CLASS ACTION SUIT: DERIVATIVE OR

REPRESENTATIVE SUIT
A final draft submitted in partial fulfillment of the course Company Law for the
requirement of degree of B.A. LL.B. (Hons.) for the academic session 2021-22

SUBMITTED BY:

Rahul Bhaskar

Roll-1957 (4th Year, 7th Semester)

SUBMITTED TO:

Ms. Nandita S. Jha

August, 2021

Chanakya National Law University

Nyaya Nagar, Mithapur,800014

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 ACKNOWLEDGEMENT:

I place on my record my sincere thanks to all who helped me in making this project a reality. This
project could not have been completed without the sincere efforts of my kith and kin. They
supported me in every possible way and helped me not only by providing me information but also
in the making of this project. They provided me with all the emotion and support that I needed and
they proved to be a source of my constant extrinsic motivation. This project would have become a
futile effort in their absence. I would like to mention the name of my teacher of Company Law,
Ms. Nandita S. Jha., who provided me not only with technical know-how of the project but also
got me through the struggles of making a project on such an important topic. The topic has many
criticisms associated with it, mostly because of erroneous interpretation of sources but it was only
because of the guidance of a real teacher that helped me in the completion of this project.

At last I would like to thanks each and everyone who were there with me during the making of this
project and who helped me either directly or indirectly. Their immense contribution means a lot to
me and this journey would not have been possible in the absence of their tireless efforts.

THANKING YOU

NAME: Rahul Bhaskar

ROLL NO.: 1957 (4th Year, 7th Semester)

COURSE: B.A. L.LB

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 DECLARATION;

I hereby declare that the project entitled “Class Action Suit: Derivative or Representative
Suit” submitted by me, Rahul Bhaskar, Roll No. 1957, student of B.A. LL.B. batch of 2018-
23 is my original work and has not been submitted anywhere else. I hereby declare that all the
statements made above are true to my best knowledge.

(Rahul Bhaskar)

CHANAKYA NATIONAL LAW UNIVERSITY

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 TABLE OF CONTENT:

1. Acknowledgement------------------------------------------------------------------------
2. Declaration---------------------------------------------------------------------------------
3. Introduction--------------------------------------------------------------------------------
4. Aims and Objectives----------------------------------------------------------------------
5. History of Class Action Suit-------------------------------------------------------------
6. Indian Provisions Relating to Class Action Suit--------------------------------------
7. Derivative Suit-----------------------------------------------------------------------------
8. Conclusion----------------------------------------------------------------------------------
9. Bibliography--------------------------------------------------------------------------------

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 INTRODUCTION:

The Companies Act, 2013, in its final form, brings about a number of changes from its earlier
iteration in 1956. Most of these changes either make changes to existing substantive or procedural
provisions as necessary. However, there are rare changes made, bringing in concepts and rights or
processes that were not present in the 1956 version. The right of a collection of shareholders or
depositors to raise and maintain a suit as a class of claimants is one of them.

The concept of a class action suit began to emerge in the United States in the early 18 th century.
With a growing number of claimants seeking restitution and often revenge under Rule 23 of the
United States Federal Rules of Civil Procedure for various claims, this form of litigation developed
in popularity. From corporate fraud to aircraft delays, there are a variety of issues that might arise.

Much like other provisions in company law which have been transplanted from the United
Kingdom or the United States, the concept of class action suits in its present form has also been
inspired by similar provisions in these jurisdictions.

The need for a provision allowing for class action suits came out of a series of incidents involving
Satyam Computer Services Limited.

In this case some of the aggrieved investors approached the National Consumer Dispute Redressal
Commission (NCDCR) and Supreme Court. However, their claim was rejected because there was
no appropriate law to deal with it. The aggrieved class of investors who approached the NCDCR
to pursue the litigation on behalf of all other investors actually claimed for class action suits.
However, at that time, no such provision regarding class action suits was available in India.

Thereafter, Indian shareholders filed a petition before NCDRC. However, the claim was rejected.
Again, the appeal was made before the Supreme Court, but the decision was the same. It was held
in the judgment that India was not a suitable place for filing class-action suits.

Although the perpetrators in the Satyam Computer Case were arrested, it was crucial to maintain
the interest of shareholders and investors. No provision of class action suits was present in India
due to which no compensation was provided to the investors.

Thus, after the Satyam case, it is quite evident that the need for the introduction of class action
suits was so pressing and critical in India.

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In the aftermath of the collapse of Satyam Computer Services Limited, Clause 217, providing the
right of members or creditors to file an application before the NCLT on behalf of the all members/
creditors in the event that the management of the company was being conducted in a manner
prejudicial to the interests of the company or its members or creditors, assumed greater importance
as a redressal mechanism separate from the traditional oppression and mismanagement
application. This provision was enacted as Section 245 of the Companies Act, 20131.

AIMS AND OBJECTIVES:

 To know the History of Class Action Suit.

 To know the Provisions relating to Class Action Suit in India.

HYPOTHESIS:

The researcher presumes that:

Class Action Suit is an alternative remedy for a Derivative Suit.

RESEARCH METHODOLOGY:

The research methodology adopted in the project is mainly focused on doctrinal way of research.
References in the project have been taken from web journals, articles, newspaper, websites and
books. However every reference has been taken in an unplagiarized manner and due credit has
been given to each source in the bibliography section. Views have been presented on each topic
with no outsourcing of facts. Every view presented is completely original in form of comments
and the facts and other contents are interpretation of authentic materials.

The reason for choosing doctrinal way of research is because this is such a topic on which facts
and data is already available and it depends on an individual that how he interprets such facts. No
discovery or invention of facts is required for this topic of project.

REVIEW OF LITERATURE:

Company Law, Avtar Singh, 17th ed., 2020

1
S.245, The Companies Act, 2013.

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The researcher utilized the above-mentioned book for the purpose of better understanding of the
topic of Class Action Suit, as the same has been extensively been dealt with in chapter 16 of the
book and provides an excellent understanding of the topic. Further, upon reading, there are certain
authorities that can be cited with the help of the book in order to substantiate the issues described
in the final research work, in order to make the work more authoritative.

SOURCES OF DATA:

 Books
 Journals
 Internet Sources

METHOD OF WRITING:

The method of writing followed in the course of this research paper is primarily analytical.

MODE OF CITATION:

For the Purposes of executing this project work the researcher has resorted to a uniform mode of
citation.

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 HISTORY OF CLASS ACTION SUIT:

The class action suit was an ‘Invention of Equity2’ arising out of the Bill of Peace of the United
Kingdom which allowed English courts to bring together multiple claims related to the same cause
of action, within a common legal proceeding.

It is often argued that a class action suit is a modified version of a public interest litigation.

The concept of the class action suit emerged in United States of America in the early 18th century.
This course of litigation grew in popularity with an increasing number of claimants seeking
restitution and often retribution under Rule 23 of the United States Federal Rules of the Civil
Procedure for sundry claims ranging from corporate fraud to air flights delay. The amendment in
the year 1966 brought about a change in the way class action practice and litigation was perceived
and this invited much required scholarly attention.

In India the enabling concept of class action suits was first endorsed in the Dr. Jamshed J Irani
Report (2005)3. The report suggests that in case of fraud on the minority by wrongdoers, who are
in control and prevent the company itself bringing an action in its own name, derivative actions in
respect of such wrong non-ratifiable decisions have been allowed by courts. Such derivative
actions are brought out by shareholder(s) on behalf of the company, and not in their personal
capacity, in respect of wrong done to the company. Similarly the principle of
“Class/Representative Action” by one shareholder on behalf of one or more of the shareholders of
the same kind have been allowed by courts on the grounds of persons having same locus standi.
Though these principles have been upheld by courts on many occasions, these are yet to be
reflected in Law. The report stressed upon the need for recognition of these principles.

The purpose of including such a clause in the Companies Act of 2013 was to safeguard small
shareholders, increase auditor responsibility, and defend against the possibility of corporate fraud

2
William Weiner, Delphine Szyndrowski, The Class Action, From The English Bill of Peace to Federal Rule of Civil
Procedure 23
3
Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India, Report
on Company Law.

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and scams. The Ministry of Corporate Affairs justified the inclusion of this provision by claiming
that it would ensure that “the shareholder feels like a king” in matters such as managerial salary.

The aftermath of the Satyam Computer Case felt the need for the provisions relating to the class
action suit which led to the inclusion of Section 245 of The Companies Act, 2013 which deals with
the matters related to the class action suits in India.

The Provisions related to Class Action Suit falls under Section 245 of the Companies Act, 2013.

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 INDIAN PROVISIONS RELATING TO CLASS ACTION SUITS:

Class Action Suits, also known as a class-action lawsuit, class suit, or representative action, is a
type of lawsuit where one of the parties is a group of people who are represented collectively by a
member of that group. A class action is also a procedural instrument, which enables one or more
claimants to file a claim and pursue litigation on behalf of a larger group, class or entities with
common rights and grievances.

The Indian legislature introduced the concept of class actions into section 245 of the Companies
Act 20134. Section 245 introduces the concept of "specialised class actions" by shareholders and
depositors of a company to the Indian legal regime, and is likely to have a far reaching impact on
the use of class actions as an effective remedy in the Indian legal regime.

Who can file Class Action:

If the members or depositors are of opinion that the management or conduct of affairs of the
company are being carried on in a manner prejudicial to the interest of the company or its members
or depositors, they can file an action before the tribunal on behalf of all of them or any of the
following orders:

 to restrain the company from committing an act which is ultra vires the articles or
memorandum of the company;
 to restrain the company from committing breach of any provision of the company’s
memorandum or articles;
 to declare a resolution altering the memorandum or articles of the company as void if the
resolution was passed by suppression of material facts or obtained by mis-statement to the
members or depositors;
 to restrain the company and its directors from acting on such resolution;
 to restrain the company from doing an act which is contrary to the provisions of this Act
or any other law for the time being in force;
 to restrain the company from taking action contrary to any resolution passed by the
members;

4
S.245, The Companies Act, 2013.

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  to claim damages or compensation or demand any other suitable action from or against—
 the company or its directors for any fraudulent, unlawful or wrongful act or omission or
conduct or any likely act or omission or conduct on its or their part;
 the auditor including audit firm of the company for any improper or misleading statement
of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or
conduct; or
 any expert or advisor or consultant or any other person for any incorrect or misleading
statement made to the company or for any fraudulent, unlawful or wrongful act or conduct
or any likely act or conduct on his part;
 to seek any other remedy as the Tribunal may deem fit.

Number of Members or Depositors required to file Class Action Suit:

In the case of a company having a share capital, not less than one hundred members of the company
or not less than five per cent of the total number of its members, whichever is less5; or

Any member or members holding not less than five per cent of the issued share capital of the
company, subject to the condition that the applicant or applicants has or have paid all calls and
other sums due on his or their shares. In case of company not having share capital, not less than
one-fifth of the total number of its members.

In case of depositors not less than 100 depositors or not less than five per cent of the total number
of depositors, whichever is less; or

Any depositor or depositors to whom the company owes five per cent of the total deposits of the
company.

Against Whom Class Action can be filed:

A class action suit can be instituted against the company, its directors, its auditor (including the
audit firm), any expert, adviser, consultant, or any other person for specified acts or omissions.

5
Avtar Singh, Company Law, p.546(17th ed. 2020).

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In case of any suit against auditor or audit firm, the liability shall be of the firm as well as of each
partner who was involved in making any improper or misleading statement of particulars in the
audit report or who acted in a fraudulent, unlawful or wrongful manner.

Powers of the Tribunal:

On receipt of a class action suit application, the Tribunal will look into the following before
admitting it6:

 whether the member or depositor is acting in good faith in making the application for
seeking an order;
 any evidence before it as to the involvement of any person other than directors or officers
of the company on any of the matters;
 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;
 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;
 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 authorized by the
company before it occurs or ratified by the company after it occurs;
 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.

After an application has been admitted the Tribunal is to have regard of the following:

 a public notice shall be served on the admission of the application to all the members or
depositors of the class in such manner as may be prescribed;
 all similar applications prevalent in any jurisdiction should be consolidated into a single
application and the class members or depositors should be allowed to choose the lead
applicant and in the event, the members or depositors of the class are unable to come to a

6
S.245(4), The Companies Act, 2013.

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 consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in
charge of the proceedings from the applicant’s side;
 two class action applications for the same cause of action shall not be allowed;
 the cost or expenses connected with the application for class action shall be defrayed by
the company or any other person responsible for any oppressive act.

Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for
reasons to be recorded in writing, reject the application and make an order that the applicant shall
pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the
order.

An order passed by the Tribunal has binding effect upon the company and all members, depositors,
and auditors, including audit firm or expert or consultant or advisor or any other person associated
with the company.

According to section 245(7)7 of the Act, any company which fails to comply with an order passed
by the Tribunal is punishable with fine of not less than Rs. 5,00,000 but may extend to Rs.
25,00,000. Every defaulting officer is punishable with imprisonment extending to 3 years and fine
of not less than Rs. 25,000 extending up to Rs. 1,00,000.

Application of Other Sections:

The provisions of Sections 337 to 341 are to apply mutatis mutandis to an application made to the
Tribunal under Section 241 or Section 245.

Section337provides penalty for frauds by officers. Section338creates lia bility where proper
accounts are not kept. Section 339 imposes liability for fraudulent conduct of business. Section
340 provides for power of Tribunal to assess damages against delinquent directors, etc. Section
341 provides that liabilitytmder Sections339 and 340is to extend to partners or directors in firms
or companies8.

7
S.245(7), The Companies Act, 2013.
88
Avtar Singh, Company Law, p.547(17th ed. 2020).

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 DERIVATIVE SUIT:

A derivative action, also called the shareholder derivative suit, comes from two causes of action,
(i) it is an action to compel the corporation to sue and (ii) it is also an action brought forth by the
shareholder on behalf of the corporation for redressal against harm to the corporation.

Such an action allows the shareholders monitoring and redressal of any harm caused to the
corporation by the management within, in a case where it is unlikely that the management itself
would take measures to redress the harm caused. Thus, the action is ‘derivative’ in nature when it
is brought by a shareholder on behalf of the corporation for harm suffered by all the shareholders
in common.

In India, derivative suits are brought under the clauses of oppression and mismanagement.

While the Companies Act, 2013 does provide, under Chapter XVI, sections for the prevention of
Oppression and Mismanagement, it does not specifically provide for derivative litigation. Instead,
it provides a remedy that is very similar to direct action.

The cost factors associated with derivative litigation can play a public role in the diversity of Indian
shareholders. The integration and mobilization of shareholders is a time-consuming and costly
legal process. In this case, the law stipulates that statutory derivatives litigation will make
managers more accountable to shareholders. Due to better investor sentiment, increased
management responsibility will increase market liquidity9.

Indian conditions appear to be the ideal one for Derivative suits as there happens to be a transition
to more dispersed shareholders with existing institutional structures already slow and inefficient.
The base of retail investor has expanded due to a string of recent public offers of securities by
companies in India and the requirement to have at least 25% public shareholding for a listed
company, thus dispersing the shareholder base. Thus, the utility of Derivative suits cannot be
dismissed. Yet, Indian laws give an implicit preference to other methods of corporate remedy
mechanisms like direct suits and approaching other dispute resolution forums. These forums

9
Roopam Dadhich and Sankalp Jain, Contextualising Derivative Action Suits in India, (Sept.02, 9:48PM,2021)
https://www.tcclr.com.

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include the Company Law Board and the SEBI (for listed companies). The reform measures that
SEBI has taken are only effective insofar as listed companies are involved.

Further, there needs to be procedural clarity on Derivative Suits, especially in the face of Order 1
Rule 8 of the CPC which, by its nature, talks about representative suit or a direct suit often mistaken
as Derivative Suit. For instance, under a representative suit, the claimant is representing the rights
of other similarly placed shareholders and the relief provided reaches directly to them, not the
company, whereas, under a derivative suit, company is the only affected party and not a particular
shareholder.

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 CONCLUSION AND SUGGESTION:

The class actions provided for in the "Company Law" ensure that company management puts the
interests of stakeholders and the company above their own interests and hold them accountable for
the actions of the company's stakeholders. It increases management’s accountability for the
company’s fiduciary responsibilities. The legal support of class actions enables minority
shareholders of the company to more effectively protect their interests through representative
litigation. However, this increased power should not be misunderstood as a new technology that
allows companies to meet their ransom demands.

As compared to other remedies, Class Action is of a more serious nature and involves grave
ramifications if the application is found to be made with malafide intentions or does not conform
to the criteria prescribed in the Companies Act. The shareholders or depositors would not be able
to easily get away for filing a frivolous or vexatious application. The applicants should carefully
weigh their options under different provisions of the Companies Act before proceeding under this
section.

Considering the stringent quantitative and qualitative screening of all Class Action applications,
an alternate remedy under the Companies Act may sometimes prove to be a safer bet for the
shareholders and depositors. However, the possibility of a Class Action suit filing is a welcome
introduction.

Derivative suits provide a unique corporate remedy which would be immensely useful, given the
manner in which shareholders would be dispersed thus, increasing costs should they sue as a Direct
action. After the codification of Director’s Duties through the Companies Act, 2013, several
questions remain as to the omission of provisions for statutory derivative suits which appear in the
Company Law statues in other Common law jurisdictions like the UK, Hong Kong and Singapore.
Derivative suits would soon become a popular remedy and in such a case its statutory insertion
would become necessary and though Common Law principles should also be affirmed while
adding the aforementioned.

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 BIBLIOGRAPHY:

BOOKS:

 Company Law by Avtar Singh, 17th ed., 2020.

 Company Law by Dr. G.K. Kapoor, 23rd ed., 2021.

STATUTES:

 Companies Act, 2013.

WEBSITES:

 https://samistilegal.in/
 https://law.asia/
 https://www.business-standard.com/
 https://content.next.westlaw.com/
 https://www.tcclr.com/

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