Jindal Poly Films Limited: India's first class action suit under Section 245 of Companies Act 2013

Section 245 of the Companies Act, 2013 ("Companies Act"), which came into effect on June 1, 2016, has finally been invoked in a petition filed in the case of Ankit Jain v. Jindal Poly Films Limited. The concept of class action remedy, as incorporated by Section 245 of the Companies Act, was first proposed in the JJ Irani Committee Report of 2005, to empower minority shareholders to act collectively against corporate wrongdoers who are in control of the company.

Section 245 of the Companies Act was dormant for nearly 8 (eight) years until 2024, when minority shareholder, Mr. Ankit Jain alongside other minority shareholders ("Minority Shareholders"), filed allegations of mismanagement against Jindal Poly Films Limited ("JPFL") before the Principal Bench of the National Company Law Tribunal ("NCLT"). While the NCLT's decision is still awaited, this case could mark a turning point in India's corporate governance landscape. In this article, we take the opportunity to examine how this class action suit could reshape shareholders' remedies in India and how this stands in comparison to the remedy envisaged under Section 241 of the Companies Act.

The present dispute arises from allegations made by the Minority Shareholders that JPFL's promoters sold the optionally convertible preference shares and redeemable preference shares to a trust controlled by the JPFL's promoters at prices significantly below their fair market value, thereby causing a financial loss of approximately ₹2,268,00,00,000/- (Indian Rupees Two Thousand Two Hundred and Sixty-Eight Crores only) to JPFL and its shareholders.

Furthermore, the Minority Shareholders have alleged that JPFL advanced a sum of over ₹90,00,00,000/- (Indian Rupees Ninety Crore only) to Jindal India Power Limited (formerly known as Jindal India Thermal Power Limited) pursuant to a power purchase agreement which was later cancelled. The advance was then treated as a loan without repayment terms, and both the principal and interest were written off in the financial year 2018-19, resulting in additional losses to the JPFL.

Accordingly, the Minority Shareholders filed for the class action under Section 245 of the Companies Act, seeking directions from NCLT to either reverse the sale of optionally convertible preference shares and redeemable preference shares and to compensate the Minority Shareholders.

A class action lawsuit, while not defined in the Companies Act, is a type of lawsuit filed on behalf of a group of persons who are represented collectively by a member of that group, against a defendant or a number of defendants. In India, Section 245 of the Companies Act provides the minority shareholders with the remedy of initiating a class action, enabling members/depositors to approach the NCLT if the company's affairs are being conducted in a manner prejudicial to the interests of the company or its stakeholders.

In order to initiate a class action under Section 245 read with Rule 84 of NCLT Rules, 2016, the following thresholds would need to be met:

(a) For companies with share capital: at least 5% (five percent) of the total members or 100 (hundred) members whichever is less, or members holding not less than 5% (five percent) of the issued share capital of an unlisted company or members holding not less than 2% (two percent) of the issued share capital of a listed company;

(b) For companies without share capital: at least not less than one-fifth of the total members; and

(c) In case of depositors: at least 5% (five percent) of the total depositors or 100 (hundred) depositors, whichever is less or depositors who owe 5% (five percent) of the total deposits of the company.

Further to avoid multiplicity of proceedings, Section 245 (5) prohibits the initiation of 2 (two) class action applications for the same cause of action.

At first glance, Sections 245 and 241 of the Companies Act may appear to overlap, but they serve distinct purposes. Under Section 241, the aggrieved members may proceed individually to protect their rights against acts of oppression or mismanagement. Section 245 allows a group of members/ depositors forming a class to file a collective action against the conduct that is prejudicial to the interest of the company or its members/ depositors.

Section 241 covers situations wherein the company's affairs are conducted in a manner prejudicial to public interest, oppressive to members, or detrimental to the company. In contrast, Section 245 offers a narrower remedy, confined to situations where the company's management or affairs are conducted prejudicially to the interests of the company or its members/ depositors.

Another distinction lies in the scope of these sections. Section 241 applies to past and present misconduct, which is evident from the phrase 'affairs of the company have been or are being conducted', in the section. Section 245 applies only to ongoing misconduct, as reflected from the phrase 'affairs of the company are being conducted' in the section.

The case of Ankit Jain v. Jindal Poly Films Limited holds significant importance as it is expected to shape the judicial interpretation of Section 245 of the Companies Act. The outcome will determine how minority shareholders can collectively seek relief against acts of oppression, mismanagement, or prejudicial conduct by those in control.

Notably, JPFL has raised an important question regarding whether Section 245 can be extended to cover past misconduct, which was prejudicial to the interest of the company or its members/depositors, as the section is worded in a manner that implies that its applicability is limited to ongoing acts of misconduct, making this a critical issue of interpretation in the present case.

The Minority Shareholders have also argued that US class action jurisprudence should not be directly applied in India, given the distinct structure and ownership patterns of Indian companies. In India's corporate sector, particularly in family-run companies, concentrated ownership often leads to information asymmetry, leaving minority shareholders with limited access to key information. The promoters hold not only a direct stake in the company but also strengthen their control through mechanisms such as cross-holding and tunneling.

Accordingly, this case will play a pivotal role in defining the scope and applicability of Section 245, ensuring that the provision serves as an effective tool for protecting minority shareholders and promoting transparency and accountability in Indian corporate governance.

The invocation of Section 245 in Ankit Jain v. Jindal Poly Films Limited represents a watershed moment in Indian corporate law. After lying dormant for nearly 8 (eight) years, Section 245 is being examined, raising critical questions about its scope, including whether the Section applies to past misconduct. While the NCLT's decision is still awaited, this case has the potential to reshape corporate governance norms and launch a new era of shareholder empowerment in India.

About the authors: Vrinda Patodia is a Partner and Manik Tanwar is an Associate at Obhan & Associates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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