2020 (1) TMI 811 - HC - Companies Law

Rejection of plaint - Specific performance of agreement of sale - plaint rejected on the ground that there is no substantial legal cause of action for filing the suit and the entire basis for filing the suit is based on an alleged oral agreement between two companies is also absurd, speculative and bad in law. Whether the oral agreement of sale entered by two or more private limited companies validly gives rise to cause of action to file suit for specific performance? HELD THAT - Section 21 of the Act of 2013 lays down the manner in which the document or proceeding requiring authentication by a company or contracts made by or on behalf of a company. There is no provision of oral agreement in the Act of 2013. In view of Section 465(2)(b) of the Act of 2013 coming into force, Section 46(1)(b) of the Act of 1956 is repealed and therefore, the latter is not applicable. Ministry of Law and Justice, Government of India, issued notification dated 30-08-2013, amending the law relating to companies and by the said amendment, Section 46 of Companies Act, 1956 was repealed. In the new Act, it is expressly said this Act which means 2013 Act. When there is conflict between the old Act and new Act, new Act will prevail. Application under Order VII Rule 11 CPC can be filed at any stage of the proceedings. Therefore, the contention of the respondent in this regard cannot be appreciated. As per Section 10 of the Contract Act, if law envisages written contract, it should be in writing. Normally, when two companies wanted to enter into an agreement for sale and purchase of of land, they must enter into a written agreement, but not by way of an oral agreement - In the present case, it is the case of the respondent that it entered into an oral agreement with the petitioners for purchase of a huge extent of land, which cannot be believed. The trial Court dismissed the application filed by the petitioners/defendants on the ground that the application is filed when the suit was coming up for arguments. But, as per the provisions of Order VII Rule 11 CPC., when an application filed for rejection of the plaint, it shall be decided on the basis of the cause of action disclosed in the plaint and the said application can be filed at any stage even at the stage of arguments - In the present case, the trial Court, without deciding the application on the basis of the cause of action mentioned in the plaint, simply dismissed the application on the ground that the said application was filed at the stage of arguments, which is against the provisions of Order VII Rule 11 CPC. In view of the same, it can be said that the trial Court erroneously dismissed the application without properly looking into the provisions of law. The the oral agreement entered by the two juristic persons is not valid - revision petition allowed.

Summary

Issues Involved:
1. Validity of oral agreements between juristic persons (companies).
2. Applicability of Order VII Rule 11 CPC for rejection of plaint.
3. Interpretation of relevant provisions under the Companies Act, 1956 and 2013.
4. Determination of cause of action based on oral agreements.

Detailed Analysis:

1. Validity of Oral Agreements Between Juristic Persons:
The respondent/plaintiff filed O.S.No.21 of 2009 seeking specific performance based on an alleged oral agreement of sale between two companies. The petitioners/defendants argued that such an oral agreement between juristic persons is not legally valid. The court examined Section 46(1)(b) of the Companies Act, 1956, which allowed oral agreements, but noted that this provision was repealed by Section 465(2)(b) of the Companies Act, 2013. The new Act does not provide for oral agreements, making the alleged oral contract invalid.

2. Applicability of Order VII Rule 11 CPC for Rejection of Plaint:
The petitioners/defendants filed I.A.No.491 of 2018 under Order VII Rule 11(a) read with Section 151 CPC, seeking to reject the plaint on the grounds that it did not disclose a substantial legal cause of action. The court reiterated that the power to reject a plaint under Order VII Rule 11 CPC can be exercised at any stage of the proceedings, even at the argument stage, provided the plaint does not disclose a cause of action or is barred by law.

3. Interpretation of Relevant Provisions Under the Companies Act, 1956 and 2013:
The court analyzed the transition from the Companies Act, 1956 to the Companies Act, 2013. Section 46 of the 1956 Act, which permitted oral agreements, was repealed by Section 465(2)(b) of the 2013 Act. The court emphasized that the new Act prevails over the old Act, and the absence of a provision for oral agreements in the 2013 Act means such agreements are not legally valid between companies.

4. Determination of Cause of Action Based on Oral Agreements:
The court scrutinized whether the plaint disclosed a cause of action based on the alleged oral agreement. It was noted that companies, being artificial legal persons, must act through authorized agents and typically enter into written agreements. The lack of a Board resolution authorizing any person to enter into an oral agreement further weakened the respondent's case. The court concluded that the oral agreement did not provide a valid cause of action for filing the suit.

Conclusion:
The trial court's dismissal of the interlocutory application was found to be erroneous. The court held that the oral agreement between the two companies was not valid under the current legal framework, and the plaint did not disclose a cause of action. Consequently, the Civil Revision Petition was allowed, the order dated 14.12.2018 was set aside, and the plaint in O.S.No.21 of 2009 was rejected. All pending miscellaneous petitions were also closed.