1. Introduction
The introduction of class action lawsuits under the Companies Act, 2013 (the law)marked an important step towards protecting shareholders and savers. After more than a decade since the law came into force, substantial applications have been filed in India before the National Company Law Tribunal (NCLT)with minority shareholders taking companies to task for alleged mismanagement. This development in corporate law brings Indian practices more in line with global standards and provides minority stakeholders with a powerful tool to safeguard their interests.
Two notable class action filings have recently been filed, illustrating the increasing importance and utility of this mechanism in the Indian corporate sector. In these cases, minority shareholders alleged mismanagement and actions detrimental to their interests, and took their grievances to the NCLT under Article 245. These cases represent a potential turning point for class actions in India, where shareholders have traditionally relied on other departments of the companies . Take action to address complaints from companies. The NCLT’s responses to these cases are expected to set critical precedents that will clarify the procedural and substantive aspects of class action lawsuits under Indian company law, thereby promoting greater accountability and transparency.
2. Historical context of class action in India
The concept of class action lawsuits is not new in Indian law. The Code of Civil Procedure, 1908, through Order I, Rule 8, first introduced “representative suits”, allowing groups of people with similar interests to be collectively represented in court. Nevertheless, until the entry into force of the law, company law did not contain any explicit provisions for collective actions.
Previously, shareholders in India were largely dependent on derivative actions in cases of fraud or unratifiable corporate decisions. The JJ Iranian Commissioncharged with revising the Companies Act, 1956, recommended including provisions for class action lawsuits to improve corporate governance and provide stakeholders with effective tools to tackle corporate misconduct. In response, Section 245 of the law codified the provision, giving shareholders and depositors the ability to file class action lawsuits, a significant advance in stakeholder rights.
3. Legal framework for collective actions under the Companies Act, 2013
Section 245 of the Companies Act gives minority shareholders and depositors the power to bring class action lawsuits against a company, its directors, accountants and other advisors if they believe the company’s actions are detrimental to their interests. Unlike Section 241, which deals broadly with oppression and mismanagement, Section 245 focuses specifically on collective actions, providing a more direct redress for group grievances.
The law determines who may file a class action lawsuit, specifies thresholds for initiating such actions, and specifies the entities that can be held liable. For example, in companies with share capital, at least 5% of shareholders or 100 members must join the lawsuit. This threshold provides structure, but may limit accessibility for smaller shareholder groups.
a) Thresholds and limitations for initiating class actions
Section 245 specifies the minimum number of members or depositors required to commence a class action. For companies with share capital, a minimum of 5% of members or 100 members, whichever is lower, must become members. For companies without share capital, the threshold is one-fifth of the total number of members. These thresholds are intended to ensure that only serious cases with sufficient support move forward, avoiding frivolous lawsuits. However, critics argue that these requirements may be too restrictive, especially for stakeholders in smaller companies or for individual shareholders who face significant financial barriers.
b) Scope of class actions against directors, accountants and advisors
Section 245 extends liability to directors, auditors, consultants and advisors for fraudulent, unlawful or unlawful acts. This is especially relevant for accountants, who have a legal responsibility to maintain transparency in financial disclosures. Recent legal interpretations, as in Union of India v Deloitte Haskins and Sells LLPemphasize that resigning from a company does not absolve an accountant from liability for fraudulent conduct. This decision underlines the expectation that accountants, 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 for filing frivolous claims. Companies face fines of up to INR 25,00,000 for non-compliance with a court order, while applicants found guilty of vexatious claims can be fined up to INR 1,00,000. These penalties serve as a deterrent, but there is a need for a balanced approach to ensure that genuine claims are not discouraged for fear of penalties.
4. Comparative perspective: collective actions under Indian and US corporate law
In the United States, class action lawsuits have been a proven mechanism for decades, made possible by a liberal approach to class action litigation. In contrast, Indian law is still developing in this area. The law represents an important step forward, but procedural and practical limitations remain. Unlike the US, India does not have specialized courts for class action cases, which can lead to procedural delays and logistical hurdles. While US law provides for contingency fee provisions, which lower the cost barrier for claimants, such provisions are not available in India, limiting access for minority shareholders.
5. Conclusion
The emergence of class action lawsuits under the Act is a promising development for Indian corporate law. These provisions provide minority shareholders and depositors with effective legal tools to tackle corporate misconduct and protect their interests. However, the true potential of class action lawsuits will only be realized if procedural complexity is kept to a minimum and the NCLT consistently enforces the accountability of directors, auditors and consultants.
The Indian judiciary’s handling of these cases, including the handling of recent applications, will play a major role in shaping the future of class action lawsuits in India. With a more mature legal framework and evolving legal interpretations, India is on the cusp of a new era in shareholder protection and corporate responsibility. As stakeholders become more aware of their rights, the business community may witness a wave of class action lawsuits, which will reinforce the shift toward better corporate governance and greater transparency.
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This article was written by Mr. Abhishek Sharma, a Partner, and Mr. Yash Sharma, an Associate at SNM Law Partners.