Genesis, Analysis and Comparison of Class Action Suits

Sukrit Katriar, Nisha Bharti

ABSTRACT

In the early 18th century, the idea of a class action lawsuit first appeared in the United States of America. As more parties filed lawsuits under Rule 23 of the United States Federal Rules of Civil Procedure for a variety of allegations, including corporate fraud and delayed flights, the popularity of this legal strategy increased.

Following the failure of Satyam Computer Services Limited, Clause 217, which grants members or creditors the right to submit an application to the NCLT on behalf of all members or creditors in the event that the management of the company was acting in a way that was harmful to those parties’ interests, gained more significance as a redressal mechanism distinct from the customary oppression and mismanagement procedures. The Companies Act of 2013 adopted this clause as Section 245 of its text.

Section 245 has received little scholarly discussion, mostly because it is unknown on Indian soil. However, a thorough analysis of this clause is required in order to identify any flaws and, if necessary, propose modifications.

Three major sections make up this chapter. The first section gives a quick history of class action lawsuits in India and briefly summarises what happened to Satyam in December 2008. The second section lists the shortcomings and errors in the aforementioned provision and examines how shareholders and creditors can abuse it. The final section offers suggestions on how to make India’s law governing class action lawsuits effective and efficient.

A settlement of $125 million from Satyam and $25.5 million from PwC46 protected the interests of their counterparts in the United States, but Indian stockholders and investors suffered because there was no provision for class action lawsuits. The discrepancy between how Indian and American, Satyam security holders were treated rekindled the Ministry of Corporate Affairs’ interest in class action lawsuits. The incapacity of shareholders and creditors to hold the auditors accountable was also incorporated into Section 245.

A. INTRODUCTION

The Companies Act, 2013, in its final form, modifies the 1956 version in a number of ways. The majority of these modifications either amend existing substantive or procedural requirements as required.³ Rarely, revisions are made that introduce ideas, procedures, or rights that were absent from the 1956⁴ version. One of them is the ability of a group of shareholders or depositors to bring and maintain a lawsuit on behalf of a class of claims.

The introduction of Section 245 of the 2013 Companies Act, which grants shareholders and security holders the ability to bring class action lawsuits, is examined in this essay. The idea of class action lawsuits in its current form was also influenced by analogous provisions in these countries⁵, much like other aspects of business law that have been imported from the United Kingdom or the United States. We’ll start by looking at the history of class action lawsuits, not just in the UK and the US but also in relation to Indian public interest litigation legislation. The events that led to the introduction of class action lawsuits in the Companies Act of 2013 will also be covered in this paper, which will be followed by a thorough analysis of the provision. Last but not least, a comparison with equivalent provisions in the United States would provide a description of the section’s shortcomings. As a conclusion, it would also be proposed to sketch up a potential road map for class action lawsuits in India.

B. GENESIS OF CLASS ACTION SUITS

One could argue that a class action lawsuit is fundamentally just a modified form of public interest litigation. Emperor Jahangir might be responsible for the creation of public interest lawsuits. He writes about his famed Zanjir-e-adl, a gold chain that hung in his courtyard, in the Tuzak-e- Jahangiri, his autobiography. Jahangir would show up and personally decide the dispute after supplicants tugged on the chain and a bell rang in the emperor’s apartment⁶.

In more recent years, the ‘jurisprudence of the masses’ first appeared in the early 1980s.⁷. Public interest litigation focuses on the idea that social justice and citizen rights are inextricably linked, and that it is only through enforcing these rights that justice can be served to the “have nots.” This is made possible if the courts creatively interpret the law, breaking from the established Anglo-Saxon jurisprudential standards for the administration of justice⁸.

Of course, with public interest litigation cases, there is still the issue of whether the claimant was injured and if the claimant has a legitimate basis for asking for reparations or damages. A person who has been unfairly denied something, refused something,⁹ or had his title to something improperly altered must have experienced some sort of legal grievance in order to be considered an aggrieved party. To address this, the Supreme Court has recently embraced a more liberal interpretation of the notion of locus standi. The Supreme Court determined in the Fertiliser Corporation Case¹⁰ and S.P. Gupta v. Union of India that the traditional approach taken by the Courts required redefinition and that “… whenever there is a public wrong or public injury caused by an act or omission of the State or a public authority which is contrary to the Constitution or the law, any member of the public acting bona fide and having sufficient interest can maintain an action for the redressal of such public wrong or public injury”¹¹.

The mainstay of class action lawsuits continues to be the promotion of a system through which many “have-nots” may seek compensation from the “haves” as a result of an accident or damage inflicted. However, because class action lawsuits are by their very nature diluted, as we will demonstrate in the coming sections, the need of locus standi.

The class action lawsuit was a “Invention of Equity”¹²that resulted from the United Kingdom’s Bill of Peace¹³, which permitted English courts to combine many claims pertaining to the same cause of action into a single judicial procedure¹⁴. The following are the two main justifications for the use of the class action tool: (1) Multiple actions are avoided, time and effort are saved as a large and unmanageable number of people club and join their grievances in a single suit; and (2) Law provides a right to seek redress against the wrongs that are not worth pursuing individually¹⁵.

These justifications have their origins in a situation where each member of the multitude had common legal and factual interests with every other member. Having all parties involved in a single chancery suit and resolving all issues at once was significantly more cost-effective¹⁶. The appropriateness of the case was the Chancery Court’s first priority. However, as the representative of the group is supposed to represent the interests of all, it was realised that the relationship between the represented and the representative was crucial¹⁷. Lord Eldon encouraged and established the class action doctrine in the Cockburn v. Thompson¹⁸case. The American doctrine of class action lawsuits developed¹⁹ along similar lines.

In the early 18th century, the idea of a class action lawsuit first appeared in the United States of America. As more parties filed lawsuits under Rule 23 of the United States Federal Rules of Civil Procedure for a variety of allegations, including corporate fraud and delayed flights, the popularity of this legal strategy increased. The 1966 amendment changed the way class action practise and litigation were viewed, which called for much-needed scholarly research.

The Dr. Jamshed J. Irani Report (2005)²⁰ was the document that first supported the idea of class action lawsuits in India. The study claims that courts have permitted derivative lawsuits in regard to such incorrect non-ratifiable judgements in cases of fraud on the minority by wrongdoers who are in charge and prohibit the company itself from filing an action in its own name. Such derivative actions are initiated by shareholder(s) in response to wrongdoing against the corporation, and not in their individual capacity(s).

On the basis of people possessing the same locus standi, courts have similarly permitted the principle of “Class/Representative Action” by one shareholder on behalf of one or more shareholders of the same kind. Despite the fact that courts have frequently upheld these ideas, the law has not yet caught up with them. The importance of recognizing these ideas was emphasised in the study.

The Companies Act of 2013 (which replaced the earlier Act of 1956) introduced such a clause with the primary goals of providing protection for small owners, imposing greater accountability on auditors, and preventing potential corporate fraud and scams. The Ministry of Corporate Affairs’ justification for including this clause was to ensure that “the shareholder feels like a king” in situations like managerial remuneration²¹.

The events that followed Mr. Ramalinga Raju’s confession on January 7, 2009, however, brought the urgent necessity for India to enact a class action process into stark relief. We shall now talk about the problems with financial misconduct and fraud at Satyam Computer Services Limited that gave rise to the 2013 Companies Act’s Section 245 inclusion.

C. THE SATYAM DEBACLE – NEED FOR CLASS ACTION SUITS

Following a string of occurrences involving Satyam Computer Services Limited, it became necessary to include a clause enabling for class action lawsuits. Leading information, communications, and technology (ICT) company Satyam Computer Services Limited (now merged with Tech Mahindra) offered first-rate business consulting, information technology, and communication services²². The United States hosted a sizable number of its clients²³. The New York Stock Exchange, the National Stock Exchange, and the Bombay Stock Exchange all listed it.

A Satyam board meeting was convened in December 2008 to discuss a proposal to buy Maytas Properties Limited and Maytas Infra Limited. It should be emphasised that because this acquisition involved connected parties, a majority vote was required to approve it.²⁴More than 30% of the shares in both businesses were owned by the promoter family. Real estate was a separate industry from Satyam’s that was pursued by both Maytas companies. Furthermore, because the Raju family held more than 30% of the shares in both companies, this transaction included a related party.

Despite several reservations voiced by the independent directors during the meeting, the resolution was adopted without dissent²⁵. The Satyam shareholders, however, rejected this board decision, and the company’s stock price quickly fell²⁶. The Board of Directors then set a meeting for January 10, 2009 to discuss (i) enhancing the Company’s governance structure, (ii) reviewing the Company’s strategic options to increase shareholder value, and (iii) addressing concerns resulting from a potential dilution in the Promoters stake²⁷.

However, on January 7, 2009, Mr. Ramalinga Raju, the company’s then chairman, admitted to financial mismanagement and using the “Maytas scheme” to try to hide it²⁸. Even though the Satyam board was forced to reverse its intention to buy the Maytas’ companies, it was later discovered that the Maytas purchases had been made in order to influence prior financial deception by Satyam. By displaying phoney assets, Satyam had been inflating revenues for years.²⁹ A significant loss in shareholder wealth³⁰ resulted from the share price of Satyam dropping from Rs 304.80 on the 31st of November 2008 to Rs 54.05 on the 31st of January 2009.

The SEBI Act 1992, the SEBI (Prohibition of Fraud and Unfair Trade Practises) Regulations 2003, and the SEBI (Prohibition of Insider Trading) Regulations 1992 all provided the legal framework for the prosecution of the promoters, certain board members, and other key managerial personnel; however, these prosecutions only aimed to enforce the existing criminal provisions within the scope of Indian securities law³¹. There were no provisions in place to make up for lost share value for shareholders.

A number of investors sought relief for this loss of share value and went to the Supreme Court of India and the National Consumer Disputes Redressal Commission, but their claims were denied since there was no statute in place that permitted recovery of shareholding value in such circumstances.³². Indian shareholders attempted to obtain financial relief before the National Consumer Disputes Redressal Commission (NCDRC), but were unsuccessful. The NCDRC rejected their claim on the grounds that “We do not have the infrastructure to deal with such a kind of petition […] CBI and CLB (are) already seized with the matter”³³. The Indian Supreme Court declined to overrule this decision even after an appeal.³⁴

The company³⁵, however, was required to pay $125 million to holders of American Depository Receipts (ADRs) registered on the NYSE. Mahindra Satyam settled the In re Satyam Computer Services Ltd. Securities Litigation³⁶ by paying $125 million to American investors who held ADRs after the company’s former promoters admitted to defrauding investors. After acquiring Satyam, Tech Mahindra was compelled to pay any ongoing legal disputes with numerous investors who had asserted damages as a result of the company’s shares falling sharply on the stock exchanges³⁷.

Furthermore, Price Waterhouse Coopers India, Satyam’s auditors, significantly failed to uncover the fraud and financial account manipulation³⁸. Due to intense competition among auditors to gain and hold onto market share, particularly with high-income clients, auditors would accept the assertions of their clients at face value without conducting even the most basic tests, much like in the case of Enron and its auditors Arthur Andersen³⁹. Furthermore, the fact that Satyam was a large source of income for PWC India may have provided the managers with strong incentives to provide Satyam with the accounting treatment it desired⁴⁰. The global head of internal audit fabricated fictitious client names and fictitious invoices to increase the revenue amount⁴¹. The deception went so far as to prevent the cash from the American Depository Receipts from even appearing on the balance sheet⁴². Other methods used to commit the fraud included fabricating board resolutions and procuring loans for the company through illicit ways. The most problematic thing was that, despite being Satyam’s auditors from 2000 until 2009 (when the scam was uncovered), they failed to test or verify the brazen $1.04 billion that Satyam claimed to have on its balance sheet in “non-interest bearing” deposits⁴³. Since Satyam paid PWC twice as much as the other firms in this scheme, it has been questioned whether PWC was involved. The bogus sources of income that Satyam generated were never even recognised as fraud by the auditors.

Despite this, Satyam’s auditors, expert advisors, and other professionals were mostly unaffected because they could not be held responsible for the financial misstatements in the books of accounts. Under the previous Companies Act of 1956, companies hired auditors and shareholders had no direct contact with them. As a result, Indian stockholders were unable to bring a claim against Satyam’s auditors.

The ADR holders of Satyam, on the other hand, added PWC as a defendant to a class action lawsuit⁴⁴. The PWC arguments included the claim that India was the best place to bring a class action lawsuit, which sparked much discussion about whether or not India was the best place for foreign investors⁴⁵. The argument that Order 1 Rule 8 of the Civil Procedure Code, 1908⁴⁶, which permits plaintiffs having identical interests to file a single representative suit, has received support. According to this clause, the Court must make sure that all class members’ interests are safeguarded and that the same review process that is used in individual lawsuits is followed. It could be claimed that this rule is broad enough to cover the class action lawsuit brought by American foreign investors against Satyam⁴⁷.

A settlement of $125 million from Satyam and $25.5 million from PwC⁴⁸ protected the interests of their counterparts in the United States, but Indian stockholders and investors suffered because there was no provision for class action lawsuits. The discrepancy between how Indian and American Satyam security holders were treated rekindled the Ministry of Corporate Affairs’ interest in class action lawsuits. The incapacity of shareholders and creditors to hold the auditors accountable was also incorporated into Section 245.

D. SECTION 245 – OVERVIEW AND ANALYSIS

D.1 – 245. Of Companies Act 2013

(1) 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, 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 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.

(2) Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

(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 a company not having a share capital, not less than one-fifth of the total number 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.

(4) In considering an application under sub-section (1), the Tribunal shall take into account, in particular—

(a) whether the member or depositor is acting in good faith in making the application for seeking an order;

(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of sub-section (1);

(c) whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;

(d) any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;

(e) where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—

(i) authorised by the company before it occurs; or

(ii) ratified by the company after it occurs;

(f) where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

(5) If an application filed under sub-section (1) is admitted, then the Tribunal shall have regard to the following, namely:—

(a) public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed;

(b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side;

(c) two class action applications for the same cause of action shall not be allowed;

(d) the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.

(6) Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.

(7) 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.

(8) Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

(9) Nothing contained in this section shall apply to a banking company.

(10) Subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1).

D.2 – We shall now proceed to analyze the individual aspects of Section 245.

The addition of Section 245 to the Companies Act of 2013 allows a member of the company to file a lawsuit against the company along the same lines as Section 241, which addresses exploitation and poor management.

Under Section 241 of the Companies Act of 2013, a member may file a lawsuit for oppression and mismanagement if one of the following conditions is met:

(a) the company’s affairs have been or are being conducted in a way that is harmful to the public interest, the company’s interests, or is oppressive to him or other shareholders; or

(b) there has been a material change in the management or control of the company due to a change in the Board of Directors, manager, or manager’s.

The clauses in Section 241 are the same as those in Sections 397 and 398 of the previous Companies Act of 1956. The import of these provisions is, however, slightly altered by Section 245 of the 2013 Companies Act. After the prejudicial act has been committed against the members or the firm, a claim may be lodged under Section 241 of the Companies Act, 2013.

However, Section 245 grants shareholders and depositors three different types of rights, as follows:

– To enjoin the company or its board of directors;

– To declare a company decision that altered the MoA or the AoA as void

– To demand compensation.

Section 245 allows for anticipatory proceedings for restraint, although Section 241 does not. A company or its board of directors may be prohibited from acting in the following ways: violating the company’s articles of incorporation or memorandum; acting on a resolution passed while concealing material information or misleading the shareholders and creditors; violating the provisions of the Companies Act, 2013, or any other law currently in effect; and acting in violation of any resolution passed.

Additionally, Section 245 gives the right to challenge a decision adopted by the firm that was reached through the omission of crucial information or through false statements. Finally, as a direct result of Satyam, the section now includes allows directors, auditors, and expert advisers to be compensated for actions, inactions, or conduct that is fraudulent in nature or likely to be so, incorrect, or illegal.

A class action lawsuit against a corporation, its directors, auditors, audit firm, any expert, or advisor may be brought under Section 245(1)(g) of the Companies Act, 2013, on the basis that the defendants made false or misleading statements or engaged in fraudulent behaviour. However, the lack of contractual privity between the directors, auditors, audit company, any expert, or advisor and the applicant shareholders or depositors presents several concerns. A contract exists not between the shareholders and such third parties, but rather between the company and the directors, auditors, audit firm, any expert, or advisor. Therefore, it is evident that the shareholder’s ability to bring a class action lawsuit is not constrained by a contract.

D.3 – Eligibility to file a class action suit

According to the Companies Act of 2013, in order to bring a class action lawsuit on behalf of shareholders, they must meet the following conditions:

(a) In a company with share capital, where not less than one hundred of its shareholders or not less than the prescribed percentage of the total number of its shareholders, whichever is smaller between them, or any shareholder or shareholders not holding less than the prescribed percentage of its issued share capital, provided that all applicants have fully paid up their shares;

(b) in the case of a company without share capital, not less than one-fifth of the total number of shareholders;

According to Section 245 (3) (ii), the number of depositors must be at least 100 or the prescribed percentage of all depositors, whichever is less. It also includes any depositor who the company owes the prescribed percentage of all deposits to.

It is crucial to remember that the Ministry of Corporate Affairs has not yet announced the guidelines governing class action lawsuits as of the publication date of this paper. According to Rule 16.1 of the Draught Companies Rules 2013, the number of shareholders in a company must be at least one hundred or not less than ten percent of all shareholders, whichever is less, or a shareholder or members who hold a minimum often percent of the issued share capital individually or jointly, provided that all applicants have fully paid up their shares.

The fact that only shareholders and deposit holders may bring a class action lawsuit is one of the most obvious flaws in this clause. Other stakeholders like creditors and employees are wholly left out. In its 57th Report on the firms Bill, 2011, the Standing Committee on Finance made the following recommendations: “It has been felt that creditors may not be given statutory power for class action since they can pursue their claims through contracts/agreements with borrow firms.

On the other hand, as depositors are primarily unsecured and lack any contractual rights, it is proposed that they be given the authority to bring class action lawsuits before the Tribunal.⁴⁹“

Although the provision only allows shareholders and depositors to pursue remedies under Section 245, the definition of a depositor appears to be somewhat ambiguous. In accordance with Section 31 of the 2013 Companies Act, “deposit” refers to any money received by a company as a deposit, loan, or in any other form, but excludes certain kinds of amount that may be defined in collaboration with the Reserve Bank of India. Although the RBI does allow some loans or advances to be classified as deposits, this is not entirely clear. But it’s still unclear whether a lender like that will be regarded as a depositor or not. Arguments that certain categories of amounts are excluded from the definition of “deposits” allow for a deviation from the rules outlined in Chapter IV (Acceptance of Deposits) may be made, but this does not prevent the concerned lender from pursuing remedies under Section 245 of the 2013 Companies Act.

Another apparent typographical error may be found in Section 245(1), which states that “such number of members, depositors, or any class of them, as the case may be, as are indicated in sub-section (2)…” In accordance with Section 245(2), “where the members or depositors seek any damages or compensation or demand any other appropriate action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful, or wrongful manner.”The minimum number of participants and depositors needed to file a class action lawsuit is provided by Section 245(3). As a result, Section 245(3), not Section 245(2), lists the necessary number as stated in Section 245(1).

D.4 – Directions to the NCLT as to the treatment of class action suits

The other provisions of the agreement forbid a firm from acting outside of its authority, against resolutions, or in accordance with resolutions that were approved with material information omitted or represented falsely. But a close reading of Section 245(1)(e) demonstrates the National Company Law Tribunal’s broad authority, which can displace the civil courts’

jurisdiction by establishing an express bar on it. According to Section 245(1)(e), class action lawsuits may be filed to enjoin a firm from acting in a manner that is against the terms of this Act or any other currently in effect statute.

Additionally, Section 245(4) instructs the NCLT to consider specific conditions related to the relevant facts. The NCLT must demonstrate that the applicant contacted the Tribunal in accordance with Section 245 in good faith and determine whether the claim truly qualifies for class action status or whether the applicant could have brought the claim individually. The NCLT must consider evidence showing that parties other than the company’s directors or officers were involved in the claim, as well as the opinions of the company’s members or depositors who have no direct or indirect personal stake in the outcome. The likelihood and majority of the thing in question being approved or authorised by the company⁵⁰ must also be taken into account by the NCLT.

D.5 – The procedure of a class action suit

The NCLT is required to follow the process outlined in section 245 (5), which outlines the requirements to meet before bringing a class action lawsuit. First, when the class action has been admitted, a public notice must be distributed to all class members in the manner specified. In accordance with Rule 16.2 of the Draught Companies Rules 2013, the notification must be published within seven days after the Tribunal’s admission of the application. Such publishing must occur at least once in a vernacular newspaper in the state where the company’s registered office is located. The publication must be in the primary vernacular language of that newspaper. Additionally, there must be at least one publication in an English newspaper that is available in that state. Additionally, the notification must be published on the websites of the company, the NCLT, the MCA, the relevant Registrar of Companies, and the stock market where the firm is listed (if applicable).

The public notice must include the following information:

(i) name of the lead applicant;

(ii) brief particulars of the grounds of application;

(iii) relief sought by such application;

(iv) statement to the effect that application has been made by the requisite number of members/depositors;

(v) statement to the effect that the application has been admitted by the Tribunal after considering the matters stated under sub-section (4) of section 245 and it is satisfied that the application may be admitted;

(vi) Informing other members or depositors that they can also join the applicant, if they so wish;

(vii) date and time of the hearing of the said application;

(viii) time within which any representation may be filed with the Tribunal on the application; and

(ix) such other particulars as the Tribunal thinks fit.

Interestingly, under the Draft Companies Rules, 2013, an application under Section 245 of the Companies Act, 2013 cannot be withdrawn without the leave of the Tribunal.

It is necessary to combine any related applications that have been submitted in any other jurisdiction into a single application. It should be possible for the class’s shareholders or depositors to choose the lead candidate. If the shareholders or depositors of the class cannot agree on the lead applicant’s nomination and there is a deadlock, the Tribunal shall have the authority to choose the lead applicant. The lead applicant will represent the applicants and be in charge of the proceedings. It is important to note that two class action lawsuits with the identical claim cannot be filed.

Additionally, the business or any such party liable for the cause of action shall bear any costs or expenditures incurred as a result of the application of the class action lawsuit.

D.6 – Penalties

Any corporation that disobeys an order issued under Section 245 is subject to a fine ranging from five lakh to twenty-five lakh rupees, according to the NCLT. Every officer of the corporation who is in default is also subject to penalties, which include imprisonment for a term of no more than three years and a fine of between Rs.25,000 and Rs.1 lakh. It is important to observe that the regulations for oppression and poor management of a firm do not include any such penalty.

D.7 – Other Miscellaneous Provisions

Applications under Section 245 that are frivolous or vexatious, as judged by the NCLT, will be dismissed and subject to costs, up to a maximum of one lakh rupees, in an effort to reduce superfluous litigation. The applicability of Section 245 does not extend to such banking firms because the phrase “depositors” includes all types of depositors, including retail customers. Additionally, procedures have been implemented to allow impacted shareholders and depositors to file lawsuits on their behalf. It is anticipated that shareholder rights organisations and unions will be crucial to Section 245’s implementation.

E. COMPARATIVE ANALYSIS WITH UNITED STATES RULES OF CIVIL PROCEDURE

Rule 23 of the Federal Rules of Civil Procedure, 1966, which gives plaintiffs a way to cooperate and pursue claims collectively in circumstances when individual claims will be improper or unsuitable, contains provisions relevant to class action lawsuits in the United States of America. It also provides a structure to protect the rights of all parties.⁵¹

It lays out the prerequisite requirements that must be met in order for the trial court to certify a class action.⁵² There are four requirements that stand out in this regard: (i) there must be a sizable number of class members; (ii) the lawsuit must concern a legal issue or a legal principle that applies to the entire class; (iii) the claims made by the class representative must be typical of the entire class; and (iv) the person acting as the class representative must fairly and adequately protect the interests of the class⁵³. However, it should be noted that under Rule 23(c)(5), the class may be further divided into sub-classes, with each sub-class having its own representative, if the interests of some of the class members differ from one another.⁵⁴

Before being accepted as a class action in the United States, a lawsuit must adhere to a set of standards. The court must decide whether the lawsuit can be maintained as a class action, in accordance with Rule 23(c), after the case is filed. This procedure is known as class certification. Before certifying a class action, the judge will consider a number of factors, including (i) whether the court finds that there is a legal or factual issue that the class as a whole share but that only affects a specific individual, (ii) whether the individual will be able to continue his claim without the class certification, (iii) whether the class action is superior to other available methods to achieve a just and efficient resolution of the case, etc. Any settlement reached by the parties must also be approved by the court. Class members frequently incur high costs as a result of these procedures.

The idea of “opting out” of a class action lawsuit was not addressed in Rule 23 prior to the Federal Rules of Civil Procedure being revised in 1966. The new change, however, made it clear that class action litigants would be able to “opt out” or be dismissed from the case.⁵⁵ In this case, a claimant might file the petition on behalf of all members without their consent, and only those who learn of the lawsuit would need to submit a form indicating that they do not want to take part in the proceedings.⁵⁶ In these situations, the attorneys have the authority to act on behalf of a sizable class of unidentified clients or class members with little to no consultation, but they are also under pressure to represent the class in a fair and effective manner.⁵⁷

Consequently, it can be seen that class actions are helpful and significant legal tools in the United States. When the individual damages sought are insufficient to justify initiating a lawsuit, a class action aids in bringing the plaintiffs’ interests together and making the litigation viable.⁵⁸

As stated in Section 245 of the United States Rules, the language of Rule 23 does not specify a specific threshold (100) for bringing a class action lawsuit. The United States provision additionally stipulates that a legal or factual issue must fundamentally be shared by the class; it specifically states that the preservation of the interests of the class is of utmost significance. ⁵⁹Injunctive and declaratory remedies with regard to the class is specifically covered under Rule 23. Additionally, it emphasizes the control of the person, numerous strategies for managing the class effectively, and the convenience or inconvenience of consolidating litigation in a single jurisdiction or forum.

It is important to note that section 245 of CA 2013 only permits publishing a public notice in the manner specified. There is no mention of the requirement for individual notification, which could lead to future difficulties. One cannot undervalue the value of an individual. The value of notice is significant in defining personal autonomy and choice, which must never be compromised. Do not undervalue the need of providing individual notice to all those who can be quickly and easily identified with reasonable effort in circumstances where there has been serious harm to individuals, even though the class is the only party involved in the litigation. Rule 23 also talks about the possibility of subclasses and each subclass be treated as a class. Such mention is completely absent in Section 245.

Similar to Indian law, American law requires that the court certify the class action in order to allow it. Following such certification, the class members are notified and offered the option to withdraw from the proceedings⁶⁰. The judgment⁶¹ will not be binding on those who choose to opt-out. The Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act, both passed by the US Congress in 1998, were created to prohibit any abuse of class action lawsuits based on securities laws. In order to address and correct some class action abuses without negatively impacting the beneficial function that class actions are exhibiting⁶², there is also the Class Action Fairness Act, 2005. The obvious lack of an opt-out provision in Section 245 creates the potential for coordination failure.

According to Regulation 5 (2) of the SEBI (Investor Protection and Education Fund) Regulations, 2009, the Investor Protection and Education Fund established by SEBI may, among other things, be used for aiding investors’ associations recognized by SEBI to undertake legal proceedings (not exceeding 75% of the total expenditure on legal proceedings) in the international court system⁶³. However, this regulation is plagued with its own set of issues, such as what types of class action lawsuits will fall into this category, what will be the basis for calculating and establishing the amount for numerous class action lawsuits, what will be the basis for calculating attorney fees, etc.

F. CONCLUSION

The Indian legislature made a bold move by allowing shareholders and depositors to file class actions, but Section 245’s provisions are not without flaws. The final section makes some recommendations for the direction of India’s class action lawsuit law.

The phrase “as may be prescribed” appears five times in the section’s text alone. The Ministry of Corporate Affairs has been given a significant amount of delegated legislative authority, therefore it becomes fairly necessary to notify people of the relevant provisions of the 2013 Draught Companies Rules. Order 1 Rule 8 of the Code of Civil Procedure, 1908⁶⁴ provides the legal framework for class action lawsuits, although it should be emphasized that this rule is general in nature and does not necessarily applicable to class action lawsuits brought against businesses. Additionally, pursuant to Order 1 Rule 8, consent of the court is required prior to the filing of a lawsuit by different parties stemming from the same cause of action.

In its current form, the 2013 Draught Companies Rules only cover the bare minimum of shareholders or depositors and the posting of the notice. Before publishing the rules governing class action lawsuits, other crucial factors such as the deadlines for case resolution, claim division, opt-out clauses, engagement of experts and lawyers, etc., could be taken into account.

The exclusion of creditors from the list of qualified claimants is yet another blatant error that appears to weaken the provisions of Section 245 in some way. While it is true that businesses have legal responsibilities to creditors, the same could be said for shareholders and depositors. The provisions of Section 245 just provide a clear remedy to a group of unhappy firm stakeholders. That group of stakeholders would suffer if creditors were removed, as it would be unfair and unfair to them.

Although shareholder derivative proceedings are uncommon in India⁶⁵, the right implementation of Section 245 can help to mitigate this issue. Shareholder derivative lawsuits are rarely used in the Indian context due to the lengthy legal processes, high expenses of filing civil lawsuits, and ban on success-based fees, which often serve as the primary incentive for plaintiff’s attorneys. It is not apparent, nevertheless, whether Section 245 would also include derivative actions⁶⁶.

It will be fascinating to see how the Indian parliament and the Ministry of Corporate Affairs further hone and enhance the provisions of Section 245 given that class action lawsuits are still relatively new phenomena in India. The way the judiciary handles the provisions will be equally fascinating.

Notes:-

¹ Student, BBA LLB, Corporate Law, University of Petroleum and Energy Studies

² Student, BBA LLB, Corporate Law, University of Petroleum and Energy Studies

³ For example, consider the inclusion of key corporate governance provisions which were hitherto part of Clause 49 of the Bombay Stock Exchange Listing Agreement in Chapters XI and XII of the Companies Act, 2013

⁴ Legislative Brief, The Companies Bill, 2009, PRS Legislative Research,

http://www.prsindia.org/uploads/media/Company/Legislative%20Brief–companies%20bill%202009.pdf last seen on 31/01/2015

⁵ Consider for example, other provisions relating to Independent Directors, Board Committees, Auditor responsibilities and liability which have been transplanted from the Sarbanes Oxley Act and the Cadbury Committee Report

⁶ M. Hidayatullah, “Highways and Bye- Lanes of Justice”, (1984) 2 SCC (Jour) 1

⁷ Upendra Baxi, “Taking Suffering Seriously: Social Action Litigation in the Supreme Court of India”, 8 Delhi Law Review 107, L. Rev. (1979)

⁸ Kailash Thakur, Environmental Protection Law and Policy in India 308 (2003)

⁹ Ex parte Sidebotham (1880) 14 Ch. D. 458

¹⁰ Fertiliser Corporation Kangar Union v. Union of India, AIR 1981 SC 344

¹¹ S. P. Gupta v. Union of India, AIR 1982 SC 149, 190

¹² William Weiner, Delphine Szyndrowski, The Class Action, From The English Bill of Peace to Federal Rule of Civil Procedure 23: Is There a Common Thread, 8 Whittier Law Review 935, 936 (1986-1987)

¹³ Chafee, Zechariah. “Bills of peace with multiple parties.” Harvard Law Review (1932): 1297-1332.

¹⁴ Rowe Jr, Thomas D. “Distant Mirror: The Bill of Peace in Early American Mass Torts and Its Implications for Modern Class Actions, A.” Ariz. L. Rev. 39 (1997): 711.

¹⁵ Supra n. 10

¹⁶ Stephen C. Yeazell, Group Litigation and Social Context: Toward a History of the Class Action, 77 No. 6 Columbia Law Review 866, 868 (1977)

¹⁷ James Wm. Moore and Marcus Cohnt, Federal Class Actions, p 308

¹⁸16 Ves. Jr. 321

¹⁹ Supra n.15

²⁰ Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India, Report on Company Law, May 31, 2005, available at http://resource.cdn.icai.org/8315announ854.pdf (last accessed on Sep 4, 2015)

²¹ Class Action Suits To Ensure Shareholder Democracy, The Hindu, Nov 8, 2009, available at http://www.thehindu.com/todays-paper/tp-business/class-action-suits-to-ensure-shareholder-democracy/article134987.ece (last accessed on Sep 4, 2015)

²² Directors Report 2008-2009, Mahindra Satyam, pg 31, available at http://www.techmahindra.com/sites/resourceCenter/Financial%20Reports/mahindra-satyam-annual-report -2008-09- and-2009-10.pdf (last accessed on Sep 4, 2015)

²³ These clients included Unilever, Nestle, DuPont, Cisco Systems, GE, Sony and Applied Materials. See Bibhu Ranjan Mishra, Satyam Clients Likely to Re-Evaluate Contracts, Business Standard, Bangalore, Dec 18 2008

²⁴ Ahmad, Tabrez and Tabrez, Malawat and Kochar, Yashovardhan and Roy, Ayan, Satyam Scam in the Contemporary Corporate World: A Case Study in Indian Perspective (August 23, 2009), IUP Journal, 2010

²⁵ Varottil, Umakanth, Evolution and Effectiveness of Independent Directors in Indian Corporate Governance (February 6, 2010). Hastings Business Law Journal, Vol. 6, No. 2, p. 281

²⁶ Supra n.22, at page 7
²⁷Supra n. 20 at page 11

²⁸ For the full text of the letter issued by Mr Raju, see “Full text: This letter Ramalinga Raju wrote uncovered the Rs 4,676 cr Satyam scam”, Firstpost, Apr 9, 2015 available at http://www.firstpost.com/business/full-text-this-letter-ramalinga-raju-wrote-uncovered-the-rs-4676-cr-satyam-scam-2190559.html (last accessed on Sep 4 2015)

²⁹ Supra n. 22 at page 7

³⁰ Supra n. 20 at page 25

³¹ Order bearing no. WTM/RKA/SRO/64 – 68 /2014 under sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 in the matter of Satyam Computer Services Ltd, JULY 15th, 2014

³² Samar Srivastava, Class Action Suits Are Up Against Challenges, Forbes India (25/02/2013), available at- http://forbesindia.com/article/breakpoint/class-action-suits-are-up-against-challenges/34781/1 last seen on 15/08/2015

³³Consumer body rejects Satyam shareholders’ compensation plea, Economic Times, May 12, 2009, available at http://articles.economictimes.indiatimes.com/2009-05-12/news/27651532_1_retail-shareholders-satyam-s cam- satyam-shareholders (last accessed on Sep 4, 2015)

³⁴ Midas Touch Investors Association v. M/S Satyam Computer Services Ltd. & Ors, Civil Appeal No. 4786 of 2009, in the Supreme Court of India, 10/08/2009

³⁵ Samar Srivastava, Class Action Suits Are Up Against Challenges, Forbes India (25/02/2013), available at- http://forbesindia.com/article/breakpoint/class-action-suits-are-up-against-challenges/34781/1 ,last seen on 15/08/2015

³⁶ 712 F.Supp.2d 1381 (2010)

³⁷ Satyam Computers’ United States investors have to pay about Rs 200 cr tax settlement: AAR, The Economic Times (29/08/2012), available at http://articles.economictimes.indiatimes.com/2012-08-29/news/33476332_1_mahindra-satyam-lead-plaintiffs-satyam-computer-services, last seen on 20/08/2015

³⁸ Reading the Satyam Scam, 44 No.3 , Economic and Political Weekly 5, 5(2009), available at http://www.jstor.org/stable/40278394, last seen on 5/03/2015

³⁹ Toffler, Barbara Ley, and Jennifer Reingold. Final accounting: Ambition, greed, and the fall of Arthur Andersen, Broadway Business, 2004, p 48

⁴⁰ Supra note 21 at p 6

⁴¹Madan Lal Bhasin, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, 2 Open Journal of Accounting 26, 30 (2013)

⁴² Ibid

⁴³ Id at 31

⁴⁴ Ibid

⁴⁵ Subhro Sengupta & Siddharth Tiwari, Satyam – Asatyam: Appreciating the Class Action provision in the Companies Act, 2013 and its impact on Investor Protection 1, 3 in Selected Essays In Company Law, (Prof. Nishtha Jaiswal and Dr. Rajinder Kaur ed., 2015)

⁴⁶ Order 1 , Rule 8, The Code of Civil Procedure, 1908 provides adequate remedy to numerous parties to file a representative suit who will be served notice through public advertisement and the ensuing decree of the Court is binding

⁴⁷ In Re Satyam Computer Services, Ltd., Securities Litigation, No. 1:09-md-2027 (BSJ), Memorandum Of Law In Support Of Motion To Dismiss For Forum Non Conveniens, submitted before the United States District Court Southern District Of New York on November 9, 2009 on behalf of PricewaterhouseCoopers Private Limited, Price Waterhouse, and Lovelock & Lewes (Defendants), pg 6, available at http://amlawdaily.typepad.com/satyamforumnon.pdf (last accessed on Sep 4, 2015)

⁴⁸ Varottil, Umakanth, The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India (February 11, 2014). NUS – Centre for Law & Business Working Paper No. 14/01; NUS Law Working Paper No. 2014/001

⁴⁹ Standing Committee on Finance, Lok Sabha, The Companies Bill, 2011, Fifty- seventh Report , 2011-2012

⁵⁰Varottil, Umakanth, The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India (February 11, 2014). NUS – Centre for Law & Business Working Paper No. 14/01; NUS Law Working Paper No. 2014/001

⁵¹ Christophe Bernard and Sylvain Bourjade, Economic incentives in class actions: an analysis through the United States/EU examples, Global Competition Litigation Review 2013

⁵² Ibid

⁵³Janet Cooper Alexander, An Introduction to Class Action Procedure in the United States Conference:

Debates over Group Litigation in Comparative Perspective, Pubs & Blogs Stanford Law School, available at http://law.duke.edu/grouplit/papers/classactionalexander.pdf last seen on 13/01/2015

⁵⁴ Ibid

⁵⁵Fed. R. Civ. P. 23(c)(2)(B)(v)

⁵⁶ All American Airways, Inc. v. Elderd, 209 F.2d 247, 249 (2d Cir. 1954)

⁵⁷ William W. Schwarzer, Structuring Multiclaim Litigation: Should Rule 23 Be Revised?, 94 No. 4 Michigan L Review 1250, 1250 (1996)

⁵⁸ Janet Cooper Alexander, An Introduction to Class Action Procedure in the United States Conference: Debates over Group Litigation in Comparative Perspective, Pubs & Blogs Stanford Law School, available at http://law.duke.edu/grouplit/papers/classactionalexander.pdf last seen on 13/01/2015

⁵⁹ Ibid

⁶⁰ Class Action, Tech Law Journal, available at http://www.techlawjournal.com/glossary/legal/classaction.htm, last seen on 5/04/2015

⁶¹ Ibid

⁶² Class Action, Tech Law Journal, available at http://www.techlawjournal.com/glossary/legal/classaction.htm, last seen on 5/04/2015

⁶³Consultative Paper On Review Of Corporate Governance Norms In India, Securities and Exchange Board of India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf, last seen 18/06/2015

⁶⁰ Class Action, Tech Law Journal, available at http://www.techlawjournal.com/glossary/legal/classaction.htm, last seen on 5/04/2015

⁶¹ Ibid

⁶² Class Action, Tech Law Journal, available at http://www.techlawjournal.com/glossary/legal/classaction.htm, last seen on 5/04/2015

⁶³Consultative Paper On Review Of Corporate Governance Norms In India, Securities and Exchange Board of India, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf, last seen 18/06/2015

⁶⁴ One person may sue or defend on behalf of all in same interest

⁶⁵ Vikramaditya Khanna & Umakanth Varottil, The Rarity Of Derivative Actions In India: Reasons And Consequences, in Dan. W. Puchniak, Harald Baum & Michael Ewing-Chow, The Derivative Action in Asia: A Comparative and Functional Approach (2012), at 380

⁶⁶ http://indiacorplaw.blogspot.in/2014/12/derivative-action-for-patent.html

(Article is written jointly by Sukrit Katriar and Nisha Bharti)