Corporate Governance: Analysing Reflective Loss And Derivative Action In India And Other Jurisdictions
Anushka Jha, School of Law, Christ (Deemed-to-be) University
ABSTRACT
Instances of Public Companies facing depletion of share value due to mismanagement of company affairs have led to shareholders and other stakeholders, such as creditors wanting to personally recover damages. While the separate legal entity concept talks about a company being completely independent of its member, it is a well-settled principle that the shareholders and the company too will be distinct legal entities. The Reflective Loss rule does not permit shareholders to recover any amount lost due to a fall in the value of shares due to the actions of wrongdoers. Another route that the shareholder might resort to is derivative action. This route allows shareholders to sue the wrongdoers on behalf of the company. However, both of these concepts have not been expressly laid down under the Companies Act 2013 in India. However, In other jurisdictions, such as the UK, derivative action has been codified, and the principle of reflective loss has been expressly laid down. However, In India, precedents have shown that courts often confuse Section 245 to be similar to a derivative action. While one speaks about class action suits, no explicit recognition is provided to derivative action.
The author contends that the codification of these principles would be economically viable for any company. In case of a derivative action, the need to file a suit as a class is not required, and even a single shareholder can bring a claim to the court. Further, if the derivative action is successful, both the company, including shareholders and the non-shareholders, would ultimately benefit. Codification of Reflective loss is necessary to clear the position of creditors. Few jurisdictions, such as Singapore, bar creditors from bringing an action to recover their money. However, a UK Supreme Court case of Savilleja v. Marex; laid down that the rule of reflective loss would only be applicable to the shareholders. However, the position of creditors in India under reflective loss is not clear, requiring codification. This is essential in light of misgovernance witnessed in numerous public companies such as Yes Bank in India. This paper seeks to analyze the need to codify these principles to strengthen corporate governance in India. Further, the author seeks to examine these principles laid down in other jurisdictions in the world and seeks to bring about appropriate reasoning on the need to codify these corporate governance principles.
Keywords: Reflective Loss, Derivative Action, Creditors, Codify, Creditors
