Shareholder remedies: Require ‘leave of the Court’?

Part I: Introduction:
The unpleasant tussle between the Mistry Group and the Tata group for the control of
Tata Sons Company, has erupted a dialogue on the numerous reliefs for shareholders who
are victimised by oppression, mismanagement and prejudicial acts of the directors. The
dispute inevitably piqued the need to investigate the procedure established by law to
commence legal proceedings under various shareholder remedies. Although there have been
noteworthy contemplations on the minimum threshold requirements and consent requisites
that have to be satisfied by a disgruntled shareholder prior to invocation of a statutory relief,
the need for obtaining the ‘leave of the court’ before commencement of proceedings is still
ambiguous. This article will spell out the convoluted statutory requirement of 'leave of the
court' and whether it is an essential for a shareholder to initiate an action under the various
provisions of the law.

Part II: Explaining the statutory requirement of the ‘leave of the court’:
The statutory requirement of ‘leave of the court’ mandates the permission from the
court prior to the commencement commission of legal action certain acts by a party or for
granting of permission to do certain actions in relation to an ongoing litigation. For
instance, the following suits require the court’s leave: a suit under section 92- ‘Public
Charities’ of the Civil Procedure Code, 1908 [“CPC”]1; a suit under Order 1 Rule 8- ‘One
person may sue or defend on behalf of all in same interest’ 2, CPC; a compromise under
Order 23 Rule 3B, CPC; amendment of grounds in the special leave petition stage 3;
among othersrequires the leave of the court. The intention behind this requirement being,
the invocation of these provisions is ‘fraught with grave results’4, therefore, this
necessitates the satisfaction of the court on the legality and legitimacy of the claim raised.

However, the nature of the ‘leave of the court’ is not the same in all these
circumstances. For instance, while the ‘leave of the court’ is understood to be a ‘condition
precedent’5 for instituting a suit under section 92 of CPC, it is merely a procedural
requirement and can be obtained even in the appellate stage for a suit under Order 1 Rule 8
CPC6.
In this backdrop, in the next part, we shall discuss if there is a requirement for the
leave of the court for a) suit against oppression and mismanagement filed under section 241
read with section 244 of the Companies Act, 2013 [“Companies Act”] b) class action suit
filed under section 245 of the Companies Act and c) derivative action filed under common
law [“CLDA”]. This article will analyse if the ‘leave of the court’ is required for the
recourses available to a shareholder.

1
Ashok Kumar Gupta & anr v. M/s Sitalaxmi Sahuwala Medical Trust and Others; The Victoria Edward Hall
Rep. v. M. Samraj and Others (2001) 3 MLJ 39; M. Anandan Vs Ayyanna Gounder Memorial Trust, (1993) 2
MLJ 533
2
https://main.sci.gov.in/supremecourt/2018/126, 26/12626_2018_11_1501_14989_Judgement_15-Jul-
2019.pdf ; AIR 1975 SC 371.
3
Saurav Jain and Ors. vs. A.B.P. Design and Ors. MANU/SC/0509/2021
4
Sri Ram Krishna Mission and Anr. vs Paramanand and Ors, AIR 1977 All 421
5
N. Anandan vs Ayyanna Gounder, Memorial Trust, (1993) 2 MLJ 493
6
P-2 The Diocese Of Madras Rep. v. R-2 Rev. S Immanueal; Mookka Pillai v. Valavanda Pillai A.I.R. 1947
Mad. 205; Muthukaruppa Ethandar v. Appavoo Nadar A.I.R. 1943 Mad. 161.
 Part III: Requirement of the leave of the court under Section 241, 244, 245 of
the Companies Act and common law derivative action suit

In this part, we shall first explain each of these different types of suits. thereafter, we shall
discuss, for each of these three types of suits here, whether the leave of the court is required
before initiating the suit.

III.1: Section 241/244 vs. Section 245 vs. CLDA

An aggrieved shareholder has mainly three remedies in the Indian regime. Section 241-
‘Application to Tribunal for relief in cases of oppression, etc.’, of the Companies Act, 2013
[“Companies Act”] allows a shareholder to bring action for oppression and/ or
mismanagement by bestowing the right to approach the tribunal when the affairs of the
company have been or are being conducted in a manner prejudicial to public interest or in a
manner prejudicial or oppressive to him or any other member or members or in a manner
prejudicial to the interests of the company. However, a member can approach the tribunal
only when the requirements under section 244 of the Companies Act are fulfilled.

Section 245- ‘Class Action’ of the Companies Act allows shareholders to pursue class action
or collective remedy, that is, pleading on behalf of a whole class of shareholders if the
management or conduct of the affairs of the company are being conducted in a manner
prejudicial to the interests of the company or its members or depositors.

Lastly, CLDA, allows the shareholder to plead on behalf of the company for a wrong done
against the company7. This is in contrast to section 245 of the Companies Act, which allows
direct action through which shareholders can bring on behalf of the entire class. A claim
under CLDA is not codified in the Companies Act, but is premised upon Order 1 Rule 8,
CPC8. However, as Prof. Umakanth Varottil notes in his paper titled 'The rarity of
derivative actions in India: Reasons and consequences’ 9, CLDAs are initiated in extremely
limited circumstances. This is in stark contrast to the trend in other emerging Asian markets
where derivative actions are a ‘mainstay’10 of corporate litigation. The paucity in CLDAs
can be traced to the similarities it shares with the remedy under Section 241/244 of the
Companies Act. In Icp Investments (Mauritius) Ltd vs Uppal Housing Pvt. Ltd. & Ors11, the
Delhi High Court noted that the distinction between relief of oppression/mismanagement
and CLDA has disappeared. The Court went to the extent of holding that, the Parliament
having constituted the NCLT and NCLAT and by vesting with them the jurisdiction over
all matters arising from Section 241 of the Companies Act, CLDAs in civil courts are no
longer maintainable in India.

The next point of analysis is, whether the ‘leave of the court’ is mandated for
approaching the court/tribunal under these recourses.

III.2. requirement of the leave of the court in each of the three actions discussed
above
7
Pramod Premchand Shah v. Rata Tata; http://globalclassactions.stanford.edu/sites/default/files/documents/
USA__National_Report.pdf
8
https://indiacorplaw.in/2021/03/the-continued-influence-of-foss-v-harbottle-in-india.html
9
http://164.100.69.66/jupload/dhc/MUG/judgement/22-01-2021/MUG22012021S34442015_112441.pdf
10
Makhan Lal Jain v Amrit Banaspati Co, AIR 1953 All 326.
11
Cyrus Investments Private Limited & Anr., v. TATA Sons Limited & Ors, 2017 SCC OnLine NCLAT 261.
 As a derivative action follows the procedure formulated under Order 1 Rule 8 of
CPC, the prior permission of the court is mandated12. There is no dispute about that (pls
footnote).

However, according to section 424- ‘Procedure Before Tribunal and Appellate

Tribunal’ of the Companies Act, ‘the Tribunal and the Appellate Tribunal shall not, while
disposing of any proceeding before it or, as the case may be, an appeal before it, be bound
by the procedure laid down in the Code of Civil Procedure, 1908’. This raises the concern as
to whether if a derivative action is initiated before the NCLT, the ‘leave of the Court’ as per
Order 1 Rule 8 of CPC has to be granted.

Under S. 245, statutorily, procedure wise, there is no explicit requirement for leave
of the court (unlike Order 8… CPC). There are other procedural requirements. For instance,
there is a certain numeric threshold…….. In J.P. Srivastava & Sons Ltd. & ors. vs Gwalior
Sugar Co. Ltd & ors13, the court said in relation to the relevance of setting up such numeric
threshold, though in the context of the O&M suit that ‘the object of prescribing a qualifying
percentage of shares in the petitioners and their supporters to file petitions […] is clearly to
ensure that frivolous litigation is not indulged in by persons who have no real stake in the
company. […] If the court is satisfied that the petitioners represent a body of shareholders
holding the requisite percentage, it can assume that the involvement of the company in
litigation is not lightly done and that it should pass orders to bring to an end the matters
complained of and not reject it on a technical requirement. Substance must take precedence
over form14’. By analysing if the minimum thresholds provided under S. 245 are met, in
essence, the court decides if the claim raised is legitimate. There are other procedural
requirements as well: such as the ones given under clause 4. Clause 4 states…… However,
the class action suit prescribed under S. section 245 of the Companies Act provides that
while considering an application under the Ssection, the ‘Tribunal shall take into account’
that if the application has been made in is raised in good faith, evidence of involvement of
third parties in the matters complained, whether the complaint could be individually
prosecuted by the applicant rather than through a class action and whether the cause of
action has occurred or yet to occur.

Given that S. 245 is a new provision, there is limited jurisprudence on the

interpretation of various terms in the clauses, including the ambiguity associated with the
term that the court should be There is a lack of clarity on the extent and scope of satisfaction
required by the court under the provision. Given the lack of existing jurisprudence on this
provision, it is ambiguous as to whether by ‘take into account’ the above-mentioned factors.
these factors, the tribunal/court has to grant permission for the application to proceed.
Further, the question whether these factors are a ‘condition precedent’ or merely a
procedural requirement is yet to be certainly defined (explain better, not clear at the moment
without oral explanation). explain how this difference matters.

Now moving on to the claim for oppression and mismanagement raised under S. 241.
The maintainability of an application under S. 241 is governed by the satisfaction of the
conditions laid down under Section 244 of the Companies Act. However, S. 244 itself does
not explicitly too doesn’t specify a requirement for the leave of the court. However, it
12
[(2005) 1 SCC 172]
13
https://www.barandbench.com/view-point/consent-under-oppression-and-mismanagement-1913-to-2013
14
https://doi.org/10.1017/CBO9780511998027.011
prescribes certain other procedural requirements before the claim can be allowed.first of all
it sets out a numeri threshold (state clause 1 in simple terms). However, this requirement can
be waived. Once this numeric requirement is satisfied, it becomes the “right” of the
aggrieved member to sue under S. 241 as the word used under S. 244(1) is “shall”.
Therefore, there is no concept of the leave of the court to this extent which is alright because
the members who are filing the suit are filing it for themselves and not for others per se.
However, the angle/flavour of the S. 241 suit becoming a representative suit comes in by
virtue of S. 244(4) which states that once it is satisfied that the concerned members are
entitled to make an app under S. 241, any one or more of them having obtained the consent
in writing of the rest, may make the application on behalf and for the benefit of all of them.,
however, it requires a written consent from the parties on behalf of whom the application is
being made. The requirement of obtaining a consent in writing is not new as similar
requirements were codified under Section 153-C (3) of the Companies Act, 1913 and
Section 399 (3) of the Companies Act, 1956 too. Courts have been of the opinion that
‘obtaining of the consent is a condition precedent to the making of the petition. In other
words, consent must have been obtained prior to the presentation of the application’15. Once
these procedural requirements Therefore, can it be said that by deciding if the consent
requirement SO FAR THE CONCERNED MEMBERS ARE CONCERNED is fulfilled, the
case can move ontribunal/court is providing its permission/leave to proceed with the suit.
Hence, there is no concept of the leave of the court here and the consent of the affected
members has been put into place to keep a check that the representative nature of the suit is
reasonable and is indeed truly representative.

Further, both section 241 and section 245 of the Companies Act provides a minimum
threshold limit, which has to be satisfied before the tribunal/ court proceeds to assess
whether any conduct is prejudicial to the interests of a class of members/ depositors 16. In J.P.
Srivastava & Sons Ltd. & ors. vs Gwalior Sugar Co. Ltd & ors 17, the court while dealing
with a challenge to maintainability to a petition under Section 397 of the Companies Act
1956 noted that ‘the object of prescribing a qualifying percentage of shares in the
petitioners and their supporters to file petitions […] is clearly to ensure that frivolous
litigation is not indulged in by persons who have no real stake in the company. […] If the
court is satisfied that the petitioners represent a body of shareholders holding the requisite
percentage, it can assume that the involvement of the company in litigation is not lightly
done and that it should pass orders to bring to an end the matters complained of and not
reject it on a technical requirement. Substance must take precedence over form 18’. By
analysing if the minimum thresholds provided under section 241 and 245 are met, in
essence, the court decides if the claim raised is legitimate.Therefore, it could be argued that
by deciding if the minimum threshold is met, the court is providing its leave to proceed with
the claim.

While analysing the importance of the ‘leave of the court’ under Order 1 Rule 8 of
CPC, the Allahabad High Court in Sri Ram Krishna Mission and anr. vs Paramanand and
ors., noted that class action suits ‘transcend[s] the personal or parochial nature of the
combatants who are arrayed as parties to the suit. It affects the rights of other persons,
not present before the court’, therefore, a ‘duty’ is cast on the court to ensure the claims

15
Id.
16
17
[(2005) 1 SCC 172]
18
https://www.barandbench.com/view-point/consent-under-oppression-and-mismanagement-1913-to-2013
raised are legitimate and that they meticulously follow the procedures laid down. As in
essence, both section 241/244 and section 245 of the Companies Act, provide for
remedies which affects others who are not party to the suit, the court would have to
assume similar duties in granting permission for instituting a suit under these provisions.