Class Actions in India: Will the Floodgates Open?

Introduction

Hollywood films such as A Civil Action and Erin Brockovich brought the concept of ‘class action’ into our everyday conversation. The true story of a struggling single mum-turned-hero, Erin Brockovich filed a lawsuit on behalf of residents of a small California town against a large company. The class action that ensued claimed that the company’s systematic disposal of waste chromium contaminated the groundwater that supplied municipal wells, resulting in hundreds of the town’s residents falling seriously ill. The lawsuit was ultimately settled at about USD 333 million (in 1996), and the film (released in 2000) made the protagonist a hero.

For years, the United States of America has been seen as being the foremost bastion of class action as it has strong tort laws, followed by Canada and some European countries (including the United Kingdom), which have also been putting in place collective redressal mechanisms. Indeed, a class action was filed in late 2019, before a German Court on behalf of the entire German population of male piglets as plaintiffs.[1] Whether the case will be admitted as maintainable with animals as named plaintiffs, remains to be seen.

Shareholder activism has been on the rise globally. The shareholder of today is more involved (or evolved!), than before, and is no mute spectator to the business of the company and acts of its management. It is no longer restricted to raising a voice against oppression by majority shareholder(s), or mismanagement of a company, but includes concerns in relation to business decisions, social and environmental issues, strategic management, brand value, reputation, etc. It is now par for the course, for shareholders to demand answers or specific action, including change or compliance with more stringent corporate governance policies. Activism can take several forms, including proxy shareholder battles, publicity campaigns, shareholder resolutions, etc. This has led to a more dynamic interaction between ordinary shareholders and management/promoter groups.

In India, the development of shareholder activism has been slow but constant, from the more passive past to the more active present. The recent spate of financial frauds and scams have also played their part. Investors, shareholders, and even consumers demand transparency and accountability; and are not afraid to demand it.

Enter the long-awaited Companies Act, 2013 (which replaced the Companies Act, 1956), under which the newly-introduced provisions (notified on June 1, 2016, but yet to be used effectively) enable class action to be initiated against a company and its management in certain circumstances. Aimed at investor protection and enhanced accountability,[2] the 2013 Act was touted by the Government as being a historic measure, that would give impetus to growth and bring about transparency.

The key advantage of class action is that individual complainants who may not have the resources to initiate individual proceedings may join together as a class, benefitting from economies of scale and costs.  Efficiency of the judicial system may also be increased as there is no repetition of witnesses and arguments.

The concept of class action is not new to India, however, as some statutory provisions enable an action to be brought by a few in the name of and for the benefit of many. We briefly consider some of these below.

Representative Actions

The Code of Civil Procedure, 1908, enables the plaintiffs to collectively bring a claim to court in a representative capacity for the benefit of a group or class of persons. It thus carves out an exception to the general rule that all persons interested in a suit should be made parties, and enables a group or class of persons with common interest or grievance in a matter to bring an action through only a few named representative plaintiffs.[3] Similar provisions enable a group of representative defendants to enter a defence on behalf of the entire group.

A representative action needs the permission of the court to proceed. Notice must be given to all persons interested, so that any person on whose behalf, or for whose benefit, the suit is instituted (or defended), may apply to be made a party, particularly since any decree passed, will be binding on all members of the class.

Public Interest Litigation

Public interest litigations, or ‘PILs’ filed by a few petitioners have become ubiquitous in India.  PILs are often filed for the enforcement of fundamental rights under the Constitution of India, of a group of persons or the general public, in public interest.[4]  Multiple and far-reaching orders have been passed by High Courts and the Supreme Court against State entities (remedies are not available against private entities), for far-reaching reliefs in public interest.

As this action is filed on behalf of the public at large, the standard rule of locus standi (the right to bring an action in court), does not apply. The petitioners are not themselves required to have suffered the legal injury complained of, or to be part of the affected class. Even an unconnected third party may initiate such proceedings on humanitarian grounds for the benefit of all members of the group or class.[5]

Consumer Protection

The Consumer Protection Act, 2019, which recently came into force,[6] considerably overhauled consumer protection law in India. Consumer class action has received statutory blessing, enabling registered consumer associations, and one or more consumers (where they have a common interest or grievance) to file a class actionon behalf of the group. Complaints may be filed in relation to any goods sold or delivered with the permission of the District Forum, provided they have the same interest or grievance and seek the same relief on behalf of or for the benefit of the group.

The Central and State Governments are also empowered to file a complaint either in their individual or representative capacity for the interests of consumers in general. A first of its kind case was filed in 2015, suo motu by the Union of India against Nestlé India. Initiated as a class action suit on behalf of consumers of Nestlé’s ‘MAGGI Noodles’, the Union contended that Nestlé’s labels were misleading and that there were high levels of lead detected in the Noodles that are much loved by children.[7]

Initial action against Nestlé India was taken by the Food Safety and Standard Authority of India, directing it to recall the products from the market and cease production, an action which was challenged and set aside by the Bombay High Court. The class action lawsuit was filed by the Union of India immediately thereafter on behalf of Indian consumers. Damages of approximately INR 640 crores (USD 85.5 million) were sought for alleged unfair trade practices and sale of defective goods. The matter is currently pending before the National Consumer Disputes Redressal Commission (‘NCDRC’).

Provisions for Minority Protection against Oppression and Mismanagement

Minority shareholder interests have been protected under the erstwhile Companies Act, 1956 (‘the 1956 Act’), and the Companies Act, 2013 (‘the 2013 Act’). Redressal to minority shareholders is available in relation to acts of oppression by the majority shareholders and/ or mismanagement of the company by the controlling group.[8]

There is a threshold qualification of a minimum of 10 members or 10% the members of a company that must be met before a group can initiate this action. The National Company Law Tribunal (‘the Tribunal’), before whom such an action may be filed, has extensive powers to grant redressal against the complaints of oppression/mismanagement. For instance, the Tribunal may grant orders requiring the majority group to buy out the minority shareholders, appointing/removing a director to/from the board of the company, directing the audit of the company’s accounts, appointing an administrator to take over the management of the company, and in egregious cases, even winding up of the company.

While this minority protection is not in itself a ‘class action,’ it empowers a group of shareholders to jointly seek redress.

Class Action under the 2013 Act

The lack of a specific provision for class action in Indian corporate law was particularly felt in the aftermath of the ‘Satyam scandal’ in 2009,  whenthe Chairman of Satyam Computer Services Ltd. confessed to cooking up the company’s books of account to the extent of about USD 1.47 billion (about INR109  billion).  Not surprisingly, the shares tanked, and investors lost about INR 186  billion in value.

After the scandal broke, several investors went after the Chairman, Directors and auditors of the company. As many as 12 class action suits were filed in the United States, ultimately leading to a settlement of almost USD 125 million for the US investors.

The fate of Satyam’s Indian investors was less happy A consumer protection association, Midas Touch Investors Association (“MITA”), approached the NCDRC seeking compensation of INR 49.87 billion (approximately USD 668.52 million), for around 300,000 retail shareholders. The NCDRC refused to hear the complaint citing, among others, a reason that it was not equipped to deal with such cases.[9] MTIA moved the Supreme Court against the rejection but ultimately withdrew the petition[10] (possibly on account of a realisation that they were unlikely to get relief), and Satyam’s Indian investors watched their money go down the metaphorical drain.

The need to codify class actions in respect of company law had been recommended as early as May 2005, in the J.J. Irani Committee’s Report submitted to the Ministry of Corporate Affairs.[11] Two Companies Bills in 2009 and 2011 introduced provisions for class action, but these Bills lapsed. Notably, the 2011 Bill restricted eligible plaintiffs only to members and depositors, excluding creditors from its purview.  The rationale was that the creditors could enforce their claims through contracts with their borrowers, and as such, there was no necessity for a statutory right to class action; members and depositors not having any security, it was necessary to empower them accordingly.[12]

Section 245 of the 2013 Act

It is in this background that Section 245 was introduced in the 2013 Act, enabling members and depositors of a company, either individually or as a class, to join together for redress and appropriate reliefs from the Tribunal. (Banking companies are excluded from its ambit.)

A numerical threshold must be met as a condition to availing of the benefit of Section 245 viz. a minimum of 100 members or 10% of the total number of members of a company is needed to file a class action suit. Where the company does not have share capital, the minimum threshold is 1/5thof the total number of members. Depositors are also entitled to institute class action on similar thresholds.

All similar applications are consolidated into a single proceeding and the lead applicant is chosen amongst them, either by joint consensus of the group, or by the Tribunal. The lead applicant is in charge of prosecuting the action.

Reliefs may be sought against the company, its directors,  auditors,  expert, adviser or consultant for any fraudulent, unlawful or wrongful act, including monetary compensation or damages for the commission of fraudulent acts or those that that are prejudicial to the interests of the company, or its members or depositors, or against the public interest. Orders passed are binding on them all.

There is no maximum cap on the compensation or damages that may be awarded, or the manner in which they may be distributed amongst the applicants, the same clearly being left to the discretion of the Tribunal.

The costs of the application must be defrayed by the company or any other person responsible for any oppressive act.  On the other hand, unsuccessful applicants may be directed to pay the defendant’s attorney’s fees if such an application is rejected as being frivolous or vexatious.

Funding of Class Actions

The Investor Education and Protection Fund: Recognising the need to support minority shareholders and investors, the Ministry of Corporate Affairs announced that plans to implement a scheme to provide them with financial assistance for class actions through the IEPF (Investor Education and Protection Fund), established by the Central Government under Section 125 of the 2013 Act.[13]

Litigation Financing: Third-party funding and the modality of contingency fees, permitting the plaintiff’s lawyer to bear the risk of litigation with the advantage of windfall profits in the event of a successful claim, have leveraged class action movement in the United States and elsewhere. In India, the absence of regulation and a prohibition on lawyers working on contingency or success fees means that this trend is yet to pick up, although it is simply a matter of time.

The Coronavirus Landscape

It is impossible to write an article today without considering the coronavirus pandemic. As distribution networks stretched thin, ‘force majeure’ and ‘material adverse event’ claims were raised in several different avatars. Amid the exponential rise in disputes, as some businesses are being alleged to have taken undue or unfair advantage, some COVID-19 class action cases have already been instituted.

A class-action lawsuit was filed against online retailer Amazon in Florida for allegedly charging excessive prices for personal hygiene products during a public health crisis”. The overpriced sale of goods (such as USD 199 for a bottle of hand sanitizer, USD 40 for face masks, and USD 99 for toilet paper) was held to be in violation of State laws combating price gouging.[14] Costco and eBay are the other retailers that are facing class action claims for alleged price gouging of high demand products during the COVID-19 pandemic.

Gojo Industries Inc., faced a class action before the New York Federal Court on the grounds of misleading, deceptive and unfair claims that it’s Healthcare Advanced Hand Sanitiserkills 99.99% of illness-causing germs” and has the “ability to prevent colds, flu.”[15]

An action has been filed against IPI and its CEO, J. Joseph Kim, on behalf of shareholders who purchased or otherwise acquired IPI securities between February 14 and March 9, 2020,  seeking to recover damages caused due to a massive drop in stock price. The complaint alleges that IPI and its CEO, falsely described their product as a fully completed vaccine when it was nothing of the sort,” which eventually led to a USD 643 million loss of market capitalisation when a statement from Citron Research disputed IPI’s claim.[16]

Crystal ball gazing

Once the dust on COVID-19 settles down, there may be a floodgate of class action claims against global businesses around the world, ranging from cases of negligence against hospitals, restaurants, the travel industry, etc. alleging that they did not take adequate steps to protect the consumers or negligently exposed them to the virus resulting in personal injury or death, to damage claims on account of stock drop securities class action, for instance, owing to misfeasance, malfeasance.

In the Indian scenario, Infosys, the beleaguered tech giant, became the target of a class-action lawsuit in the United States in 2019, in respect of alleged unethical practices; something which the company vehemently denied.  After Infosys was cleared of wrongdoing by the Securities and Exchange Commission in May 2020, the suit was “voluntarily dismissed without prejudice” by the plaintiffs,[17]  and another Satyam-like crash was avoided.

In conclusion, the waters are being tested and it is certain that more and more consumers,  shareholders, and groups of affected/aggrieved parties will approach Indian courts and tribunals for redressal on the basis of similar class actions.


* Partner, Cyril Amarchand Mangaldas

** Principal Associate, Cyril Amarchand Mangaldas

[1] “Germany’s male piglet population might be about to rewrite legal history”, Rick Noak (November 19, 2019), The Washington Post available at https://www.washingtonpost.com/world/2019/11/19/germanys-male-piglets-just-became-latest-animals-file-cases-court-without-their-knowledge/

[2]Statement of Objects and Reasons to the Companies Act, 2013

[3] See Order I, Rule 8 CPC

[4] Articles 226 and 32 of the Constitution of India 

[5]V. Purushotham Rao v. Union of India, (2001) 10 SCC 305

[6] Notification dated 23-7-2020  issued by Ministry of Consumer Affairs, Food and Public Distribution available at https://consumeraffairs.nic.in/sites/default/files/Provisions%20of%20Act%20comes%20into%20force.pdf

[7] Union of India v. Nestle India Ltd., Consumer Complaint No. 870/2015 filed on 11-8-2015 before NCDRC

[8]Sections 397 and 398 under the 1956 Act, which correspond with Section 241 under the 2013 Act.

[9]https://economictimes.indiatimes.com/tech/software/consumer-forum-rejects-plea-on-compensation-in-satyam-case/articleshow/4510331.cms

[10]https://www.business-standard.com/article/companies/sc-dismisses-midas-touch-investor-association-plea-against-satyam-109081003014_1.html

[11] Report of the Expert Committee on Company Law (2005) dated May 31, 2005 issued by Ministry of Corporate Affairs available at http://reports.mca.gov.in/Reports/23-Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf

[12] 57th Report of the Standing Committee on Finance (2011-12) (15th Lok Sabha) (Ministry of Corporate Affairs) on the Companies Bill, 2011, p. 16, available at http://164.100.47.193/lsscommittee/Finance/15_Finance_57.pdf

[13]“Govt to give financial aid to minority investors filing class action suits” Business Standard dated  May 6, 2019 available at https://www.business-standard.com/article/pti-stories/govt-set-to-provide-financial-assistance-to-minority-investors-for-class-action-lawsuits-119050500240_1.html

[14]Armas v. Amazon .com Inc., Case No. 104631782, Eleventh Circuit Court in Miami – Dade County, Florida; [A Copy of the class action complaint is available at https://www.docketalarm.com/cases/Florida_State_Miami-Dade_County_Eleventh_Circuit_Court/2020-005653-CA-01/STEPHANIE_ARMAS_VS_AMAZON.COM_INC./Doc-02-Complaint/]

[15] Magdiela Gonzalez v. Gojo Industries, Inc., Case No. 1:20-cv-00888. United States District Court Southern District of New York; [Copy of the class action complaint is available athttps://webcache.googleusercontent.com/search?q=cache:P4pYvmgjNxAJ:https://www.classaction.org/media/gonzalez-v-gojo-industries-inc.pdf+&cd=1&hl=en&ct=clnk&gl=in]

[16] Copy of the class action complaint is available at https://www.dandodiary.com/wp-content/uploads/sites/893/2020/03/inovia-complaint.pdf

[17] https://www.thehindu.com/business/Industry/class-action-suit-against-infosys-dismissed-in-us/article31647106.ece

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