Business Standard

Class action lawsuit explained

Sudipto Dey 

The government-legal battle is the first instance of a class action suit filed in the country by the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, citing the Consumer Protection Act, Business Standard reaches out to legal experts to understand the legal intricacies of a class action lawsuit

What is a class action lawsuit, and who can file it?

Class action is simply filing a law suit in a larger group instead of individual suits where there are numerous persons having the same interest in that suit. Different regulations may have a different requirement for filing it, but generally more than one person can file it. However, the new section in Companies Act, - which is still not in force - requires at least 100 members or depositors to file a class action under Section 245.

Principles of consumer protection are provided under the Consumer Protection Act, which is primarily based on principles of "unfair trade practice", points out Zakir Merchant, Partner, Khaitan & Co.

A class action suit can be filed under Section 12 (1) (c) of the "The government can take action under Section 12 of the Consumer Protection Act, 1986, either in its individual capacity, or on behalf of the complaining consumers. The government in this case appears to have done so on behalf of consumers," says Rajiv Luthra, managing partner, Luthra & Luthra. However any such suit has to be presented along with cogent evidence, thorough preparation, assisted and accurate quantification of damages, with product liability cases based on testing, he adds.

A class action suit can also be filed under Section 91, Order 1 Rule 8 of Civil Procedure Code, 1908. "However different statutes may have different provisions for filing suit," says Lalit Kumar, partner, J Sagar Associates.

Under what grounds are class action suit filed?
A class action suit can be filed under the Companies Act, against members of a company, its auditors, or any expert, advisor, consultant to the company under several grounds. Some key ones are:
  • To prevent the company from making any misleading statement, or inclusion or omission of any matter in the prospectus that goes against the articles or memorandum of the company
  • To prevent the company from making any misleading statement, or inclusion or omission of any matter in the prospectus that goes against the articles or memorandum of the company;
  • To restrain the company from doing an act which is contrary to the provisions of the company law;
  • Against the auditors for any improper or misleading statement of particulars in the audit report
According the company law provisions, the order of the National Company Law Tribunal in any class action suit is binding on a company. Any failure to implement the order of the tribunal can attract fine in the range of Rs 5 lakh to Rs 25 lakh on the defaulting company. Further, every officer responsible for such default shall be liable for imprisonment and fine. Interestingly, if the tribunal finds the application for filing class action suit frivolous, it may, in addition to dismissing the application, impose a fine of Rs 1 lakh on the applicant.

What has been the success rate of such lawsuits in India?
Legal experts say class actions suits have not been successful in India till now. Following the Satyam case such a suit was filed by many shareholders in India but in vain. This was one of the reasons provisions for bringing in class action suits were introduced in the Companies Act,

Legal experts point out class action is prominent and successful globally, especially in the US. "One reason is that US laws permit contingency fees for lawyers," says Kumar of J Sagar Associates. Contingency fee is like a success fee paid to the lawyer arguing the class action for the plaintiff. The fee will only be paid if the order is in favour of the plaintiff and is paid from the compensation and damages that is awarded. Indian laws do not permit any such arrangement of contingency fee.

If this class action suit fails, could it have an impact on other similar cases going forward?

Legal experts do not think so. "Every case is tested on its merits based on its legal evidence and legal issues involved before dismissal of a class action suit," says Luthra. Lawyers, however, add that if a class action on the same matter is filed in another forum, any earlier failure will have a bearing on the new suit.

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