Class Action Suits (Section 245): Collective Shareholder Remedies Against Management, Auditors, and Advisory Consultants for Ultra Vires Acts

Class Action Suits (Section 245): Collective Shareholder Remedies Against Management, Auditors, and Advisory Consultants for Ultra Vires Acts | Sumanjari & Co. Advocates

Published by: Sumanjari & Co. Advocates

Section 1: Executive Overview & Practical Reality

The introduction of Section 245 in the Companies Act, 2013 was a watershed moment in Indian corporate governance, born out of the catastrophic failure of oversight witnessed in the Satyam computer scandal. Prior to the 2013 Act, aggrieved Indian retail shareholders and depositors were virtually powerless against sprawling corporate conglomerates and complicit gatekeepers—statutory auditors, independent valuation professionals, and merchant bankers—who rubber-stamped fraudulent transactions. While traditional derivative actions in common law civil courts were crippled by prohibitive ad-valorem court fees and crippling procedural delays, Section 245 armed investors and depositors with a collective litigation weapon directly before the National Company Law Tribunal.

In the contemporary commercial landscape, Section 245 represents the ultimate check on management and advisory malfeasance. Unlike Section 241, which primarily addresses intra-promoter and shareholder-vs-management oppression in closely-held companies, Section 245 is uniquely tailored for collective investor protection across both listed and unlisted entities. Crucially, Section 245 shatters the traditional doctrine of privity by extending direct, joint and several financial liability beyond the errant directors to the statutory audit firms, credit rating agencies, and technical advisors whose misleading reports or fraudulent certifications enabled the siphoning of public wealth.

However, the ground realities of litigating a class action suit in India are fraught with institutional and strategic challenges. The statutory thresholds (e.g., 100 members/depositors or 5% to 10% of total holders) require sophisticated investor coordination. Moreover, Section 245(8) imposes severe, punitive cost penalties on frivolous or vexatious applications, making tactical preparation, forensic audit corroboration, and disciplined drafting absolute prerequisites before approaching the Tribunal.

Section 2: Statutory & Regulatory Framework

The substantive foundation and procedural rules governing class action litigation are set out under Chapter XVI of the Companies Act, 2013, read with the NCLT Rules, 2016:

• Section 245(1), Companies Act, 2013: Confers standing upon requisite numbers of members or depositors to initiate proceedings before the NCLT on behalf of members or depositors, seeking an array of declaratory, injunctive, and compensatory orders where the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors.
• Section 245(1)(a) to (h): Enumerates the specific reliefs available: (a) restraining the company from committing an act which is ultra vires the articles or memorandum; (b) restraining the company from committing breach of any provision of the company's memorandum or articles; (c) declaring a resolution altering the memorandum or articles as void if passed by suppression of material facts; (d) restraining the company from acting on such resolutions; (e) restraining the company from doing an act contrary to law; (f) restraining the company from taking action contrary to any resolution passed by the members; and (g) claiming damages, compensation, or other suitable action against: (i) the company or its directors for any fraudulent, unlawful, or wrongful act or omission; (ii) the auditor including audit firm for any improper or misleading statement in their audit report or for fraudulent conduct; and (iii) any expert, advisor, or consultant for an incorrect or misleading statement.
• Section 245(3), Companies Act, 2013 read with National Company Law Tribunal (Amendment) Rules, 2019: Prescribes the numerical thresholds for instituting a class action:
• For Members: In a company having a share capital, not less than 100 members or not less than 10% of the total number of its members, whichever is less, or any member(s) holding not less than 5% of the issued share capital (for unlisted companies) or 2% of the issued share capital (for listed companies). In a company not having share capital, not less than one-fifth of total members.
• For Depositors: Not less than 100 depositors or not less than 10% of the total number of depositors, whichever is less, or any depositor(s) to whom the company owes not less than 5% of the total value of outstanding deposits.
• Section 245(4) & (5), Companies Act, 2013: Mandates the Tribunal, upon admission, to cause a public notice to be served on all members or depositors, consolidate similar applications, and ensure that the cost of public notice is borne by the company or the errant respondents.
• Section 245(8), Companies Act, 2013: A critical deterrent clause providing that if the Tribunal finds that an application is frivolous or vexatious, it shall record reasons and direct the applicant to pay to the opposite party costs not exceeding INR 1,00,000/-.
• Rule 84 to 87A, NCLT Rules, 2016: Sets forth the formal procedure for filing class action petitions in Form NCLT-9, accompanied by verification affidavit, public notification protocols in regional and national newspapers, and the appointment of lead applicants.

Section 3: Landmark Judicial Precedents

While class action litigation in India is an emerging jurisprudence, significant principles have been laid down by the Supreme Court and appellate tribunals:

• Securities and Exchange Board of India v. Price Waterhouse, (2019) SCC OnLine SC 1236: The Supreme Court affirmed that auditors are public gatekeepers who owe a profound fiduciary duty to the investing public and shareholders. Where auditors demonstrate gross negligence, turn a blind eye to fictitious invoicing, or fail to exercise basic professional skepticism, their conduct crosses the threshold from negligence into complicity and constructive fraud, exposing them to direct statutory sanctions and compensatory liabilities.
• Union of India v. Deloitte Haskins & Sells LLP & Ors., (2023) 4 SCC 352: The Supreme Court upheld the constitutional validity of Section 140(5) of the Companies Act, 2013, ruling that statutory auditors who have acted fraudulently or abetted fraud cannot escape liability merely by resigning from the company. The Court established that the statutory net under company law holds auditors strictly accountable for historical misstatements, a principle that directly informs damage actions under Section 245(1)(g)(ii).
• Foss v. Harbottle, (1843) 2 Hare 461: The historic English common law precedent establishing the rule of the majority and the company as the proper plaintiff for corporate wrongs. Section 245 statutorily abrogates the strict rigors of Foss v. Harbottle in India, expressly permitting minority groups to sue on behalf of the collective without establishing the traditional narrow exceptions of 'fraud on the minority'.
• N. Narayanan v. SEBI, (2013) 12 SCC 152: The Supreme Court held that the publication of fabricated financial statements, inflated revenues, and concealed liabilities is a grave corporate fraud upon the market. Corporate directors and promoters who engineer book-building frauds are jointly and severally liable to disgorge profits and compensate defrauded retail investors.
• Vijay Chhibber & Ors. v. M/s Unitech Limited, CP No. 120/ND/2019 (NCLT New Delhi): One of the earliest prominent applications admitted under Section 245 on behalf of home-buyer fixed deposit holders against the management and board of an infrastructure giant for systematic siphoning of deposit monies into offshore subsidiaries, resulting in freezing of directors' personal assets and forensic tracking.

Section 4: Stage-by-Stage Procedural Roadmap

Instituting and prosecuting a Class Action Petition under Section 245 demands precise logistical and legal coordination:

• Phase 1: Investor Mobilization, Locus Audit & Data Verification (Days 1–30):
• Marshal the investor cohort to satisfy the numerical threshold (e.g., verifying 100 members or 2%/5% capital holding).
• Execute formal Power of Attorneys and Authorization Deeds designating 2 to 3 'Lead Applicants' under Rule 84 of the NCLT Rules, 2016.
• Obtain certified forensic evidence: independent chartered accountant balance sheet analysis, MCA disclosures, ROC filings, and forensic trails of related-party siphoning.
• Phase 2: Drafting Form NCLT-9 & Verification (Days 31–45):
• Draft the Class Action Petition in Form NCLT-9 setting forth: (i) commonality of interest across the class; (ii) specific ultra vires acts, false audit reports, or fraudulent omissions; (iii) quantification of damages suffered by the class; and (iv) prayers against company, directors, and auditors.
• Draft urgent Interim Applications under Rule 11 / Section 245(1) praying for: (a) freezing the personal bank accounts and properties of errant directors and partner-in-charge of the audit firm; (b) restraining the company from altering asset structures or alienating core properties.
• Phase 3: E-Filing & Preliminary Scrutiny (Days 46–60):
• E-file the petition on the NCLT portal, pay court fee (INR 5,000 for Class Action under the NCLT Schedule), and tender physical sets.
• Cure registry scrutiny objections within the 7-day statutory period.
• Phase 4: Admission Hearing & Mandatory Public Notice (Days 61–90):
• Argue admission before the Bench. Under Section 245(4), the Tribunal determines whether the application is filed bona fide, the class is properly defined, and a prima facie case of ultra vires action or fraud is established.
• Upon admission, the Tribunal directs issuance of Public Notice under Rule 85 in one English national daily and one regional vernacular daily where the registered office is situated, inviting any other class members to join or opt-out.
• Phase 5: Trial, Discovery & Final Decree (Days 91–240):
• Consolidation of all parallel suits and applications under Section 245(5).
• Direction for discovery, inspection of working papers of the statutory auditors, and summoning of forensic records.
• Passing of final decree under Section 245(1)(g) ordering payment of damages and compensation, binding all members/depositors under Section 245(6).

Section 5: Tactical Offenses, Defenses & Critical Pitfalls to Avoid

Offensive Arsenal for Class Action Petitioners:

• The Gatekeeper Joinder Strategy: Never sue only the operating company or promoter directors. Always implead the statutory audit firm (and the specific audit partner who signed the audit report) along with independent valuation experts under Section 245(1)(g)(ii) & (iii). Corporate promoters often strip assets into offshore trusts, leaving companies as empty shells. Audit firms maintain substantial professional indemnity insurance policies, ensuring a viable asset pool for recovering class damages.
• Weaponizing Section 143 & CARO Violations: Detail every violation of the Companies (Auditor's Report) Order (CARO) and Section 143 of the Companies Act, 2013. Demonstrating that the auditor failed to report undisputed statutory arrears, inventory discrepancies, or unhedged related-party loans establishes actionable negligence and statutory breach under Section 245.
• Securing Freezing Orders under Rule 11: Move an immediate application for preservation of assets. Seek an order restraining directors and promoters from alienating personal properties or leaving the country without Tribunal permission under the precedent established in Union of India v. Nirav Modi.

Defensive Shields for Companies, Directors & Audit Firms:

• The Section 245(4) Bona Fide Filter: Mount an aggressive challenge at the admission stage proving that the application is motivated by personal vendettas, competitor rivalry, or extortionate buyout demands. If the petitioner fails to establish a genuine common grievance shared by the class, demand immediate dismissal under Section 245(4)(a).
• The Auditor's Auditing Standards Defense (SAs): For audit firms, demonstrate full adherence to the Standards on Auditing (SAs) issued by the ICAI (e.g., SA 240 on Auditor's Responsibilities Relating to Fraud). Prove that management perpetrated an active, collusive conspiracy with forged third-party documents that reasonable audit procedures could not penetrate, negating the existence of gross negligence or complicity.
• The Class Disqualification Objection: Scrutinize the authorization list. Eliminate duplicate names, non-members, unregistered transferees, and depositors whose claims are under separate contractual arbitration, breaking the numerical threshold under Section 245(3).

Critical Pitfalls to Avoid:

• Failing to Satisfy Section 245(3) Thresholds: Commencing an action based on informal support without verifiable DP-ID client master lists, physical share folios, or deposit receipts. A single mathematical shortfall will result in threshold dismissal.
• Risking Section 245(8) Punitive Costs: Instituting claims based on speculation rather than documentary proof. If the Tribunal brands the petition as frivolous, petitioners face mandatory personal cost orders up to INR 1,00,000/-.
• Drafting Vague Claims for Damages: Alleging abstract loss without presenting a comprehensive financial damages model verified by an independent valuation professional quantifying the direct pecuniary loss suffered by the class.

Section 6: Ready-to-Use Court Drafting Template

Below is an unabridged, practical model Class Action Petition under Section 245 of the Companies Act, 2013 before the National Company Law Tribunal, Allahabad Bench at Prayagraj.

BEFORE THE NATIONAL COMPANY LAW TRIBUN

ALLAHABAD BENCH AT PRAYAGRAJ

COMPANY PETITION (CLASS ACTION) NO. 18/ALD/2026

IN THE MATTER OF SECTION 245 OF THE COMPANIES ACT, 2013 READ WITH RULES 84 TO 87A OF THE NCLT RULES, 2016;

BETWEEN:

1. MR. SUNIL KUMAR SRIVASTAVA,

R/o 18/2, Lowther Road, George Town, Prayagraj, UP - 211002.

...LEAD APPLICANT NO. 1

2. MRS. RUCHI MALHOTRA,

R/o C-44, Sector 50, Noida, Gautam Buddha Nagar, UP - 201301.

...LEAD APPLICANT NO. 2

(ON BEHALF OF THEMSELVES AND 142 OTHER REGISTERED EQUITY SHAREHOLDERS OF RESPONDENT NO. 1 COMPANY)

VERSUS

1. PRAGATI GREEN-TECH SOLAR LIMITED,

Through its Managing Director,

CIN: L40106UP2017PLC094112,

Registered Office at Plot No. B-15, Ecotech-III, Greater Noida, UP - 201306.

...RESPONDENT NO. 1

2. MR. HARSHWARDHAN RATHORE,

Promoter & Managing Director, Pragati Green-Tech Solar Ltd.,

R/o Bungalow 8, Sector 15-A, Noida, UP - 201301.

...RESPONDENT NO. 2

3. MR. ALOKESH CHOUDHARY,

Whole-time Director & Chief Financial Officer,

R/o Sector 44, Noida, UP - 201301.

...RESPONDENT NO. 3

4. M/S V.K. MEHROTRA & ASSOCIATES, CHARTERED ACCOUNTANTS,

Through its Managing Partner,

Firm Registration No. 004128C,

Office at 112, Hazratganj, Lucknow, UP - 226001.

(Statutory Auditors of Respondent No. 1)

...RESPONDENT NO. 4

5. MR. VIVEK MEHROTRA, FCA,

Statutory Audit Partner (Signing Auditor for FY 2023-24 to 2025-26),

R/o Rana Pratap Marg, Lucknow, UP - 226001.

...RESPONDENT NO. 5

CLASS ACTION PETITION UNDER SECTION 245 OF THE COMPANIES ACT, 2013 SEEKING DAMAGES, COMPENSATION, AND INJUNCTIONS AGAINST THE COMPANY, ERRANT DIRECTORS, AND STATUTORY AUDITORS FOR FRAUDULENT DIVERSION OF CAPITAL AND MISLEADING AUDIT REPORTS.

MOST RESPECTFULLY SHOWETH:

1. LOCUS STANDI AND SATISFACTION OF STATUTORY THRESHOLD:

The Lead Applicants institute the present Class Action Petition on behalf of themselves and 142 other registered equity shareholders of Respondent No. 1 Company, who collectively hold 12,40,000 equity shares of face value INR 10/- each, representing exactly 6.88% of the total issued share capital of Respondent No. 1. The Petitioners satisfy the mandatory numerical thresholds prescribed under Section 245(3)(i) read with the NCLT (Amendment) Rules, 2019, being more than 100 members and holding more than 5% of the issued capital of the unlisted public company. The formal authorization deeds and power of attorneys executed by all 144 members are annexed as Annexure A-1 (Colly).

2. SYSTEMIC CORPORATE FRAUD AND ULTRA VIRES CONDUCT:

A. FAKE INFRASTRUCTURE CONTRACTS AND SIPHONING OF IPO/EXPANSION FUNDS:

During financial years 2024-25 and 2025-26, Respondents No. 2 and 3 diverted INR 48,50,000/- (Rupees Forty-Eight Crores Fifty Lakhs) raised from private institutional placements and retail share expansion for setting up a 50 MW Solar Park in Bundelkhand, UP. The funds were siphoned through fictitious engineering contracts awarded to three non-operational dummy shell firms owned by relatives of Respondent No. 2.

B. GROSS STATUTORY COMPLICITY AND FRAUD BY STATUTORY AUDITORS (RESPONDENTS NO. 4 AND 5):

Respondents No. 4 and 5 acted in fraudulent collusion with management by issuing unqualified, clean Independent Audit Reports for FY 2023-24, FY 2024-25, and FY 2025-26, falsely certifying that physical verification of solar equipment and civil works had been carried out, despite the fact that the project site at Jhansi was barren land with zero civil foundation work. Respondents No. 4 and 5 knowingly suppressed the siphoning in gross violation of Section 143(12) of the Companies Act, 2013 and Standards on Auditing (SA 240).

3. DIRECT FINANCIAL DAMAGE SUSTAINED BY THE CLASS:

As a consequence of the fraudulent siphoning and concealment, the book value of Respondent No. 1 Company has collapsed from INR 114/- per share to negative INR 12/- per share, entirely wiping out the equity wealth of the Petitioner class, who have suffered collective pecuniary damages quantified at INR 14,13,60,000/- (Rupees Fourteen Crores Thirteen Lakhs Sixty Thousand).

4. PRAYERS:

The Lead Applicants, on behalf of the entire class of 144 shareholders, most respectfully pray that this Hon'ble Tribunal may graciously be pleased to:

(a) Pass an order under Section 245(1)(g) holding Respondents No. 1, 2, 3, 4, and 5 jointly and severally liable to pay damages and compensation of INR 14,13,60,000/- to the class of applicants, along with interest at 12% per annum from the date of fraudulent diversion;

(b) Direct Respondent No. 4 Audit Firm and Respondent No. 5 Audit Partner to refund and disgorge the entire audit fees of INR 42,00,000/- received from Respondent No. 1 Company back to the corporate accounts;

(c) Restrain Respondents No. 2 and 3 from acting as directors of Respondent No. 1 or any other public company under Section 245(1)(e);

(d) Direct the Central Government / Serious Fraud Investigation Office (SFIO) under Section 212 to initiate criminal investigation against Respondents No. 2 to 5;

(e) Issue public notice of admission of the present Class Action Petition under Section 245(5) read with Rule 85 at the cost of Respondent No. 1 Company.

INTERIM RELIEFS PRAYED FOR:

(i) Direct an immediate freeze upon the personal bank accounts and immovable properties of Respondents No. 2, 3, and 5 pending final disposal of the present petition;

(ii) Restrain Respondent No. 1 Company and its directors from alienating, selling, or encumbering any land parcels or fixed assets of the Company.

THROUGH

SUMANJARI & CO. ADVOCATES

Counsel for the Lead Applicants

Chambers: D-311, Block D, Allahabad High Court, Lucknow Bench, Lucknow.

Place: Prayagraj / Lucknow

Dated: 21st September 2026

Section 7: Practical FAQs

Q1: What is the key legal difference between an oppression petition under Section 241 and a class action petition under Section 245?

Answer: While Section 241 is primarily an equitable remedy designed to protect minority shareholders against oppressive management or deadlock within a company (focusing on corporate governance and buyout remedies), Section 245 is a collective legal action designed to obtain damages, compensation, and injunctions against ultra vires acts, corporate fraud, and market misconduct. Crucially, while a Section 241 petition can be instituted only against the company and errant management, Section 245 permits direct claims for damages against third-party gatekeepers, including statutory audit firms, independent auditors, and professional advisors.

Q2: Can a class action suit under Section 245 be instituted against a banking company or a non-banking financial company (NBFC)?

Answer: Under Section 245(9) of the Companies Act, 2013, banking companies are explicitly exempted from the purview of class action suits. However, Non-Banking Financial Companies (NBFCs) and housing finance corporations incorporated under the Companies Act are fully subject to Section 245. Aggrieved depositors of an NBFC who have suffered defaults in fixed deposit repayments can maintain a collective class action under Section 245(1) read with Section 245(3)(ii) against the NBFC, its directors, and its statutory auditors.

Q3: How are the legal costs and public notice expenses funded in an Indian class action suit?

Answer: Under Section 245(5) read with Rule 85 of the NCLT Rules, 2016, once the Tribunal admits a class action petition, the cost of issuing public notices in national and regional newspapers must be defrayed by the respondent company, or as directed by the Tribunal. Furthermore, under Section 125(3)(d) of the Companies Act, 2013, applicants in a sanctioned class action suit are entitled to seek reimbursement of legal expenses incurred in prosecuting the class action from the Investor Education and Protection Fund (IEPF), subject to Central Government rules.

Q4: Is the final judgment or decree in a Section 245 class action binding on shareholders or depositors who did not actively participate in the petition?

Answer: Yes. Under Section 245(6) of the Companies Act, 2013, any order passed by the Tribunal in a class action suit is binding on the company and all its members, depositors, and auditors, consultants, or advisors associated with the company, regardless of whether they actively appeared or signed the authorization deeds. However, members who exercised their right to 'opt out' following the mandatory public notice issued under Section 245(5) are excluded from the binding effect and cannot share in the awarded damages.

Sumanjari & Co. Advocates

Rooted in Law. Rising with You. | Your Right, Our Resolve.

Chamber Office: Chamber No. D-311, Block D, Allahabad High Court, Lucknow Bench, Gomti Nagar, Lucknow, UP

Courts & Tribunals: Allahabad High Court (Lucknow Bench & Prayagraj) | UP RERA & UP REAT | Serving Noida, Ghaziabad & Lucknow

Key Contacts: Adv. Jitendra Tiwari (+91 82990 86204) | Adv. Aishwarya Pandey (+91 83024 71764)

Email: info.sumanjarirightsandremedies@gmail.com | Website: sumanjariadvocates.com

Bar Council of India Statutory Disclaimer: This publication is compiled and published strictly for educational, scholarly, and strategic informational guidance of the bar, bench, corporate clients, and litigants navigating corporate and company law disputes. In compliance with the Bar Council of India Rules, this document does not constitute advertisement, personal communication, solicitation, invitation, or legal advice. Receipt or reading of this guide does not establish an attorney-client relationship. Litigants are expressly advised to seek personalized legal counsel based on the specific facts, jurisdictional nuances, and evidentiary matrix of their respective matters before initiating or defending litigation.