Author: Isha Khurana
Fifth-year law student at Jindal Global Law School, Sonipat
I. Introduction
Class action suits have witnessed a series of developments in Indian corporate law, starting from the Satyam scam, moving into the 2005 JJ Irani Committee report on Company Law, and currently, awaiting the finality of a successful class action suit. Given the general family dominated nature of Indian businesses, the committee report cited the need to provide minorities with protection against majority or promoter decisions, as a rationale for the introduction of the class action provision, through Section 245 of the Companies Act, 2013.
While the provision itself does not come with many flaws, seeing as it is para materia to American provisions on class actions, the concept of a class action was faced with severe criticism in India, due to the fact that it had never been applied or used to bring forth a suit.
Aspects of class action suits, such as their clash with different provisions of law, (including representative suits under Order 1 Rule 8 of the Civil Procedure Code), have been discussed in previous literature. In the following years, the introduction of a class or group action in case of consumer disputes has also sparked discussions. This piece however, delves into how recent developments in the corporate landscape, through the Jindal Polyfilms and ICICI Securities suits, may bring forth a new beginning for class actions and its jurisprudence in India.
II. Observations from Jindal Polyfilms and ICICI Securities
The allegations by the minorities in both, Jindal Polyfilms and ICICI seem to be classic cases of oppression and mismanagement by the majority. In Jindal, minority shareholders raised issues against the sale of optionally convertible preference shares and redeemable preference shares, to promoter entities at valuations which had apparently caused a loss to the company. Further, in ICICI, the impugned transaction comprised of a swap ratio, that led to benefit the parent company, ICICI Bank, rather than shareholders of ICICI securities.
In both these cases, the majority shareholders challenged the maintainability of the suits instituted by minority shareholders. For instance, in the ICICI case, the company protested the institution of such a suit on grounds of threshold and subject-matter maintainability. More interestingly, they argued that the de-listing of shares and the swap ratio, were decisions that had been approved by shareholders, including minority shareholders, at previous general meetings. While the shareholders claim that their vote was compromised due to ICICI Bank’s employees reaching out to them and driving their voting choices, the tribunal has not responded in favour of this argument.
Essentially, the tribunal opined that shareholders bear the onus to take a well-informed decision (while stating that even laymen such as gardeners are able to take decisions regarding their voting), and cannot thus argue that their votes were misguided. Hence, minority shareholders have a long way to go in terms of convincing the tribunal, the extent to which their voting may have been influenced by the Bank’s employees and establishing the general maintainability of their application.
The minority may be faced with two other issues arising from Section 245 (e), since it involves ratification of certain decisions/occurrences by the company. Firstly, and in the ICICI case particularly, it was argued that the impugned decisions and transactions, have been approved through shareholders’ meetings. Thus, if the tribunal chooses takes this into account, as instructed by Section 245 (1), then they may subsequently dismiss the suit and application, solely based on such ratification. Secondly, for both the ICICI securities and Jindal case, there may be several hurdles in establishing a fiduciary duty on the majority shareholders, since the plain language of the statute does not lay out such responsibility on the majority. This is an issue that several class actions in India may come to face in the future, since the cause of such actions are likely to be agency disputes between the majority-minority shareholders and if minorities fail to pin such fiduciary duties on the majority, the application may fail.
However, these issues are related to the substance of the minority’s claims. It must be remembered that in Indian jurisprudence, most class actions have not reached finality, or for that matter, even moved past the application stage, due to the rejection or non-certification of the class, or group of shareholders. Rejection of classes under Section 245, often occurs due to non-fulfilment of the threshold category. The threshold being not less than 100 members or 10% of the total members in a company (wherein the company has a share capital) or, not less than 1/5th of the total number of members (wherein the company does not have a share capital).
It is also important to note that Section 245 (read with Rule 85 of the NCLT Rules, 2016) discusses the admissibility procedure for class actions in India, and is para materia to Rule 23 of the federal civil procedure rules of the United States. Despite this similarity, Indian class actions have failed to achieve the same success as American class action lawsuits, perhaps because Indian courts are far less willing to admit class actions and dismiss them on grounds of non-certifiability, whereas American courts have grown to welcome class action lawsuits and often witness courts using their discretionary powers to certify or also, de-certify a class, as per their understanding of the case, since there is no threshold limit prescribed under Rule 23. While this may lead to arbitrary discretion by courts in certain instances, the lack of a threshold requirement also goes on a long way in ensuring that class actions are not dismissed solely because the threshold requirement is not met, especially if the plaintiffs have a valid claim. Moreover, the Companies Act, 2013 also provides the option of a waiver for threshold requirements, for suits under Section 241 (by making such an application under Section 244h). Following a similar approach for waivers under class action thresholds, may be useful, especially if the non-existence of a threshold limit entirely is too extreme of a measure. Thus, it is likely that class actions may witness some success under Indian law if courts exhibit a more open approach to certification, and potentially reach a stage of merits of the cases being heard.
III. Analysing similarities with Consumer Protection Law
Analogous to the developments for class actions under the Companies Act, is the journey of class actions under consumer protection law. Thus, consumer protection law becomes important to study, in this analysis of class actions, especially due to the similarity in grounds on which class actions may have been rejected. Similar instances of rejection are present consumer protection jurisprudence, as seen in the cases of Vivek Kumar Singh v Sweta Estates Pvt Ltd and Surendar Pal Singh v DLF Homes Panchkula Ltd. The consumer forum held that in both these cases, class actions under the consumer protection regime were not maintainable because the complainants were not ‘similarly placed’, either in terms of the relief they were seeking or in terms of the procedural requirements (timelines) that were to be followed. Further, in Surendar Pal, the consumer forum also established a high threshold for bringing a claim under Section 12 (1) (c) of the 1986 Consumer Protection Act, by stating that the “complaint must be filed on behalf of or for the benefit of all the persons having a common grievance, seeking a common relief and having a community of interest against the same service provider or respondent”.
It is argued that this reluctance of the consumer courts along with their strict standards to allow a class action is not new or unfamiliar in any manner due to the position in the Satyam scam. In essence, during the Satyam scam, the NCDRC stated that they do not have the necessary infrastructure that is required to deal with such a class action suit and thus, they cannot entertain the same. Hence, class actions under consumer protection law did not fare well either, until recently.
The case of the Aakriti Aquacity brought about a pleasant change in class action jurisprudence, wherein the homebuyers of a property were successful in instituting, as well as obtaining a judgement in their favour by the NCDRC, NCLAT, and the Supreme Court. While the NCLAT decision was intertwined with pleadings under the Insolvency and Bankruptcy Code, 2016, the Tribunal continued to hold in favour of the homebuyers, who relied on Section 12 (1) (b) of the 1986 Act to institute such a suit as a class action in the first place. Here, reading the term ‘consumer association’ to mean a group of people who are similarly placed, allows us to conclude that the suit filed was in substance, a class action.
The reasons for non-reliance on Section 12 (1) (c) may firstly be that it is more in the nature of a ‘representative’ suit, and does not necessary envision the formation of a ‘class’ or association. Contrarily, Section 12 (1) (b) inherently seems more favourable to those consumers seeking to form a ‘class’ since it envisages a group of consumer coming together as an association to collectively represent their interests, rather than any other form of representation. Further, a strict standard has already been established by the judiciary for Section 12 (1) (c), as observed in Surendar Pal, steering consumers towards Section 12 (1) (b).
One may then have hope that as the fate of consumers changed in the consumer protection regime, a similar outcome may be expected for minority shareholders under the current Companies Act, through cases such as Jindal Polyfilms and ICICI.
IV. Concluding Remarks
The JJ Irani Committee Report, had visualized class action lawsuits as an avenue for a larger group of shareholders, to protect their interests in the company, against the decisions of the controlling parties, being either the promoters, managers, or majority shareholders. Unfortunately, the text of the 2013 Act comes as a hurdle in establishing a fiduciary duty on majority shareholders under class actions, slowing down the protection of minority rights. To top it off, class actions continued to be riddled with issues of subject-matter and threshold maintainability.
Since the applications under Jindal and ICICI securities have become public knowledge, many have grown hopeful about a positive outcome from these cases and the beginning of a new era for Indian class action lawsuits. The arguments being raised by the companies and majority shareholders are a convincing reflection of many apprehensions that scholars have had towards section 245 and also reflect the rejection of maintainability, on grounds of threshold which has been taking place since several years.
Thus, the fate of ICICI securities and Jindal Polyfilms now rests with the respective tribunals, and it will be interesting to observe whether the minority shareholders are able to put forth persuasive arguments to bring about a difference for the protection of minorities.
Note: This article has been reviewed by Mr. Vinod Kothari (Managing Partner, Vinod Kothari and Company), at the Tier II Stage.
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