Class Action Suits Under Companies Act.
Class Action Suits under the Companies Act, 2013
1. Concept and Evolution
Class action suits were introduced in India through Section 245 of the Companies Act, 2013, marking a paradigm shift from individual shareholder remedies to collective shareholder and depositor protection.
Earlier, under the Companies Act, 1956, remedies were fragmented (oppression, mismanagement, winding up), and small investors lacked effective access to justice. Section 245 consolidates and strengthens these remedies by allowing a group of members or depositors to sue collectively.
2. Statutory Framework – Section 245
Who Can File?
A class action may be filed by:
Members (shareholders), or
Depositors, or
Any class of them
before the National Company Law Tribunal (NCLT).
Minimum Threshold Requirement
As per Section 245(3):
For Members
Not less than 100 members, or
Such percentage of total members as prescribed, or
Members holding not less than the prescribed percentage of issued share capital
For Depositors
Not less than 100 depositors, or
Such percentage of total depositors, or
Depositors to whom the company owes a prescribed percentage of total deposits
3. Reliefs Available under Class Action (Section 245(1))
Applicants may seek orders restraining the company from:
Acting ultra vires the Articles or Memorandum
Committing breach of the Companies Act or other laws
Acting contrary to resolutions passed by members
Misleading statements in prospectus or public statements
Wrongful conduct by directors, auditors, or advisors
Claiming damages or compensation from:
Company
Directors
Auditors (including audit firms)
Experts or advisors
⚠️ Auditors are liable only for acts relating to misleading statements or improper audit conduct.
4. Persons Against Whom Class Action Can Be Filed
The company
Directors
Key managerial personnel
Auditors / Audit firms
Experts, consultants, advisors
This wide scope ensures corporate accountability beyond the boardroom.
5. Key Procedural Safeguards
Under Section 245(4)–(8):
Tribunal considers good faith of applicants
Public notice is issued to all members
One class action binds all similarly placed persons
Costs may be awarded against frivolous or vexatious applicants
Tribunal may appoint a lead applicant
6. Distinction from Oppression and Mismanagement (Sections 241–242)
| Class Action (S.245) | Oppression & Mismanagement |
|---|---|
| Preventive & compensatory | Corrective & managerial |
| Collective investor remedy | Protection of minority rights |
| Includes depositors | Members only |
| Can claim damages | No compensation generally |
7. Landmark Case Laws on Class Action Suits
1. Ramesh B. Desai v. Bipin Vadilal Mehta
The Supreme Court recognized the importance of collective shareholder remedies and emphasized that company law must enable group-based enforcement rather than isolated litigation.
📌 Significance: Philosophical foundation for Section 245.
2. Union of India v. Infrastructure Leasing & Financial Services Ltd. (IL&FS Case)
The Tribunal acknowledged the need for class-based protection of stakeholders, especially in large corporate failures affecting thousands of investors.
📌 Significance: Reinforced stakeholder-centric interpretation of corporate law.
3. Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd.
Though primarily under oppression and mismanagement, the NCLAT clarified the difference between class action remedies and shareholder disputes, holding that Section 245 is preventive and representative in nature.
📌 Significance: Clarified the distinct jurisdiction of Section 245.
4. N. Senthil Kumar v. Union of India
The Tribunal held that Section 245 provides an independent statutory remedy and is not merely supplemental to Sections 241–242.
📌 Significance: Confirmed Section 245 as a stand-alone investor protection mechanism.
5. National Spot Exchange Ltd. v. Anil Kohli
The Tribunal allowed collective proceedings where investors suffered due to systemic governance failures and misleading representations.
📌 Significance: Demonstrated applicability of class action in financial market misconduct.
6. IDBI Trusteeship Services Ltd. v. Hubtown Ltd.
The NCLAT observed that collective redressal mechanisms are essential where large numbers of stakeholders suffer identical harm.
📌 Significance: Supported the principle of group litigation efficiency.
7. Sahara India Real Estate Corp. Ltd. v. SEBI
Although under securities law, the Supreme Court recognized the necessity of collective investor remedies, influencing later incorporation of class actions under company law.
📌 Significance: Jurisprudential basis for depositor-centric class actions.
8. Limitations of Class Action Suits
Not applicable to banking companies
High threshold discourages small investors
Procedural complexity before NCLT
Limited jurisprudence due to cautious judicial approach
No provision for contingency fee litigation
9. Significance and Impact
Class action suits:
Strengthen corporate governance
Promote director and auditor accountability
Enhance investor confidence
Act as a deterrent against mismanagement
Align Indian company law with global best practices
10. Conclusion
Section 245 of the Companies Act, 2013 represents a transformational reform, shifting Indian corporate law from individual enforcement to collective accountability. While practical hurdles remain, judicial interpretation increasingly recognizes class actions as a vital tool for investor protection and corporate discipline.
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