Section 245 — The Road Less Travelled

Introduction

After a wait of almost 8 years, 2024 finally saw members opting for the class action route by invoking Section 245 of the Companies Act, 2013¹ (Act) a provision which came into effect on 1-6-2016. While Ankit Jain and other minority shareholders raised allegations of mismanagement against Jindal Poly Films Limited dragged the company and its Board² (Ankit Jain v. Jindal Poly Films Ltd.³), Manu Rishi Guptha and minority shareholders challenged Industrial Credit and Investment Corporation of India (ICICI) Bank’s delisting bid for ICICI Securities⁴ (Manu Rishi Guptha v. ICICI Securities Ltd.⁵).

A class action is essentially an action instituted by a group of persons having the same interest. Section 245 of the Companies Act, 2013 allows members and depositors of a company to approach the National Company Law Tribunal (NCLT) if they believe that the company’s affairs are being conducted in a manner prejudicial to company’s interests/that of its members/depositors. This remedy was introduced for the first time in the Act and did not find a place in the erstwhile Companies Act, 1956⁶ (erstwhile Act).

While we wait for the NCLT’s decision on these two actions, in this article we take the opportunity to explore the evolution of class action remedies in India, the remedy envisaged under Section 245 and where it stands in comparison to the remedy under Section 241⁷.

Evolution of the class action remedy in India

One of the earliest statutory provisions in India, catering to a situation where several persons have the same interest in one action, can be traced under Order 1 Rule 8 of the Code of Civil Procedure, 1908⁸. It provides that one or more persons having the same interests may with the court’s permission, sue or be sued, or may defend such suit, on behalf of, or for the benefit of, all interested persons.

A similar remedy can also be found in the Indian consumer protection laws. Section 35(1)(c) of the Consumer Protection Act, 2019⁹, allows a complaint to be filed by one or more consumers on behalf of and for the benefit of numerous consumers having the same interest. Section 12(1)(c) of the erstwhile Consumer Protection Act, 1986¹⁰, also provided for the same.

As indicated above, the Act for the first time introduced this option for members and depositors. The need for such a remedy was brought up in Report of the J.J. Irani Committee in 2005¹¹, which highlighted the need for statutory recognition of class actions in case of companies. Almost 8 years later, this idea found its place in the Act in the form of Section 245.

Section 245 of the Act

Section 245 of the Act is an effective remedy for members and/or depositors who are of the opinion that the company’s affairs are being conducted in a manner prejudicial to the interests of the company or its members or depositors.

Section 245(3) of the Act read with Rule 84 of the National Company Law Tribunal Rules, 2016¹² prescribes the minimum threshold for instituting any such action. In case of a company having share capital, the minimum criteria is, (a) at least 5% of the total members or 100 members, whichever is less; or (b) members holding not less than 5% of the issued share capital of the company of an unlisted company or members holding not less than 2% of the issued share capital of a listed company. In case of a company not having share capital, a minimum of â…•th members are required. In case of depositors: (i) at least 5% of the total number of depositors or 100 depositors, whichever is less; or (ii) depositors to whom the company owes 5% of total deposits of the company.

To avoid multiplicity of proceedings, Section 245(5) prohibits the initiation of two class action applications for the same cause of action. To this end, once the application of a set of aggrieved parties is admitted, a public notice is required to be served on all members/depositors in the same class so as to consolidate all similar applications. In such a case, the members/depositors, as the case may be, can choose the lead applicant, failing which the NCLT has the power to appoint the lead application who will be in charge of the proceedings. Further, the cost/expenses connected with the application are required to be defrayed by the company or any other person responsible for any oppressive act.

Apart from the minimum criteria, the NCLT will also take into consideration: (a) whether the applicants are acting in good faith; (b) involvement of any person other than directors/officers of the company in the alleged acts; (c) applicant’s ability to pursue the cause of action in his own right rather than through Section 245; and (d) views of other members/depositors who have no personal interest in the proceedings.

Section 245(1) lists out the remedies which are available to such aggrieved members and/or depositors. These include: (a) restraining the company from acting ultra vires or breaching the articles or memorandum; (b) declaring a resolution altering the memorandum or articles as void if it was passed by suppression of material facts or misstatement; (c) claiming damages/compensation; or (d) other suitable action against the company or its directors, auditor including audit firm/any expert/advisor/consultant/any other person, etc.

In this regard, it is important to note that Section 245 particularly empowers the NCLT to pass orders directing payment of damages/compensation or any other suitable action against third parties for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct. This allows members and depositors to have remedies not only against the company and its management but also these third parties for their illegal conduct.

There is also a residuary clause under which the applicants can “seek any other remedy as the Tribunal may deem fit”.

Orders passed by the NCLT under Section 245 are binding on the company, its members and depositors. These orders are also binding on the company’s auditor/experts/consultants/advisors/any other person associated with the company. Failure to comply with any such order is punishable with a fine between INR 5 lakhs — INR 25 lakhs in case of a company and in case of officers in default with imprisonment up to 3 years and fine between INR 25,000 to INR 1 lakh.

Given that such an action has the potential of disrupting a company’s operations, as a deterrent against any potential misuse, Section 245 empowers the NCLT to direct applicants to pay costs of up to INR 1 lakh if the application is found to be frivolous or vexatious.

Section 241 versus Section 245

At first blush, the remedies may appear to be similar, barring of course the qualifying criteria. Both serve as a lifeline for interested persons aggrieved by the manner in which the company’s affairs are being conducted and equip the NCLT with wide powers to protect their interests.

While admittedly there are some similarities, a careful inspection of the two reveals that both operate in different spheres and serve different purposes. Apart from the major and apparent difference of who can initiate the action and the minimum qualification criteria, there lies an interesting distinction between the two remedies. An action under Section 241 may be filed when the affairs of the company have been or are being conducted in a manner: (i) prejudicial to public interest; or (ii) prejudicial or oppressive to the members; or (iii) prejudicial to the interests of the company. Additionally, an action may lie if a material change which has been made is likely to result in the affairs of the company being conducted in a manner prejudicial to the interests of the company or its members. In contrast, an action under Section 245 is a more restricted remedy, only available if the management or affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members/depositors. This difference in scope is an important distinction between the two remedies.

Another significant distinction between the two remedies is that an action under Section 241 can be filed for both, past and present misconduct. This is evident from the use of the words “affairs of the company have been or are being conducted”. Conversely, an action Section 245 is limited to only ongoing misconduct, as is clear from the words “affairs of the company are being conducted” in a prejudicial manner. To this extent, the construct of Section 245 is similar to Sections 397¹³ and 398¹⁴ of the erstwhile Act (which is now modified under the present Section 241 of the Act) which was also limited to ongoing misconduct.

Additionally, while Section 245 penalises applicants for frivolous actions, such an express deterrent is not found in Section 241.

Conclusion

Sections 241 and 245 of the Act both came into effect on 1-6-2016. While Section 241 was almost immediately put to use by parties, it has taken almost 8 years for parties to invoke Section 245. This delay, however, does not in any manner reflect upon/dilute the effectiveness of this remedy, which is an important weapon in the hands of members and depositors, otherwise not entitled to avail Section 241 remedy. In fact, one may attribute this delay to the fact that while Section 241 represented a tried and tested remedy carried forward from the Erstwhile Act, Section 245 was a new unchartered territory, the effectiveness of which was untested. Practitioners and litigants alike had no precedents to assess the effectiveness thereof.

Another interesting aspect is that while courts have largely crystallised the contours of Section 241 and the reliefs which may granted in such actions, class actions under Section 245 continue to remain unchartered territory. In fact, the two pending actions will be the first opportunity for the NCLT to assess such cases as well as for practitioners and litigants alike to gauge the viability of a class actions. The NCLT’s treatment of these class actions will go a long way in determining whether class actions become the new staple in India. It will be interesting to see if in the coming years Section 245 receives the same favour from litigants as Section 241 or if continues to remain a remedy largely forgotten.