[Parth Birla and Runit Rathore are 5th year and 4th year BA.LL.B. students, respectively, at Hidayatullah National Law University, Raipur]
Recently, the National Company Law Appellate Tribunal (“NCLAT”) in a much-anticipated appeal by the Jindal Poly Films Ltd (“JPF”) upheld the National Company Law Tribunal’s (“NCLT”) verdict admitting the class action suit by shareholders under section 245 of the Companies Act, 2013 (“the Act”). It marks a significant development for India’s corporate governance landscape, since the reasoning provides much-needed clarity on class action as a remedy.
The provision was notified by the authorities in 2016, coinciding with the operationalization of the NCLT. However, for almost a decade, no application had crossed the statutory threshold provided in section 245, read along with NCLT Rules 2016, rendering the provision largely dormant.
Traditionally, a class action refers to a suit filed by a plaintiff on behalf of a class of persons who have suffered the same injury, and it is well-rooted in the Civil Procedure Code in the form of Representative Suit, as well as in Competition Law and Consumer Law. Its insertion into the Act was prompted by the high-profile Satyam Computers’debacle, subsequent to the JJ Irani Committee’s recommendations, which expedited the inclusion of class actions to deter corporate misconduct for dispersed shareholders. Section 245 confers on shareholders and depositors a statutory recourse to file an application before the NCLT where the affairs of the company are conducted in a manner prejudicial to their interests.
This post discusses the reasoning adopted by the tribunals in allowing class action and examines the hurdles in the framework. Further, it analyses the far-reaching implications of the ruling and explores the cross-jurisdictional issues regarding class action. It concludes by prescribing the way forward.
Factual Matrix of the Case
At the outset, JPF invested Rs. 703 crores in optionally convertible and redeemable preference shares issued by Jindal Polytech Ltd. Subsequently, the instruments were transferred to promoter-linked entities for Rs. 105 crores, a valuation that the minority shareholders objected to as being significantly lower than the fair market value. Hence, they filed a class action under section 245.
JPF (the Respondent), argued solely over the maintainability of such action and contended that such suit should not be admitted as a class action but as a derivative action, conceptualized from Foss v. Harbottle. Further, drawing on US jurisprudence, it pleaded that class actions compensate shareholders directly, whereas derivative actions benefit the company. In the present case, the relief is sought for the company and not for the shareholders; therefore, the suit does not qualify as a class action. Additionally, it submitted that the phrase “are being conducted” contained in section 245does not encompass past transactions that have already been concluded. These arguments have established a significant basis for determining the future role of class action provisions in India’s corporate governance regime.
The Verdict: Unravelling the Maintainability Conundrum
The NCLT acknowledged the benevolent legislative framework governing class action. While it perused the US precedents with respect to class action versus derivative action, it came to a conclusion that “the rights given under Section 245 has a larger scope on specific intent than what could be considered as class action in US jurisdiction”. It further clarified that there is no such requirement to rely on US jurisprudence in matters relating thereto, as India has its own peculiar statutory framework. Moreover, the NCLT held that the availability of a remedy under section 241 does not preclude the maintainability of a suit under section 245. The verdict also highlighted the primacy of class actions over derivative actions, as it would reduce inconsistency and multiplicity of proceedings. It observed that the provision allows one to seek damages or compensation for the past and present as well as future transactions, otherwise it “would defeat the very purpose of the provision”. Additionally, the NCLAT, while affirming the NCLT’s verdict, further reasoned that section 245(1)(g)(iii) uses the expression “unlawful or wrongful act or conduct or any likely act or conduct on his part” to make it evident that the remedy in the form of damages takes into account past actions as well. It also clarified that once the threshold of 2% of issued share capital under Rule 84(3)(iii)(b) of the NCLT Rules, 2016 is met and a prima facie case has been established by the shareholders, it becomes a valid case for class action. It further observed that a few shareholders may represent the losses suffered by the entire class of minority shareholders.
Class Action Eclipse: Decoding Prolonged Obscurity
Despite the reverent intentions of policymakers behind the inclusion of the class action provision, it remained a paper tiger due to delayed implementation and limited judicial precedents. The concept failed to deliver the intended results owing to multiple factors, which are discussed as follows: Firstly, the high threshold requirement, which mandates 100 or 10% members (whichever is less) to bring class action suits. Secondly, the provision narrowly limits class actions to shareholders and depositors alone, sidelining creditors, debenture-holders, bondholders, employees, and other stakeholders. It also carves out banking companies entirely, and this exclusion proved painful during the 2018 Punjab National Bank scam, where aggrieved stakeholders faced massive losses due to fraudulent dealings, but were unable to sue the directors or auditors for accountability. In addition, class actions involve substantial legal costs, creating barriers for members and depositors. Moreover, despite commercial dispute timelines declining from 1,445 days in 2020 to 626 days in 2022, delays persist, causing value erosion, lower recoveries, and discouraging applicants.
Analysis
The decision to admit the Rs. 2,500 crores class action breaks the traditional barrier of “reflective loss”, as 4.99% shareholders were allowed to pursue damages for undervalued preference share sales to promoter entities. The NCLT, by inviting other shareholders to join the action, fundamentally reshaped how minority voices counterbalance promoter dominance in listed firms. It also compelled the promoters to shift from opacity and a self-dealing attitude toward greater transparency, enforced through stricter board oversight and independent director scrutiny of related-party transactions. The SEBI’s Stewardship Code, which urges active ownership, gains attention as it has the potential to trigger a surge in activist interventions like voting against prejudicial deals or supporting class actions.
An interesting question that arises is whether section 245 could be widened to include creditors as a class, enabling them to pursue collective class actions against prejudicial acts like fund misuse or unfair asset transfers? The Fifty-Seventh Standing Committee Report (2011) clearly eliminated creditors from the purview due to contractual mechanisms, but future litigation may test this, especially in light of post-2011 reforms like the Insolvency and Bankruptcy Code’s evolution and current ruling admitting 4.99% shareholders without strict locus standi. Such expansion could greatly serve purposes like streamlining justice for India’s Rs. 10 lakh crore stressed debt pool, curbing fragmented litigation amid the NCLT’s backlog, boosting recoveries beyond the IBC’s 30% average recovery, and fostering holistic corporate accountability by aligning creditor interests against persistent promoter tunnelling.
Cross-Jurisdictional Comparisons
India can refine its class action model by importing global best practices. For instance, in the US, rule 23 of the Federal Rules of Civil Procedure allows even one member to initiate a class action suit, contrasting with India’s high threshold. Meanwhile, Australia requires a minimum of seven members to bring a suit, and the UK does not impose any numeric floor, although it mandates the requirement of “same interest”. The UK permits third-party litigation funding for group actions via representative actions and Competition Appeal Tribunal opt-out collectives, with funders covering costs in return for a success-based fee. India can also explore introducing domestic litigation funding by allowing mutual funds and foreign institutional investors to play an active role, as the Delhi High Court has signalled green light towards third-party funding by non-lawyers in the arbitration domain.
Interestingly, South Korea and China offer institutional models with state-backed representatives as lead plaintiffs, which ensures credibility and resource availability. Similarly, India could pilot NCLT or SEBI-appointed custodians to act as the main plaintiff representing the whole class. While the instant NCLT ruling elegantly diverges from US jurisprudence, India could recalibrate its approach by devising solutions tailored to its unique corporate landscape.
Conclusion
The NCLAT’s ruling illuminates section 245 as a potential remedy for promoter overreach, yet its application is subject to judicial experimentation. The tribunal transcended the traditional interpretation of the provision by repositioning class actions from dormancy to vitality. This evolution requires closer examination of its broader impacts- whether it would flood the NCLT or whether the SEBI would step in to curb the widespread tunnelling. Ultimately, this ruling sparked a crucial debate on access versus abuse, given NCLT’s pre-existing backlog of cases.
The tribunals would play an important role through Rule 85of the NCLT Rules 2016, as it has to decide whether a class action is admissible, testing on the lines of good faith, whether: grievances are common, evidence supports the allegations, and an individual suit would be more appropriate. By scrutinizing the motives underlying class action, it protects companies from frivolous and malicious litigation. This gatekeeping role, fortified through evidentiary hearings and cost-imposition powers, ensures section 245 evolves as a precise scalpel rather than a blunt instrument.
– Parth Birla & Runit Rathore