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Section - 245

Class Actions in the Companies Act, 2013: a Recipe forConfusion?

The Companies Act, 2013 introduces some important changes to the company law regime in India. In

this post, we shall discuss one such new feature: the class action. The provisions governing class

actions are introduced through s. 245 of the Act. These provisions are included under Chapter XVI

Prevention of Oppression and Mismanagement: however, class actions are evidently not the same as

petitions against oppression/mismanagement. Rules governing applications in respect of

oppression/mismanagement (echoing s. 397-398 of the 1956 Act) are found in s.241-244: s. 245

introduces a distinct regime of class actions.

Section 245(1) reads:

Such number of member or members, depositor or depositors or any class of them, as the case may

be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct

of the affairs of the company are being conducted in a manner prejudicial to the interests of the

company or its members or depositors, file an application before the Tribunal on behalf of the

members or depositors for seeking all or any of the following orders

The reference to such number as are indicated in sub-section (2) appears to be a typographical

error: the prescription regarding the number of members/depositors is contained in sub-section (3).

The requisite minimum numbers are specified as being either 100, or such percentage of the total

number of members/depositors as may be prescribed by the rules.

Member is defined in s. 2(55) to mean:

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to

become member of the company, and on its registration, shall be entered as member in its register of

members; (ii) every other person who agrees in writing to become a member of the

company and whose name is entered in the register of members of the company; (iii) every person

holding shares of the company and whose name is entered as a beneficial owner in the records of a

depository...

A depositor is not defined; but a deposit is defined as including any receipt of money by way of

deposit or loan or in any other form by a company, but does not include such categories of amount as

may be prescribed in consultation with the Reserve Bank of India. If the RBI does permit certain

loans or advances under the latter part of the provision (not include such categories), such that the

loans are not treated as deposits, whether such a lender will nonetheless be considered a depositor is

an open question. It may perhaps be argued that the exclusion from certain categories of amountsfrom the definition of deposits is meant to allow deviation from the provisions of Chapter IV

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(Acceptance of Deposits), but not for the purpose of disentitling the concerned lender from remedies

u/s 245.

Section 245(1) thus gives the right to the members/depositors to file an application to the Tribunal ifthey are of the opinion that the management or conduct of the affairs of the company are being

conducted in a manner prejudicial to the interests of the company or its members or depositors

Insofar as a member is concerned, the contours of this section are not clearly delineated from the

oppression section (s. 241). Under s. 241, an application can be filed by a member who complains

that the affairs of the company have been or are being conducted in a manner prejudicial to public

interestor in a manner prejudicial or oppressive to him or any other member or members or in a

manner prejudicial to the interests of the company The ingredients overlap to an extent. One can

perhaps argue that applications u/s 241 can be filed in case of specific oppression to certain members

or classes; and while reference is made to interest of the members in s. 245, it must mean a

reference to all the members as a class. In any case, even such a (perhaps tenuous) distinction would

not result in a clear demarcation between the two sections. Insofar as depositors are concerned, it

appears that s. 245 can be used only in cases when depositors as a class are being treated in a

prejudicial manner. (Depositors also have other remedies for fraudulent deposits etc. under other

sections see s. 75 for example which we shall discuss separately). The provision is not free of

doubt, however. Clarity has not been aided by the wording of s. 241 either. (Section 241 also has

requirements as to minimum number of members, and is, naturally, limited to members and not to

depositors. The Tribunal has the discretion to waive the minimum number threshold in the case of s.

241, however.)

Section 245 states that the application before the Tribunal is to be filed on behalf of the members or

depositors This again raises interesting questions: particularly because the application may be one

to claim damages. The damages in such a case will presumably be awarded to all those on whose

behalf the application is filed. When the section states on behalf of the members, does it mean on

behalf of all members? If not, how is one to decide what the class is in respect of which the class

action is brought? If one were to say all members, what would happen if some of the members are

also the actors behind the wrongs complained of? How will principles of ex turpi causaetc. apply in

such a case? What principles will the Tribunal apply to ensure a proper distribution of any monetary

award? These questions do not seem to have any easy answers on the basis of the language of the

sections.

Amongst the orders which can be sought in a proceeding u/s 245, one is [s. 245(1)(g)] as follows:

to claim damages or compensation or demand any other suitable action from or against

(i) the company or its directors for any fraudulent, unlawful or wrongful actor omission or conduct or

any likely act or omission or conduct on its or their part;

(ii) the auditor including audit firm of the company for any improper or misleading statement of

particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or

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(iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement

made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or

conduct on his part

This apparently gives a right to members or depositors to claim damages from third parties: one

wonders what the cause of action is in such cases. The cause of action cannot be on the basis of a

contract with the alleged third party the contract will be between the company and the third party,

not the members. If one were to say that there is a liability in tort, one would be saying that the

common law position on duties of auditors etc. is modified. The implications indeed, the need or

desirability for this is not clear. The other way of looking at this would be to say that the statute is

effectively allowing a type of derivative action, and is providing that the Tribunal shall be the forum for

such an action. Again, a difficulty arises: clause (i) allows claims from the company itself: that can

barely be a derivative action in the true sense. Some of the rules governing common law derivative

actions do not seem to find a place in s. 245. In any case, another question which arises is what the

impact of s. 245 would have on the classic derivative action. One could conceivably argue that given

extensive codification, a separate derivative action should no longer be possible. (This argument was

made and rejected in England in respect of a double derivative action: the English statute

however was far clearer than the mix-and-match solution in sections 241-245.) In sum: what is the

jurisprudential nature of the s. 245 remedy? What does class action really mean in this context? One

will have to wait and watch how the Courts make sense of these provisions.

The breadth of clause (iii) will also need to be examined: liability is apparently created when an expert

makes an incorrect statement. One assumes that this is not a strict liability test; nor does it apply inthe case of advice given to the company which is not meant to be acted upon directly by the

members. The language leaves all possibilities open. These issues all seem to arise from the statute

introducing class actions without at all seeing how this would fit in with existing remedies recognized

in company law. The result is a bunch of sections likely to give rise to serious analytical and

interpretative difficulties.

We will discuss these issues arising from these provisions (and other provisions of the new Act) over

future posts.