In this post we will talk about class action suit under Section 245 of the Companies Act and the procedure to file a case for the same.
Class Action Suit in NCLT
What is NCLT?
National Company Law tribunal is a quasi judicial body constituted under Company act of 2013. It has the powers to adjudicate matters relating to mergers , insolvency ,agreements,reconstructions ,arbitration and closure of Indian Companies .The NCLT bench is headed by a judicial member either retired or serving as a high court judge along with a technical member from Indian Corporate Law service. Currently India has 16 benches of NCLT all over the nation.
What is the Cause action suit ?
Originated from United States Of America , class action suit or representative suit is a form of lawsuit filed by a number of people against one defendant ,when more people are injured by a single party it is more convenient and practical to get together and bring a lawsuit against the party without filling 100 different suits in the court of law. Also ,in cases where the matter of an individual person may be frivolous to be filed in court a class action suit can be brought against the party . Filing a class action suit is cost and time effective as well. It is vital that the class action suit only stand when the action injures a member of society or a group of people and there is no personal agenda or interest of a single person involved .
Class action suit in National Company Law Tribunal
The concept of class action suit was introduced into the Indian legislation under section 245 of Indian company act of 2013. The provision was introduced in order to empower the shareholders , investors and depositors to take legal action against the frauds committed by the company and its board of directors ,auditors and advisors . The shareholders and investors can bring a class action lawsuit under section 245 of company act of 2013 before the NCLT against the company if the company is engaged in illegal practices or it is acting ultra vires to the existing company policies and norms.
The need for class action suit came into light in 2009 after the very famous Satyam Computer services Limited also known as the satyam case , where the shareholders and investors of the company were unable to file a class action suit and sought any kind of legal remedy against the company for fraud , the shareholders could not claim any damages from the company and hence suffered a major loss .This brought a need to take necessary and proactive measures by the ministry of corporate affairs to safeguards the interests and rights of the investors .
Finally on 1st june , 2016 the ministry of corporate affairs introduced section 245 in companies act of 2013 , enlisting provision to bring a class action lawsuit against the Indian companies .
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About Section 245 of Companies Act of 2013
Section 245 of Companies Act of 2013 gives a detailed framework and allows for the shareholders and depositors to safeguard their interest and sought relief from the company , section 245 under its 10 sub section lays down the procedure in which the suit can be filed .
Every company has a MEMORANDUM OF ASSOCIATION ,which defines the company’s aims , objectives , capital , assets ,policies and most importantly its relations with the shareholders and the investors . A company memorandum serves like the constitution of the company ,its a legal document and the company is liable to strictly adhere to it . The MOA is publicly accessible. The shareholders only invest money after reading and agreeing to the company’s memorandum.
According to section 245 a class action suit can be brought to restrain the company from committing any act which is against the Memorandum of the company or any act which is ultra vires of the company policies .
Section 245 also enables the shareholders to bring action if the company passes any resolution to amend the memorandum of association without disclosing the material fact or concealing the important matters by misrepresenting it or taking a decision without informing or consulting the members , if by some means the resolution is passed and the materials come into light later , a restraining order against the company to act on such resolution can also be filed by the investors .
The investors can also seek a legal remedy if any resolution that is passed by the majority of the members is not practiced by the company .
Not only the company and its board of directors but also auditors/auditing firms , advisors/consultancy firms can be sued and brought as a party if they fraudulently conceal important facts or mislead the investors by presenting fraudulent reports and act against the interest of the investors .
It is very important to note the difference between an individual right and interest and interest of all the members and shareholders of the company , a class action suit cannot be brought under this section if only the interest of a single member is injured , if a class action suit is brought against the companies for every individual interest it will be next to impossible to run a company in India. In addition to that it is also very essential that the suit is filed in good faith by the investors and the actions of the company or the amendments in company policy will harm the interest of the shareholders and depositors directly or indirectly , if the change in company policy does not affect the shareholders and is brought in under good faith by the company then the class action suit will not stand in the court of law .
The section further lays down the provision as to the required number of members that can bring the suit ,
According to the section ,. For companies with a share capital, Hundred members or a prescribed percentage of ten percent , whichever is less or member(s) holding at least ten percent shareholding in the company. It is imperative that the member should have paid all calls and dues. For a company without share capital, 1/5th total members is sufficient to launch proceedings.
In case of depositors, minimum Hundred or at least ten percent of the total depositors, whichever is less or a depositor to which company owes ten percent of the total deposits.
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Further the section also explains the processes and procedure to file the suit ,
The procedure is as follows :
After the investors have filed an application under FORM 9 of the national company law tribunal , and the nclt successfully accepts the application after reviewing the facts and the evidence on record , a Public notice is to be served to all the members ,investors and depositors in the prescribed manner. If there are any pending cases & applications under any other jurisdiction , the tribunal has the power to club the applications into one . In the circumstances , where there are many parties involved in a case it is difficult for all the members to be present in the court at every hearing and carry out the necessary requirements hence it the parties are encouraged to elect a lead applicant , who will act as a representative and carry out all the necessary requirements , other members need not be present in the court if the lead applicant is present . Any decisions or any statements made by the lead applicant , it is binding to all the applicants and each and every applicant is liable jointly and severally.In case where the applicants are not able to decide the lead applicant the tribunal is empowered to choose the lead applicant. No two class applications can be filed for the same cause of action . The company or any member of the company who is engaged in the fraud or illegal practice shall be responsible to bear the cost of the application .
Moreover , any order passed by the tribunal shall be binding to all the board of directors ,auditors and advisors of the company , if the company fails to comply with the order of the tribunal the company shall face fiscal as well as penal consequences , the company is liable to pay a fine which shall not be less than five lakh and can extended upto twenty five lakh in addition to that , the members of the company who are at default shall be punishable with imprisonment for less than or upto 3 years at the discretion of the court and are also liable to pay a fine which shall not be less than twenty five thousand and can extend upto one lakh .
It is often seen that the class action suit is brought without any substantive reason or with malafide intention by the investors in order to put the companies in place of inconvenience and trouble . Therefore if the tribunal is of the view that the application filed is frivolous ,it shall reject the application and submit a written report stating the reason to reject the application and in that case the applicants are responsible to pay the opposite party for the cost which may exceed upto 1 lakh.
It is very vital to note that the following section does not cover or apply to banking and insurance companies.
Amendments brought under the section 245
The central government amended RULE 84 and specified clearly the requirements to file class action lawsuits under this company’s act of 2013. The amendment was announced and notified by the ministry of corporate affairs and the amendments came into force on 8th May ,2019.
According to the amended rules the required number of members to file an application shall be five percent or all the members of the company or one hundred members of the company whichever is less .
In case of unlisted company member(s) holding not less than five percent of the shares whereas in the case of listed companies member(s) holding not less than two percent of the shares can file an application under section 245.
The amended rules for depositors to file the application are as follows
Any member who owns five percent or the total number of depositors or hundred depositors of the company whichever is less can file the application
If a member owns more than five percent of the company deposit or total deposits of the company can also bring a suit against the company under this section.
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Conclusion
Class action suits have gained importance in many areas of law especially consumer Protection law in India and has helped in taking down fraudulent and illegal practices of the companies .The step to introduce class action suits in the company law act was taken by the government because if a class action suit has to be filed by the investors of the indian companies , the investors had the option to either go through with rigorous civil proceedings ,which are tedious and can take years of trial and litigation for the final judgement or the investors could file a class action suit through consumer protection forum which had its own challenges .Hence , Investors and shareholders rights and interests section 245 was added to the act . A strong legislation paves a way for better and more ethical Practices by the company ,and also saves time of the court and the parties of the suit . In addition to that it is also cost effective .
However , there have been views that section 241 of the act overlaps section 245 of the company act 2013 and there is hardly any or closer to no difference between the same and adding section 245 was not required
Section 241 of the act also empowers the members to bring a lawsuit against the company if the company acts in any manner prejudicial to the law or against the public interest or the company is engaged under any illegal practices . The members can claim the reliefs such as termination , modifications of any company policy , reduction in share prices , allowing or restraining transfer of shares , Removal of managing director or any board of director acting against the company , execution of any act related to company property or terminating transfer of goods ,restriction in allotment of shares and recovering any amount fraudulently gained by the managing director .
The members and shareholders of the company can together bring the lawsuit against the company but section 245 also covers depositors who can file a suit against the company . section 245 also enables to sue auditors/auditing firms and advisors and question them for the illegal practices committed by them which is again missing in section 241 of the act . In section 245 the tribunal is compiled to issue a public notice and hence any party can also join later after the application is filed .In other words the concept and provisions in section 245 are much wider and gives an umbrella cover to the investors .
The need for introducing section 245 is still debatable
However in few instances the apex court have expressed its in view ,
In cyrus Investments Private Limited & Anr., v. TATA Sons Limited & Ors., [2017 SCC OnLine NCLAT 261], acknowledged that the court shall first assess as to whether the thresholds are fulfilled under both sections (241 and 245) and only then proceed to assess whether any conduct is prejudicial to the interests of a class of members/ depositors, as applicable. Further, “Issued Share Capital” automatically means “Issued and subscribed Share Capital” and includes both equity and preference share capital, in context of the sections.
In the landmark judgement of Shanta Prasad Chakravarty & Ors., v. M/s. Bochapathar Tea Estate Private Limited & Ors., [2017 SCC OnLine NCLAT 335], observed that while a petition under section 241, 242 and 244 of the Act may be preferred only against the company, board of directors, shareholders or its members, under section 245, one may proceed against the statutory auditors and/ or advisors as well.
This post was written by Yoshita Gwalani
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