Court Rejects Plea to Dismiss Suit Based on Alleged Requirement of Written Agreement Under Companies Act, 2013; Authority to Execute Agreement to be Decided on Evidence
In a significant judgment delivered on September 15, 2026, the Rajasthan High Court, presided over by Justice Rekha Borana, upheld the maintainability of a civil suit founded on an oral agreement between two companies, Gnex Impex Private Limited and M/s Shyam and Shyam Oils Private Limited. The Court dismissed the revision petition challenging the trial court's rejection of an application to dismiss the plaint under Order VII Rule 11 of the Civil Procedure Code, 1908 (CPC).
The defendant company contended that under the Companies Act, 2013, agreements between companies must be in writing and that oral agreements are not recognized. Additionally, they argued that the person who executed the agreement on behalf of the defendant company was not authorized, as no authority letter was provided. The defendant also questioned the validity of the cause of action based on the notices served before filing the suit.
Justice Borana, after examining the relevant provisions and precedents, clarified that the earlier Section 46 of the Companies Act, 1956, which governed contracts between companies, had been repealed and was not re-enacted in the Companies Act, 2013. Therefore, there is no statutory prohibition against oral agreements between companies under the current law. The Court relied on the general principles of contract law under the Indian Contract Act, 1872, which acknowledges the validity of oral agreements.
Referring to the Punjab & Haryana High Court's decision in M/s Shorewala Investment & Properties Ltd. v. Girish Kumar Jain (2024 PHHC 113081), the Court observed that reliance on Section 46 of the repealed 1956 Act was misplaced. Moreover, the Supreme Court's dismissal of appeals against these judgments was interpreted as an affirmation of the legal position that oral agreements are permissible.
Regarding the authorization of the person signing the agreement on behalf of the company, the Court emphasized that this issue involves facts to be established through evidence and cannot be adjudicated at the preliminary stage of rejecting the plaint under Order VII Rule 11 CPC. Since the plaint specifically pleaded authorization, the trial court rightly refused to reject the suit on this ground.
The Court further explained that Section 21 of the Companies Act, 2013, which deals with who may sign documents on behalf of a company, does not prohibit oral agreements. It only sets out rules regarding authorization for executing written documents.
Consequently, the Rajasthan High Court dismissed the revision petition, affirming that in the absence of any statutory bar, oral agreements between companies are valid under general contract law principles, and disputes regarding authorization to contract must be decided on evidence.
This ruling is expected to have wide implications for commercial litigation involving corporate entities, particularly where oral agreements are concerned. Legal practitioners are advised to ensure proper pleadings and evidence regarding authorization but can rely on the Indian Contract Act to uphold oral contracts where applicable.
Bottom Line:
Companies Act, 2013 - In absence of any specific bar under the Act of 2013, oral agreement between two companies is not prohibited and validity of such agreement would be governed by general law under the Indian Contract Act - Plea regarding absence of authority letter in favour of person executing agreement on behalf of company cannot be decided at stage of Order VII Rule 11 CPC when plaint contains specific pleading of authorization.
Statutory provision(s):
Companies Act, 2013 Section 21, Indian Contract Act, 1872 Section 10, Civil Procedure Code, 1908 Order VII Rule 11
