Section 245 and 246 of Companies Act 2013: Class Action and Related Proceedings
Sections 245 and 246 of the Companies Act, 2013 form part of Chapter XVI dealing with prevention of oppression and mismanagement. Section 245 provides a statutory class action remedy for qualifying members or depositors, while Section 246 applies specified winding-up related provisions to applications under Section 241 or Section 245.
Section 245 - Class action
Section 245 enables the prescribed number of members, depositors, or a class of them to apply to the Tribunal where they are of the opinion that the management or conduct of the affairs of the company is being carried on in a manner prejudicial to the interests of the company, its members or its depositors.
In practical terms, a class action permits eligible persons with a common grievance to seek collective relief instead of requiring every affected person to pursue an independent proceeding.
Who can file a class action under Section 245?
Section 245(3), read with Rule 84 of the National Company Law Tribunal Rules, 2016 as amended, specifies the numerical or holding thresholds for members and depositors.
| Applicant category | Threshold |
|---|---|
| Members - company having share capital | At least 5% of the total number of members or 100 members, whichever is less; alternatively, member or members holding at least 5% of issued share capital in an unlisted company or at least 2% in a listed company, subject to payment of calls and other sums due on the shares. |
| Members - company without share capital | Not less than one-fifth of the total number of members, as stated in Section 245(3)(i)(b). |
| Depositors | At least 5% of the total number of depositors or 100 depositors, whichever is less; alternatively, depositor or depositors to whom the company owes at least 5% of its total deposits. |
Reliefs that may be sought under Section 245(1)
Eligible applicants may seek one or more of the following orders from the Tribunal:
- Restraining the company from committing an act that is ultra vires its memorandum or articles.
- Restraining the company from committing a breach of its memorandum or articles.
- Declaring void a resolution altering the memorandum or articles where it was passed by suppression of material facts or obtained by misstatement to members or depositors.
- Restraining the company and its directors from acting on such a resolution.
- Restraining the company from doing an act contrary to the Companies Act, 2013 or any other law in force.
- Restraining the company from taking action contrary to a resolution passed by the members.
- Claiming damages, compensation or other suitable action against the company or its directors for fraudulent, unlawful or wrongful acts, omissions or conduct.
- Claiming appropriate relief against an auditor or audit firm for improper or misleading statements in an audit report or for fraudulent, unlawful or wrongful conduct.
- Claiming appropriate relief against an expert, adviser, consultant or other person for an incorrect or misleading statement made to the company or for fraudulent, unlawful or wrongful conduct.
- Seeking any other remedy that the Tribunal considers fit.
Liability of an audit firm
Where damages, compensation or other suitable action is sought against an audit firm, Section 245(2) extends liability to the firm and to each partner involved in the improper or misleading statement in the audit report or the fraudulent, unlawful or wrongful conduct.
Factors considered by NCLT
Under Section 245(4), the Tribunal considers matters including the applicant's good faith, involvement of persons other than directors or officers, whether the applicant could pursue the cause in an individual capacity, the views of disinterested members or depositors, and whether the relevant act or omission could be authorised or ratified by the company.
What happens after a class action is admitted?
Section 245(5) establishes a collective procedure after admission. Public notice is given to members or depositors of the class in the prescribed manner. Similar applications are to be consolidated, and the class may choose a lead applicant; where consensus is not reached, the Tribunal may appoint one. Two class action applications for the same cause of action are not permitted.
The NCLT Rules also provide for public notice of an admitted Section 245 petition. This helps identify the class, the lead applicant, the grounds and relief sought, and the consequences for persons falling within the class.
Binding effect, non-compliance and frivolous applications
Binding order: An order under Section 245 binds the company and its members, depositors, auditor including the audit firm, expert, consultant, adviser and other persons associated with the company as specified in the section.
Failure to comply: Section 245(7) provides consequences where a company fails to comply with a Tribunal order, including monetary penalty for the company and penal consequences for officers in default as set out in the Act.
Frivolous or vexatious application: Under Section 245(8), the Tribunal may reject such an application for recorded reasons and may order the applicant to pay costs to the opposite party, subject to the statutory ceiling.
Banking companies
Section 245(9) expressly states that Section 245 does not apply to a banking company.
Representative applications
Subject to compliance with Section 245, sub-section (10) permits an application or other action by a person, group of persons or association of persons representing persons affected by an act or omission specified in Section 245(1).
Section 246 - Application of certain provisions to proceedings under Section 241 or Section 245
Section 246 provides that Sections 337 to 341, both inclusive, apply mutatis mutandis to an application made to the Tribunal under Section 241 or Section 245.
Meaning of mutatis mutandis: the referenced provisions apply with the necessary changes required by the different context.
| Provision applied through Section 246 | Subject |
|---|---|
| Section 337 | Penalty for frauds by officers. |
| Section 338 | Liability where proper accounts were not kept. |
| Section 339 | Liability for fraudulent conduct of business. |
| Section 340 | Power of Tribunal to assess damages against delinquent directors and others. |
| Section 341 | Liability under Sections 339 and 340 extending to partners or directors in firms or companies in the circumstances specified by the Act. |
Official legal resources
For the latest statutory text, rules, notifications and filing information, refer to the official Ministry of Corporate Affairs website and the Companies Act, 2013. For tribunal information and orders, refer to the National Company Law Tribunal.
Note: This article is a general legal reference. Statutory provisions, rules, notifications and judicial interpretation should be checked for the facts and date relevant to a particular matter.