The government must keep a low threshold of shareholders or
depositors needed to initiate class action
Class-action—this buzzword is not new to Indian
jurisprudence. It is already embedded in statutes such as the CPC
1908 and the Consumer Protection Act 1986, but has been rarely
invoked. Class-action gained popularity only when the Companies Act
2013 introduced it in Section 245. Concurrent with the
establishment of the National Company Law Tribunal (NCLT) from June
1, 2016, class-action has also been notified and is now in
The rules of the game are now going to change for good with
substantial rights being vested in shareholders and depositors to
file class-action suits with the NCLT over misconduct, not only
against errant companies and directors but also against their
auditors and other advisors, experts and consultants.
In 2005, the JJ Irani Committee voiced the need to introduce
class-action and derivative-action in Indian company law, but these
recommendations remained on the back-burner till India Inc was
shocked by the Satyam scam.
The company law of the day, Companies Act 1956, didn't have
any effective provision for mass shareholder activism and minority
While many class-action suits were successfully filed in the US
by holders of ADRs of Satyam, nothing could be done here in India
as the Companies Act 1956 did not permit this action. Thus, the
legislature included specific class-action provisions in the
Companies Act 2013. Section 245, which applies to all kinds of
companies except banks, meets this deficit.
The section provides that a certain number or percentage of
'members and depositors or any class of them', whichever is
less, can file an application before the NCLT.
The aggrieved members or depositors can seek an order
restraining a company from committing an act which is ultra vires
of or is in breach of the company's charter documents;
declaring a resolution altering the charter documents as void if
such resolutions are passed by superseding material facts or
through a misstatement; restraining the company from doing any act
which is contrary to the Companies Act or any other law;
restraining the company from taking action contrary to any
resolution passed by the members; or awarding damages, compensation
demand or any suitable action from or against the company, its
directors, auditors and in some cases even from experts, advisors
In the case of a company and its directors, such damages or
compensation can be ordered for any fraudulent, unlawful or
wrongful act or omission by them; the auditors, on the other hand,
can be held accountable for any improper or misleading statement in
their audit report.
The auditor's liability will be joint, i.e., of both the
audit firm as well as the partner who prepared and signed the
To file a class-action suit, the members or depositors will need
to establish that the management's conduct of the company's
affairs are prejudicial to their or the company's
While Section 245 lays the substantive law and provides that any
100 or more members or depositors, as the case may be, can file a
class-action, other aspects such as the minimum percentage of the
total number of the members/depositors that would be required for
filing class-action will be provided through rules that are
forthcoming from the ministry of corporate affairs.
It is suggested that the government should consider providing a
relatively lower threshold to ensure that class-action right is
within the reach of members and depositors.
Interestingly, the provisions for class-action are contained in
the chapter related to prevention of oppression and mismanagement
under the Companies Act 2013; therefore, a question arises what is
the need to have a separate provision for class-action when they
can be covered under the already existing provision of oppression
The remedies sought from class-action are very different from
the remedies derived from the general provisions of oppression and
While, in the class-action, applicants seek an order restraining
the company and its directors from doing certain acts; remedies
under general oppression and mismanagement could be the acquisition
of shares or interest of the other members of the company,
restrictions on transfer or allotment of shares by the company.
The order of the NCLT in a class-action matter will be binding
not only on the members or depositors who filed the class-action
but on all its members, depositors, auditors and others.
Whereas class-action is now a reality in Companies Act,
derivative-action is still not specifically provided for.
Derivative-action too plays a significant role in corporate
governance; therefore, similar provisions for them could have been
provided in the Companies Act. However, that's a separate
matter and can be discussed at some other time.
This article was originally published in THE FINANCIAL
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