AN ANALYSIS OF CLASS ACTION SUIT

Transcription

1 AN ANALYSIS OF CLASS ACTION SUIT Rajvansh Singh* Shreeansh Shahi** Rishabh Tiwari*** * 2nd BA year law student, National Law University Odisha ** 2nd BA year law student, National Law University Odisha *** 2nd BA year law student, National Law University Odisha INTRODUCTION The introduction of class action suit is one of the major changes, which took place in CA, Class action is a representative action in the form of suit by a large number of people bring a claim.the major objective behind this was to secure the interest of minority shareholder. Thus class action suit is expected to be a medicine for abusive and arbitrary conduct of the management of the company. Class action is Shareholder activism is a concept, which is new to India and still developing, which means that the shareholders of the company taking part actively in every aspect of the company. Generally, individual shareholders do not take legal action against the company because of certain reason, which may include lack of motivation, economically unaffordable for the individual or statutory hindrance. Thus, it is feasible, when a group of shareholders come together to take legal action against the company, which in simple word is know as class action suit. It is a process by which few people can sue for the benefit of large group. The concept of class action is not a new concept in India; it can be found in Code of Civil Procedure, 1908 in the form of representative suit and Public Interest Litigation, each one of them having their own limitation. The concept of class action suit came into picture in early 18 th century in United States. The history of Class Action Suit with respect in India can be traced to the Satyam case, but the statutory recognition was given in Companies Act, The shareholders were not able to claim as there was no provision under CA, This project explores the section 245 of CA, 2013 with depth analysis. Majority of the provision of companies act have been taken form US and UK and class 17 P a g e Journal on Contemporary Issues of Law [JCIL]

2 action suit is also one of them. Thus aims to compare the difference of class action suit present in India and US and highlights the lacunas. NEED FOR CLASS ACTION SUITS Facts: Satyam computer services limited was a leading company dealing in information, communication and technology. The clients of the company were spread in India as well as United States. The company was listed in NSE, BSE and New York Stock Exchange. A meeting of Satyam board was called to consider a proposal for acquisition of Maytas Properties and Maytas Infra Limited. The family of the promoter held 30 % share of the Maytas firm and thus it was a related party transaction. Shareholders of the company were against the decision and the price of the share felt down. In the meantime Mr.Ramalinga Raju, the chairman admitted of financial mismanagement and Maytas deal was to cover for it. Satyam board withdraws its decision to acquire Matyas firm. It was discovered that Matyas acquisition was to carry to manipulate past financial fraud that is Satyam was inflating profit. Thus, the price of the share felt to from with in the span of two month. As a result, the shareholders of company suffered a huge loss. A group of investor approached National Consumer Dispute Redresssal Commission and Supreme Court but it was rejected, as there was no law to deal with it. Indian shareholder along with Midas touch also filed petition before NCDRC but the claim was rejected and said, We do not have the infrastructure to deal with such kind of petition CBI and CLB (are) already seized with the matter. When the appeal was made before Supreme Court, the decision was same. Also, Prince Water Coopers India failed to detect the fraud of financial accounts. Also, Satyam would have given incentive to PWC India to get the required treatment. Fake customer identities, false invoice 1 were created to inflate the revenue amount. Also, the board resolution was molded and loans were issued by illegal means. Even the money, which was received from the American Depository Receipts were not shown in the balance sheet. PWC India overlooked 1.4 billion dollar, 1 Madan Lal Bhasin, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited [2013] OJA P a g e Journal on Contemporary Issues of Law [JCIL]

3 which was claimed by the company to be in its balance sheet as non- interest bearing. This conduct of PWC raised question as to whether it was involved in the scam. 2 Issue: As PWC and Satyam computer held that India is the place, where the case should be heard and claimed for forum non conveniens. Therefore the issue arose whether India was a suitable for a for investor Class Action, and whether laws in India can deal with such a measure Judgement: It was held that India was not suitable for Class Action Suit because of the following reasons Class Action Litigation was not possible in India due to provision listed in SEBI Act, 1992 and Securities and Contract Act, There was no scope of representative Suit. Representative suit is just a procedural remedy given under CPC. There is no right to sue, when there is a bar provided by a statue. In case representative suit was valid, a new problem of enforceability of award came into picture. A investor, who is not a party how will he / she get the claim enforceable. The judicial body of India, itself has rejected the claims of investor, as there was lack of provision to deal with such issues. Whereas, in United States, a sum of 125 million dollar was paid compensation by Mahindra Satyam to united state investor. 3 Tech Mahindra, which overtook Satyam, was directed to settle all pending litigation with the investor, who had claimed loss because of depreciation in the value of share. 4 BEFORE: CLASS ACTION SUIT When the provision of Class Action Suit was not there, the grievance redressal mechanism, which could be used by the shareholder were: 1) A suit against the company for oppression and mismanagement 5 2) a suit for derivate action the management of the company 6 3) A suit under Order 1 Rule 8 of CPC. The suit, which is made under oppression and mismanagement, provide 2 Varottil Umakanth, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance Hastings Business Law Journal, Vol. 6, No. 2, p ArjyaMajumdar, Class action suit Genesis, Analysis and Comparison [2014] HNLUJ Minny Narang & Gunjan Jain, Class Action Suits, a Measure of Progressive Activism in India [2013] IJR, 49-51, 5 Companies Act 2013, s Nagappa Chettiar v. The Madras Race Club (1949) 1 MLJ P a g e Journal on Contemporary Issues of Law [JCIL]

4 for substantive right to the shareholder whereas class action is only procedural means for substantive relief. Thus, shareholders were left with no option of provision under which they can claim. Indian civil courts have no authority over cases where the statute bars their jurisdiction and it was held in Kesha appliance v. Royal Holding Services Ltd that Indian securities law is one of the area in which civil courts have no jurisdiction and is barred by SEBI. The money collected through penalty will be deposited in consolidated fund of India. This result in double burden on the company, which commits. CLASS ACTION SUITS A COMPARISION OF USA AND INDIA Class Action Suits in USA This theory for the first time got its inception in the Federal Rules of Civil Procedure of the USA under Rule 23 in The prerequisites for class action suits are: The whole of the class is in itself is so large that joinder of every members is not possible; Then there are some question of laws and facts common for the classes; If claim and defenses of the said parties are of the claim and defenses of the classes; Can the parties that are representing will be properly able to protect the interests of the class. Later, the Federal Jurisdiction was increased by upon many class action lawsuits by the introduction of Class Action Fairness Act of There are various reasons due to which class action suits related to a company arises like when - a company breaches the employment terms, is involved in unfair labor practices, affairs of the company are mismanaged etc 8. There has been such a large growth in USA of these kind of lawsuits that many firms are now specialized in class action law suits. The lawyers that represent the class are called Contingency lawyers and based upon how well they perform and the outcome of the case, they charge their fees 9. 7 Kesha appliance v. Royal Holding Services Ltd 2006 (1) BomCR 'Class Action' (LII / Legal Information Institute, 2018) < accessed 20 February 'Class Action Suits' (Lawyersclubindia, 2018) < asp> accessed 20 February P a g e Journal on Contemporary Issues of Law [JCIL]

5 As has been already discussed above that shareholders are involved in various claims. These claims are generally involved around the violation of rules made by the Securities Exchange Commission and to be specific, around the violation of Rule 10b-5 which provides that: It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, a. To employ any device, scheme, or artifice to defraud, b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. In the case of Dura Pharmaceuticals V. Broudo 10, it was held by the Supreme Court of the USA, that a case can be established under Rule 10b-5 only if the Plaintiff pleads that: The defendant has made material representation. The sale or purchase of the securities is connected with misrepresentation. He or they relied on the misrepresentation Scienter. But the above rule is criticized for not providing adequate compensation and necessary deterrence. Also Private Securities Litigation Reform Act, 1995 has unnecessary procedures, which result in becoming a hurdle for cases that come under the ambit of Rule 10b In Europe 12, class action suits can only be brought by consumer associations and not by any individual, as their main objective is to delimit the ambition of companies. 10 'Dura Pharmaceuticals, Inc. V. Michael BroudoCasebriefs' (Casebriefs.com, 2018) < accessed 20 February 'Lawsuits, Legal News & Issues, Lawsuit Settlements, Class Action Lawsuits' (Lawyersandsettlements.com, 2018) < accessed 20 February 'Google Books' (Books.google.co.in, 2018) < accessed 20 February P a g e Journal on Contemporary Issues of Law [JCIL]

6 UNDER INDIAN LAW In India the company law gives a lot of importance to the minority shareholders for protecting their rights against the mismanagement and oppression of the company and at the same time it follows a very important rule which was laid down in the case of Foss V. Harbottle 13 which states that majority should be given more importance than minority. Also recent amendments can be considered as a positive step towards making the company accountable in case of violation by it. Order 1 rule 8 of the Civil Procedure Code 14 provides that when a large body of people are against the same party then they will be able to bring action as a group and one of them or several of them will be allowed to act as a representative of that group. But parties generally refrain from exercising their claim under this provision because of the long and hassling procedure. Therefore a need for a more pragmatic provision was felt particularly during the Satyam case where the American investors were able to receive back their money because of a strong framework for class action suits in the United States of America whereas the Indian investors were left with nothing but to follow the same old lengthy procedure as discussed above. Then the J.J Irani Committee established for the company law while talking about class action suits said that: In case of fraud on the minority by wrongdoers, who are in control and prevent the company itself bringing an action in its own name, derivative actions in respect of such wrong non-rectifiable decisions have been allowed by courts. Such derivative actions are brought out by shareholder(s) on behalf of the company, and not in their personal capacity (ies), in respect of wrong done to the company. Similarly the principles of Class/Representative Action by one shareholder on behalf of one or more of the shareholders of the same kind have been allowed by courts on the grounds of persons having same locus standi 'Foss V Harbottle Rule: Defined And Explained - Gilesfiles' (GilesFiles, 2018) < accessed 20 February 'Code Of Civil Procedure, 1908 Bare Acts Law Library Advocatekhoj' (Advocatekhoj.com, 2018) < accessed 20 February Researchersclub V, 'JJ IRANI COMMITTEE: A COMMENT' (RESEARCHERS CLUB, 2018) < accessed 20 February P a g e Journal on Contemporary Issues of Law [JCIL]

7 It also said that although the courts have upheld these principles from time to time but they should be expressly brought down in law. The Company Law Bill, provided that: (1) Any one or more members or class of members or one or more creditors or any class of creditors may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or creditors, file an application before the Tribunal on behalf of the members and creditors for seeking all or any of the following orders, namely:- (a) To restrain the company from committing an act which is ultra vires the articles or memorandum of the company; (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 misstatement to the members or creditors; (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. (2) Any order passed by the Tribunal shall be binding on the company and all its members and creditors. (3) Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both. 16 'PRS Bill Track The Companies Bill, 2009' (Prsindia.org, 2018) < accessed 20 February P a g e Journal on Contemporary Issues of Law [JCIL]

8 The above stated provision though provided for bringing the class action suits by the creditors and the depositors but it failed to address some major issues such as these actions will be funded, how the claim will be distributed among the class members, compensation that is to be given to the creditors and the shareholders. In an affirmative step, Securities Exchange Board of Regulations 17 was notified by the SEBI in 2009 which established an education and investor protection fund for helping the investor s associations which have been recognized by SEBI to pursue legal proceedings for the investors involving securities which are either listed or have been proposed to be listed but it is to be subject to the limitations that have been laid down by the said regulation. Moreover, some guidelines have been given for the funding of the NGO s to pursue class action suits under the Companies Act , and in particular under section 250C. Under section 245, of the new company law it has been provided that any member or any number of members or as it has been provided under sub section (2) of the section, if they think that the management of the company has been conducted in such a manner that they are against the interests of the members of the company they can file an application for getting all or any of the following orders- (a) To control the organization from conferring a demonstration which is ultra vires the memorandum or articles of the organization; (b) To control the organization from conferring rupture of any arrangement of the organization's notice or articles; (c) To proclaim a determination adjusting the update or articles of the organization as void if the determination was passed by concealment of material certainties or got error to the individual s contributors; (d) To limit the organization and its executives from following up on such determination; 17 Staff I, 'Securities And Exchange Board Of India - SEBI' (Investopedia, 2018) < accessed 20 February 'The Companies Act, 1956' (Indiankanoon.org, 2018) < accessed 20 February P a g e Journal on Contemporary Issues of Law [JCIL]

9 GAPS IN THE PROVISIONS OF CLASS ACTION SUITS Provisions under the companies act, 2013 The provision governing class action suits under the Act is Section 245. The substantive provision reads: Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they 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, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders Overlapping of provisions As per Section 245(1) read with Section 245(3), a Class Action Suit may be filed by: (3) (i) The requisite number of members provided in sub-section (1)shall be as under: (a) in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares; (b) in the case of company not having a share capital, not less than one- fifth of the total numbers of its members. (ii) The requisite number of depositors provided in sub-section (1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed. In the opinion of the author, as far as depositors are concerned, the Act does not provide any definition of the same. Even though, a definition of deposits is available, the same is not very helpful in determining who are depositors. The Ministry of Corporate Affairs has passed Companies (Acceptance of Deposits) Rules 2013, under which a depositor is defined as: 25 P a g e Journal on Contemporary Issues of Law [JCIL]

10 I. Any member of the company who has made a deposit with the company in accordance with sub-section (2) of Section 73 of the Act; or II. Any person who has made a deposit with a public company in accordance with section 76 of the Act. This is a circuitous definition and brings us back to the Act itself. Further, in the context of class action suits by depositors, it is observed that there is an overlap between Section 754 and Section 245 (1) (g) (i). The former provides for damages for fraud and the latter for damages, compensation or any other suitable action against 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. Thus, there is possibility of duplicity of suits on the same cause of action. Further, the Act does not provide any remedy to other stakeholders under the provision for class action. Thus, creditors, consumers, employees etc. cannot organize themselves as a group and demand for compensation or damages from the company. In the USA however, the different stakeholders too can file class action suits against incumbent companies. 19 Distribution of damages and compensation Under Section 245(1) (g), class action suits can be filed for claiming damages or compensation for certain acts or omissions of directors, auditors, consultant or any other person. Although this is a noble endeavor, the problem lies in the fact that the Act does not provide how these damages and compensations will be distributed amongst the claimants. As far as members are concerned, some may claim to have suffered more injury due to the high percentage of their holdings in comparison to the others. There is no guideline in the Act that would help the Tribunal to determine how to distribute the monetary rewards. Further, it has been noted in various class action suits that that victims receive no compensation or benefits for their association. Sometimes it is felt that the compensation awarded may have been greater if an individual rather than a group pursued the case. A possible solution to the same could be coming out with a formula that would divide the damages and compensation on the basis of the shareholdings of the aggrieved parties. This would ensure an 26 P a g e Journal on Contemporary Issues of Law [JCIL]

11 equitable distribution of damages is made and each member is compensated in proportion to her holding. Wide application Amongst the orders which can be sought in a proceeding under Section 245(1)(g) as follows: To claim damages or compensation or demand any other suitable action from or against (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 In the opinion of the author, this casts a very wide net on the persons who can be implicated in a class action suit. Common sense does not allow one to say that any other person would mean any person even remotely related to the impugned action. However, the Act does not make it clear what could be a possible cause of action in case such a person is made a defendant. Other problems Unscrupulous Minority Shareholders Such actions are open for misuse by unscrupulous minority shareholders in furtherance of their vested interest thereby hampering the efficacy of the entire corporate and legal system of a country. At 100, the Act sets a low limit for the number of people required for a class action suit. This number can even reduce, if the percentages required to be set by the Act itself, lower the number of shareholders. Thus, very few shareholders could join hands, and seek judicial remedy in the form of class action, even though the transaction might actually be beneficial for the company as a whole. Contingency model In the US, plaintiff law firms work on a contingency model, where they take no fees upfront and usually collect a third of the settlement amount. In India, the Bar Council prohibits a contingency model. It is therefore, unlikely that law firms would have any incentives to fight cases. 27 P a g e Journal on Contemporary Issues of Law [JCIL]

12 Class Action versus oppression and mismanagement The investors of an organization can likewise benefit a remedy under Section 241 (Application to Tribunal for relief in instances of mistreatment and so on.) of the Companies Act, which permits help in situations where the undertakings of the organization have been directed in a way biased to public interest or harsh to some other member or in a way biased to the interest of the organization. However, Section 241 limits its assurance to the investors of an organization, while Section 245 likewise incorporates depositors in its domain. In spite of the fact that, when compared with Section 245, the extent of remedies accessible under Section 241 is considerably more extensive, (for example order of purchase of shares by any members by any part, limitations on exchange or allocation, end or adjustment of an agreement, evacuation or arrangement of director and so forth.), Section 245 is significantly more liberal with a award for harms and remuneration to the candidates. Any request made under Section 245 is in nature of rem and is restricting even on those individuals or investors who are not party to the application instead of a request of oppression and mismanagement which is just authoritative on the parties to the application. While a Class Action can be invoked if there should be an occurrence of any demonstration biased to the interest of the individuals, the investors or the organization; on the off chance thatof mistreatment and administration, public interest additionally considered. 20 The Companies Act has furnished the investors with solid weapons as Section 241 to Section 245 which can be utilized to make the reprobate officers responsible for their choices and for implementation of the corporate law. In wake of this new strengthening of the partners, the corporate officers should turn out to be more reasonable with their activities to secure themselves against a Class Action. The idea of class action is at an extremely beginning stage in India. The idea is yet to be advanced and adjusted according to the functional application and the changing business sector patterns. Albeit different remedies under the Companies Act have plenty of precedents of reference to direct the applicants, India is yet to build up its own library of judgments to depend on, with the end goal of Class Action. One may need to allude the judgments of foreign nations on this idea for some direction till that time. 28 P a g e Journal on Contemporary Issues of Law [JCIL]

13 CONCLUSION The provision of class action suit makes sure that the management of the company prioritize the interest of shareholder. Before CA, 2013 there was no judicial recourse to a condition like Satyam. Under the virtue of this section, small shareholder can claim their investment, if the management act arbitrarily and against the interest of shareholder. However, such a provision can be used with a mala fide intention by the shareholders. Thus, courts should make sure that the suit brought under this provision is in good faith and should have a good possibility of success. Apart from this to make class action suit a successful one, a lot of change needs to be made in securities law, mostly in price manipulation and insider training. Although class action suit marks for the uplifting the rights of small shareholder, but we should not forget that our judiciary is very slow in giving decision, which again leads to the harassment of shareholders. Thus, Parliament and Ministry of Corporate Affair need to take certain steps to refine and further improve the provision to make it more and more and effective. 29 P a g e Journal on Contemporary Issues of Law [JCIL]