Summary: A Class Action Suit is a legal remedy available under Section 245 of the Companies Act, 2013, allowing shareholders or depositors to collectively challenge actions that harm their interests. It protects minority shareholders from oppression, where majority shareholders misuse their powers, treating the company as personal property. The suit can be filed before the tribunal by a requisite number of members or depositors when a company’s actions are prejudicial to their interests. The tribunal can issue orders to restrain ultra vires acts, prevent breaches of company rules, declare resolutions void, or award damages for fraudulent acts by the company, its directors, auditors, or consultants. Audit firms and their partners can also be held liable for misleading financial reports. The tribunal considers factors such as good faith, potential company authorization, and shareholder interest before admitting an application. Once admitted, public notice is issued, and a lead applicant is chosen. Duplicate applications are not allowed, and the company bears the litigation costs. Non-compliance with tribunal orders results in fines ranging from ₹5 lakh to ₹25 lakh, with defaulting officers facing imprisonment up to three years. Frivolous applications may be dismissed with a penalty up to ₹1 lakh. The provision does not apply to banking companies.
Sections from 241 to 246 of Companies Act, 2013 deals with prevention of Oppression and Mismanagement.
What is Class Action Suit?
A class action is a legal proceeding in which shareholders bring suit as a group against the company or its directors or officers and the judgment or settlement received from the suit covers all the shareholders equally.
Section 245 deals with class action suit. Let’s deep dive into provisions: –
| Section | Provision |
| Section 245(1)-Filing of application to the tribunal | Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely:-
(a) to restrain the company from committing an act which is ultra vires the articles or memorandum of the company; (b) to restrain the company from committing breach of any provision of the company’s memorandum or articles; (c) to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors; (d) to restrain the company and its Directors from acting on such resolution; (e) to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force; (f) to restrain the company from taking action contrary to any resolution passed by the members; (g) to claim damages or compensation or demand any other suitable action from or against— (i) the company or its Directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part; (ii) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or (iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part; (h) to seek any other remedy as the Tribunal may deem fit. |
| Section 245(2)-Liability of audit firm | Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner. |
| Section 245(3)(i)-Requisite number of members for sub-section (1) of section 245 | The requisite number of members provided in sub-section (1) shall be as under:—
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares; (b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members. |
| Section 245(3)(ii)- Requisite number of depositors for sub-section (1) of section 245 | The requisite number of depositors provided in sub-section (1) shall not be 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 of the company as may be prescribed. |
| Section 245(4):-
Points tribunal shall take into account in consideration of an Application under 245(1) |
(a) whether the member or depositor is acting in good faith in making the application for seeking an order;
(b) any evidence before it as to the involvement of any person other than Directors or officers of the company on any of the matters provided in clauses (a) to (f) of sub-section (1); (c) whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section; (d) any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section; (e) where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be— (i) authorised by the company before it occurs; or (ii) ratified by the company after it occurs; (f) where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company. |
| Section 245(5)- Point to take into account by tribunal if application under sub-section (1) of section 245 is admitted
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(a) public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed;
(b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side; (c) two class action applications for the same cause of action shall not be allowed; (d) the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act. |
| Section 245(6) -Effect of order of tribunal | Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company. |
| Section 245(7) – Fine in case of non-compliance of Tribunal order | Any company which fails to comply with an order passed by the Tribunal under this section 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. |
| Section 245(8)- Penalty in case of Frivolous Applications | Where 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 |
| Section 245(9) | Nothing contained in this section shall apply to a banking company |
| Section 245(10) | Subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1). |
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