1. Introduction
The introduction of class action suits under the Companies Act, 2013 (the Act), marked a significant step towards protecting shareholders and depositors. After more than a decade since the Act was enacted, India has started to see substantial applications filed with the National Company Law Tribunal (NCLT), with minority shareholders taking companies to task for alleged mismanagement. This development in corporate law aligns Indian practices more closely with global standards and provides minority stakeholders with a powerful tool to safeguard their interests.
Two notable class action applications have recently been filed, illustrating the rising importance and utility of this mechanism in the Indian corporate sector. In these cases, minority shareholders alleged mismanagement and actions prejudicial to their interests, bringing their grievances before the NCLT under Section 245. These cases represent a potential turning point for class actions in India, where traditionally, shareholders have relied on other sections of the Companies Act to address corporate grievances. The NCLT’s responses to these cases are expected to set critical precedents that will clarify procedural and substantive aspects of class action suits under Indian corporate law, fostering greater accountability and transparency.
2. Historical Context of Class Action in India
The concept of class action suits is not new in Indian law. The Code of Civil Procedure, 1908, through Order I, Rule 8, first introduced “representative suits,” allowing groups of people with similar interests to be represented collectively in court. Despite this, companies’ law did not incorporate explicit provisions for class actions until the enactment of the Act.
Prior to this, shareholders in India were largely reliant on derivative actions in cases of fraud or non-ratifiable company decisions. The J.J. Irani Committee, tasked with revising the 1956 Companies Act, recommended including provisions for class action suits to enhance corporate governance and provide stakeholders with effective means to address corporate misconduct. In response, Section 245 of the Act codified the provision, empowering shareholders and depositors to file class action suits, a significant advancement in stakeholder rights.
3. Legal Framework of Class Actions Under the Companies Act, 2013
Section 245 of the Companies Act empowers minority shareholders and depositors to file class action suits against a company, its directors, auditors, and other advisors if they believe the company’s actions are prejudicial to their interests. Unlike Section 241, which deals broadly with oppression and mismanagement, Section 245 specifically targets class actions, providing more direct recourse for group grievances.
The Act defines who may file a class action suit, specifies thresholds to initiate such actions, and details the entities that can be held accountable. For instance, in companies with share capital, at least 5% of shareholders or 100 members must join the suit. This threshold provides structure but can limit accessibility for smaller shareholder groups.
a) Thresholds and Limitations for Initiating Class Actions
Section 245 specifies the minimum number of members or depositors required to initiate a class action. For companies with share capital, at least 5% of members or 100 members, whichever is lower, must join. For companies without share capital, the threshold is one-fifth of the total number of members. These thresholds are designed to ensure that only serious cases with sufficient support move forward, thus avoiding frivolous litigation. However, critics argue that these requirements can be overly restrictive, particularly for stakeholders in smaller companies or for individual shareholders facing significant financial barriers.
b) Scope of Class Actions Against Directors, Auditors, and Advisors
Section 245 extends liability to directors, auditors, consultants, and advisors for any fraudulent, unlawful, or wrongful acts. This is especially relevant for auditors, who have a legal responsibility to uphold transparency in financial disclosures. Recent judicial interpretations, such as in Union of India v. Deloitte Haskins and Sells LLP, emphasize that resigning from a company does not absolve an auditor from liability for fraudulent conduct. This decision underscores the expectation that auditors, as gatekeepers of corporate governance, act responsibly and transparently in the public interest.
c) Challenges and Penalties
The Companies Act imposes penalties on both companies and applicants for non-compliance with NCLT orders or for filing frivolous claims. Companies face fines of up to INR 25,00,000 for failing to comply with a tribunal order, while applicants found guilty of vexatious claims can be fined up to INR 1,00,000. These penalties serve as deterrents, but there is a need for a balanced approach to ensure that genuine claims are not discouraged due to fear of penalties.
4. Comparative Perspective: Class Actions Under Indian and Us Corporate Law
In the United States, class action suits have been a well-established mechanism for decades, facilitated by a liberal approach toward collective litigation. In contrast, Indian law is still developing in this area. The Act represents a significant step forward, but procedural and practical limitations persist. Unlike the U.S., India does not have specialized courts for class action cases, which can lead to procedural delays and logistical hurdles. Further, while U.S. law provides for contingency fee arrangements, which reduce the cost barrier for plaintiffs, such provisions are not available in India, limiting access for minority shareholders.
5. Conclusion
The rise of class action suits under the Act is a promising development for Indian corporate law. These provisions provide minority shareholders and depositors with effective legal tools to address corporate misconduct and protect their interests. However, the true potential of class action suits will only be realized if procedural complexities are minimized and the NCLT consistently enforces accountability among directors, auditors, and advisors.
The Indian judiciary’s approach to these cases, including its treatment of recent applications, will be instrumental in shaping the future of class action litigation in India. With a maturing legal framework and evolving judicial interpretations, India stands on the cusp of a new era in shareholder protection and corporate accountability. As stakeholders become more aware of their rights, the corporate sector may witness a surge in class action suits, reinforcing the shift towards better corporate governance and increased transparency.
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This article is authored by Mr. Abhishek Sharma, a partner, and Mr. Yash Sharma, an associate at SNM Law Partners.
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