Class Actions

In one line

A class action lets a qualifying body of members or depositors sue on behalf of the whole class, not only the company or its directors but also its auditors, its audit firm and its experts and advisers, for orders restraining ultra vires or unlawful acts and for damages or compensation, and any order binds everybody associated with the company.

In exam wording: under section 245(1) the requisite number of members or depositors, or any class of them, may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for all or any of the orders the sub-section lists.

Why the law has this at all

Section 245 was enacted after the Satyam episode, and its shape cannot be explained without saying so. A very large number of investors lost money because accounts had been falsified over years; the auditors had certified them; and the existing remedies were all inadequate for that loss.

The oppression petition was the wrong shape. Section 241 protects a member against conduct prejudicial or oppressive to him as a member, and its relief is designed to bring the matters complained of to an end, not to compensate a scattered body of investors. And its respondents are the company and those in control, not the auditor who signed the accounts.

The derivative action was worse. At common law the company is the proper plaintiff, and the exceptions to Foss v. Harbottle required fraud and control, as [Majority Rule and Its Limits] explains.

And an individual suit was uneconomic. Each investor's loss, although devastating in aggregate, was too small to justify litigation against a company and its professional advisers.

The Act's answer was the class action, borrowed from American practice, with four features that answer those defects directly.

A class sues on behalf of the whole class, so the cost is shared and the outcome binds everybody.

The respondents extend beyond the company. Sub-section (1)(g) reaches the company or its directors, the auditor including the audit firm, and any expert, adviser, consultant or other person.

The reliefs include damages and compensation, which s.242 does not provide.

And the cost is thrown on the company or on the person responsible, sub-section (5)(d), which is what makes the remedy usable at all.

Section 245(1): who may apply, and for what

Who. The requisite number of member or members, depositor or depositors, or any class of them, who are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, filing on behalf of the members or depositors.