Class Action Suit Under Companies Act: Section 245

A class action suit under the Companies Act is section 245, and it is the provision that lets ordinary shareholders take a company, its directors, its auditors and its advisers to the National Company Law Tribunal as a group rather than one by one. It covers depositors as well as members, and it sits alongside the oppression and mismanagement remedy in sections 241 and 242 rather than replacing it.

What can a class action suit under the Companies Act ask for?

Section 245(1) lists eight heads of relief. Five are restraining orders, one is declaratory, one is compensatory and one is a catch-all.

The Tribunal can be asked to restrain the company from committing an act that is ultra vires its articles or memorandum, from breaching any provision of its memorandum or articles, from acting contrary to the Act or any other law in force, and from taking action contrary to a resolution passed by the members.

It can be asked to declare a resolution altering the memorandum or articles void where that resolution was passed by suppression of material facts or obtained by mis-statement to members or depositors, and to restrain the company and its directors from acting on such a resolution.

Section 245(1)(g) is the money limb. It allows a claim for damages or compensation, or any other suitable action, against three categories:

• The company or its directors, for any fraudulent, unlawful or wrongful act, omission or conduct, including a likely act, omission or conduct.
• The auditor, including the audit firm, for any improper or misleading statement of particulars in the audit report, or for any fraudulent, unlawful or wrongful act or conduct.
• Any expert, advisor, consultant or other person, for any incorrect or misleading statement made to the company, or for any fraudulent, unlawful or wrongful act or conduct.

Section 245(1)(h) is a catch-all: any other remedy the Tribunal deems fit.

Who can file, and how many are needed

The alternative threshold in the same clause is members holding not less than such percentage of the issued share capital as may be prescribed. For a company not having share capital, section 245(3)(i)(b) requires not less than one-fifth of the total number of members.

Depositors get a mirror test in section 245(3)(ii): not less than one hundred depositors, or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits as may be prescribed.

Section 245(10) widens standing further. Subject to compliance with the section, an application may be filed or action taken by any person, group of persons, or association of persons representing the persons affected.

What the Tribunal weighs before admitting

Section 245(4) sets out six considerations, and the first one is about the applicant rather than the company: whether the member or depositor is acting in good faith.

The Tribunal also looks at evidence of involvement of any person other than directors or officers, whether the cause of action is one the applicant could pursue in their own right rather than through a section 245 order, and evidence of the views of members or depositors who have no personal interest in the matter. Where the act or omission has not yet occurred, it asks whether it could and likely would be authorised by the company beforehand or ratified afterwards. Where it has already occurred, it asks whether it could and likely would be ratified.

What happens once an application is admitted

Section 245(5) governs the procedure and it reads like a class-action statute anywhere:

1. Public notice is served on admission to all members or depositors of the class, in the prescribed manner.
2. Consolidation. All similar applications prevalent in any jurisdiction are consolidated into a single application, and the class chooses a lead applicant. Where they cannot reach consensus, the Tribunal appoints one, who takes charge of the proceedings from the applicants' side.
3. No duplication. Two class action applications for the same cause of action are not allowed.
4. Costs. The cost or expenses connected with the application are defrayed by the company or any other person responsible for any oppressive act.

Section 245(6) makes any order passed binding on the company and all its members, depositors, the auditor including the audit firm, any expert, consultant or advisor, and any other person associated with the company.

The penalties on both sides

Section 245(7) punishes a company that fails to comply with a Tribunal order under the section with a fine of not less than five lakh rupees which may extend to twenty-five lakh rupees, and every officer in default with imprisonment which may extend to three years and a fine of not less than twenty-five thousand rupees which may extend to one lakh rupees.

Section 245(8) points the other way. Where an application is found to be frivolous or vexatious, the Tribunal rejects it for reasons recorded in writing and may order the applicant to pay the opposite party costs not exceeding one lakh rupees.

Section 245(9) carves out banking companies from the section entirely.

Section 246 applies sections 337 to 341 mutatis mutandis to an application under section 241 or section 245. Those are winding up sections, including section 337, penalty for frauds by officers and fraudulent conduct of business.

Where this sits in the disclosure picture

A class action is a Tribunal proceeding, not an exchange filing, though a listed company's disclosure of material litigation under the listing regulations is how it typically reaches the market first.

• The National Company Law Tribunal is the forum a section 245 application goes to.
• How to read a corporate governance report covers the quarterly filing where governance machinery is disclosed.
• How to check related party transactions covers a common subject of shareholder complaint, in the filings.
• The shareholding pattern is where the ownership base that would have to reach one hundred members is disclosed.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.