Class Action under Section 245 of Companies Act, 2013

The Companies Act, 2013 introduced several progressive mechanisms to strengthen corporate governance and protect the interests of stakeholders. One such important provision is Section 245, which provides for class action. This provision enables members and depositors to collectively approach the Tribunal when the affairs of a company are conducted in a manner prejudicial to their interests or the interests of the company.

Class action represents a shift from individual remedies to collective enforcement. It allows a group of affected stakeholders to seek relief in situations where individual action may be ineffective or impractical. The provision is particularly significant in cases involving widespread mismanagement, fraud, or misleading disclosures.

Section 245 forms part of the broader framework dealing with prevention of oppression and mismanagement, and it acts as an additional remedy to ensure accountability of companies and their management.

Meaning and Nature of Class Action

A class action is a legal proceeding in which a group of persons having a common interest files an application before the Tribunal. Instead of each person filing separate cases, the law permits them to act collectively.

Under Section 245, members or depositors, or any class of them, may file an application if they believe that:

• The management of the company is being conducted in a manner prejudicial to the interests of the company, or
• The conduct of affairs is harmful to the interests of members or depositors

The provision is designed to address situations where the wrongful acts affect a large number of stakeholders. It reduces multiplicity of proceedings and ensures consistency in judicial decisions.

Objective of Section 245

The primary objective of Section 245 is to protect stakeholders from abuse of corporate power. It seeks to ensure that companies do not act in a manner that is:

• Ultra vires their constitutional documents
• Contrary to law
• Fraudulent or misleading
• Prejudicial to stakeholders

Another important objective is to enhance corporate accountability. The provision extends liability not only to the company but also to directors, auditors, and other professionals associated with the company.

It also promotes transparency and fairness by enabling stakeholders to challenge wrongful decisions and actions collectively.

Who Can File a Class Action

Section 245 prescribes specific thresholds for filing a class action application. These thresholds ensure that only genuine and substantial claims are brought before the Tribunal.

Members of the Company

The eligibility depends on whether the company has share capital or not.

In case of a company having share capital:

• Not less than 100 members, 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

These conditions ensure that a significant portion of shareholders supports the action.

In case of a company without share capital:

• Not less than one-fifth of the total number of members

This requirement reflects the need for substantial representation in companies without share capital.

Depositors

Depositors are also given the right to file class action applications.

The following thresholds apply:

• 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

This inclusion recognises the importance of depositors as financial stakeholders in the company.

Grounds for Filing a Class Action

A class action can be filed when the conduct of the company is prejudicial or unlawful. The provision covers a wide range of situations.

The following are key grounds:

• Acts that are ultra vires the memorandum or articles of association
• Breach of provisions of the memorandum or articles
• Passing of resolutions through misstatement or suppression of material facts
• Actions contrary to the provisions of the Companies Act or any other law
• Actions contrary to resolutions passed by members
• Fraudulent, unlawful, or wrongful acts or omissions

The scope is broad enough to cover both existing misconduct and potential future misconduct.

Reliefs Available under Section 245

Section 245 provides a comprehensive list of remedies that may be granted by the Tribunal. These remedies are designed to prevent harm and provide compensation where necessary.

Injunctions and Restraining Orders

The Tribunal may restrain the company from:

• Committing acts beyond its powers (ultra vires acts)
• Breaching provisions of its memorandum or articles
• Acting on resolutions obtained through misrepresentation
• Acting contrary to the Companies Act or other laws
• Taking actions inconsistent with resolutions passed by members

These remedies are preventive in nature and aim to stop wrongful actions before they cause further damage.

Declaration of Resolutions as Void

If a resolution altering the memorandum or articles is passed by:

• Suppression of material facts, or
• Misstatement to members or depositors

The Tribunal may declare such resolution as void. This ensures that decisions obtained through unfair means do not stand.

Claim for Damages or Compensation

One of the most significant aspects of Section 245 is the ability to claim compensation.

Damages may be claimed from:

• The company or its directors
• Auditors, including audit firms
• Experts, advisors, consultants, or any other persons associated with the company

Liability arises in cases of:

• Fraudulent acts
• Unlawful conduct
• Wrongful acts or omissions
• Misleading statements

For example, auditors may be held liable for incorrect or misleading statements in audit reports. Similarly, experts and consultants may be held responsible for incorrect advice or representations.

Any Other Remedy

The Tribunal has wide discretionary powers to grant any other remedy it considers appropriate. This ensures flexibility in addressing complex situations.

Procedure for Class Action

The procedure for class action under Section 245 is structured to ensure fairness and efficiency.

Filing of Application

The application is filed before the National Company Law Tribunal (NCLT) by eligible members or depositors.

Admission of Application

Once the application is admitted, the Tribunal initiates further steps to ensure proper representation and transparency.

Public Notice

A public notice is required to be issued to all members and depositors. This ensures that:

• All affected parties are informed
• Interested persons can participate in the proceedings

Public notice plays a crucial role in maintaining transparency.

Consolidation of Applications

If multiple applications are filed in different jurisdictions for the same cause of action:

• They are consolidated into a single application
• This avoids duplication of proceedings

The law clearly provides that two class action applications for the same cause of action are not allowed.

Appointment of Lead Applicant

A lead applicant is appointed to represent the class. The lead applicant:

• Conducts the proceedings
• Represents the interests of all members or depositors involved

This ensures effective management of the case.

Binding Nature of Tribunal’s Order

An important feature of Section 245 is that the order passed by the Tribunal is binding on a wide range of persons.

The order is binding on:

• The company
• All its members
• All depositors
• Auditors
• Experts
• Consultants
• Advisors
• Any other person associated with the company

This ensures that the decision has comprehensive effect and prevents further disputes on the same issue.

Safeguards Against Misuse

While Section 245 provides strong remedies, it also includes safeguards to prevent abuse.

If the Tribunal finds that the application is:

• Frivolous, or
• Vexatious

It may:

• Reject the application, and
• Order the applicants to pay costs up to ₹1 lakh

This provision discourages unnecessary litigation and ensures that only genuine claims are pursued.

Class Action in Case of Misleading Prospectus

Section 245 also extends to cases involving misleading statements in a prospectus.

A class action may be filed by:

• Any person, or
• Group of persons, or
• Association of persons

who have been affected by:

• Misleading statements
• Inclusion of false information
• Omission of material facts

This is particularly important in protecting investors from fraudulent disclosures during public offerings.

Conclusion

Class action under Section 245 of the Companies Act, 2013 is a powerful mechanism designed to protect the collective interests of stakeholders. It provides a structured and comprehensive remedy against acts of oppression, mismanagement, and unlawful conduct.

The provision recognises that certain wrongs affect a large group of stakeholders and cannot be effectively addressed through individual actions. By enabling collective enforcement, it strengthens the legal framework governing companies.