India Losing its Domestic Arbitration! The Need for Legislative Amendment
The Companies Bill, 2011, might not be garnering as much attention as the Lokpal Bill this Parliament session, but it too is a game changing piece of legislation that promises to regulate India’s corporate governance on the lines of global best practices. And one of the most significant features of the bill is that it introduces the provision of class action suits against Indian companies.
The bill, which seeks to replace the existing Companies Act of 1956, was tabled in Parliament a few days ago. However, it has elicited a mixed response from industry bodies and legal experts, especially over the provision of class action suits.
“‘Class action’ basically means a group litigation, where an affected group or class of persons either sue together or are made litigants collectively in a suit,” explains Payal Chawla, partner, Hemant Sahai Associates, a corporate law firm based in Delhi.
The concept is new to India, though it is widely prevalent in the West. Says Mukesh Butani, founding partner, BMR Advisors, a legal firm in Delhi, “There are specialist lawyers who handle class action suits in North America and many countries in the EU.” The famous case where Erin Brockovitch (played by Julia Roberts in the eponymous film) won $333 million in damages from the Pacific Gas and Electric Company for the people of Hinkley, California, for the pollution of their water supply, was a class action suit.
Class action suits in the US are usually characterised by huge compensation payouts. The Eveleth Mines case of 1984 is yet another example of a class action suit in the US. A group of women working in the mine brought a suit against sexual harassment by male workers there. In 1998, the aggrieved settled with Eveleth Mines for $3.5 million.
Clause 245 of the Companies Bill states that a certain number — no fewer than 100 — of members of a company and depositors can bring a class action suit before the National Company Law Tribunal (NCLT). This can be to restrain the company from committing an act which is ultra vires (beyond the powers of) the company’s articles or memorandum, check the company from committing a breach of any provision of its memorandum or articles, and so on. The group can also seek compensation from the company or its directors for any fraudulent, unlawful or wrongful act.
Says Niloy Pyne, partner, Amarchand & Mangaldas, Advocates & Solicitors, “The Companies Bill, particularly Section 245, does introduce a comprehensive concept of class action in India for derivative action. A class of members or depositors may seek restraint orders on the company or its directors in anticipation of breach of legal provisions and may also seek damages or compensation for unlawful acts of the company and its directors. This concept shall no doubt be a game changer for aggrieved individuals who are not in a position to independently take on the might of a corporation.”
Incidentally, after the Satyam scam, its US shareholders’ petitions for compensation from the company were grouped into a “class”. The new management entered into a $125-million agreement with the aggrieved early this year. The Indian shareholders couldn’t take recourse to any such remedy in the absence of class action suits in the country.
So will this legislation lead to class action suits being brought by victims of tragedies such as the recent fire at AMRI Hospitals? Well, not unless the provision for class action is incorporated in the Code of Civil Procedure. “If class action provisions are incorporated in the Indian Code of Civil Procedure as well, on the lines of Rule 23 of the US Federal Rules of Civil Procedure, it would ensure wider applicability of the concept,” says Pyne.
As per Rule 23 of Civil Procedure in the US, one or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defences of the representative parties are typical of the claims or defences of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.
Critics say that the provision for class action in the Companies Bill is not without its drawbacks, “The concept of class action is contemporary,” admits a spokesperson for the Federation of Indian Chambers of Commerce and Industry. “But due care should be taken to eliminate harassment and undue activism.”
Others feel that 100 people coming together for a class action as specified in the bill is not practical. “This number should ideally be brought down,” says Shameek Sen, assistant professor, National University of Juridical Sciences, Calcutta.
Some say that class action suits would be beneficial for the plaintiffs in terms of litigation costs. Instead of charging them, the lawyer could take a percentage of the compensation awarded as his fees. “If the champerty concept is made permissible in India, thereby allowing even a stranger to a lawsuit (such as a lawyer) to bear the costs on the basis that he pursues the litigant’s claim as consideration for receiving part of judgment proceeds, it could truly address the concerns of costs on the part of litigants,” says Pyne.
The proposed legislation further states that any order passed by the NCLT with regard to a class action suit will be binding on the company and all its members, depositors and auditors. A company which fails to comply with the tribunal’s order will be penalised with a fine which can extend up to Rs 25 lakh.
The bill also tries to eliminate frivolous class action suits or applications. It says that the NCLT can reject the application if it is found to be “frivolous or vexatious” and ask the applicant to pay the opposite party damages not exceeding Rs 1 lakh.
However, it may be a while before class action suits come into effect. The Opposition wants the Companies Bill to be sent back to the parliamentary standing committee on finance for review. “We feel that there have been some major alterations to the bill and its provisions are widely different from the recommendations of the report submitted by the standing committee on finance,” says Prakash Javadekar, BJP spokesperson.
If and when the bill does come to pass, will class action suits empower individuals who seek justice against malpractice by a large corporation? That remains to be seen.
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