Business Standard

Kumkum Sen: Class Action: The new kid on the block

Kumkum Sen 

The introduction of Class Actions as a recourse for stakeholders is one of the new kids on the block in the Companies Bill 2012 (‘2012 Bill’).

Class actions, in other jurisdictions, notably the US, are very similar to Public Interest Litigations (PIL) in India; in so far they relate to public issues - environmental, cost of essential commodities and various aspects of rights and entitlements of citizens. Many jurisdictions have introduced specific laws so that aggrieved parties have a statutory right to approach the appropriate forum for recourse.

In India, the Consumer Act specifically provides for class or rather representative action. Similarly, actions before the erstwhile MRTP Act, and now Sections 19(1)(a) provide for parties to approach the Commission in matters under Sections 3 & 4 of the Act represented by Consumer and Trade Associations.

The Companies Act 1956 (“Current Act”) envisages inclusiveness - public notices being published in local newspapers and sent to the various regulators, agencies and stakeholders. Meetings of members and creditors are held to ensure representation in cases of Schemes of Amalgamation under Sections 391 and 394 of the Current Act. Similar requirements are also provided in Bankruptcy Law under Section 433 to 439 and the actual liquidation proceedings initiated by the Official Liquidator under Section 448 onwards of the Current Law.

The value addition in introducing Class Actions under the 2012 Bill is best if compared with the current provisions under Sections 397 and 398 of the Companies Act for oppression and mismanagement. The definition of ‘Oppression’ provided as a standalone provision with its specific procedure not very different from Section 397 of the Current Act.

Section 245 of the 2012 bill as it reads, notwithstanding the good intention, is confusing. The applicability is restricted to “Members” which is defined under Section 2 (55) as synonymous with shareholders. Depositor is not defined, and the closest definition is possibly the NBFC Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 - an important but not a large class. The omission of creditors and debenture holders is incorrect, and needs to be addressed. Ultimately, Class Action provides more options to the shareholder and this is probably dictated by the Satyam spectre.

Damages can be claimed, not just from the company and its directors but from auditors as well, for any fraudulent unlawful or wrongful acts and omissions. Additionally, other consultants not specifically named, can also be sued for damages, in case of any incorrect or misleading statements, misconduct etc. Companies will have to take huge insurance covers in future, as well as provide indemnities to all service providers and advisors. And in case an action is found to be frivolous, the Tribunal can direct that the company is paid costs of rupees one lac- which is illusory.

Other jurisdictions e.g. the UK, require more equitable and meaningful securitization by the Class or the Representative.

If there is an that Section 402 of the Current Act vests the Company Law Board with wide powers, take a look at Section 245, particularly sub clause (1) E which empowers the National Company Law Tribunal (“NCLT”) to restrain directors from taking any action contrary to the provisions of the Act, as well “as any other law in force”.

The legislature’s intention in providing for this overarching provision is unclear. There can be several claimants against a corporation ranging from citizens who are aggrieved as a result of the activity the corporation carries on, there could be disgruntled beneficiaries of the CSR activity, or consumer complaints. The list is endless and each grievance has its own redressal forum

The benefits of Class Action are that of reduction of legal costs as well as unity of purpose. Will it not give rise to Ambulance chasing? Possibly, it will lead to unwarranted harassment of corporations as well. It is indeed equally possible that these provisions may be misused and abused whereby litigation will increase substantially.

On balance a change was overdue, and there are glitches in all laws. The real test will lie in the setting up and staffing of the NCLTs all over India.

Till such time just continue with the grand old dame of 1956.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at  

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First Published: Mon, January 07 2013. 00:58 IST