Introduction

A Class Action is one where a class or group of people with a common grievance join hands to seek relief. It is a cost effective procedural device whereby few people can sue for the advantage of a larger group. The concept of a class action has been part of the legal system of other countries since decades. However, this tool was not available to the stakeholders in India until the introduction of the Companies Act, 2013.

Class Action – Section 245

Section 245 of the Companies Act, 2013 notified on 1st June, 2016 contains the concept of class action in Chapter XVI Prevention of Oppression and Mismanagement, wherein the neighbouring provisions have been made with a similar objective i.e. protection of interests of stakeholders. Section 245 widens the scope of the concept of “prevention of oppression and mismanagement” by providing a right to file class action suit.

Section 245 given a right to members and depositors of the company to collectively approach Tribunal (NCLT) to initiate Class Action against the company, the directors, auditors, or any advisor or expert who engage in any wrongful, unlawful and fraudulent act or omission or conduct on their part in relation to a company.

Class Action v. Oppression and Mismanagement

Section 241 limits its protection to the shareholders of a company, while Section 245 also includes depositors in its ambit. Although, as compared to Section 245, the scope of remedies available under Section 241 is much wider (such as order for purchase of shares by any member, restrictions on transfer or allotment, termination or modification of an agreement, removal or appointment of director etc.), Section 245 is much more generous with an award for damages and compensation to the applicants.

Who can initiate Class Action?

1. In case of a company having share capital, the action may be brought by:

  • Not less than 100 shareholders of the company, or not less than a prescribed percentage of the total number of its members (whichever is less).
  • Any member or members holding not less than a prescribed percentage of the issued share capital of the company, subject to the condition that the applicant or applicants have paid all calls and other sums due on his or their shares.

2. In case of a company not having share capital, the action must be brought by not less than one fifth (1/5) of the total number of shareholders.

  • Not less than 100 depositors of the company, or not less than a prescribed percentage of the total number of depositors (whichever is less) or any depositor or depositors to whom the company owes a prescribed percentage of total deposits of the company.

How to apply

An application under section 245(1), read with section 245(3) of the Companies Act, 2013, must be filed in Form NCLT-9 as provided in Rule 84 to the National Company Law Tribunal Rules, 2016. A copy of such application must be served on the company, other respondents and all such persons as the National Company Law Tribunal (NCLT) may direct.

Penalties

Any company which fails to comply with an order passed by the Tribunal shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

However, there is no provision dealing with default or violations of the orders passed under section 245 of the Companies Act by the officers, directors, majority shareholders or experts or professional consultants.

If any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt of Courts Act, 1971.

Appeals An order from the National Company Law Tribunal (NCLT) can be appealed to the National Company Law Appellate Tribunal (NCLAT). Any person aggrieved by an order of the Appellate Tribunal can file an appeal before the Supreme Court of India.

Note

Provisions relating to class action suits do not apply to a banking company.

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