Under what circumstances can a shareholder file a derivative suit under Section 245 of the Companies Act, 2013, and what is the procedure to initiate it?

Under Section 245 of the Companies Act, 2013, a shareholder can file a derivative suit when they believe that the company is being wronged and the company itself is unwilling to take action against the wrongdoers. This legal provision allows a shareholder to step in and seek relief on behalf of the company when the management fails to act in the best interests of the company. The circumstances under which a derivative suit can be initiated include situations where there are acts of mismanagement, fraud, or any other illegal activity that harms the company, and where the company’s board of directors is either complicit in or indifferent to the misconduct.

To initiate a derivative suit, the shareholder must first ensure that they have held shares in the company for at least 1 year prior to the filing of the suit, as per the stipulations outlined in Section 245(1). Additionally, the shareholder must represent at least 100 members of the company, or those holding at least 10% of the voting power, or a certain percentage of the share capital, as specified in the rules. It's crucial to demonstrate that the suit is in the interest of the company and that all other options, including attempts to remedy the situation directly with the company, have been exhausted.

The procedure to file a derivative suit begins with making an application to the National Company Law Tribunal (NCLT) under Section 245(4). This application must include the details of the alleged wrongs, the reasons for the suit, and the efforts made to persuade the company to take action. The NCLT will then assess whether the application is maintainable and whether it genuinely serves the interests of the company. If the NCLT is satisfied, it may allow the suit to proceed, and the shareholder can then formally file the suit in the NCLT.

Practically, it is advisable for a shareholder considering a derivative suit to consult with legal counsel experienced in corporate law to ensure compliance with all procedural requirements and to effectively present their case. This includes gathering all necessary evidence to substantiate claims and documenting any correspondence with the company regarding the issue at hand. Understanding the company’s articles of association and any applicable shareholder agreements is also vital, as these documents may impose additional requirements or processes that must be followed.