so lucky, primarily due to the lack of a provision relating to class actions.

A class action suit has some pre-requisites –

  • There should be a representative, who can represent the interests of all the members of the class, and who is typical of the class members.
  • There should be a prescribed number of persons as per law in the class, who can collectively file the suit.
  • There should be a commonality among the class of persons.
  • Claims of the persons should be similar to those of everyone else in the class.
  • The class/ representative must fairly and adequately represent the interests of the absent class members.

The relevant provisions relating to class action suits in the Companies Act, 2013 were notified in June, 2016. As per this provision, members/ depositors of a company can file a class action suit if they feel that the management or the 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. The number of members required to file a class action suit, in the case of a company having a share capital is not less than 100, or not less than a prescribed percentage of the total number of members (whichever is less), or any member(s) holding not less than a prescribed percentage of the share capital of the company. In the case of a company not having a share capital, the prescribed number of members are not less than one-fifth of the total number of members. In the case of depositors, not less than 100 depositors or not less than such percentage of the total number of depositors as may be prescribed (whichever is less), or any depositor(s) to whom the company owes such percentage of total deposits of the company as may be prescribed. The suit can be filed with the NCLT, against a company, its directors, auditors, including audit firm, and advisor or consultant, in case the actions taken by them are against the interests of the company. The term “interests of the company” as per the Companies Act, 2013, can cover a very wide range of items, and the judges’ interpretation in these cases would determine what could be included in this definition. Also, the section relating to class action suits does not extend to banking companies.

Even before this provision was introduced in the Companies Act, 2013, some other statutes in India allowed for similar suits. These are –

  1. Code of Civil Procedure, 1908 – It states that several persons can come together to file a claim when they have a common grievance or same interest in the suit. Apart from a common interest or similar grievance, they should be looking for similar relief.
  2. Competition Act, 2002 – It states that a class of people can file a litigation in the event of an anti-competitive activity.
  3. Consumer Protection Act, 2019 – The Central Consumer Protection Authority has the power to initiate class actions suit on behalf of the consumers. A preliminary subjective inquiry would be done by the Authority before initiating the suit.
  4. Public Interest Litigation (PIL) – It refers to litigation undertaken to secure public interest, and to promote justice for socially-disadvantaged parties. It is filed against a State or any public authority. Public interest cases may arise from private law matters too, and may not necessarily be against the Government alone (Government would be one of the parties, with a private party being the other respondent).

Some of the obvious advantages of a class action suit are –

  • It helps in aggregating a large number of individual claims into one representational lawsuit.
  • It helps in increasing the efficiency of the legal process.
  • It helps in lowering the cost of litigation for individual claimants.

However, some of the limitations of such suits, in India are –

  • Unlike in the countries such as the USA, India does not have the concept of third-party funding, which helps in financing such suits.
  • Concept of contingency fee is not common in India, wherein the client is not charged a legal fee, but a fixed success fee.
  • Banks have been kept out of the purview of class actions under the Companies Act, 2013. The need for exempting a sector is not clear.
  • As per the Companies Act, 2013, only certain classes of persons can file a class action suit. Other parties such as creditors, debenture holders and other stakeholders of the company, who may also have suffered, cannot use this as remedy.

India has not seen its first class action suit as of now. With increasing shareholder activism, it is felt that the day is not far. Companies must ensure that the Directors and Officers (D&O) liability insurance policies specifically cover class actions.

Prerna Mohan