Class Action Suits and Rights of a Shareholder

Shareholders are the owners of a company and invest their money with the expectation that the company will be managed honestly, transparently and in accordance with the law. However, there may be situations where the management, directors, auditors or other professionals associated with the company act in a manner that harms the interests of shareholders.

To address such situations, the Companies Act, 2013 introduced the concept of class action suits. These suits provide shareholders with a collective legal remedy to protect their rights and seek redress against wrongful corporate conduct.

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Understanding Shareholders’ Rights in a Company

A shareholder enjoys various rights under company law. These rights ensure participation in corporate governance and protection of investments. Some of the important rights of shareholders include:

• Right to Receive Information: Shareholders are entitled to receive financial statements, annual reports, notices of meetings and other important corporate disclosures. This enables them to make informed decisions regarding their investments.
• Right to Vote: Members of a company have the right to vote on important matters such as appointment of directors, approval of major transactions, alteration of constitutional documents and other significant corporate decisions.
• Right to Dividend: Where a company declares dividends, shareholders have the right to receive their proportionate share of the profits.
• Right to Transfer Shares: Subject to legal and contractual restrictions, shareholders generally have the right to transfer their shares.
• Right to Participate in Meetings: Shareholders can attend general meetings, ask questions, raise concerns and participate in discussions concerning the affairs of the company.
• Right to Seek Legal Remedies: Where the affairs of a company are conducted in a manner prejudicial to the interests of shareholders, various legal remedies are available. One of the most significant remedies introduced under the Companies Act, 2013 is the class action suit.

Meaning of Class Action Suit

A class action suit is a legal proceeding in which a group of persons having a common interest and common grievance collectively approach the National Company Law Tribunal (NCLT) for relief.

Instead of each shareholder filing separate proceedings, a representative action may be brought on behalf of all similarly affected shareholders or depositors. The objective is to provide an efficient and cost-effective mechanism for addressing widespread corporate misconduct.

Class action suits recognise that wrongful acts committed by a company may affect a large number of shareholders in a similar manner. Collective action helps ensure that even small shareholders can seek justice where individual litigation may be impractical or expensive.

Evolution of Class Action Suits in India

Investor protection has always been an important aspect of company law in India. The Companies Act, 2013 contains several provisions imposing liability on directors, promoters and other persons for fraudulent conduct, misrepresentation and unlawful acts.

The need for a specific class action mechanism gained prominence after major corporate governance failures highlighted the vulnerability of investors. The concept was recommended by the J.J. Irani Committee on Company Law in 2005, which recognised the importance of representative actions for protecting shareholder interests.

Subsequently, the Companies Act, 2013 incorporated class action provisions under Section 245. However, these provisions were brought into force only in 2016.

The introduction of class action suits marked a significant development in Indian corporate law by strengthening shareholder protection and corporate accountability.

Purpose of Class Action Suits

The primary objectives of class action suits include:

• Protecting minority shareholders against corporate misconduct.
• Preventing abuse of powers by directors and management.
• Promoting transparency and accountability in corporate governance.
• Providing collective remedies for common grievances.
• Reducing the burden of multiple individual proceedings.
• Enhancing investor confidence in corporate institutions.
• Facilitating compensation for losses caused by wrongful corporate actions.

Who Can File a Class Action Suit?

Section 245 of the Companies Act, 2013 specifies the categories of persons who may initiate a class action suit.

Members of a Company Having Share Capital

A class action may be filed by:

• Not less than 100 members of the company; or
• Not less than 10% of the total number of members, whichever is less; or
• Any member or members holding not less than 10% of the issued share capital of the company.

The applicants must have paid all calls and other sums due on their shares.

Members of a Company Without Share Capital

In the case of a company not having share capital, not less than one-fifth of the total number of members may initiate a class action.

Depositors

A class action may also be initiated by:

• Not less than 100 depositors; or
• Not less than 10% of the total number of depositors, whichever is less; or
• Any depositor or depositors holding not less than 10% of the total value of outstanding deposits.

The inclusion of depositors significantly broadens the scope of protection under company law.

Against Whom Can a Class Action Suit Be Filed?

One of the notable features of Section 245 is that proceedings can be initiated against multiple categories of persons associated with the company.

Company and Directors

A class action may be filed against the company or its directors for fraudulent, unlawful or wrongful acts and omissions that adversely affect the interests of members or depositors.

Auditors and Audit Firms

Proceedings may be initiated against auditors and audit firms for:

• Improper or misleading statements in audit reports.
• Fraudulent conduct.
• Negligent performance of audit responsibilities.

This provision strengthens auditor accountability and promotes accuracy in financial reporting.

Experts, Advisors and Consultants

Experts, advisors and consultants who make incorrect or misleading statements to the company may also be held liable through class action proceedings.

This ensures that professional advisors exercise due care while rendering services.

Reliefs Available Through Class Action Suits

Section 245 empowers shareholders and depositors to seek a wide range of remedies.

Restraining Ultra Vires Acts

The Tribunal may restrain the company from committing acts beyond the powers conferred by its Memorandum of Association or Articles of Association.

Preventing Breach of Constitutional Documents

The company may be restrained from violating provisions contained in its memorandum or articles.

Declaration of Resolutions as Void

The Tribunal may declare resolutions void if they were obtained through:

• Suppression of material facts.
• Misrepresentation.
• Misleading disclosures.

Preventing Implementation of Invalid Resolutions

Directors and management may be restrained from acting upon resolutions obtained through unlawful means.

Preventing Violations of Law

Class action proceedings may seek orders restraining the company from acting contrary to the Companies Act, 2013 or any other applicable law.

Enforcing Members’ Decisions

The company may be restrained from acting contrary to resolutions duly passed by shareholders.

Claiming Damages and Compensation

One of the most important remedies available is compensation for losses caused by wrongful conduct.

Damages may be claimed against:

• The company.
• Directors.
• Auditors and audit firms.
• Experts.
• Advisors.
• Consultants.

This enables shareholders to recover losses arising from fraudulent or unlawful conduct.

Procedure for Filing a Class Action Suit

The application is filed before the National Company Law Tribunal.

After receiving the application, the Tribunal examines whether the requirements prescribed under Section 245 have been fulfilled.

The Tribunal then considers various factors before deciding whether the application should be admitted.

Factors Considered by NCLT

The Tribunal takes into account several considerations before granting relief.

Good Faith of Applicants

The Tribunal assesses whether the members or depositors have acted honestly and in good faith.

Involvement of Other Persons

Evidence indicating involvement of persons other than directors or officers may also be considered.

Availability of Alternative Remedies

The Tribunal may examine whether the matter could be pursued individually rather than through a class action mechanism.

Views of Disinterested Members

The opinions of members and depositors who do not have a direct personal interest in the dispute may be relevant.

Possibility of Ratification

The Tribunal may consider whether the impugned act has already been ratified or is likely to be ratified by the company.

Notice and Consolidation of Proceedings

Upon admission of the application, the Tribunal issues a public notice to all members or depositors belonging to the concerned class.

Where multiple applications are filed for the same cause of action:

• Similar applications may be consolidated.
• A lead applicant may be appointed.
• Multiple proceedings relating to the same issue are generally avoided.

This ensures procedural efficiency and consistency.

Binding Nature of NCLT Orders

Orders passed under Section 245 are binding on:

• The company.
• Members.
• Depositors.
• Directors.
• Auditors and audit firms.
• Experts.
• Advisors.
• Consultants.
• Other persons associated with the company.

The binding effect ensures effective enforcement of the Tribunal’s directions.

Penalties for Non-Compliance

Failure to comply with the Tribunal’s orders may attract significant penalties.

A company may be subjected to substantial monetary fines for non-compliance.

Officers responsible for the default may face imprisonment as well as monetary penalties.

The Companies Act also discourages abuse of the process by allowing the Tribunal to dismiss frivolous or vexatious applications and award compensation to the affected party.

Importance of Class Action Suits for Shareholders

Class action suits have significantly strengthened shareholder rights in India.

Protection of Minority Shareholders

Minority shareholders often lack the ability to influence management decisions. Class action suits provide them with a collective platform to challenge wrongful conduct.

Enhanced Corporate Governance

The possibility of collective litigation encourages directors and management to comply with legal and ethical standards.

Increased Accountability

Directors, auditors and consultants become more accountable for their actions when they may face collective claims from shareholders.

Cost-Effective Remedy

Collective proceedings reduce duplication of litigation and make legal action more practical for investors.

Investor Confidence

Strong enforcement mechanisms improve confidence among investors and contribute to the development of healthy capital markets.

Class Action Suits and Corporate Governance

Class action suits serve as an important pillar of modern corporate governance.

They encourage:

• Greater transparency.
• Better disclosure standards.
• Responsible decision-making.
• Stronger investor protection.
• Improved accountability of management and professionals.

By creating legal consequences for wrongful conduct, class action suits contribute to the development of ethical business practices and responsible corporate behaviour.

Conclusion

Class action suits under Section 245 of the Companies Act, 2013 represent a significant advancement in shareholder protection and corporate accountability. They provide shareholders and depositors with a collective mechanism to challenge unlawful, fraudulent and prejudicial conduct affecting their interests. 

The provision enables actions against companies, directors, auditors and other professionals while offering a wide range of remedies, including injunctions and compensation. Although practical challenges such as high thresholds, litigation costs and procedural complexities continue to limit their widespread use, class action suits remain an important tool for protecting shareholder rights and promoting transparent corporate governance in India.

Note: This article was originally written by Chandana Pradeep and published on 01 May 2020. It was subsequently updated by the LawBhoomi team on 10 June 2026.