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Posted By: Singularity Legal

Tags: Litigation Finance, Singularity legal, Prateek Bagaria


Litigation Finance of mass claims in India

Litigation finance has no exact definition. It refers to a broad genre of transactions which differ inter se in many respects: pure financing for a future share of the award; financing along with active management of claim recovery; insurance against adverse orders; discounted sale of award, etc. A particular form of litigation finance is where the funder is funding an action by a class of claimants against one or few defendants. The funder usually takes an active part in managing such claims, and the claimants are mostly concerned only with getting the final relief. Australian law provides a term of art for these transactions – a ‘litigation funding scheme’.i For simplicity, this may be referred to as class action funding.

India has rich jurisprudence on litigation finance, mainly because unlike many other common law countries, the common law torts and crimes of maintenance and champerty were never in force as special laws in India.ii Consequently, a fair agreement to supply funds to carry on a suit in consideration for a share in the litigation proceeds has never been considered void, illegal or against public policy in India.iii Despite this, due to the tedious nature of Indian court procedures and a dearth of high-value international disputes, the litigation funding market in India remained underdeveloped. There are no home-grown players, and global funders are yet to set up operations in India.

However, this is fast-changing. Indian court procedures have evolved rapidly over the last decade,iv accompanied by concurrent strides in making India arbitration-friendly.v At the same time, India has now become a hotbed for high value, international commercial disputes.vi All this has generated great interest by funders towards the Indian market. Indian businesses now frequently seek and obtain litigation funding for their disputes. But while litigation funding of corporate claimants has seen positive growth in India, class action funding remains unheard of. As is explained further in this article, this is only because of an information gap amongst both funders and litigants about the potential class actions hold in India.

To begin with, the Indian market is rife with class action claims waiting to be filed. In recent years, the Indian market has been hit with a number of frauds and scams, especially in the banking sector, that have eroded the investments and deposits of thousands of people. In 2019-20 alone the total reported losses owing to bank fraud was at US$ 25 billion. To offer perspective, there are two notable examples of these scams:

  1. Punjab and Maharashtra Co-operative Bank had concentrated almost 70% of its loan book in Housing Development and Infrastructure Limited for six to seven years, in violation of Reserve Bank of India (“RBI”) norms. This was only brought to light when the managing director of the bank wrote to the RBI confessing how the bank had hoodwinked auditors and regulators for years. Today, the bank is under operational restrictions imposed by RBI which prevent depositors from withdrawing beyond a small amount.vii
  2. Laxmi Vilas Bank saw a steady decline in its financial position over the last few years, eroding its net-worth and mounting up non-performing assets. Though there was no single scam at play, there were transactions where the bank appeared to have lent out money irregularly. Ultimately, RBI put the bank under corrective actions. After a period of restrictions on withdrawal of money, the bank was merged with DBS Singapore. This merger itself wiped out significant value for the bank’s shareholders.viii

There are many such cases, including Punjab National Bank and Yes Bank, where fraudulent or negligent transactions have resulted in losses for shareholders, depositors and bondholders.

In cases like these, there is clear tortious liability on the banks and their key promoters for negligently (and in some cases, even fraudulently) dealing with depositors’ money. In many cases, promoters have even come forward and admitted their wrongdoings to the RBI. In other cases, there is clear violation of prudential norms on the face of publicly available information. The Indian law on torts is derived from common law, and therefore, torts like negligence would be dealt with in the same way as they are dealt globally. Similar claims may lie with shareholders of these banks, because each of these scams when revealed have decimated the shareholder value in those companies. If actual losses, other damages and interest for each depositor and shareholder is accounted for, each of these scams can be the subject of class action claims worth billions of dollars. Globally, third-party funders have assisted small claimants in exactly these kind of situations by funding mass claims, and this is possible in India as well.

The immediate next question which must then be addressed is whether Indian court procedure allows such mass claims. Contrary to popular perception, Indian law has multiple effective avenues for mass claims. The Companies Act 2013 envisages class actions by shareholders,ix while Order 1 Rule 8 of the Civil Procedure Code 1908 allows a single claimant to sue on behalf of numerous persons if they have the same interest in a suit. In fact, Order 1 Rule 8 is very similar to a representative action (in Singapore/HK/ DIFC/Australia) or a mass tort claim as they refer to it in US. The best differentiator (compared to Singapore) is that India has an opt-out mechanism (like in DIFC). This means one does not need permission from each plaintiff to represent the mass/class. The court can allow one claimant to sue on behalf of the rest, and once this is done, any other claimant unwilling to make the claim must come before the court and opt out. On the other hand, under the Companies Act, once you satisfy the numerical requirement of forming a class, an action can be commenced without any court permission.

Beyond just the mere possibility of class action procedure, there are other factors that also work to shorten the timeline for, and reduce the uncertainties in, the resolution of these claims:

  1. The Civil Procedure Code was recently amended to include summary judgment procedures similar to those in Singapore, UK or DIFC.x In cases where there is admitted fraud and/or violation of prudential norms by the bank, summary judgment procedure can be used effectively to reduce the timeline of obtaining a judgment to 1 to 2 years.
  2. Indian court decrees have reciprocal enforcement arrangements for enforcement with Malaysia, Hong Kong, New Zealand, Singapore, United Arab Emirates and United Kingdom.xi Therefore, judgments obtained in India can easily be enforced against defendants with assets abroad. Indian banks carry on business globally with branch structure, exposing them to jurisdictions like UK, Singapore, HK and Canada.
  3. Because of this global branch structure, claims can be brought against these banks concurrently in jurisdictions like Singapore, UK and Dubai where court procedures are much more predictable and efficient. Such a global class action typically results in quicker settlement and resolution of disputes.

All these factors work to make such class actions very lucrative for third-party funders. First, there are potential class actions in India where liability is clear, if not admitted. Second, not only is there procedure for class action, there are avenues for reaching a judgment or settlement quicker. Third, any judgment can be easily enforced in enforcement-friendly jurisdictions. Fourth, due to the sheer number of depositors and shareholders involved, the quantum of recovery is in the billions of dollars.

In conclusion, not only are there meritorious class action claims that can be made in India, the claims are exactly the kind of opportunities which third-party funders globally seek out and fund. Such class actions not only offer effective means for small claimants to redress the wrongs done to them, but also act as deterrents and checks against large organizations acting recklessly with public money. At the same time, class actions similar to these account for a significant portion of funders’ investments globally. Realizing that such opportunities exist in India as well provides further comfort for global funders to set up shop in India.

About Singularity Legal

Singularity is an Asia and Africa focused international disputes boutique, established in August 2017. Since then, we have handled over US$ 3 billion in cross-border disputes across jurisdictions and industries. These disputes were in various parts of the world including Egypt, India, Israel, Indonesia, Kazakhstan, Nigeria, Malaysia, the Philippines, Turkey, UK, UAE, Sierra Leone, Singapore and Somalia.

In the first 1300 days, we are already recognized as market leaders.

  • Legal 500 – Tier 2 in Asia-Pacific – India for arbitration;
  • Benchmark Litigation – Tier 3 in Asia Pacific – India for international arbitration;
  • Financial Times – Top 5 in Asia-Pacific for innovation in dispute resolution;
  • India Business Law Journal and Asian Legal Business – Rising Law Firm of the Year;
  • RSG Consulting – Top 50 law firms in India.
  • Asian Legal Business – Trailblazer 2020
  • BusinessWorld’s Legal Leaders – Oil & Gas Law Firm of the Year

i See Regulation 5C.11.01 of Corporations Regulations 2001

ii Passarilal Mannoolal v. Chhuttanbai and Ors. AIR 1958 MP 417

iii Ram Coomar Coondoo v. Chander Canto Mookerjee (1877) ILR 2 Cal 233

iv See the Commercial Courts Act 2015, and amendments made thereunder to the Civil Procedure Code 1908

v The Arbitration & Conciliation Act 1996 was amended in 2015, 2018 and 2020

vi For both ICC and SIAC, India is at the top of the overall number of parties worldwide filing new arbitrations in a given year. In 2019, between these two institutions, this totalled to 632 India users (147 before ICC and a staggering 485 before SIAC). In fact, in 2020, Indian users constituted more than 50% of the total foreign users of SIAC.

vii Mateen Hafeez, ‘An Insider blew the lid of Rs. 6500 crore PMC Bank scam’, available at https://timesofindia.indiatimes.com/business/india-business/an-insider-blew-the-lid-off-pmc-scam/article show/72987358.cms#:~:text=Police%20sources%20said%20since%202017,bank%20for%20its%20group%20c ompanies

viii BFSI, ‘What went wrong with Laxmi Vilas Bank’ available at https://bfsi. economictimes.indiatimes.com/news/banking/here-is-all-you-need-to-know-about-what-went-wrong-with-lakshmi-vilas- bank/78404094

ix Section 245, Companies Act 2013

x Order XIII-A, Civil Procedure Code 1908

xi Section 44A, Civil Procedure Code 1908

Prateek Bagaraia

Published by The Knowledge Network