Op EdsOP. ED.

It may come as a surprise to many but class actions are not new to India. Sections 91 and 92[1] and Order 1 Rule 8[2] of the Code of Civil Procedure, 1908 provide an avenue to bring an action in a representative capacity against wrongdoers. In corporate jurisprudence, the law protected the rights of minority shareholders from “oppressive” acts of the majority[3]. In the Indian corporate context Parliament introduced the concept of “mismanagement” in the Companies Act, 1956[4]. Through the Companies Act, 2013[5], the Parliament introduced the remedy of “class action” in matters concerning the operations of companies. The provision on class action was notified in 2016 but the Rules of the National Company Law Tribunal prescribed the threshold limit enabling the invocation of the remedies only as late as May 2019. Despite thriving corporate litigation, in the past 2 years we have not witnessed the use of this provision.  

Obstacle course for the oppressed

A Standing Committee on Finance (2011-2012) which scrutinised the Companies Bill, 2011[6] made specific reference to introduction of class action and its impact has been discussed. It was brought to the notice of the Standing Committee that class action was a poor substitute for the well-established derivative action in a country like India and specific provision should be made for codification of derivative action. The Committee rejected it by stating that new concepts ought not to be introduced hurriedly as these are evolving concepts. The Committee obviously overlooked the fact that Indian courts had recognised the exceptions to the rule in Foss v. Harbottle[7] for a long time now. The exceptions were summarised in N.V.R. Nagappa Chettiar v. Madras Race Club[8] more than 7 decades ago.

  1. In respect of matters which are ultra vires the company and which the majority of shareholders, were incapable of sanctioning; (see Burland v. Earle[9]).
  2. Where the act complained of constitutes a fraud on the minority.
  3. Where the action of the majority is illegal the minority could bring an action in the company’s interest.
  4. The decisions in Baillie v. Oriental Telephone and Electric Co. Ltd.[10], and Cotter v. National Union of Seamen[11], recognised a fourth exception where a special resolution was required by the articles of the company and the company obtained the assent of the majority to such special resolution by a trick, or even where a company authorised to do a particular thing only by a special resolution does it without a special resolution duly passed as in such a case to deny a right of suit to the shareholders without using the name of the company would in effect result, the company doing the thing by an ordinary resolution.

The Committee wrongly concluded that the concept of derivative action was a new concept and recommended the adoption of class action which was enacted in Section 245[12] of the Companies Act, 2013. Along with this, the law as it stands now effectively ousted the jurisdiction of civil courts from entertaining any suit or proceeding in respect of which the Tribunal would have power to determine. By introducing such a section[13], much confusion has arisen about the jurisdiction of civil courts to deal with “derivative actions”[14]. As a consequence, plaintiffs will have to now cross a jurisdictional hurdle before getting courts to appreciate the substance of the complaint in a derivative action. This will necessarily increase costs and delay the hearing of the cases on their merits and more importantly, place needless obstacles in the path of genuine complaints against wrongs by those in control of a company.

So, in practice, what remedy does the minority shareholders have in the case of a wrongdoing by the majority. It will require a minority shareholder to seek out and collect and create an association of similarly placed persons to satisfy the requirements of the section. That is a very difficult task. Unless the company in question is a closely held small group of shareholders, it is very difficult for a larger group of unknown persons distributed widely to form a cohesive group to petition the Tribunal[15].

Even if the minority shareholder(s)/depositor(s) were to get over the initial difficulties of organising themselves into an organised group, the provisions as they stand creates numerous obstacles by use of very vague and ambiguous terms. The Tribunal is called upon to take into account[16] the various subjective factors before admitting a petition before it. By using language such as “good faith”, testing whether the cause is personal or ruling out availability of alternate remedies, the section imposes onerous conditions for the class to jump over. One cannot expect the wrongdoers against whom complaints are made to simply roll over and accept their faults. They are bound to raise issues of lack of “good faith” and/or that the petition being one espousing a personal cause, etc. The Tribunal would then have to apply its judicial discretion to determine whether the petition can be admitted or not.

Class action versus relief for oppression

If one compares the provisions relating to class action with those concerning grant of relief in case of oppression, once the shareholder meets the criteria fixed by the law in terms of percentage shareholding or numbers to petition the Tribunal complaining of acts of oppression, the Tribunal gets to determine if such acts are oppressive or not. What constitutes oppression of course has been left to the Tribunal to determine on the facts and circumstances of each case and based on numerous judicial pronouncements. It is now well-settled law that even perfectly legal acts by a majority can be viewed as being oppressive and illegal acts need not necessarily be termed as oppressive. Law also provides for the Tribunal to waive the minimum requirements to invoke the relief against acts of oppression[17].

Conclusion

Unless the law empowers the minority to seek remedy, class action will remain as a dead letter in the statute books. The protection provided to the purported wrongdoers seem to have weighed greater in the minds of the lawmakers rather than to protect the interest of the small investors who invest in ventures, with the fond hope of getting returns on them. The dissent notes of one of the members of the Standing Committee that scrutinised the Companies Bill, 2011 highlights this aspect. A company against whom a complaint is made has all the resources to defend its actions. It fights its investors with the money they have invested. The company and those in control of it have access to all the information, which the small investors have to struggle to get. If the Tribunal finds a complaint frivolous, law enables the imposition of costs up to Rs 1 lakh. If needed, this can be even increased. But, to ask the small investors to go through an obstacle race, would only hurt the rule of law in the long run. There have been studies conducted in African countries[18], that suggest that better minority rights protection in corporate bodies give rise to better governance. After all, a legal system that encourages well-run corporations to be scrutinised will inspire investor confidence and thus provides a stable economy for the country as well. Killing derivative action and denying access to civil courts could be claimed to be streamlining corporate litigation but what it has done is take away a well-established right of minority shareholders and emboldened controlling shareholders of companies.


Advocate practising in the Madras High Court, e-mail: <karthikseshadri@iyerandthomas.com>.

[1] <http://www.scconline.com/DocumentLink/ukJyj372>.

[2] <http://www.scconline.com/DocumentLink/hIh8pj25>.

[3] Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272, paras 60-90 provides a very elaborate historical outline on the development of the law concerning oppression in Britain and India.

[4] <http://www.scconline.com/DocumentLink/pm3Rt2A0>.

[5] <http://www.scconline.com/DocumentLink/A5aqjfDv>.

[6] <http://www.scconline.com/DocumentLink/2L267KZU>.

[7] (1843) 2 Hare 461 : 67 ER 189.

[8] 1948 SCC OnLine Mad 222 : (1949) 1 Mad LJ 662.

[9] 1902 AC 83.

[10] (1915) 1 Ch 503.

[11] (1929) 2 Ch 58.

[12] <http://www.scconline.com/DocumentLink/f92Y78q0>.

[13] S. 430. Companies Act, 2013

[14] See Vikram Jairath v. Middleton Hotels (P) Ltd., 2019 SCC OnLine Cal 6663; Naresh Dayal v. Delhi Gymkhana Club Ltd., 2021 SCC OnLine Del 91; Chiranjeevi Rathnam v. Ramesh, 2017 SCC OnLine Mad 23049.

[15] S. 245 read with the Regulations of the NCLT provides that for company having share capital, not less than 100 members or 5 per cent of the total number of members, whichever is less; or any member or members holding, singly or jointly, not less than 5 per cent of the issued share capital in case of an unlisted company (2 per cent in case of a listed company). The requisite number of depositors to file a petition u/S. 245(1) shall be as under – not less than 100 depositors or 5 per cent of the total number of depositors, whichever is less; or any depositor or depositors to whom the company owes, singly or jointly, 5 per cent of the company’s total deposits.

[16](a)  whether the member or depositor is acting in good faith in making the application for seeking an order;

(b)    any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in cls. (a) to (f) of sub-s. (1);

(c)      whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;

(d)     any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;

(e)      where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—

                      (i)         authorised by the company before it occurs; or

                     (ii)         ratified by the company after it occurs;

(f)      where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company. <http://www.scconline.com/DocumentLink/f92Y78q0>.

[17] <https://www.bloombergquint.com/opinion/autonomy-versus-protection-a-delicate-balance-for-nclt-in-the-tata-mistry-battle>.

[18] Country-Level Corporate Governance and Protection of Minority Shareholders’ Rights: Evidence from African Countries, Agyemang, Otuo SerebourOsei-Effah, MavisSamuel Kwaku AgyeiGatsi, John Gartchie, Accounting Research Journal; Bingley Vol. 32, Issue 3 (2019).

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): V.K. Jain (Presiding Member), held that homebuyers cannot be made to wait indefinitely for the possession of the plots allotted to them and they are entitled to refund of the amount which they paid

Developer Company was selected by Government of Uttar Pradesh for the development of a township in Greater Noida in the name of ‘Sushant-Megapolis’.

No Time Frame

Large number of complainants booked residential plots and executed agreements with the OP. In the agreement, no time frame for delivering possession of the plots to the allottees was incorporated but the complainants were verbally told that the possession would be handed over within 36 months from the execution of the agreement.

Case of the Complainants

Complainants stated that the township has not been developed, hence no possession was offered to them along with other allottees.

Class Action

Therefore complainants approached the commission by way of class action under Section 12(1)(c) of the Consumer Protection Act seeking a refund of the amount paid by the allottees along with compensation.

Vide an order in 2017, Commission granted the permission to the complainants to institute this complaint on behalf of all the allotted who wanted a refund of the amount paid to the OP. Hence, public notice in two newspapers, circulated in Delhi/NCR were published and several allottees were permitted to join the complaint.

Preliminary objection raised by the OP was that the complaint is barred by limitation.

Analysis & Decision

OP having not completed the development and having not offered possession of the allotted plots to the allottees, they had a recurrent cause of action to file the Consumer Complaint, bench relied on the decision of Meerut Development Authority v. Mukesh Kumar Gupta, (2012) CPJ 12 (SC).

Commission found no merit in the above contention.

Farmers’ Protest | Compulsory Acquisition

With regard to delay in development due to the farmer’s protest, bench on perusal of the communication sent by OP noted that there was no dispute with the farmers as the land comprised in the project namely ‘Megapolis’ was concerned, the said land having been purchased by the complainant on market rate with the consent of landowners, the said case is not of compulsory acquisition of land by the State government.

Small Parcels of Land | Patches required to be acquired from State Government

The proposed project was a large land acquired directly from the farmers, though there were some small patches which were to be acquired from the State Government. OP having advertised the project and having executed the agreements for development and sale of plots, it was for them to purchase those small patches of land from the landowners at a negotiated price even if they had to pay a price higher than the price they were willing to pay.

Hence, it could not be said that the non-acquisition of such small parcels of land delayed the project.

Further, the bench stated that even if the plea taken by the OP with respect to non-acquisition of those small parcels of land is accepted on its face value, the allottees cannot be made to suffer for the inability of the OP to acquire those land parcels.

It’s been 12 years since the sale of the said plots started, but till this date, it is not known whether the OP will be able to complete the development work and if so when the said development would be completed.

Class Action

Counsel for the complainant stated that they have settled with eleven allottees other than the original complainants and they are in negotiations with thirteen other allottees.

For the above-stated, Commission stated that even if the above situation prevails, that would not lead to the dismissal of the class action. Once the jurisdiction of this Commission by way of a class action is invoked, the Commission is required to take the matter to its logical conclusion unless the matter is settled with each and every member of the class.

No Specific Time Period

Commission added to its analysis that though no specific time period for completing the development and offering possession to the allottees was indicated in the agreement, that would not entitle the builder to prolong the development work to an indefinite period.

As far as the development of plots is concerned, such a work does not require as much time as required for construction of group housing flats in multistoried buildings.

“…the development work of the plots, even on a large scale, must be completed within a period of three years from the approval of the lay-out plans.”

Bench relied on the Supreme Court decision of Pioneer Urband Land & Infrastructure Ltd. v. Govindan Raghavan, (2019) 5 SCC 725 and Kolkata West International City (P) Ltd. v. Devasis Rudra II, (2019) CPJ 29 (SC).

In view of the above discussion, Commission held that the allottees of residential plot in the project namely ‘Sushant Megapolis’ cannot be made to wait indefinitely for the possession of the plots allotted to them and they are entitled to refund of the amount which they paid to the OP along with appropriate compensation.

Further, the OP shall refund the entire principal amount received and pay Rs 50,000 as cost of litigation.[Bhrigu Kaushik v. Ansal Hi-Tech Township Ltd., Consumer Case No. 1951 of 2016, decided on 16-10-2020]

Case BriefsForeign Courts

Supreme Court of the United States: While deliberating on the issue that whether employees should always be permitted to bring their claims in collective actions, no matter what they agreed with their employers, the 9 judge Bench of the Court with a ratio of 5:4, held that the law embodied under the National Labor Relations Act (NLRA) clearly gives the employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum. Furthermore the Supreme Court in the past has never read the right to class actions under the NLR Act.

The parties in dispute (Ernst & Young LLP v. Morris) entered into an agreement providing that they would arbitrate any disputes that might arise between them. The agreement stated that the employee could choose the arbitration provider and that the arbitrator could grant any relief that could be granted by a court in the relevant jurisdiction. The agreement also specified individualized arbitration, with claims “pertaining to different employees to be heard in separate proceedings. Morris sued Ernst & Young in federal court. He alleged that the firm had misclassified its junior accountants as professional employees and violated the federal Fair Labor Standards Act (FLSA) and California law. Morris further sought to pursue the state law claim as a class action under Federal Rule of Civil Procedure 23. The employees pleaded before the Court to infer that class and collective actions are “concerted activities” protected by Section 7 of the NLRA, which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,

The majority decision was delivered by Neil M. Gorsuch, J. It was held by the majority that if workers were allowed to band together to press their claims, he wrote, the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace. However 4 Judges disagreed with the majority opinion. Ruth Bader Ginsburg, J., leading the dissent, termed the majority decision as “egregiously wrong” and stated that there “will be huge under-enforcement of federal and state statutes designed to advance the well being of vulnerable workers”. [EPIC System Corps v. Jacob Lewis, Case No. 16–285, decided on 21.05.2016]