Class Action Suits: Empowering Minority Shareholders under Section 245#
For decades, minority shareholders in India felt helpless when promoters mismanaged funds or auditors turned a blind eye to corporate fraud. The legal costs of fighting a massive corporation individually were prohibitive.
The introduction of Section 245 in the Companies Act, 2013, changed the game by introducing the concept of the "Class Action Suit," a powerful legal tool imported from Western jurisdictions.
What is a Class Action Suit?#
A Class Action Suit allows a group of people (a "class") who share a common grievance against a company to band together and file a single, consolidated lawsuit before the National Company Law Tribunal (NCLT).
This pools their resources, shares the legal costs, and presents a formidable challenge to errant management.
Who Can File a Class Action Suit?#
To prevent frivolous litigation by a single disgruntled investor, the law sets minimum thresholds for filing:
- Shareholders:
- In a company with share capital: Not less than 100 members, OR members holding not less than 10% of the total voting power.
- In a company without share capital: Not less than one-fifth of the total members.
- Depositors:
- Not less than 100 depositors, OR depositors holding not less than 10% of the total outstanding deposits of the company.
Grounds for Filing a Suit#
Shareholders or depositors can approach the NCLT if they believe the management or conduct of the affairs of the company is prejudicial to the interests of the company or its members/depositors.
Specifically, they can seek orders to restrain the company from:
- Committing an act which is ultra vires (beyond the powers) of the Articles or Memorandum.
- Committing a breach of any provision of the company’s memorandum or articles.
- Acting on any resolution passed by suppressing material facts.
- Doing any act contrary to the Companies Act or any other law.
Holding Auditors and Consultants Accountable#
Perhaps the most potent weapon within Section 245 is its reach. A Class Action Suit can claim damages or compensation not just from the company or its directors, but also from:
- The Statutory Auditor: For any improper or misleading statement made in the audit report or for any fraudulent conduct.
- Experts and Advisors: Any expert, advisor, or consultant whose incorrect or misleading statement was relied upon by the shareholders/depositors.
Conclusion#
Section 245 acts as a powerful deterrent. The mere threat of a Class Action Suit, backed by an organized group of institutional or retail investors, forces boards and auditors to maintain the highest standards of governance and disclosure.