Section 245 : Class Action Suit under Companies Act, 2013

The provision of Class Action Suit was inserted in the Companies Act, 2013 (hereinafter referred to as Act) on the recommendation of the JJ Irani Committee as there was no such provision under the erstwhile Companies Act i.e. Companies Act, 1956. Also, the Satyam Fiasco majorly opened the eyes of the law maker and posed before the them the specific need of such a provision in the law to give a right to the Shareholders and other stakeholders in cases where the Company fails to fulfil its responsibility towards them.

The provision of Class Action under the Act is provided under two Sections which deals with two different kinds of Class Action Suit. Section 37 deals with Securities Class Action whereas Section 245 deals with Specialized Class Action by Members and Depositors.

We shall be discussing the Class Action Suit under Section 245 in length in this article. As the provision of the Section is vast and is read with the specified Rules of The National Company Law Tribunal Rules, 2016 (hereinafter referred to as Rules), the article is divided in 10 headings.

1. Against whom Class Action Suit under Companies Act, 2013 can be filed?

The Class Action Suit can be filed and Orders can be sought against the:

1. Company;

2. Directors of the Company;

3. Auditor including Auditor Firm of the Company for any improper or misleading statement made in audit report or any fraudulent, unlawful or wrongful act or conduct;

4. Expert or advisor or consultant or any other other person for incorrect or misleading statement made to the Company or any fraudulent, unlawful or wrongful act or conduct.

2. The orders that can be sought by the Applicant [Section 245(1)]:

1. To restrain the company from committing an act which is ultra vires the articles or memorandum of the Company;

2. To restrain the Company from committing breach of any provision of the Company’s MOA or AOA;

3. To declare a resolution altering the MOA or AOA 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;

4. To restrain the Company and its directors from acting on such resolution;

5. To restrain the Company from doing an act which is contrary to the provision of the Act or any other law for the time being in force;

6. To restrain the Company from taking action contrary to any resolution passed by the members;

7. To claim damages or compensation or demand any other suitable action from or against –

• • 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;
  • 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;

[As provided in Section 245(2) where any other suitable actions are demanded from or against audit Firm, then in such a case, 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]

• • 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;

8. To seek any other remedy as the Tribunal may deem fit.

3. Requisite Number of Members/Depositors:

# The requisite Number of Members who may file an Application before the NCLT shall be [Section 245(3) read with Rule 84]:

1. In case of Company having a Share Capital:

Not less than 100 Members or Not less than 5 % of the total number of its members, whichever is less

OR

Any member or members holding not less than 5% of the issued share capital in case of the unlisted Company and not less than 2% of the issued share capital in case of listed Company, subject to the condition that such member/s have paid all calls and other dues on the shares

2. In case of Company not having a Share Capital:

Not less than 1/5^th of the total number of its Members

# The requisite Number of Depositors who may file an Application before the NCLT shall be [Section 245(3) read with Rule 84]:

Not less than 100 depositors or 5% of the total number of depositors of the Company, whichever is less,

Or

Any depositor/s to whom the Company owes 5% of total deposits of the Company.

Also, 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 the act of omission, if any. [Section 245(10)]

4. Pre-requisites/ Conditions for considering admissibility of  Application filed [Section 245(4) read with Rule 85]

The section has put a mandatory obligation on the Tribunal to look into some factors before accepting the Application under this section, therefore, in considering an Application the Tribunal shall take into account in particular:

• Whether the member or depositor is acting in good faith in making the Application for seeking an order [Section 245(4)(a)];
• Any evidence before it as to involvement of any person other than directors or officers of the Company on any matters which involve the Orders to be taken against the Company or its directors as provided in Clauses (a) to (f) of Section 245(1) [Section 245(4) (b)];
• Whether the cause of action is one which the member/depositor could pursue in his own right than through an order under this section [Section 245(4)(c)];

Rule 85(2) further suggested the Tribunal to take into account while considering the desirability of an individual action as opposed to Class Action as provided in Section 245(4)(c), whether admitting separate actions by Member/s or depositor/s would create a risk of –

1. Inconsistent or varying adjudications in separate actions or;

2. Adjudications that would dispose off interest of other members;

3. Adjudications which would substantially impair or impede the ability of other members of the class to protect their interest.

• • Any evidence before it as to the views of the members/depositors of the Company who have no personal interest, direct or indirect in the matter being proceeded under this section [Section 245(4)(d)];
  • Where the cause of action is an act or omission that is yet to occur whether the act or omission could be and in circumstances would likely to be; authorized by the Company before it occurs or ratified by the Company after it occurs [Section 245(4)(e)];
  • Where the cause of action is an act of 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(4)(f)].

In addition to the Conditions specified in the Section the applicable Rule 85 also specifies additional Grounds that the Tribunal may take into account while considering the admissibility of the Application filed:

• Whether the class has so many members that joining them individually would be impractical, making a class action desirable;
• Whether there are questions of law or facts common to class;
• Whether the claims or defences of the representative parties are typical of the claims or defences of the class;
• Whether the representative parties will fairly and adequately protect the interest of the class.

It can be inferred from the pre-requisites specified that the Tribunal would look through a lens at an Application filed under this section and only after it is completely satisfied that the Class Action Suit is the best or the last resort would it allow such an application to be processed, may it is for this particular that the nation has never seen an Class Action Suit under the Act.

5. Procedure to be followed by the Tribunal upon acceptance of Application [Section 245(5) read with Rule 85, 86, 87]

1. The Application shall be filed before the Tribunal in Form NCLT-9. A copy of every Application shall be served on the Company, other Respondent and all such person as the Tribunal may Direct.

2. Public Notice shall be served on admission of the application to all the members or depositors of the class, as per Form No. NCLT 13, by –

• Publishing the same within 7 days of admission of the Application by the Tribunal at least once in vernacular Newspaper in the principal vernacular language of the State in which the registered office of the Company is situated and at least once in English in English Newspaper circulating in the State;
• Requiring the Company to place the public Notice on the website of such Company, if any;
• Notice shall also be placed on the website of the Tribunal, MCA, concerned RoC and in case of the Listed Company on the website of the concerned Stock Exchange where the securities of the Company are listed, until the Application is disposed off by the Tribunal.

The date of issue of the newspaper in which such notice appears shall be considered on the date of serving the public notice to all the members of the class.

Content of Public Notice:

• Name of the lead applicant
• Brief particulars of the ground of application
• Relief sought by such application
• Statement to the effect that application has been made by the requisite number of members/depositors
• statement to the effect that the application has been admitted by the Tribunal after considering the matters stated under sub-section (4) of section 245 and these rules and it is satisfied that the application may be admitted
• date and time of the hearing of the said application
• time within which any representation may be filed with the Tribunal on the application;
• the details of the admission of the application and the date by which the form of opt out has to be completed and sent as per Form NCLT-1 and shall be accompanied with such documents as are mentioned in Annexure ‘B’, and such other particulars as the Tribunal thinks fit.

The cost or expenses connected with the publication of the public notice shall be borne by applicant and shall be cleared by the Company or any other person responsible for any oppressive act in case the order is passed in favor of Applicant.

3. All similar applications should be consolidated into a single application and the class members/depositors should be allowed to choose the Lead Applicant and if they fail to come to consensus, the Tribunal shall have the power to appoint Lead Applicant, who shall be in charge of proceedings from the Applicants Side

4. Two class action for the same cause shall not be allowed.

5. The cost or expenses connected with the Application shall be covered by the Company or any other person responsible for the oppressive act.

6. Rule of Opt-Out [Rule 86]

As a general Rule, a Class member who receives a Public Notice as per the provisions of the Section shall be deemed to be a member of the Class unless he expressly opts out of the proceedings.

A member of the Class action has an option to opt out of the proceedings at any time after the Institution of Suit, with the permission of the Tribunal as per Form NCLT-1.

A class member opting out shall not be precluded from pursuing a claim against the Company on an individual basis under any other law, subject to any conditions imposed by the Tribunal.

7. Orders of the Tribunal

Any Orders passed by the Tribunal Shall be binding on

• The Company and
• All its members/depositors and
• Auditor including Audit Firm
• Expert, Consultant or Advisor or any other person associated with the Company. [Section 245(6)]

Non-Compliance of Order [Section 245(7)]

In case of non compliance of the Order passed by the Tribunal:

The Company shall be punishable with a minimum fine of Rs 5 Lakh which may extend to Rs 25 Lakhs and every Officer in default shall be punishable with the Imprisonment for a term which may extend to 3 years and with a minimum fine of Rs 25,000 which may extend to Rs 1 Lakh.

8. Cost of Frivolous Complaints [Section 245(8)]

Under this sub section the Tribunal has been provided with a right to reject the Application with the cost on Applicant where it finds that the Application was frivolous or vexatious.

Thus, if an Application if found frivolous or vexatious, the same shall be rejected by the Tribunal and the reasons shall be recorded in writing and shall make an Order imposing a cost on the Applicant which shall not exceed Rs 1 Lakh, to be paid to the Opposite Party.

9. Non- Applicability [Section 245(9)]

According to this, the provisions of Section 245 shall not apply to the Banking Companies.

10. Conclusion:

The provision of Class Action Suit was actually thought to be included in the Companies Act only after the Satyam fiasco but to date it remains unexplored as no suit has ever been filed under this section and it is yet to be interpreted in the light of any judicial pronouncements.