Non-Compete Clause In Shareholder Agreement Binding On Auction Purchaser: NCLAT New Delhi

On 8 April, the New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) held held that non-compete obligations contained in a shareholder agreement can bind a purchaser of shares even if those obligations are not incorporated into the Articles of Association, particularly where the acquisition takes place through a liquidation auction.

The Bench of Judicial Member Justice Yogesh Khanna and Technical Member Ajai Das Mehrotra observed:

“If Flovel is allowed to compete with its own company viz the appellant herein, the appellant then shall go out of business, as in every tender there are restrictions that two companies of the same group cannot bid for the same tender. The secrecy of price will also be lost.”

Four appeals came before the NCLAT. Mecamidi HPP India Pvt Ltd filed Appeal Nos. 89 of 2024, 90 of 2024 and 91 of 2024, while GH Energy Pvt Ltd filed Appeal No. 87 of 2024 as the majority shareholder.

Flovel Hydro Technologies Pvt Ltd, the respondent in all appeals, acquired 47 per cent shares in Mecamidi HPP India Pvt Ltd through a liquidation auction of Mecamidi S.A., France.

The appeals challenged a 1 February 2024 order of the National Company Law Tribunal (NCLT), Delhi Bench, which directed registration of Flovel's 47 per cent shareholding.

Mecamidi HPP India Pvt Ltd operated as a 2010 joint venture between Indian promoters and Mecamidi S.A., France. The parties executed a JV shareholder agreement (JVSPA) and a memorandum of understanding, under which Mecamidi France held 47 per cent shareholding at the relevant time.

The JVSPA contained a non-compete clause restraining Mecamidi and its affiliates from competing in India, Bhutan and Sri Lanka during the joint venture.

Mecamidi France entered insolvency in 2019 and went into liquidation in 2020. Its stake was auctioned in France, where Flovel emerged as the highest bidder. The Paris Commercial Court approved the sale in September 2021, and the French appellate court upheld it in October 2022 while directing compliance with Indian law and the company's charter documents.

Flovel then sought registration of its shares in India. When the company refused, Flovel moved the NCLT, which ordered registration of the shares. That order led to the present appeals.

The appellants objected to maintainability, arguing that Flovel held no share certificates, had no executed Form SH-4, and was never a member. They contended that Flovel could not invoke Sections 241–242 of the Companies Act.

They further argued that Flovel, as successor to Mecamidi (France), remained bound by the JVSPA, memorandum of understanding, and Articles of Association, including the non-compete clause.

The respondents countered that the non-compete obligation could not bind Flovel as it was not incorporated into the Articles of Association. They also argued that Flovel was not a party to the JVSPA.

The NCLAT rejected the maintainability objection, holding that Flovel could not be penalised for not filing Form SH-4 when the company itself had refused to issue duplicate share certificates. It held that the appellant could not rely on its own default to defeat Flovel's claim.

The Tribunal further noted that the NCLT had erred in holding that the non-compete clause could not be enforced merely because it was not part of the Articles of Association.

Examining Articles 21, 22 and 25 of the Articles of Association, the Tribunal held that Article 22 required transferees to accept obligations of the transferor, including those under the memorandum and Articles.

It found that the expression “including” expanded the scope of binding obligations beyond the Articles alone. Article 25 created a deeming fiction in insolvency situations, while Article 21 empowered refusal of registration where transfer documents remained incomplete.

The Tribunal also held that the JVSPA formed part of the binding contractual framework, as the company itself was a party to it and not merely the shareholders. It observed:

“It is a settled position of law that shareholder agreements are binding even if are not incorporated in the articles, so long as are not contrary to the Articles … Now JVSPA reserves such rights for both the Indian promoter's shareholders as well as Mecamidi (France) now Flovel. Thus we do not agree to the Flovel's stand it is not bound by any of the obligations of Mecamidi (France) under the JVSPA, since had purchased shares in a court auction. It is a settled position of law an auction purchaser enjoys no special right.”

The Tribunal rejected Flovel's argument that it escaped the JVSPA obligations as a non-signatory. It held that by purchasing Mecamidi's stake, Flovel stepped into its shoes and assumed its contractual liabilities.

Accordingly, the NCLAT set aside the NCLT's finding that Flovel was not bound by the non-compete clause.

For Appellants: Advocates Kartik Kaushal and Mohammed Faraz Anees

For Respondents: Senior Advocate Sudhir K Makkar with Advocates Saumya Gupta, Kanishk Garg, Anirudh Wadhwas, Kartik Gupta, Kartik Garg