What did the Supreme Court decide in Rangaraj?

A shareholders’ agreement that adds transfer limits beyond the Articles is not binding on the company or shareholders.

Do transfer restrictions need to be in the Articles?

Yes. To bind all members and the company, transfer restrictions must appear in the Articles of Association.

Is a family pre-emption pact enforceable against the company?

Not if it contradicts the Articles or adds new limits not found in the Articles.

What happened to the High Court decree?

It was set aside. The Supreme Court allowed the appeals and rejected enforcement of the private agreement.

Why is this case important for private companies?

It draws a clear line: internal pacts cannot override the company’s constitution (the Articles).

V.B. Rangaraj v. V.B. Gopalakrishnan

Classroom-style explainer on shareholders’ agreements vs Articles of Association, transfer limits, and pre-emption in private companies.

Supreme Court of India 1992 AIR 1992 SC 453 Company Law Reading Time: ~6 min Author: Gulzar Hashmi India

Quick Summary

A family-run private company had a private pact to keep shares equal in two branches and to give first option within the branch on sale. One member sold shares against this pact. Lower courts upheld the pact. The Supreme Court said: private agreements cannot add transfer limits beyond what is written in the Articles of Association. So, the sale stood and the pact did not bind the company.

Issues

Can shareholders make a deal that conflicts with or adds to the Articles?
Do branch-wise pre-emption rights bind the company if they are not in the Articles?

Rules

The Articles of Association are the company’s constitution. Transfer limits bind members only if written in the Articles.

A shareholders’ agreement that imposes extra limits (not in Articles) is not enforceable against the company or other members.

Private pacts cannot override or contradict the Articles.

Facts (Timeline)

Timeline: family company shares and transfers

Company & Shares: Private company with 50 shares. A joint family (plaintiffs) first held 13, later acquired the remaining 37.

Family Pact (1951): Two brothers’ branches to hold 25 shares each. Right of first refusal within the branch before any outside sale.

Deaths: Baluswamy (1963) and Guruviah (1970) passed away. Their sons became parties to the dispute.

Disputed Sale: One son from Baluswamy’s branch sold shares to a member from Guruviah’s branch, against the pact.

Trial & High Court: Sale held invalid; directed re-transfer to plaintiffs; injunction granted. High Court affirmed.

Supreme Court: Appeals by defendants reached the Supreme Court for final decision.

Arguments

Appellants (Defendants)

The Articles do not contain such strict branch-wise limits.
A private pact cannot bind the company or stop a lawful transfer.

Respondents (Plaintiffs)

The family agreement is longstanding and should control transfers.
Company must honor pre-emption to keep equal shareholding.

Judgment

The Supreme Court allowed the appeals and set aside the High Court decree. The family pact imposed additional restrictions not in the Articles. Such limits are not binding on the company or members.

Transfer restrictions must be found within the Articles, not just in a private agreement.

Ratio

Articles control. Share transfer limits that add to or conflict with the Articles are ineffective unless they are written into the Articles themselves.

Private pacts cannot change the company’s constitution.

Why It Matters

Protects certainty of company constitutions.
Guides drafting: put pre-emption and transfer caps in the Articles, not only in side letters.
Reduces disputes in family businesses and private companies.

Key Takeaways

Articles are supreme for transfer rules.

Private pacts adding limits are not binding.

Put pre-emption clauses into the Articles.

Mnemonic + 3-Step Hook

Mnemonic: “A.R.T.”—Articles Rule Transfers

Articles: Check the Articles first.
Restrictions: Only those in the Articles bind all.
Transfers: Private pacts ≠ enforceable limits.

IRAC Outline

Issue: Can a shareholders’ agreement impose transfer limits that are not in the Articles?

Rule: Articles govern; extra limits in private agreements do not bind the company or members.

Application: Branch-wise pre-emption and equal holding were absent from the Articles; enforcing them would add new limits.

Conclusion: Private pact not enforceable; appeals allowed; High Court decree set aside.

Glossary

Articles of Association: The company’s internal rulebook; binds members and officers.
Shareholders’ Agreement: A private contract among members; cannot override the Articles.
Pre-emption Right: Right of first refusal to buy shares before they go to others.
Private Company: Company with transfer limits and member cap under law; still governed by its Articles.