CLASS ACTION LAW SUIT

Introduction

In today’s world of globalisation, the capital market of a country forms the backbone of its economy. It has become the most powerful instrument of socio-economic growth of a country and has attracted various investors from different socio-economic groups and different levels. But it is important to understand that what attracts these investors is their trust and confidence in the growth and transparency of the capital market. Thus in order to protect and promote the interest and confidence of these investors and to strengthen the position of capital market, the concept of Class action law suit was originally developed. Since there has been a significant growth in securities investment in India, it is has become important for our country to incorporate this concept in the legal system for securing the interests of our investors.

What is a Class Action Law Suit?

A class or collective action is a lawsuit in which a ‘representative’ plaintiff sues or a ‘representative’ defendant is sued on behalf of a group or class of plaintiffs or defendants who share the same interest in the case as their representative and whose rights or liabilities can be determined as a group instead of filing individual suits. In other words it is a lawsuit in which a single person or a group of person represent the interests of a larger group in litigation before the court.

It is a procedural instrument which authorizes one or more claimants to file a petition and pursue litigation on behalf of a larger group, class or entities with common rights and grievances.

Evolution

The class action cases also known as group litigation originated in England in the 13th century. These cases were filed only when some action broke in the village, town, guild or parish rules and affected several people simultaneously.

Although group litigation came to an end in England, it found its survival in the United States due to the efforts of Joseph Story, an associate justice of the U.S. Supreme Court in the early 1800s. However, at the time, Judge Story felt that group litigation was not adequate for the modern society.

But in 1833, Equity Rule 48 was passed, which allowed for group litigation, known as representative litigation, to be carried out when an excessive number of similar, individual cases had been filed. Ten years later, the Supreme Court further enhanced class actions by stating that there is no need of the plaintiff to be physically present during the hearing.

Since then many countries across the world have duely recognised and adopted this concept in order to protect and promote the interest of investors.

When they are used?

These lawsuits are generally considered in cases when:

• The individual interest of every plaintiff is identical
• The individual claim of each plaintiff is too small to be worthwhile, thus by filing a suit as a group, the plaintiffs are able to generate resources
• In order to save the time of courts in dealing with similar matters

How they function?

In such law suits, firstly there has to be a legal representative of the group of plaintiffs and the injuries suffered as well as the allegations alleged by the lead plaintiff must be similar to those of the other members of the class. Else, the lead plaintiff won’t be an appropriate representative of the class.

Before the class action lawsuit can further proceed, the class must be approved by a judge. The lead plaintiff must prove that the plaintiff’s have a valid claim against the defendants and their claims are similar in nature. The lead plaintiff must also demonstrate that he or she is in an appropriate legal capacity to represent all the members of the class.

Then once the above conditions are satisfied, the class gets certified and is given a green signal to proceed.

Different Mechanism of Class Action Law Suit

The various forms of mechanism of Class action lawsuit are as follows:-

Public Interest Litigation: Similar to the provision relating to the class action, the Indian courts have developed a branch of jurisprudence known as “Public Interest Litigation” or “Social Interest Litigation” which are generally initiated either by the court in its own motion or by public spirited individuals who represent a particular class of individuals and are filed against the state or public authorities in the High Court and Supreme Court under Article 226 and 32 of the Indian Constitution of India.

Initially PIL’s were viewed as an instrument for the courts to hear the grievances and complaints on behalf of the ones deprived of their legal right or subjected to any kind of atrocities. However, with changing times the scope of PIL has expanded to examine the issues of Public Interest.

Specialised class actions for securities litigation under the Companies Act: In January 2009, India witnessed one of its biggest corporate scams – the 'Satyam scandal' also referred to as 'India's Enron'. Satyam Computers Services Limited ("SCSL") was held liable for fraudulent activity and misrepresentation of its accounts to its board, stock exchanges, regulators, investors and all other stakeholders. Thereafter, approximately 300,000 shareholders of SCSL were unsuccessful in claiming damages worth millions due to the absence of the provision for filing a class action suit under the Companies Act, 1956. American investors on the other hand were able to claim their part of damages in the US courts through a class action suit against SCSL.

Post the Satyam scandal, with the aim of protecting the interests of the investors and strengthening the position of capital market, the Indian Parliament drafted the Companies Bill, 2009 and introduced provisions enabling affected shareholders to file a 'Class­ Action Suit'. Section 245 and 246 of the Companies Act, 2013 Act, which specifically deals with the class ­action suits. These provisions permit members and depositors to approach the National Company Law Tribunal ("NCLT") if they believe that the affairs of the company are being conducted in a manner which is against the interest of the company and its shareholders.

Section-245 expands the scope of the concept of “prevention of oppression and mismanagement” by providing a right to file class action legislation to both:

• Shareholders of a company
• Depositors

As per the provisions of section 245 (1) (g) a class action suit can be brought against:

• The company
• Directors of the company
• Auditors and audit firm of the company for any false and misleading statement in the audit report or for fraudulent, unlawful or wrongful conduct.
• Any expert or advisor or consultant or any other person for misleading statements made to company or any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part.

In addition, Section-37 of the Companies Act, 2013 also provides for a “securities class action”. As per this provision, a lawsuit can be filed or any other action may be taken by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter under the prospectus.

1. Consumer complaints under the Consumer Protection Act, 2019: The CPA aims to provide a smooth and speedy redressal to the consumers by establishing quasi judicial machinery at district, state and national levels.

Under section 12(1) (c) of CPA, one or more consumers with the same interest can file a complaint to the District Forum in relation to any goods or services provided to them.

1. Industrial Disputes / Collective Bargaining under the Industrial Disputes Act, 1947: The IDA permits any representative actions through collective bargaining because the industrial jurisprudence is based on Class-action.

The main objective behind this concept was to give the poor workmen a right to voice their demands collectively to confront a powerful employer.

1. Antitrust actions under the Competition Act, 2002: The Competition Act recognises the necessity to compensate parties for loss or damage caused as a result of anti-competitive conduct. The Competition Act also recognises that the conduct of parties may affect numerous parties for whom a private claim might not be viable, accordingly, it provides for class actions as a means of redressal due to parties full of anti-competitive conduct.
2. Order 1 Rule 8 of Code of Civil Procedure, 1908: In India, representative suits are filed under Order 1 Rule 8 of CPC, 1908. Order 1 Rule 8 describes the procedure for filing or defending a representative suit. It is applicable in cases where there are large numbers of people having common interest in a suit.

Advantages of Class Action Lawsuit

The Class action law suit provides the following advantages:-

• Provides compensation to plaintiffs who would otherwise receive nothing due to their incapacity to afford an attorney
• Helps reduce the burden of pending suits
• Saves a lot of time of the courts
• Reduces the cost of litigation because one suit costs less than a number of suits
• Ensures that the parties with similar injuries are awarded justice with no discrimination
• Greater Judicial Efficiency

Disadvantages

The disadvantages of Class action lawsuit are as follows:-

• Creates lack of decision making control because the members of the class action other than the representative have no right to decide whether to settle or continue to litigation
• The compensation awarded in such suits is usually monetary compensations, therefore non-suitable for plaintiffs seeking other kind of compensation
• If the outcome of such law suit is not favourable in the interest of the plaintiffs, then afterwards they have no right to file suit individually
• Huge fees of the attorney

Landmark Judgements on Environmental Protection Litigation

GAS LEAK IN SHRIRAM FACTORY

In M.C Mehta and Anr. v. Union of India & Ors.[i], the petitioner sought a direction for compensation against the losses suffered due to the opium gas leak from the Shriram Factories, the Court ordered the management to pay compensation to the victims of gas leak.

The “absolute liability” of a hazardous chemical manufacturer to give compensation to all those affected by an accident was introduced in this case and it was the first time compensation was paid to victims.

SANITATION IN RATLAM

In Municipal Council, Ratlam v. Vardhichand and Ors[ii], the Supreme Court acknowledged the impact of deteriorating urban environment on the poor. It linked basic public health facilities to human rights and compelled the municipality to provide proper drainage and sanitation

SEWAGE DISCHARGE IN GANGA

In M.C Mehta v. Union of India[iii], Activist-Advocate M.C Mehta filed a writ petition in the Supreme Court to throw light on the pollution of River Ganga by industries and municipalities located on its banks by discharging their waste in the river.

The court ordered the closure of a number of polluting tanneries near Kanpur. Justice E S Venkataramiah, in his judgment, observed: “Just like an industry which cannot pay minimum wages to its workers cannot be allowed to exist, a tannery which cannot set up a primary treatment plant cannot be permitted to continue to be in existence.”

TANNERIES IN VELLORE

In Vellore Citizens Welfare Forum v. Union of India[iv] the tanneries situated around river Palar in Vellore, Tamil Nadu was found discharging toxic chemicals in the river, thereby risking the health of the residents. Thus the court asked the tanneries to close their business.

Conclusion

Thus, the class action law suit acts as an instrument for keeping the activities of the company in check, provides a redressal mechanism to protect the interest of investors particularly small and minority investors and also reduces the clogging of suits in courts. Therefore, the adoption of this concept has not only resulted in improved position of investors in the market, reduced fraudulent activities by the companies but has also resulted in the companies and its directors being more diligent and efficient towards their work. Though Class action law suits are not explicitly used in India, but with growing times it is finding its position in the Indian Legal system.

(The Author, Priyana Gupta is second-year law student at Vivekananda Institute of Professional Studies, GGSIPU)

References

1. 1980 AIR 1622
2. 1988 AIR 115
3. AIR 1966 SC 2715
4. 1987 SCR (1) 819
5. https://www.sebi.gov.in/sebi_data/attachdocs/may-2018/1526621992592.pdf
6. https://www.hbsslaw.com/about-us/what-is-a-class-action-lawsuit
7. https://www.mondaq.com/india/class-actions/809134/class-action-suits-in-india-government-notifies-thresholds-for-filing-class-action-suits