Introduction
Corporate bodies are governed under the principle of majority rule, wherein corporate decisions and management are made by controlling shareholders. Although this facilitates effective corporate management, it also leads to an uneven power relationship between controlling and minority shareholders. In practice, directors and controlling shareholders have been using their power for oppressive conduct and management of corporate affairs, which are not only detrimental to corporate interests but also leave minority shareholders without any effective remedies for such conduct.
In practice, minority shareholders, although legal owners of corporate bodies, do not have sufficient voting power to influence corporate decisions or remedies for oppression. In fact, under existing corporate laws and remedies, minority shareholders have been unable to file effective suits for oppression and management of corporate affairs due to cost constraints and fear of retaliation. Minority shareholders have remained vulnerable to corporate oppression and management for many years.
In contemporary corporate jurisprudence, class action suits for empowering minority shareholders have emerged as an effective remedy for addressing inequalities and imbalances in corporate management. In fact, class action suits for the empowerment of minority shareholders and depositors have been effective in enforcing corporate accountability and transparency in corporate management, thereby promoting corporate democracy. The present article aims at critically evaluating the empowerment of minority shareholders through class action suits based on the concept, meaning, legal basis, judicial interpretations, scope, and challenges associated with the effectiveness of class action suits.
Concept and Meaning of Class Action Suits
Class action suits refer to a group of individuals or one person who institutes a suit for a larger group with a common legal grievance. The meaning of class action suits can be understood in terms of the fact that such suits involve a group of individuals with a common problem seeking justice through a single suit. This is as opposed to fragmenting the suits into several cases.
In the context of corporations, class action suits involve a group of shareholders or depositors filing a suit against a corporation and its directors, auditors, and/or advisors for actions detrimental to the interests of the group as a whole. This is as opposed to shareholder suits, which involve isolated grievances and limited remedies for shareholders.
In general terms, class action suits have a historical development as a response to the traditional problem of a power imbalance between large corporations and shareholders/depositors in common law countries. Class action suits have come to play a significant role in ensuring corporate accountability, particularly in cases involving fraud, misrepresentation, and breach of fiduciary duty.
Minority Shareholders and the Need for Collective Remedies
Minority shareholders include those individuals who own a small portion of the share capital of the company. They do not have control over the management of the company. Minority shareholders, even though they are entitled to participate in the management of the company, do not have voting rights.
Minority shareholders often face problems like oppression by the majority shareholders, management, siphoning off of funds, etc. Such actions can cause damage to the investment of the minority shareholders.
The issue of the vulnerability of minority shareholders was recognized in the corporate laws long ago. In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., it was held by the Supreme Court that “the powers exercised by directors must be exercised in a fair and good faith manner even in the presence of majority.”
In the case of Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao, the Supreme Court held that the question of fairness was of utmost importance in deciding the question of oppression. The court recognized the fact that minority shareholders must be protected in the presence of the majority.
In most cases, the minority shareholders will not prefer to take legal action against the company due to the costs associated with the legal process. Such actions will not provide an adequate solution to the minority shareholders. Collective action becomes the only solution to ensure that the minority shareholders can take legal action against the company.
Legal Framework Governing Class Action Suits in India
The legal framework for class action suits in India is provided under Section 245 of the Companies Act 2013. This is a significant shift from the past legal framework for companies, which failed to offer effective remedies for minority shareholders. This section enables shareholders and depositors to file an application to the NCLT when the company’s affairs are conducted in a manner detrimental to their interests or the company’s.
The inclusion of class action suits in the Companies Act is a significant step towards the legislative intent to strengthen the framework for the protection of investors and the prevention of corporate malpractices. This is a preventive clause, and class action can be taken not just against the firm, but also against its directors, auditors, and advisors.
This clause enables intervention by the tribunal to take action before damage is done, which is a big step towards corporate governance, which emphasizes prevention.
Who Can File a Class Action Suit
The qualifying conditions specified in Section 245 are intended to ensure that class action suits are indeed in the interest of all members of the class. For corporations with share capital, a number of shareholders or a percentage of all shareholders are permitted to make an application. A number of members are necessary for corporations without share capital. A similar facility is available to depositors.
These numerical conditions have a dual effect: they prevent frivolous litigation from taking place by making sure that litigation is for the interest of the class as a whole and not for individual interests, and they ensure that class action suits are indeed representative so that all members of the class are bound by what is granted as relief. The representative character of class action suits ensures judicial efficiency in the judgment of similar cases, preventing contradictory judgments in different suits.
Grounds for Filing Class Action Suits
These class action suits may be instituted on various grounds, which are detrimental to the collective interest of the shareholders. These include ultra vires acts, fraudulent acts, unlawful acts, and the violation of legal duties by directors and auditors.
The rationale for the basis of collective action can be found in the landmark Foss v. Harbottle principle, which has historically restricted the scope of minority involvement in company matters except for cases involving fraud and ultra vires acts. The principle is now given effect to by Section 245, which has clearly empowered minority shareholders to take collective action against cases of systemic wrongdoing.
In the S.P. Jain v. Kalinga Tubes Ltd. case, the Supreme Court held that “satisfaction with the management of a company is no ground for interference by the court unless there is a continuous course of oppressive and prejudicial conduct on the part of the management.” This is in accordance with Section 245, as it only addresses collective wrongdoing.
The provisions of company law in India, therefore, have overcome the limitations of the common law principles.
Reliefs Available under Class Action Suits
Under Section 245, tribunals enjoy broad discretion to order a wide range of reliefs that cover past and future injuries. These include the prohibition of the corporation from engaging in unlawful acts, overruling resolutions, and holding the corporation liable to make the shareholders whole for losses suffered.
Damages claims can be brought against the directors, auditors, and even the advisors in the event that there had been negligent and fraudulent behaviour. Shareholder remedies not only provide some form of reparation for the losses suffered but can also act as deterrents.
Role of Tribunals in Class Action Suits
The National Company Law Tribunal has an important role in the determination of class action suits. It has the power to assess the merits of the cases, check for good faith, and then pass appropriate orders.
In V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd., the Supreme Court has again asserted the need for balancing majority and minority interests and for judicial intervention in cases of opaque and unfair corporate conduct.
In order to prevent any kind of abuse of process, the tribunal has the power to strike out frivolous and vexatious claims and order costs against the applicants. This is an important mechanism for ensuring that class action is not abused for harassment and coercion. Discretion is essential in the interpretation of Section 245.
Impact of Class Action Suits on Corporate Governance
Class action suits have a significant place in corporate governance, which ensures transparency in the dealings of the corporation. Class action suits deter corporate directors and major shareholders from engaging in wrongdoing and force them to comply with regulatory requirements.
Strengthening the hand of minority shareholders would lead to better disclosure standards, responsible corporate decisions, and stakeholder trust. Making companies more liable through class action suits enhances accountability and the fiduciary aspect of corporate governance, hence a practice that focuses on stakeholders.
Comparative Perspective on Class Action Suits
In countries like the United States, class action suits form the core of the enforcement of securities laws and the fight against corporate fraud. The system of contingency fee arrangements and discovery facilitates class action suits.
The system of class action suits in the UK is a strict system whereby only representative actions occur under specific conditions. In contrast, Section 245 in India can be regarded as a progressive system with associated issues of procedures and the absence of judicial precedent.
The comparative study points to the need to simplify the procedures and to judicial activism to make class action suits more effective in India.
Challenges and Limitations of Class Action Suits
In spite of the legal recognition, class action suits in India continue to face several challenges. For instance, there is complexity in the procedure, which is associated with considerable litigation costs. In addition, the adjudication process is time-consuming, and there is a lack of awareness among the shareholders.
Finally, the lack of judicial precedents under Section 245 makes the interpretation of the provision uncertain. This leads to the question of whether class action suits empower minority shareholders arising, even though theoretically the legal basis for such empowerment is sound.
Class Action Suits as a Tool for Empowering Minority Shareholders
Class action suits are empowering for minority shareholders as they offer strength and legal recognition for effective remedies against systemic corporate misconduct. Minority shareholders are transformed into an organized body that can influence corporate conduct and enforce accountability.
However, for empowerment to be effective, accessibility and judicial efficiency are also crucial. Unless procedural reforms are introduced and judicial interpretation is proactive, the scope of class action suits is underutilized.
Future Scope of Class Action Suits in India
The fate of class action suits in India would depend on procedures, interpretations by the judiciary, and shareholders’ education. Another important factor which might trigger class action suits is the judiciary’s purposive interpretation of Section 245, which might favour minorities.
In today’s complex corporate environment, class action suits are likely to gain importance as instruments of corporate accountability and reform.
Conclusion
Class action suits have brought a landmark change in Indian corporate laws. This concept of class action suits can be seen as a significant move towards protecting the interests of minority shareholders and holding management and majority shareholders accountable for their actions.
It can be understood that class action suits empowering minority shareholders can be an effective class action suit mechanism, which can promote corporate democracy and ethical corporate governance.
About Author
Shreshtha Aditya is NET-qualified and holds an LLM in Constitutional Law. She is an emerging legal researcher and writer with a strong interest in contemporary legal and policy issues. Her research interests include business law, artificial intelligence, and intellectual property rights, with a focus on their practical and regulatory implications. She is committed to legal scholarship, critical analysis, and contributing to the evolving discourse at the intersection of law, technology, and governance.
Frequently Asked Questions (FAQs)
What is a class action suit in company law?
A class action suit is a legal action instituted collectively by the shareholders or depositors of a firm, claiming compensation for wrongful acts perpetrated by the firm or its directors.
Who can file a class action suit?
A certain number or percentage of shareholders or depositors are empowered to file a class action suit on behalf of all the members of the class.
How do class action suits protect minority shareholders?
Class action suits are effective in safeguarding the rights of minority shareholders.
What reliefs can be granted in a class action suit?
In class action suits, injunction, damages, compensation, and declarations against wrongful practices can be granted as reliefs.
Are class action suits effective in improving corporate governance?
Yes, class action suits are effective in enforcing good corporate governance practices.