Class actions under Section 245 of the new Companies Act, 2013 are evidently distinctive and separate and were brought in as additional tool for investor protection. This is first part of a three part series

Very generally speaking, class action suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

A Short History

The class action suit began in the equity courts of seventeenth-century England as a bill of peace. English courts would allow a bill of peace to be heard if the number of litigants was so large that joining their claims in a lawsuit was not possible or practical; the members of the group possessed a joint interest in the question to be adjudicated; and the parties named in the suit could adequately represent the interests of persons who were absent from the action but whose rights would be affected by the outcome. If a court allowed a bill of peace to proceed, the judgment that resulted would bind all members of the group.

Justice Story, who served on the US Supreme Court from 1811 to 1845 wrote that in equity courts, "all persons materially interested, either as plaintiffs or defendants in the subject matter of a bill ought to be made parties to the suit, however numerous they may be," so that the court could "make a complete decree between the parties [and] prevent future litigation by taking away the necessity of a multiplicity of suits" (West v. Randall).

The bill of peace, and later the class action, provided a convenient and efficient vehicle for resolving legal disputes affecting a number of parties with similar claims. Common issues that could have similar outcomes did not have to be tried piecemeal in separate actions, thus saving the courts and the litigants’ time and money.

Initially, a class action could be brought only in equity cases, disputes in which the parties did not necessarily seek monetary damages but instead might desire some other type of relief. The adoption of Rule 23 of the Federal Rules of Civil Procedure in 1938 broadened the scope of the class action suit, providing that cases in law seeking money damages as well as cases in equity could be brought as class actions. In 1966, the scope of the class action was again clarified and expanded when Rule 23 was amended to provide that unnamed parties to a class action were bound by the final judgment in the action so long as their interests were adequately represented.

Rule 23 of the Federal Rules of Civil Procedure defines three kinds of class actions:

1. The first type is instituted where separate lawsuits might adversely affect other members of the class or the defendant in either of two ways—if the piecemeal litigation resulting from separate suits might impose inconsistent standards of conduct on the defendant, or if multiple suits might "impair or impede" the class members from protecting their various interests.

2. In the second type of class action, a class seeks an Injunction or some type of relief compelling the defendant either to cease a certain activity or to perform some other type of action.

3. In the third category of class action lawsuit, there are questions of law or fact common to the entire class that predominate over questions peculiar to each individual plaintiff, and a class action suit is a more efficient means to resolve the controversy. Under this type of class action, individual members of the class may "opt out" of the litigation if they do not want to be bound by the results of the suit. (Phillips Petroleum Co. v. Shutts).

The Indian Scenario

The Satyam Computers’ fallout had created uproar in the country. Investors of the company abroad brought in several class actions seeking damage, while investors in India did not have any such recourse to legal remedies. This steered the Ministry to incorporate and include proactive measures for the protection of the shareholders and investors and thus the provisions of class action suits were incorporated under the Companies Act 2013.

Prior to the enactment of Companies Act 2013, class actions suits have been filed as “representative suits” under Civil Procedure Code 1908 or under the pretext of public interest litigations (PILs). The laws were not well defined with respect to class action and thus were unable to be described as “sui generis”.

This article is an attempt to reflect upon the provisions pertaining to class action as detailed under the Companies Act 2013(Act) and to ascertain the effectiveness of the new redressal mechanism.

Relevant Provisions under Companies Act, 2013

The Companies Act, 2013 introduces the concept of class action under Section 245, detailed in Chapter XVI – Prevention of Oppression and Mismanagement. However, this is not to be misunderstood with provisions governing oppression and mismanagement as set out under sections 241-244. Class actions under 245 are evidently distinctive and separate and were brought in as additional tool for investor protection.

(Both Shambo Dey  and Prachi Narayan are researchers at Vinod Kothari & Co)