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A suit that fits the Bill – II

In China, class action litigation is permitted under its civil procedure laws. Multi-plaintiff groups have brought suits seeking compensation for harm caused by pollution, false advertising, contract violations and securities law violations. The laws of China separate class action litigation into two categories—cases where the number of litigants is fixed and cases in which the number is not known when the case is filed. Where the number of litigants is fixed, the law permits joint litigation, provided the number of parties on either side of the litigation is large. It also allows such parties to choose one or more representatives to carry out the litigation. Where the number of plaintiffs or defendants is not fixed, but where many parties have similar claims, the court may issue a notice detailing the substance of the case and instructing all persons whose rights are similarly affected to register with the court within a specified period. The parties who register may then select one or more representatives to carry out the proceedings.

Chinese law also stipulates that not only are the actions of the representatives binding on the represented parties, but that the represented parties must consent to a decision by the representative to abandon the litigation, accept a demand of the opposing party or settle the case. The Companies Bill, 2009, proposes something similar for India: the decision of the court is binding on all those claimants who register with it, and also on those with similar interests who do not register but who bring suit within the prescribed litigation period.

In India, the concept of class action was first discussed by the JJ Irani Committee, constituted to review the Companies Act, 1956. The Committee’s report noted that the principle of ‘class/representative action’ by one shareholder, on behalf of one or more of the shareholders, had been allowed by the Indian courts on the grounds of persons having the same legal standing. The Committee thus expressed the need for recognition of class action in legislation. The Committee’s report noted that a situation may arise whereby the interest of the company may need to be protected from the actions of the persons in control of the company. The report also noted that the interests of the larger body of investors/shareholders would need to be addressed to protect their interests in the company. For these purposes, the Committee felt that the law should provide for class action suits on behalf of depositors/ shareholders.

Drawing from these recommendations, class action suits were first proposed in 2008. The government, then, stated its intention to enable corporate India to operate in a regulatory environment of best international practices and hoped that class action suits would foster entrepreneurship, investment and growth, and also provide for shareholders to take legal action in case of any fraudulent action on the part of the company.

Reiterating this view, especially in light of the Satyam accounting scam where pleas of an investor rights activist were dismissed by both the National Consumer Commission and the Supreme Court, corporate affairs minister Salman Khurshid has recently stated that class action suits were being proposed to provide compensation for shareholders in the event of negligence or fraud being committed by company directors and that this would help retail and small investors in fighting for their rights.

Clearly, class action suits provide individual citizens with access to justice. But there is a recurring fear that they may be used by a select few to malign or defame a legitimate and powerful market competitor. They may also become a gateway to the proliferation of predatory litigation and a tool for holding businesses ransom. Doubts could also be raised on how to effectively determine whether claimants are in fact ‘similarly situated’. This leads to the question of whether varied factual differences, which might lead to disparate outcomes in case of individually litigated claims, should be glossed over where claims are joined into a class.

Regardless, the introduction of class action under the Bill is a step in the right direction. When Indian courts are already overburdened, allowing individual claimants to band together will both help ease the burden on the courts and lower litigation costs for claimants. However, before finalising the proposed legislation, great care needs to be taken to establish an identifiable threshold to bring class action proceedings and to make sure that all such proceedings pass a materiality test. Limitation periods on class actions should also be considered and court rules for evidence, aggregation of proceedings and appointing lead plaintiff would have to be prescribed to allow the judiciary to control misuse of class actions.

A well-deliberated provision for class actions under the Companies Act, one which draws from the experiences of international jurisdictions, and one which addresses the domestic legal and commercial requirements, would undoubtedly contribute to a culture of good corporate governance, increase the efficiency of litigation, reduce expense and minimise complexity. This will eventually contribute to India becoming a more investor friendly jurisdiction and, above all, provide individual citizens greater access to legal recourse.

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

First Published in the Financial Express on December 11, 2010

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