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ANALYSIS OF CLASS ACTION LAWSUIT UNDER INDIAN LAWS.
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ANALYSIS OF CLASS
ACTION LAWSUIT UNDER INDIAN LAWS.
SUBMITTED
BY - Ms. MAARIA LAKDAWALA(A017)
YEAR:
BBA-LLB 3rd YEAR, SEMESTER-VI, BBA LLB [HONS.]
THE SVKM’S
NMIMS, NAVI MUMBAI KIRIT P. MEHTA SCHOOL OF LAW
I, Maaria Lakdawala, hereby
declare that the paper titled ‘Analysis of Class Action Suits under Indian Law’ submitted to the Kriti. P. Mehta,
School of Law represents my original work and
has not been previously submitted for academic or publishing purposes.
Furthermore, this paper represents my own opinions and conclusions.
The
materials/sources utilized
in this paper are given their due credit.
I would like to express my deep and sincere gratitude to Prof. Shreya
Madali, who guided me throughout the whole process
of writing this paper. I Thank Ma’am for giving me an opportunity to research on the present topic
and for answering any doubts
or queries I have had throughout the course of this
research.
Thank you,
MAARIA LAKDAWALA A017.
This Research paper solely focuses
on the topics of Class Action Lawsuits in accordance with Indian Companies Act 2013. This Research
paper also aims to understand the need for Class Action Lawsuits, limitation in the statute and landmark case law
namely “Satyam Scam” that have
marked class action lawsuits to prevail as an emerging and prevalent lawsuit in
Indian Legal Systems. Due to limitations
the topics are not elaborated but portrayed in a format as such any prudent man can interpret. This
paper also cite some secondary sources, journals and looks into the background of these laws to gain a better understanding.
·
To understand the need for Class Action Lawsuit and
analyse limitations if any in the statute.
·
To look briefly into the remedies available for Class
Action Suits in India.
·
Are Class Action Suits necessary in the Indian
Judicial System?
·
What was the issue and aftermath of Satyam Scam?
·
Are there Remedies Available in various Acts for Class
Action Suits?
The concept of Class Action Suit although
a familiar concept
in western states such as US and UK is a fairly new concept
inculcated in Indian Law. Class Action suit refers to a lawsuit
where one single plaintiff or
several other plaintiff join hands together to move forward with a law suit as a class on behalf of a larger group. Here the settlement or judgement awarded
or decided upon is divided among the members of the lawsuit equally. The concept of Class
Action Lawsuits was introduced
in Sec 245 of Companies Act 2013 which defines
“ specialised class
actions” in Chapter XVI pertaining to "Prevention of Oppression
and Mismanagement". by shareholders and depositors of a accompany
to the Indian regulatory system,
and is anticipated to have
a far-reaching impact on the utilisation of class actions as an effective
remedy under the Indian legal regime.
Section 37 of the Companies Act additionally includes a separate
framework for a "securities class
action." For a false statement or the inclusion or omission of any matter
in a company prospectus, a lawsuit (or any other action) can be filed (or any other action can be taken) under this section.
Any person, group of persons,
or organisation of persons harmed by the statement/inclusion/omission can file such an action.
Although collective or class action suit is not a sought-after remedy in India,
the notion of class action can be found in the Code of Civil
Procedure, 1908, in the forms of representative suit under Order 1 Rule 8 and
Public Interest Litigation under article 32 and 226 of the Indian Constitution before the High Court and
Supreme Court respectively, each with its own set of limitations.
The history of class action suits in India may be traced back to the
Satyam case, but the Companies Act of
2013 provided formal recognition. Because there was no provision under Companies Act, 1956, the shareholders were
unable to make a claim. The section 245 of the
Companies Act, 2013,
is examined in depth in this research. The majority of the provisions of the Companies Act
were derived from the United States and the United Kingdom, including class action lawsuits. Thus, the goal is
to analyse landmark case law and see regulation in regard to class action suit in India.
CHAPTER 2: NEED FOR CLASS ACTION SUITS – ANALYSIS OF SATYAM SCANDAL[1].
Summary: India's largest
corporate fraud was the Satyam Computer Services Scam2. Satyam Computer Services' founders and
directors cheated the company by falsifying accounting, inflating the stock price, and stealing enormous sums of money. It's all about corporate governance and fraudulent auditing
methods with the help of auditors and chartered accountants. The corporation falsified its financial statements to its board of
directors, stock exchanges, regulators, investors, and other stakeholders.
Facts- Satyam Computer Services Limited was India’s 4th largest information, communication, and
technology corporation. It was known as “IT Crown Jewel of India”. It was
founded in 1987 by the Raju Brothers, The company's clients
were distributed across
India and the United States.
The corporation was listed on the National
Stock Exchange, the Bombay
Stock Exchange, and the New York
Stock Exchange. The company operated on
a global level and it was
incorporated in more than 55 countries with more than 30,000 employees who
served more than 500 companies
of the corporation. Out of 500 companies, 150 companies constituted a part Fortune 500 companies
The economy was affected by the 2008 recession this resulted in a decrease in
property prices his last chance to preserve SCSL and close the difference between actual profits and manipulated
profits in the company's books of accounts. He decided to purchase Maytas Properties and Maytas Infra,
believing that this was the only way to get out of the situation and mitigate the deception he had perpetrated. The transaction was designed such that the companies
would be purchased solely on paper, with no actual financial transaction,
resulting in a balance of the amounts
already recorded in the books of accounts. SCSL's board of directors decided and sanctioned the
acquisition of enterprises without shareholder approval. The issue arose once more when the purchase angered investors,
resulting in a sharp drop in the
company's stock price. SCSL was also the subject of a lawsuit, which resulted
in a 55 percent drop in its stock
on the NYSE.
Satyam's board of directors convened
a meeting to discuss a proposal to buy Maytas
Properties and Maytas Infra
Limited. It was a related party transaction because the promoter's family owned 30% of the Maytas company. The move
was opposed by the company's shareholders, and the stock price dropped. The mounting pressure
was the final
nail in Mr. Raju's coffin,
and he admitted to
manipulating books of accounts and committed fraud in front of the Securities Exchange Board of India.
It was determined that Matyas' acquisition was used to conceal a previous
financial crime in which Satyam
inflated profits. Thus, the price of the stock fell from 304.80 to 54.05 Rs in
less than two months. And eventually
fell to Rs. 11.50 compared to Rs. 544 in 2008. Additionally the house of his younger brother Raju was
raided and 112 sale deeds for purchasing various different lands and 13,000 fake records of employees were
recorded which amount to an estimated
scam amount of Rs 7800 crores which accumulated to be an estimated Rs 12,320 fiasco. The scam had international
repercussions which leaded to a drop in companies share price by 5-15% and Sensex falling by 7.3%.
Also, Prince Water Coopers India failed to detect the fraud of financial accounts. Also, Satyam had given incentive to PWC India to get
the required treatment. They contested that failure was due to mis information and mis management.
“Fake customer identities, false invoice1 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”[2].PWC
India overlooked 1.4 billion dollar, 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[3].
As a result, the company's shareholders incurred a significant loss. Additionally “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.
The hit on India’s stock market was enormous and action for recovery was
plunged into action by the
Government. A new board was appointed
with a primary and singular goal to sell the
company in 100 days.
Winning bid was placed by Tech Mahindra
who acquired 51% company stakes
and bought out the
company for 1/3 its price before the scam hit the news.
Issue: According to PWC and Satyam
Computer, India has the territorial jurisdiction for hearing the lawsuit and claiming forum non conveniens. As a
result, the question of whether India
was eligible for an investor class action arose, as well as whether Indian laws
could deal with such a measure.
Judgement: Hon’ble Supreme
Court held that because of provisions mentioned in the SEBI Act, 1992 and the Securities and Contract
Act, 1956, India was not eligible for a class action suit for the following reasons: it was not possible in India due
to provisions listed in the SEBI Act,
1992 and the Securities and Contract Act, 1956. Suit had no scope of
representation. Representative action
is merely a procedural remedy available under the CPC under Order 1 Rule 8. When there is a bar established by a statute, there is no right to suit. If the representative litigation was successful, a new issue of award enforceability arose. How will an investor who is not a party make the claim enforceable? The Indian judicial system has rejected the investor's claims,
citing a lack of provisions to deal with such matters.
Settlement: “Whereas, in
United States, a sum of 125 million dollar was paid compensation by Mahindra Satyam
who reached a settlement with SEC to reimburse united state investors”[4]. “The US regulators yesterday fined the
software firm and its auditors Price Waterhouse India up to USD 17.5 million
for the accounts manipulation that went undetected for several years.The company also paid USD 70 million
to the UK-based company, Upaid Systems Ltd in
2009 for settling another suit, filed in 2005, accusing Satyam Computer of
fraud and forgery. [5]”
“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.”[6]
Whatever the case may be, the question remains: where does this leave
Indian shareholders? They've been
taken on a royal tour, to say the least. They couldn't bring class action
lawsuits since Indian law didn't
allow it at the time; however, Section 245 of the Companies Act, 2013 now allows it.
Tech Like any other suitor in an M&A deal, Mahindra pressed its advantage, offering
one share of its business for every 8.5 Rs per Satyam shares. It was a double whammy for Satyam's regular
Indian stockholders, but they couldn't
amidst no judicial alternative.
CHAPTER 3: REMEDIES AVAILABLE FOR CLASS ACTIONS
The primary institution for launching a class/collection action differs depending on the type of claim
and the applicable governing statute.
Actions taken in accordance with the CPC: Concerned persons
can take actions
under Order 1, Rule 8 of the CPC before a court by
asking authorization from the court or following the court's direction. The action must be filed in a court with the
necessary geographical and monetary
jurisdiction. While geographical jurisdiction is dependent on (among other
things) the cause of action and/or
the locations of the defendants, pecuniary jurisdiction is based on the lawsuit's value, which varies among Indian states.
Representative actions under Civil
Procedure Code[7]:
Order 1, Rule 8 of the CPC contains provisions
governing the filing of representative actions. Under this regulation, an
individual or a group of individuals can file a lawsuit on behalf of everyone who is interested in the case's
subject matter. However,
in order to file a lawsuit,
the following requirements must be met:
·
The representative action must include a large number
of parties.
·
All parties must be interested in the same issue
(commonality of interest).
·
Only with the authorization of the court may the
action be continued.
·
When a court grants permission, the court is required
to notify all interested parties.
·
Unless all interested parties are given notice, no part of the action
can be withdrawn or a compromise recorded.
·
If the person suing or defending in a representative
capacity fails to act diligently, the court may substitute any other person with a similar
interest in the representative action
in his or her place.
·
As a result, a court's decision in a representative
action is binding on all parties on whose
behalf or for whose benefit the suit was filed (or defended, as the case may
be) (Order 1 Rule 8(6), CPC).
The
CPC has another provision dealing to collective action in addition to Order 1
Rule 8. Section 91 allows two or more
people to file a lawsuit with the court's approval, seeking a declaration and injunction or any other type of relief against
a public nuisance
or other wrongful
act that affects
or is likely to affect the public.
Even if no exceptional damage has been caused to such persons as a result of the
public nuisance or other wrongful behaviour, such an action can be launched.
Class action cases filed under the Companies Act[8]: must be filed with the National
Company Law Tribunal,
according to Section 245(1) of the Companies Act (NCLT). The NCLT and National Company Law Appellate Tribunal
(NCLAT) were established on June 1, 2016, by
the Ministry of Corporate Affairs (MCA) to execute and fulfil the powers
and functions conferred on it by the
Companies Act. The MCA also notified section 245 of the Companies Act[9]on the same day. The MCA also notified
the National Company
Law Tribunal Provisions[10] and the National Company Law Appellate
Tribunal Rules[11], which
contain pertinent rules relating to
class actions under section 245[12]
after establishing the NCLT and NCLAT.
Actions taken
in accordance with the Consumer Protection Act[13]:
· A complaint
under the Consumer Protection Act can be brought before the following
authorities, depending on the claim's value:
· Forum for
the District (for claims of up to INR2 million). By notification, the state
government establishes a consumer dispute resolution forum in each district of
the state.
· Commission
of the State (for claims of between INR2 million and INR10 million). By
notification, the state government established a Consumer Disputes Redressal
Commission in the state.
· Commission
Nationale (for claims of more than INR10 million). The Consumer Disputes
Redressal Commission was created by notification from the central government.
Actions under the Competition Act[14].
Applications made under section 53(N)(1) of the Competition Act must be filed before the Competition Appellate Tribunal[15] (COMPAT).
Specialised class actions for securities litigation under the Companies Act[16].
A provision
relating to class action securities litigation has been introduced into the
Companies Act by section 245[17].
The notion of specialised class actions by shareholders and depositors of a firm
is introduced to the Indian legal environment under Section 245. The JJ Irani
Committee advocated the introduction of a notion of representative action that
can be commenced by one shareholder on behalf of one or more other
shareholders, based on the assumption that they would all have the same locus
standi to take action against an erring firm. Section 245 expands the
definition of "prevention of oppression and mismanagement" by
granting the ability to initiate a class action lawsuit to both: Shareholders
of a company and
Depositors.
Section 245
of the Companies Act[18]
also allows a company's members or depositors to sue a professional/expert/advisor for, among other things, making
any false or misleading statements to the company,
or for any fraudulent, unlawful,
or wrongful acts or conduct,
or any likely acts or conduct on his part. The inclusion of
the firm's auditors and consultants, as well as the corporation and its management, within the scope of the class
action suit gives stakeholders even
more authority to pursue action against such individuals for specific
wrongdoings. This clause is designed to ensure that a company's
specialists, consultants, and auditors behave
with caution and diligence before recommending the company's management. The provision is also (to a degree)
a result of the Satyam
fraud.
A "securities class action" is also allowed under section 37 of
the Companies Act[19].
Any person, group of persons,
or association of persons impacted
by any deceptive statement or the inclusion or omission of any matter in the prospectus may file a lawsuit or take any other action
under the following
provisions:
· Section 34
(criminal liability for misstatements in a prospectus).
· Section 35
(civil liability for misstatements in a prospectus).
· Section 36
(punishment for fraudulently inducing persons to invest money).
A
minimum number of members required to file such a suit/alternative action has
not yet been prescribed.
· Section 37
has been notified and is currently in force.
CHAPTER 4
A: Consumer Class Actions: A Comparative Analysis of Legislative Proposals[20]- Stanley F Rose.
This Research
paper elaborates on the legislative policies regarding consumer class action
suits in regard to the United
States of America. The paper looks into the change of policy and amendment carried out in the Federal Rules
of Civil Procedure amended in 1966. The paper
has elaborated how the amendment has procedural advantage and how
aggregation of claims helps in
disembarking evils of society such as disparity, poor litigation for certain
classes, pendency of multiple
similar suits burdening the court etc. The paper has special
focus on Rule no
23 which enables the provision of lumping class action suits in a single suit instead
of separate duplicate ligations. The
paper also distinguishes between anti-trust law and securities law in areas
of private and governmental action thorough analysis
of proposed legislation, one of the major
concerns highlighted is that in anti-trust law and securities law a private
action as well as a government action can be brought however this legislation does not seem to recognise the necessity for private consumer
action. The paper adequately highlights the point that a
customer essentially only can rely on the Federal Trade
Commission or the Justice Department as the only remedy which in my opinion is a limitation on consumer rights of private
redressal in case of grievances.
The paper has an elaboration the eleven types
of executive bills proposed. The paper has also looked
into how the final bill can be strengthen. Furthermore the paper has suggested comparisons of previous bills to new
proposed class action bills to ensure clarity.
The paper has also looked into
how class action bills were at time a low priority for the congress at the time and subsequent consequences have
also been highlighted adequately.
CHAPTER 4
B: Governance and Legitimacy in the Law of Class Actions[21]-
Samuel Issacharoff
This Research Paper highlights two very prevalent and important issues-
1- the ingredients necessary for
class action to the prosecution of perceived group harms as well and -2- under what terms and who shall be the one to
control such class actions. This paper in my opinion has attributed to the importance of how class actions should be
disaggregated and how it requires
doctrinal and theoretical sensitivity to study the field of class action suits. The analysis of Hobes , Locke and Montesquieu theory
in this paper give an outlook of various forms of governance to identify the issue of legitimacy. Very crucial
points highlighted regarding class action suits is that this actions
are an effort of the congress to discipline individualized member so they be
taxed and reach a collective consensus and award or settlement of same shall be distributed equally and same has been reiterated by the Supreme
Court in Amchem. The paper analysis this
theory in full depth. Furthermore the
analysis of the consequences of non- participating
litigants and disregarding collective action would not lead to a bright line
test for structure of class action
administration is a limitation in my opinion as the opposite of non- participant would lead to mandatory
participation in class
actions and eventually would lead to an abuse of such suits.
CHAPTER 4 C: Control
of conflicts of Interest in Class-Action Suits[22] - Lewis A Kornhauser.
This Research paper analysis the set of legal rules that have arisen as
conflict in class action suits against
an attorney of such suit in relation
to the individuals he represents. This paper has adequately
highlighted the remuneration and behaviour of attorney in such class action
suits, members in an class action suits usually don’t have enough
stake in suits to personally monitor suits and their interest
in such suits and this can lead to abuse
of power on the attorneys
and as the markets for class action suits in not well developed, these
circumstances eventually leads to
poor choice of representatives for class action suits. This papers analysis on
the court procedure for approval
of proposed settlements is iterated in 4 steps all of which are ambiguous in nature and propose in a vague manner to reach acceptable settlement to an extent these
class actions are
characterized as economies in scale of litigation. The three areas of problem i.e parties are1- lawsuits are lumped together in a single suit resulting
to binding of parties 2- class
actions are traditionally settled instead of litigated however due to the less
stake in suit there is often absence
of parties resulting in inadequate
settlement- 3- Attorney compensation is
a difficulty faced because the funds to compensate representative are usually
through successful litigation or
settlement which poses as a problem of responsibility when suit fails. The paper covers limitations in
administration of such class action suits by the representative, court
as well as litigants.
CHAPTER 4 D: Mandatory Litigation
Class Action: The only option for Mass Tort[23]- David Rosenberg
This Research paper aims to analyse the economic as well as
administrative benefit of class action
lawsuits. The four step model f binding parties,
exploiting the scale of litigation economies
courts should lump it in a single suit, to put the responsibility on the courts
to assess aggregate liability and assessment of
damages, the responsibility of the court to distribute damages should be assessed by relative strength of individual
instead of the legal claims individually. The fundamental principle of the paper relies on the basis of that the welfare and utility of the people
should be upheld and doing so maximise
accidental costs. The paper looks
into the principle that people would prefer ex-post over ex-ante, the
logic being that people would be that courts
would look into a major accidental claim
and singular accidental claim in a different light for damages in a mass tort liability. The paper has referenced Autonomy Peace, and Put Options
in Mass Tort Class Actions
which specifically mentions
the incentive of class members in class actions a parallel to
mandatory mass tort class actions. The paper doesn’t estimate or father fails to mention how non-participating
parties would affect if filed singular multiple
suit and their remedies in such class
actions.
CHAPTER 5 CONCLUSION AND SUGGESTION
The inculcation of Class Actions is a need of time in a developing
capitalist state. It offers regulations, checks and balances
for high scale scams and mis regulation
without over burdening the courts with singular duplicate litigation The CPA also establishes
a clear procedure framework. The
National Consumer Disputes Redress
Commission previously declared that
class actions that do not meet the criterion of a sufficient percentage of the
class participating in the action would not be accepted.
Furthermore, the CPA establishes a Consumer
Class Action Panel (CCPA) to investigate class action cases for violations of consumer rights,
unfair commercial practises, or false or misleading marketing
before they are heard
by the consumer forum. The statute of limitations for bringing various class
actions is determined by the statute
under which the class action is intended to be commenced. If the statute itself is silent on the time
restriction for filing an action, the provisions of a specialised statute known as the Limitation Act
1963, which specifies time limits for various actions and suits in India, shall be relied upon. For
any cause of action for which no specified period has been imposed, the Limitation Act sets a maximum period of three
years. Sections 245 and 37 of the
Companies Act do not impose a limitation period on class actions. A class
action has a two-year statute
of limitations under the CPA. It's also worth noting
that Indian courts
have the discretion to forgive delays, and a class
action can sometimes be heard after the statute of limitations has expired if good cause is demonstrated. This
clause is designed to ensure that a company's
specialists, consultants, and auditors behave with caution and diligence before recommending the company's management. The
provision is also (to a degree) a result of the Satyam fraud.
CHAPTER 6 BIBLIOGRAPHY/ REFRENCES
Journals
·
Public Choice Vol. 41, No. 1 (1983), pp. 145-175
Published by Springer
·
Harvard Law Review Vol. 115, No. 3 (Jan., 2002), pp.
831-897 (67 pages) Published by – Harvard Law Review Association.
·
The Supreme Court Review Vol. 1999 (1999), pp. 337-392
Published by : The University of Chicago Press.
·
The Journal of Consumer Affairs Vol. 5. No.2 (Winter
1971), pp. 140-153 Published By: Wiley
Statutes
·
Companies Act 2013.
·
Competition Act 2002.
·
Civil Procedure Code 1908.
·
Consumer Protection Act 1986.
Article
·
https://economictimes.indiatimes.com/tech/software/sec-settlement-in-best-interests- of-shareholders satyam/articleshow/7883857.cms?utm_source=contentofinterest&utm_medium=text &utm_campaign=cppst
Case Law
·
M/S Satyam Computer Services vs. Directorate of
Enforcement 2018 Writ Petition No 37487 of 2012.
[1] M/S Satyam Computer Services
vs. Directorate of Enforcement 2018 Writ Petition
No 37487 of 2012.
[2] Madan Lal Bhasin, ‘Corporate
Accounting Fraud: A Case Study of Satyam Computers Limited’ [2013] OJA 26.
[3] Varottil Umakanth,
‘Evolution and Effectiveness of Independent Directors in Indian Corporate
Governance’ Hastings Business
Law Journal, Vol. 6, No. 2, p.
281
[4] ArjyaMajumdar, ‘Class
action suit – Genesis,
Analysis and Comparison’ [2014] HNLUJ 23
[5] Read more at:
[6] Companies Act 2013, s 241.
[7] 1908
[8] 2013.
[9] 2013
[10] 2016
[11] 2016
[12] Companies Act 2013.
[13] 1986
[14] 2002
[15] 2009
[16] 2013
[17] (Chapter XVI of the Companies Act, which deals with "Prevention of Oppression and Mismanagement").
[19] 2013
Published by : The University of Chicago Press.
Vol.
115, No. 3 (Jan., 2002), pp. 831-897 (67 pages)
Published by – Harvard Law Review
Association.
Article Information
ANALYSIS OF CLASS ACTION LAWSUIT UNDER INDIAN LAWS.
Authors: Ms. MAARIA LAKDAWALA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/11/23
- Issue 7
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International Journal for Legal Research and Analysis
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