1. Introduction

Initiation of class actions under the Companies Act, 2013 (Law)took an important step towards protecting shareholders and depositors. After more than a decade since the law came into force, India has started seeing significant applications in the National Company Law Tribunal. (NCLT)Minority shareholders are taking companies to task over allegations of mismanagement. This development in company law brings practices in India more in line with global standards and provides minority stakeholders with a powerful tool to protect their interests.

Two important class action lawsuits have been filed recently, demonstrating the growing importance and utility of this mechanism in the Indian corporate sector. In these cases, minority shareholders filed their complaints with the NCLT under Section 245, alleging mismanagement and actions prejudicial to their interests. These cases represent a potential turning point for class actions in India, where shareholders have traditionally relied on other parts of Companies. Take action to resolve corporate complaints. The NCLT’s responses to these cases are expected to set critical precedents that will clarify the procedural and substantive aspects of class actions under Indian corporate law and promote greater accountability and transparency.

2. Historical Context of Class Action in India

The concept of class action is not new in Indian law. It was first introduced through the Code of Civil Procedure, 1908, Order I, Rule 8:representative suitIt allows groups of people with similar interests to be collectively represented in court. Despite this, until the Law came into force, there were no clear provisions regarding class actions in the company law.

Before this, shareholders in India were largely dependent on derivative actions in case of fraud or unapproved corporate decisions. JJ Iran CommitteeTasked with revising the Companies Act, 1956, it recommended the inclusion of provisions for class actions to improve corporate governance and provide stakeholders with effective tools to address corporate misconduct. In response, Section 245 of the Act enacted the provision empowering shareholders and depositors to file class actions; This is a significant advance in stakeholder rights.

3. Legal Framework for Class Actions under the Companies Law, 2013

Section 245 of the Companies Act gives minority shareholders and depositors the power to bring class action against a company, its directors, auditors and other advisors if they believe the company’s actions are prejudicial to their interests. Unlike Section 241, which deals broadly with oppression and mismanagement, Section 245 provides more direct recourse for class grievances, specifically targeting class actions.

The law defines who can bring class action lawsuits, sets thresholds for initiating such actions, and specifies details of entities that can be held responsible. For example, in companies with capital stock, at least 5% of the shareholders or 100 members must participate in the lawsuit. This provides threshold structure but may limit accessibility for smaller groups of stakeholders.

a) Thresholds and Limitations for Initiating a Class Action Lawsuit

Section 245 specifies the minimum number of members or depositors required to initiate a class action. For share capital companies, at least 5% of members or 100 members (whichever is lower) must participate. In companies without capital, this threshold is one fifth of the total number of members. These thresholds are designed to ensure that only serious cases with sufficient support proceed, thereby avoiding frivolous litigation. But critics argue that these requirements can be overly restrictive, especially for shareholders in smaller companies or individual shareholders who face significant financial hurdles.

b) Scope of Class Actions Filed Against Directors, Auditors and Consultants

Section 245 extends liability for fraudulent, illegal, or unfair acts to directors, auditors, consultants, and consultants. This is especially true for auditors, who have a legal responsibility to maintain transparency in financial disclosures. Recent judicial interpretations, e.g. Union of India – Sells Deloitte Haskins and LLPIt emphasizes that resigning from a company does not relieve the auditor from liability for fraudulent conduct. This decision underlines the expectation that auditors, as gatekeepers of corporate governance, act responsibly and transparently in the public interest.

c) Challenges and Punishments

The Companies Act imposes penalties on both companies and applicants for non-compliance with NCLT orders or making frivolous claims. Companies face a fine of up to INR 25,00,000 for non-compliance with the court order, while applicants found guilty of prejudicial allegations can be fined up to INR 1,00,000. These penalties act as a deterrent, but a balanced approach is needed to ensure that genuine allegations are not deterred by fear of punishment.

4. Comparative Perspective: Class Actions Under Indian and US Corporate Law

In the United States, class actions have been a well-established mechanism for decades, facilitated by a liberal approach to collective litigation. In contrast, Indian law is still developing in this area. The law represents an important step forward, but procedural and implementation limitations remain. Unlike the US, India does not have specialized courts for class actions, which can lead to procedural delays and logistical hurdles. Additionally, while US law provides for contingency fee provisions that reduce the cost barrier for plaintiffs, such provisions are not available in India, thus limiting access for minority shareholders.

5. Conclusion

The increase in class actions under the law is a promising development for Indian corporate law. These provisions provide minority shareholders and depositors with effective legal tools to address corporate misconduct and protect their interests. However, the true potential of class actions will be realized only if procedural complexity is minimized and the NCLT consistently enforces accountability among directors, auditors and consultants.

The Indian judiciary’s approach to these cases, including its approach to deadlines, will be instrumental in shaping the future of class actions in India. With its maturing legal framework and evolving legal interpretations, India stands on the threshold of a new era in shareholder protection and corporate accountability. As stakeholders become more aware of their rights, the corporate sector may witness a rise in class-action lawsuits, reinforcing the shift towards better corporate governance and increased transparency.

*****

This article was written by Mr. Abhishek Sharma, partner, and Mr. Yash Sharma, associate, SNM Law Partners.