In IL & FS Trust Co. Ltd. v.

Birla Perucchini Ltd,1 the decision in Rangaraj was also held

applicable to conflicts in the Articles and SHA not involving transfer of shares.
Therefore, it is a settled law that the Articles of a company would prevail when there is a
contradiction between the SHA and the Articles. But assuming that there is a certain provision in
the SHA that has not been incorporated in the articles of the Company, would it mean that
merely because the articles are silent (not contradictory), the articles will prevail?

The answer to this question might lie in recognition of the legal position that a company is
controlled only by its Memorandum and Articles. The Articles are a form of a statutory contract
binding all the members of the company as regards the affairs of the company. A company
cannot contract outside the Articles in so far as the management of the affairs of the Company is
concerned, and any other agreement attempting to bind the company as regards its affairs, not
provided for in the Articles and Memorandum of the company, may not be enforceable. For
instance, a provision in a SHA giving a casting vote to the Chairman of the Board in case of a tie,
not provided in the Articles, will not be enforceable. However, this may also depend on whether
the company is a party to the SHA.2

In the case of World Phone India Pvt. Ltd. v. Wpi Group Inc, 3 the Board of Directors of the
company passed a resolution approving a rights issue in accordance with the Articles of the
company, even though such an action required the affirmative vote of the Appellant in
accordance with a SHA entered into between the shareholders of the company. The Company
Law Board held that since the provisions of the SHA granting an affirmative vote to the
appellant were not incorporated in the Articles of the company, the said provision is
unenforceable and the board resolution approving the rights issue was valid. On appeal, Justice
Muralidhar of the Delhi High court held:
“The legal position is that where the articles of association are silent on the existence of an
affirmative vote, it will not be possible to hold that a clause in an agreement between
shareholders would be binding without being incorporated in the articles of association. The

1
[2004] 121 Comp Cas 335
2
See Russell v. Northern Bank Development Corp Ltd, [1992] 1 WLR 588
3
World Phone India Pvt. Ltd. & Ors vs Wpi Group Inc, CO.A (SB) No. 102 of 2012
question to be asked is whether the provisions of an agreement, that are not inconsistent with the
Act, but are also not part of the articles of association, can be said to be applicable. All that
section 9 states is that the clauses in the agreement that that “repugnant” to the Act shall be
“void”. This does not mean that the clauses in the agreement which are not repugnant to the Act
would be enforceable, notwithstanding that they are not incorporated in the articles of
association.”

Thus, the court has held that the provisions of the SHA, though silent in the Articles of the
company, and not in contradiction with them, will not be enforceable. This ruling, as it stands,
brings in a lot of confusion to the issue of conflicts between SHAs and Articles of a company-
because the issues don’t stand resolved merely with the conflicting provisions being
unenforceable. Further issues arise in light of the judgment of the Supreme Court in Vodafone
International Holdings BV v. Union of India4, that have not been considered by the Delhi High
Court in World Phone.
In Vodafone, three main observations were made by the Supreme Court on the issue;
 That the Supreme Court does not subscribe to the view in Rangaraj that restrictions in a
SHA, though consistent with company law, are to be authorised only when they are
incorporated in the articles of the Company.
 Shareholders can enter into any arrangement in the best interests of the Company, but the
only thing is that the provisions of SHA shall not go contrary to the articles of the
Company.
 Breach of SHA which does not breach the Articles of a company is a valid corporate
action, but the parties agreed can get remedies under the general law of the land for
breach of any agreement and not under Companies Act.

In light of the above, a logical extension of the judgment in World Phone 5 would be that even
though the provisions of an affirmative vote are not incorporated in the Articles of the company,
and though the action of the company in providing for a rights issue would be valid under the
Companies Act, such an action will still be in breach of the SHA for which the aggrieved
shareholder can pursue an action for breach of contract.

4
(2012) 6 SCC 613
5
World Phone India Pvt. Ltd. & Ors vs Wpi Group Inc, CO.A (SB) No. 102 of 2012
This view is also consistent with the position in English law. In Southern Foundries Ltd v.
Shirlaw, [1940] AC 701 it was held, “a company cannot be precluded from altering its articles
thereby giving itself power to act under the provisions of the altered articles–but so to act may
nonetheless be a breach of contract if it is contrary to a stipulation in the contract validly made
before the alteration”, and the court awarded damages for wrongful dismissal of the managing
director of the Company even though the mode of dismissing was valid under the Articles of the
company. There is considerable opinion to show that the relief may also lie in terms of an
injunction to restrain it possible breach of the SHA contract.6

The same position also seems to have been incorporated in the new Companies Act of 2013,
Section 58(2) of which provides that any contract or arrangement between two or more persons
in respect of transfer of securities shall be enforceable as a contract and the same would not
amount to restraining the concept of free transferability of the shares.

However, the controversy still remains unsettled. In fact, the same seems to have been revived
once again in Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd.7, which
was recently decided by a division bench of the Bombay high court in appeal to its previous
decision8 of a single judge bench. The court in this case held that merely the fact that the shares
of a public company can be subscribed to by the public, unlike in the case of a private company,
does not in any way whittle down the right of a shareholder of a public company to arrive at a
consensual agreement/ arrangement with a third party or another shareholder provided the terms
are consistent with the AOA as well as the Companies Act and rules governing other laws. All of
this only leads to all the more confusion leaving scope for further speculation which means the
true resolution of the issue will have to await a pronouncement from the Supreme Court.

6
Aditya Swarup, Conflicts Between Shareholders Agreement and Articles of a Company, India Corporate law (June
6, 2013)
7
2015 SCC Online Bom 2111
8
supra note 2.