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A suit that fits the Bill – I

The Companies Bill, 2009, was recently reintroduced in the Lok Sabha. It seeks to streamline, and, in some instances, modify existing legislation and introduce some new provisions. One such provision relates to class action suits, proposing that any member or class of members, or any creditor or class of creditors, of a company may apply to the Company Law Tribunal to bring a class action—on behalf of the other members or creditors of the company—if they believe that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or creditors. The

Tribunal can then pass an order that is binding on the company and all its members and creditors. The new provision would be in addition to the rights granted to the shareholders or members to bring action for oppression or mismanagement of the company, under current legislation.

Here, we highlight some class action suit provisions from different countries—which have detailed jurisprudence on the subject—and draw attention to some additional features, which Indian legislators may wish to consider so that the proposed provision can accomplish its desired objectives.

Class action as a concept originated in the US. It’s a process by which people with similar grievances join in a common suit to get compensated for the wrongs committed against them. By their very nature, class action suits require the number of individuals seeking redressal against a common defendant to be very large.

It is also essential that the loss sustained individually by each party be relatively small, but the administrative costs of individual suits be quite high.

Class action continues to be popular in the US. To bring federal action in the US, a suit needs to include a high number of class members, a common question of law or fact and a typicality of claims. Plus, the party choosing to represent should adequately protect the interests of the entire class. Interestingly, class action in the US is also an opt-out action. Members of the represented class, if they fail to opt out, are assumed to have implicitly submitted themselves to the class action proceedings.

Given the litigious nature of the US, it saw a flood of class action suits and felt the need to curtail them. This was achieved in part by legislation like the Private Securities Litigation Reform Act, 1995, which was designed to reduce the number of frivolous securities lawsuits filed before Federal Courts. This statute disallows investors to proceed with a case unless they already possess facts strongly suggesting a deliberate fraud. The 1995 Act also allows judges to decide the most adequate plaintiff in class actions and mandates full disclosure to investors of proposed settlements. It further bars bonus payments to favoured plaintiffs, and permits judges to scrutinise attorneys’ conflicts of interest. Another legislation for curtailing frivolous proceedings is the Class Action Fairness Act, 2005, which attempts to curtail forum shopping by class counsel, in pro-plaintiff State Courts, by giving Federal Courts the authority to hear different types of class action cases.

In contrast to the US, where class action under securities regulations is almost automatically granted, the laws in Israel are drafted so that class action applies only in very selective cases, which meet a very high criterion of determination. Class action suits require sanction of the court. This sanction is normally only granted when the court is satisfied that the suit was filed in good faith and there is a reasonable possibility that substantial factual and legal questions common to the group would be decided in its favour. The courts also consider whether the size of the group justifies submission of the claim as a class action, and whether class action is the best method by which to decide a given controversy.

Additionally, courts in Israel require the parties who file a class action to prove that they are indeed the ones who can adequately represent the interests of all members of the class. To this end, the parties applying for a class action have to prove to the court both their financial ability to carry the litigation to its end, and the ability of their attorney to represent such a case. Claims that can be classified as derivative actions are not considered suitable for class action.

Under Israeli law, if the court determines that the plaintiff is not a regular investor but only speculates in securities, a characteristic which does not necessarily represent the rest of the group, the court will not allow such a plaintiff to represent the group.

Legislation in Australia is similar to that in the US as it also features both federal and state class action procedures. Under the federal statute in Australia, an applicant may begin a representative proceeding for some or all of the persons who have claims that arise out of the same, similar or related circumstances, where such claims gives rise to a substantial common question of law or fact. This provision has frequently been used to enable persons to group together in a class action and agree upon a way of bringing their claims forward. Further, under the federal statute, the court has discretion to order that a proceeding no longer continue as a class action if the costs that would be incurred, if the proceeding were to continue as a representative proceeding, are likely to exceed the costs that would be incurred if each group member conducted a separate proceeding. Australian Courts can also examine whether the relief sought can be better obtained by alternate proceedings, and whether the representative proceedings provide an efficient and effective means of dealing with claims.

Another similarity between the legislation in Australia and the US is that it is essential for the courts to have a significant role in the approval or rejection of any settlements proposed in class action proceedings. In making such determination, the courts examine whether the proposed settlement is fair, reasonable or adequate in the interests of group members. Courts also evaluate the complexity and duration of the litigation, the reaction of the class to the settlement and the risks of establishing liability and damages.

Co-authored with Mr. Shardul S Shroff and Ms. Sneha Sunder

First Published in the Financial Express on December 10, 2010

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