Rajasthan High Court clarifies that Section 21 of the Companies Act, 2013, does not prohibit oral agreements between companies. Read the judgment’s key findings and business implications.
Introduction
The Rajasthan High Court has clarified that Section 21 of the Companies Act, 2013, does not prohibit companies from entering into oral agreements. The provision primarily deals with the authorisation of persons to sign documents on behalf of a company and cannot be interpreted as imposing a universal requirement that every agreement between companies must be in writing.
The ruling is significant for businesses involved in commercial transactions, supply arrangements, trading activities and other contractual dealings. It also highlights an important procedural principle: a court should not reject a plaint at the initial stage merely because the existence of an agreement or the authority of a company representative requires further examination of evidence.
The decision reinforces the distinction between the validity of a contractual arrangement and the manner in which its existence must ultimately be proved before a court.
Case Details
- Case Title: Gnex Impex Private Limited vs. M/s Shyam And Shyam Oils Private Limited
- Court: Rajasthan High Court
- Judge: Justice Rekha Borana
- Case Number: S.B. Civil Revision Petition No. 223/2026
- Citation: 2026 LLBiz HC (RAJ) 56
- Relevant Provisions: Section 21 of the Companies Act, 2013, and Order VII Rule 11 of the Code of Civil Procedure, 1908.
Background of the Dispute
The dispute arose from an alleged oral agreement between Gnex Impex Private Limited and M/s Shyam And Shyam Oils Private Limited. The latter company instituted a civil suit seeking relief in connection with the alleged contractual arrangement.
Gnex Impex Private Limited and its director challenged the maintainability of the suit by filing an application under Order VII Rule 11 of the Code of Civil Procedure, 1908. They contended that an agreement between two companies was required to be in writing under the Companies Act, 2013.
The applicants also questioned the authority of the person who had allegedly acted on behalf of the company, pointing to the absence of an authority letter.
According to the applicants, these objections justified rejection of the plaint at the threshold, without proceeding to a full trial.
The respondent company opposed the application. It argued that the Companies Act did not contain any general prohibition against oral agreements and that the question concerning the signatory’s authority could not be conclusively determined without examining the relevant evidence.
The District Judge, Jodhpur Metropolitan, rejected the application on 22 May 2025. Aggrieved by that order, Gnex Impex Private Limited and its director approached the Rajasthan High Court.
Key Issue: Does Section 21 Require Every Company Agreement to Be in Writing?
The principal legal question before the High Court was whether Section 21 of the Companies Act, 2013, prevents companies from entering into oral agreements.
Section 21 addresses the authority of a company to authenticate documents, proceedings and contracts through persons empowered to act on its behalf. However, a provision governing the authority to sign documents does not automatically establish that every contractual arrangement must be reduced to writing.
The Court examined the scope and purpose of the provision and rejected the interpretation advanced by the petitioners.
Rajasthan High Court’s Observations
Justice Rekha Borana held that Section 21 deals with the authorisation of persons who may sign documents or agreements on behalf of a company. It does not create a blanket prohibition against oral agreements between corporate entities.
The Court explained that a provision specifying who may sign a written document cannot be interpreted to mean that an oral agreement is legally impermissible.
In the absence of a specific statutory prohibition applicable to the transaction, the principles of the Indian Contract Act, 1872, concerning the formation of contracts remain relevant.
The Court also referred to the Supreme Court’s dismissal of an appeal against the Punjab and Haryana High Court’s decision in M/s Shorewala Investment & Properties Ltd. v. Girish Kumar Jain. It further relied on the Calcutta High Court’s decision in Madhab Chandra Basu v. Safikul Molla.
These authorities were considered in examining the legal position concerning oral agreements.
Authority of the Company Representative Must Be Examined on Evidence
The High Court separately considered the objection that the plaint did not contain an authority letter establishing the signatory’s authority to act for the company.
It held that this issue could not be conclusively determined at the stage of an application under Order VII Rule 11 CPC.
Where the plaint specifically asserts that the person concerned was authorised to act on behalf of the company, the truth and validity of that assertion may require examination of evidence.
The absence of an authority letter, by itself, did not justify rejection of the plaint at the threshold in the circumstances of the case.
Consequently, the High Court dismissed the civil revision petition and upheld the trial court’s order.
Legal Significance of the Judgment
The decision is relevant to companies that conduct business through negotiations, oral commitments and commercial understandings.
First, oral agreements are not automatically invalid merely because the parties are companies. Section 21 of the Companies Act, 2013, cannot be treated as a general statutory requirement that every agreement must be written.
Second, the existence of an oral agreement must still be established. A party relying on such an arrangement must be prepared to prove the terms agreed upon, the parties’ intention and the surrounding circumstances through legally admissible evidence.
Third, the authority of the person representing a company remains important. The judgment does not eliminate the need to establish that a person had the necessary authority to negotiate, conclude or act upon a contractual arrangement on behalf of the company.
Fourth, procedural objections must be considered at the appropriate stage. Order VII Rule 11 CPC provides grounds for rejection of a plaint, but disputed factual questions that require evidence cannot ordinarily be conclusively resolved merely by raising objections to the pleadings.
Practical Lessons for Businesses
Although the ruling recognises that oral agreements are not generally prohibited between companies, businesses should avoid relying exclusively on verbal commitments.
Companies should preferably execute written agreements specifying the scope of work, consideration, payment terms, delivery obligations, timelines, termination conditions and dispute resolution mechanisms.
Where negotiations take place orally, businesses should preserve supporting material such as emails, messages, purchase orders, invoices, payment records, meeting minutes and subsequent correspondence acknowledging the arrangement.
They should also maintain proper board resolutions, authorisation letters or other corporate approvals wherever required by law, their constitutional documents or internal governance procedures.
These precautions can reduce disputes concerning the existence, terms and enforceability of commercial arrangements.
Conclusion
The Rajasthan High Court’s decision in Gnex Impex Private Limited vs. M/s Shyam And Shyam Oils Private Limited clarifies that Section 21 of the Companies Act, 2013, does not impose a blanket prohibition on oral agreements between companies.
The judgment also emphasises that questions concerning a representative’s authority and the existence of an alleged contractual arrangement may require evidence and should not automatically result in rejection of a plaint at the preliminary stage.
For businesses and corporate legal professionals, the key takeaway is that oral commercial arrangements are not necessarily unenforceable simply because they have not been reduced to writing. Nevertheless, written contracts and proper corporate authorisations remain the safer approach to managing contractual risk and avoiding costly litigation.
Disclaimer: This article is intended for general legal information and should not be treated as legal advice for any specific dispute. The applicability of the judgment depends on the facts, the nature of the transaction and any statutory requirements governing the particular agreement.