Class Action

Note three things before the list.

Depositors stand with members. This is the section's first innovation.

The test is prejudice to the company, its members or its depositors. There is no requirement, as under section 242(1)(b), that winding up would be justified but unfairly prejudicial. The section 245 threshold is lower, and that is a good point to make in a comparison question.

And the application is made on behalf of the class, not merely for the applicants.

The orders that may be sought

• (a) to restrain the company from committing an act which is ultra vires the articles or memorandum;
• (b) to restrain the company from committing breach of any provision of the memorandum or articles;
• (c) to declare a resolution altering the memorandum or articles void if it was passed by suppression of material facts or obtained by mis-statement to the members or depositors;
• (d) to restrain the company and its directors from acting on such resolution;
• (e) to restrain the company from doing an act contrary to this Act or any other law for the time being in force;
• (f) to restrain the company from taking action contrary to any resolution passed by the members;
• (g) 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 act or omission or conduct, or any likely act, omission or conduct on their part;
• (ii) the auditor including the audit firm 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 adviser 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;
• (h) to seek any other remedy as the Tribunal may deem fit.

Clauses (a) to (f) are injunctions; clause (g) is money. That is the shortest way to hold the list in mind.

And notice how far clause (g) reaches. It catches conduct that is merely likely, so the class need not wait for the loss; and it reaches three sets of respondents, of whom two are outside the company altogether.

The audit firm and its partners: section 245(2)

Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

Two liabilities, and the second is personal. The firm is liable; and each partner who was involved in the improper statement, or who acted fraudulently, unlawfully or wrongfully, is liable as well.

The qualification matters. It is not every partner of the firm, but the partner involved in the statement or the conduct.

The numbers: section 245(3)

Members. In a company having a share capital, not less than one hundred members, or not less than such percentage of the total number of members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital as may be prescribed, subject to having paid all calls and other sums due on the shares. In a company not having a share capital, not less than one-fifth of the total number of its members.

Depositors. Not less than one hundred depositors, or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits as may be prescribed.

Compare section 244. There the fractions are fixed in the section itself, one-tenth of the members or of the issued share capital. Here the Act says "such percentage as may be prescribed", leaving the figures to the rules. So an answer should state the structure confidently and say that the percentages are prescribed, rather than inventing a fraction.

What the Tribunal considers on admission: section 245(4)

In considering an application, the Tribunal shall take into account, in particular:

• (a) whether the member or depositor is acting in good faith;
• (b) any evidence as to the involvement of any person other than directors or officers of the company in the matters in clauses (a) to (f) of sub-section (1);
• (c) whether the cause of action is one the member or depositor could pursue in his own right rather than through an order under the section;
• (d) any evidence as to the views of the members or depositors who have no personal interest, direct or indirect, in the matter;
• (e) where the cause of action is an act or omission yet to occur, whether it could be, and would likely be, authorised by the company before it occurs, or ratified after it occurs; and
• (f) where the act or omission has already occurred, whether it could be, and would likely be, ratified by the company.

Clauses (e) and (f) put the internal management rule into statutory form, the rule in Foss v. Harbottle being worked in [Majority Rule, Minority Rights and the Principle of Non-interference]. The Tribunal asks whether the company can and would ratify, which is precisely the internal management inquiry. So the common law idea survives, but as a discretionary consideration rather than a bar.

Clause (c) has the same flavour, keeping the class action for wrongs that are not the applicant's own to pursue.

Procedure after admission: section 245(5)

If the application is admitted, the Tribunal shall have regard to the following.

• (a) public notice shall be served on admission to all the members or depositors of the class in the prescribed manner;
• (b) all similar applications prevalent in any jurisdiction shall be consolidated into a single application, and the class shall be allowed to choose the lead applicant; if they cannot agree, the Tribunal shall appoint one, who shall be in charge of the proceedings from the applicants' side;
• (c) two class action applications for the same cause of action shall not be allowed; and
• (d) the cost or expenses connected with the application shall be defrayed by the company or any other person responsible for any oppressive act.

Clause (d) is what makes the remedy usable. A hundred small depositors cannot fund litigation against a company and its auditors; the section puts the cost on the company or the wrongdoer.

Binding effect, punishment, and the two exclusions: section 245(6) to (10)

Section 245(6): who is bound. Any order passed by the Tribunal is binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or adviser or any other person associated with the company.

That is the essence of a class action. The order binds the whole class, whether or not they joined, and binds the professional respondents too.

Section 245(7): failure to comply. A company failing to comply with an order is punishable with fine of not less than five lakh rupees extending to twenty-five lakh rupees, and every officer in default with imprisonment which may extend to three years and with fine of not less than twenty-five thousand rupees extending to one lakh rupees.

Section 245(8): frivolous or vexatious applications. Where an application is found frivolous or vexatious, the Tribunal shall, for reasons to be recorded in writing, reject it and order the applicant to pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified.

Section 245(9): banking companies. Nothing contained in this section shall apply to a banking company.

Section 245(10): who else may bring it. Subject to compliance with the section, an application may be filed or any other action taken by any person, group of persons or any association of persons representing the persons affected by any act or omission specified in sub-section (1).

Sub-section (10) is wider than it looks. An association representing affected depositors may act, which matters because the affected persons are often scattered and individually small.

The borrowed machinery: section 246

Sections 337 to 341, both inclusive, apply mutatis mutandis to an application under section 241 or section 245: penalty for frauds by officers, liability where proper accounts are not kept, liability for fraudulent conduct of business, and the power to assess damages against delinquent directors and others.

A worked example

Kurla Financial Services Limited has twelve hundred members and nine hundred depositors. Its accounts for two years show profits that were never earned; the auditor's report certified them; and a valuer's report used to support a large acquisition overstated the value of the assets acquired.

Who may apply. Members must number one hundred, or the prescribed percentage of the twelve hundred, whichever is less, or hold the prescribed percentage of the issued share capital, all calls being paid. Depositors must number one hundred, or the prescribed percentage of nine hundred, whichever is less, or be owed the prescribed percentage of the total deposits. Either group may apply, and, under section 245(10), an association representing the affected depositors may act for them.

On what opinion. That the management or conduct of the affairs is prejudicial to the interests of the company, its members or its depositors: section 245(1). Note that they need not show, as they would under section 242(1)(b), that winding up would be justified but unfairly prejudicial.

What they may ask for. Damages or compensation from the company and its directors for the fraudulent and wrongful conduct; from the auditor including the audit firm for the improper or misleading statement of particulars in the audit report; and from the valuer, an expert, for the incorrect or misleading statement made to the company: section 245(1)(g)(i), (ii) and (iii).

The audit firm's partners. Under section 245(2) the firm is liable, and so is each partner who was involved in making the improper statement or who acted fraudulently, unlawfully or wrongfully. A partner in another city who had nothing to do with the audit is not caught by the sub-section.

A resolution obtained by suppression. The acquisition was approved by a special resolution altering the objects clause, and the notice suppressed the fact that the seller was controlled by a director. The class may ask the Tribunal to declare the resolution void under clause (c) and to restrain the company and its directors from acting on it under clause (d).

A proposed act. The company now proposes a further investment plainly outside its memorandum. The class may seek to restrain it under clause (a), and, the act being contrary to the Act as well, under clause (e).

What the Tribunal weighs. Whether the applicants act in good faith; whether persons other than directors and officers are involved, which here they are, being the auditor and the valuer; whether the applicants could pursue the cause in their own right; the views of members and depositors with no personal interest; and whether the acts could and would be authorised or ratified by the company: section 245(4).

After admission. Public notice goes to all members or depositors of the class; a second application filed elsewhere on the same facts is consolidated with this one; the class chooses a lead applicant, and failing agreement the Tribunal appoints one; no second class action on the same cause of action is allowed; and the costs are borne by the company or by the person responsible for the oppressive act: section 245(5).

The order. It binds the company, all its members and depositors, the auditor and audit firm, the valuer, and any other person associated with the company, whether or not they took part: section 245(6). If the company does not comply, it is punishable with fine of five lakh to twenty-five lakh rupees and every officer in default with imprisonment up to three years and fine of twenty-five thousand to one lakh rupees: section 245(7).

A hopeless application. A rival businessman procures a hundred depositors to file a second, baseless application. The Tribunal, recording its reasons in writing, rejects it as frivolous or vexatious and orders the applicants to pay the opposite party costs not exceeding one lakh rupees: section 245(8).

And one company that is outside all of this. If Kurla Financial Services were a banking company, section 245(9) would exclude the section entirely, and the aggrieved members would be left to section 241.

Distinctions that carry marks

What this does NOT mean

It does not mean any hundred people may sue. They must be members or depositors meeting the numbers in section 245(3), and the members must have paid all calls and other sums due.

It does not mean the whole audit firm's partners are liable. Only the firm and each partner involved in the improper statement or the wrongful conduct: section 245(2).

It does not mean the section 242(1)(b) test applies. Section 245 has no requirement that winding up would be justified but unfairly prejudicial.

It does not mean ratification is irrelevant. Whether the act could and would be authorised or ratified is one of the matters the Tribunal must take into account under section 245(4)(e) and (f).

It does not mean parallel actions may proceed. They are consolidated, and two applications for the same cause of action are not allowed.

It does not mean the applicants bear the cost. The costs are defrayed by the company or the person responsible, though a frivolous or vexatious applicant pays the other side up to one lakh rupees.

It does not apply to a banking company at all.

Quick revision

• 245(1): members or depositors, or a class of them, of the number in sub-section (3), who are of the opinion that the management or conduct of the affairs is prejudicial to the interests of the company, its members or depositors, may apply on behalf of the class for orders (a) restraining an ultra vires act; (b) restraining a breach of the memorandum or articles; (c) declaring void a resolution altering the memorandum or articles passed by suppression of material facts or obtained by mis-statement; (d) restraining action on it; (e) restraining an act contrary to this Act or any other law; (f) restraining action contrary to a members' resolution; (g) claiming damages or compensation from the company or directors for fraudulent, unlawful or wrongful conduct including likely conduct, from the auditor including the audit firm for an improper or misleading statement in the audit report or wrongful conduct, and from any expert, adviser, consultant or other person for an incorrect or misleading statement to the company or wrongful conduct; and (h) any other remedy.
• 245(2): against an audit firm, the firm and each partner involved in the improper statement or the wrongful conduct are liable.
• 245(3): members, one hundred or the prescribed percentage of the total number, whichever is less, or holders of the prescribed percentage of issued share capital, all calls paid; or one-fifth of the members where there is no share capital. Depositors, one hundred or the prescribed percentage of the total number, whichever is less, or those owed the prescribed percentage of total deposits.
• 245(4): the Tribunal considers good faith; the involvement of persons other than directors and officers; whether the cause could be pursued in the applicant's own right; the views of disinterested members or depositors; and whether a future act would be authorised or ratified, or a past act ratified.
• 245(5): on admission, public notice to the class; consolidation of similar applications with a lead applicant chosen by the class or appointed by the Tribunal; no two applications on the same cause of action; costs defrayed by the company or the person responsible.
• 245(6) to (10): the order binds the company, its members, depositors, auditor and audit firm, expert, consultant, adviser and any person associated with the company; non-compliance is punishable with fine of five lakh to twenty-five lakh rupees on the company and imprisonment up to three years with fine of twenty-five thousand to one lakh rupees on every officer in default; a frivolous or vexatious application is rejected for reasons recorded in writing with costs up to one lakh rupees; the section does not apply to a banking company; and any person, group or association representing the affected persons may act.
• 246: sections 337 to 341 apply mutatis mutandis.

Test yourself

1. Who may bring a class action? Members or depositors, or any class of them, of the numbers in section 245(3): for members, one hundred or the prescribed percentage of the total number of members, whichever is less, or holders of the prescribed percentage of the issued share capital, all calls and sums due being paid, or one-fifth of the members in a company without share capital; for depositors, one hundred or the prescribed percentage of the total number, whichever is less, or depositors owed the prescribed percentage of total deposits. Under section 245(10) any person, group of persons or association representing the affected persons may also act.

2. Against whom may damages be claimed? The company or its directors for any fraudulent, unlawful or wrongful act, omission or conduct, or any likely such conduct; the auditor, including the audit firm, for any improper or misleading statement of particulars in the audit report or for fraudulent, unlawful or wrongful conduct; and any expert, adviser, consultant or other person for an incorrect or misleading statement made to the company or for such conduct: section 245(1)(g).

3. How far does an audit firm's liability extend? To the firm itself, and to each partner who was involved in making the improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner: section 245(2).

4. What must the Tribunal consider in deciding whether to admit an application? The applicant's good faith; evidence of the involvement of persons other than directors or officers; whether the cause of action could be pursued in his own right; the views of members or depositors having no personal interest; and whether an act yet to occur could and would be authorised or ratified, or an act already done ratified, by the company: section 245(4).

5. What happens once an application is admitted? Public notice is served on all members or depositors of the class; similar applications in any jurisdiction are consolidated and the class chooses a lead applicant, the Tribunal appointing one if they cannot agree; two applications for the same cause of action are not allowed; and the costs are defrayed by the company or any other person responsible for the oppressive act: section 245(5).

6. Does section 245 apply to every company? No. Nothing in the section applies to a banking company: section 245(9).