The High Court of Delhi has overruled the decision of the Company Law Board (CLB) wherein the CLB had held that since there was no bar on affirmative vote in the Articles of Association of the company, a provision in a Joint Venture Agreement providing for affirmative votes must be given effect to even if it is not incorporated in the Articles of Association of the company.
Section 9 - Applicability to private companies
The CLB had held that Section 9 of the Companies Act which provides that the Companies Act will have effect over anything contrary provided in the Memorandum of Association, Articles of Association or any other agreement executed by a company is applicable only to public limited companies.
The High Court held that while Sections 81 to 89 (related to share capital) and Sections 171 to 186 (related to company meetings) of the Companies Act in so far as they relate to issuance of shares do not apply to private companies, there is no basis for concluding that Section 9 of the Act per se does not apply to private companies. It was noted that plain reading of Section 9 makes no such exception.
Articles of Agreement prevail over shareholders' agreement
The Court further held that clauses in any agreement between the shareholders shall not be enforceable in matters related to internal management of the company just because it is not repugnant to the Companies Act. Such clauses in the agreements between shareholders shall be enforceable only when they are incorporated in the Articles of Association of the company as also previously held by the Supreme Court of India in various cases such as V. B. Rangraj v. V. B. Gopalakrishnan, AIR 1992 SC 453. [World Phone India Pvt. Ltd. & ors v. WPI Group Inc., USA - [2013] 178 Comp Case 173 (Del)]