Section - 245

Class Actions in the Companies Act, 2013: a Recipe for

Confusion?

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 amounts
from the definition of deposits is meant to allow deviation from the provisions of Chapter IV
(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 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
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 causa etc. 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
(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 in
the 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.