PETITIONER:
MANNALAL KHETAN ETC. ETC.
Vs.
RESPONDENT:
KEDAR NATH KHETAN & ORS. ETC.
DATE OF JUDGMENT25/11/1976
BENCH:
RAY, A.N. (CJ)
BEG, M. HAMEEDULLAH
SINGH, JASWANT
CITATION:
1977 AIR 536 1977 SCR (2) 190
1977 SCC (2) 424
ACT
Campanies Act 1956-- S. 108--Scope of--"Shall not
register transfer of shares"--If mandatory or
directory--Tests for deciding.
Interpretation--Mandatory or directory--Tests for deter-
mining--Non-compliance not declared an offence--If provision
could be called directory.
HEADNOTE
Section 108 of the Companies Act, 1956 provides that a
company shall not register transfer of shares unless a
proper instrument of transfer duly stamped and executed by
or on behalf of the transferor and by or on behalf of the
transferee has been delivered to the company along with the
share certificate.
The appellants and the respondents were members of a
family. The family held shares in a company, and in addi-
tion, the members were doing partnership business. To
realise large sums of income tax dues from the firms and
individual partners, the Income-tax Department issued no-
tices to the company to pay to that department any amount
due to the firm or its partners. A receiver appointed by
the Collector took possession of the appellants’ shares
along with duly signed blank transfer deeds. Later shares
belonging to the family. in the company were attached
under O. 21, r. 46, C.P.C. In the meantime the appel-
lants in settlement of their accounts with the respondents
agreed for transfer of certain shares to the respondents as
soon as the transfer became permissible. At the instance of
respondents 1 and 2, however, the company, by a resolution,
transferred the appellants’ shares to the respondents. The
appellants gave notice to the respondents that the shares
under attachment of the Incometax Department had been sold
by the Collector and that the transfers -were illegal and
void. The respondents contended that it was not a case of
transfer but one of transmission.
In a petition under s. 155 of the Companies Act the
appellants contended that tie transfer was in contravention
of the mandatory provisions of s. 108 and that the shares
had been attached by the Collector under O. 21, r. 46 C.P.C.
A single Judge of the High Court held the transfer to be
illegal and void. On appeal a Division Bench held that the
provisions of s. 108 were directory and not mandatory and
that the provisions of s. 64, C.P.C. and O. 21, r. 46 pre-
vailed over the prohibitory order contained in Form 18 in
Appendix E of Schedule I of the C.P.C. but that the attach-
ment and appointment of Receiver did not divest a party of
his right to his property.
Allowing the appeal,
HELD: The provisions of s. 108 of the Companies Act are
mandatory and the High Court erred in holding that they were
directory. [197B]
(1)(a) The words "shall not register" are mandatory in
character. The mandatory character is strengthened by the
negative form of the language which is used to emphasise
the insistence of compliance with the provisions of the Act.
Negative words are clearly prohibitory and are ordinarily
used as a legislative device to make a statutory provision
imperative. (See State of Bihar v. Maharjdhiraja Sir Ka-
meshwar Singh of Darbhanga & Ors. [1952] S.C.R. 889 at pp.
988-89; M. Pentiah & ors. v. Muddalal Veeramallappa & Ors.
[1961] 2 S.C.R. 295 at p. 308 and Additional District Magis-
trate, Jabalpur v. Shivaknant Shukla [1976] Supp S.C.R. 172
followed. [195D-E]
191
(b) The tests for finding out when a provision is manda-
tory or directory are: the purpose for which the provision
has been made, its nature, the intention of the legislature
in making the provision, the general inconvenience or injus-
tice which may result to the person from reading the provi-
sion one way or the other, the relation of the particular
provision to other provisions dealing ’with the same subject
and the language of the provision. Prohibition and negative
words can rarely be directory. Negative, prohibitory and
exclusive words are indicative of the legislative intent
when the statute is mandatory.
[195F-G]
Raja Buland Sugar’ Co. Ltd. v. Municipal Board, Rampur
[1965] 1 S.C.R. 970 and Seth Bikhral Jaipuria v. Union of
India [1962] 2 S.C.R. 880 at pp. 89394, followed.
(2) (a) In holding that s. 108 is directory and not
mandatory for the reason that non-compliance with the sec-
tion was not declared an offence, the High Court failed to
consider the provisions of s. 629-A of the Act which pre-
scribes a penalty where no specific penalty is provided in
the Act. It is a question of .construction in each case
whether the legislature intended to prohibit the doing of
the act altogether or merely to make the person who did it
liable to pay the penalty. [196B]
(b) A contract is void if prohibited by a statute under
a penalty, even without express declaration that the
contract is void, because such a penalty implies a prohibi-
tion. If a contract is made to do a prohibited act, that
contract will be unenforceable. If a contract is expressly
or implied by prohibited by statute one has to see not what
acts the statute prohibits but what contracts it prohibits.
One is not concerned with the intent of the parties. [196C-
E]
St. John Shipping Corporation v. Joseph Rank [1957] 1 Q.B.
267, referred to.
(c) The maxim a pactis privatorum publico juri non
derogatur means that private agreement cannot alter the
general law. What is-done in contravention of the provi-
sions of an Act of Legislature cannot be made the subject of
action. [196F]
Mellis v. Shitlay L.B. [1885] 16 Q.B.D. 446 referred to.
(d) In every case where a statute inflicts a penalty for
doing an act, though the act be not prohibited, yet the
thing is unlawful because it is not intended that a statute
would inflict a penalty for a lawful act. [196G]
(e) If a penalty is imposed by statute for preventing
something being done on some ground of public policy, the
thing prohibited, if done, will be treated as void, even
though the penalty imposed is not enforceable. [197A]
In the present case in addition to the prohibition
issued under O. 21, r. 46, a separate prohibitory order was
issued to the company in Form 18 in Appendix E of the First
Schedule of the C.P.C. Therefore, the company by registering
the transfer of shares was obviously permitting the transfer
and such action being in violation of the prohibition is
contrary to law. []97D]
(3) When the receiver held the scrips and the transfer
forms, it was not open to the owners to exercise rights of
ownership or to transfer their ownership to anyone else.
[197F]
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1805 to
1808 of 1968.
Appeal from the Judgment and Decree dated the 24th May, 1963
of the Allahabad High Court in Special Appeals Nos. 108 to
111 of 1963.
R.S. Gae, (in CA. 1805/68) and 1. John, for the Appel-
lants in all the Appeals.
Ex parte, for Respondents in all the appeals.
192
The Judgment of the Court was delivered by
RAY, C.J.---These four appeals by certificate raise two
questions. First, whether the provisions of section 108 of
the Companies Act, 1956 are mandatory in regard to transfer
of shares. Second, can.a company having been served with
notice of attachment of shares. register transfer of shares
in contravention of the order of attachment.
The appellant Mannalal Khetan and the respondents Kedar
Nath Khetan and Durga Prasad Khetan are members belonging to
two branches of the Khetan Family. The respondent Lakshmi
Devi Sugar Mills Private Ltd. is a private company. It was
incorporated on 7 April 1934 under the Indian Companies Act,
1913.
The Khetan family held shares in the respondent company
and in two other companies Maheshwari Khetan Sugar Mills
Private Ltd. and Ishwari Khetan Sugar Mills Private Ltd. the
shares stood in the names of (1) M/s. Ganeshnarayan Onkarmal
Khetan, (2) M/s. Sagarmal Hariram Khetan, (3) Sri Mannalal
Khetan and (4) Sri Radhakrishna Khetan.
The members of the Khetan family did partnership
business at various places. Civil Suit No. 337 of 1948 was
filed in the Bombay High Court for dissolution of the part-
nership and for taking the accounts. On 3 July 1953 the
Official Receiver of the Bombay High Court was appointed
Receiver of the properties of the partnership firms.
There were large income tax arrears and other tax li-
abilities outstanding against the firms and individual
partners. For the realisation of the income tax dues the
Income Tax Department issued in 1950 a notice under section
46(5)(a) of the Indian Income Tax Act, 1922 requiring the
respondent company to pay any amount due to the firm of
Ganesh Narayan Onkarmal or its partners to that department.
On 16 June, 1953 a Receiver was appointed by the Collec-
tor of Bombay in execution of the tax recovery certificate
issued by the Income Tax Officer S. VI Central Bombay.
Subsequently under orders of the Bombay High Court the
Receiver appointed by the Collector of Bombay took over
papers of the dissolved firm from the Receiver appointed by
the Bombay High Court. The Receiver appointed by the
Collector of Bombay also took possession of shares standing
in the names of M/s. Sagarmal Hariram Khetan, Sri Mannalal
Khetan and Sri Radhakrishna Khetan along with blank transfer
deeds signed by them.
The Additional Collector of Bombay issued to the Collec-
tor of Deoria two certificates under which on 8 March 1954
and 18/31 October 1955 certain shares of the respondent
company belonging to the Khetans were attached under Order
21 Rule 46 of the Code of Civil Procedure.
On 31 July, 1957 the members of the Khetan family
entered into agreement among them for exchange of blocks of
shares held by them in the respondent company and other.
companies in settlement of their differences and disputes.
These agreements provided for
193
transfer of shares in the respondent company and in the
Maheshwari Khetan Sugar Mills Private Ltd. belonging to
Sugarreal Hariram and Ganesh Narayan Onkarnath groups to
which the appellants belonged to the group of Kedarnath
Khetan to which respondents 1 and 2 belonged. These trans-
fers were in lieu of shares in Ishwari Khetan Sugar Mills
Private Ltd. to be transferred by the group of respondents 1
and 2 to the group of the appellant. It is significant to
notice that the agreements recited that the shares in the
respondent company were under attachment of the Income Tax
authorities, and, therefore, they could not be immediately
transferred. The agreement was that as soon as the transfer
of the shares became permissible or if the Income Tax au-
thorities so permitted, transfers as agreed and contemplated
would be effective.
On 8 April, 1958 and 3 October, 1959 the Board of Direc-
tors of the respondent company passed a resolution for
transfer of the shares belonging to the appellant group to
the group of respondents No. 1 and 2. These resolutions
were passed on the applications made on behalf of respond-
ents No. 1 and 2 and others of their group. The shares were
thereafter entered in the respondent company’s register in
the names of respondents No. 1 and 2 and others of their
group.
On 14 January, 1962 the appellant along with Kamla
Prasad Khetan and Mataden Khetan gave notice to respondent
No. 1 and Durga Prasad Khetan that the shares of the Ishwari
Khetan Sugar Mills Private Ltd. which were under attachment
of the Income Tax authorities had been sold by the Addition-
al Collector of Bombay on 23 September, 1961. The notice
stated that the agreements had become impossible of per-
formance and the consideration of reciprocal promises disap-
peared. The notice further stated that the powers of attor-
ney executed in favour of the respondent company by the
appellant in respect of their shares in the Maheshwari
Khetan Sugar Mills Private Ltd. and Laxmi Devi Sugar Mills
Private Ltd. were revoked and cancelled. The notice con-
cluded by saying that the respondents had no right, authori-
ty, or power to act on behalf of or in the name of the
appellants in pursuance of the said power of attorney.
By another notice dated 14 January, 1962 the appellants
informed the respondent company that the transfer of shares
in the company’s register had been made illegally and with-
out authority because no proper instruments of transfer duly
stamped and executed by and/or on behalf of the appellants
were delivered to the respondent company and that the shares
were under attachment by the Collector of Deoria for recov-
ery of income tax arrears on the certificate issued by the
Additional Collector of Bombay. The notice to the respond-
ent company also said that certain shares in blank transfer
forms were in possession of the Receiver appointed by the
Additional Collector of Bombay in the income tax recovery
proceedings. The notice concluded by stating that the
respondent company was informed that the alleged transfer of
shares from the names of the appellants as well as the
deletion of their names from the register was illegal and
void.
Respondent No. 1 and Durga Prasad Khetan contended in
answer to the notice that the appellant had no right, title
or interest in the 14 --1458SCI/76
194
shares mentioned in the notice, that the shares had not been
transferred but had been transmitted subject to the orders
of the Income Tax authorities under section 46(5)(a) of the
Income Tax Act, and that the shares of the Ishwari Khetan
Sugar Mills Ltd. were sold by the Additional Collector of
Bombay in recovery of the income tax arrears in spite of.
the protests lodged by the respondent and that the power of
attorney in respect of the shares could not be cancelled by
the appellant. The respondents denied that the transfers
were illegal and without authority.
In this background the appellant on 17 July, 1962 filed
a petition in the High Court of Allahabad under section 155
of the Companies Act 1956 referred to as the Act against the
respondents. The appellant contended first that the trans-
fers of all the shares in the respondent company’s register
were illegal because the transfers were without any proper
instrument of transfer. The appellant also contended that
the transfers were in contravention of the mandatory provi-
sions of section 108 of the Act and articles of the respond-
ent company. The second contention of the appellant was
that no legal transfer of the ’shares in question should
have been made because at the time of the alleged transfer
the shares had been surrendered along with blank transfer
forms to the Receiver appointed by the Collector of Bombay
in execution proceedings for recovery of the income tax
dues. The appellant also alleged that other shares had been
attached by the Collector of Deoria in pursuance of the two
certificates issued by the Collector of Bombay under Order
21 Rule 46 of the Code of Civil Procedure.
The learned Single Judge directed the. respondent
company to , rectify the register of its members by remov-
ing the names of respondents No. 1 and 2 and’ to restore the
names of the original share holders. The learned Single
Judge rejected the contention of the respondents that it was
a case of transmission of shares. The learned Judge said
that the transmission of shares occurred only by operation
of law and this was a case of transfer by voluntary act of
the parties which could not amount to transmission. The
learned Judge also held that although the transferees di-
vested themselves of all powers and control in respect of
the shares in question by executing irrevocable powers of
attorney in favour of the transferees, mere transfer of
control did not amount to transfer of possession. The
learned Judge further held that the agreements to which
reference has already been made were not instruments of
transfer and the transfer of shares which were under attach-
ment in pursuance of the certificate issued by the Addition-
al Collector under Order 21 Rule 46 of the Code of Civil
Procedure was illegal and void. The transfer of the shares
which had been surrendered to the Receiver appointed by the
Collector of Bombay was also held by the learned Judge to be
bad on the same ground.
The respondents preferred an appeal. The Division
Bench of the High Court set aside the order passed by the
Company Judge and dismissed the applications of the appel-
lant. The Division Bench held that the provisions contained
in section 108 of the Act were directory and not mandatory.
The Division Bench also held that the provisions of section
64 of the Code of Civil Procedure and Order 21 Rule 46
195
prevailed over the prohibitory order contained in Form 18 in
Appendix E of Schedule I of the Code. The Division Bench
held that the appointment of the. Receiver did not divest a
party of his right to property and the mere fact that
shares were handed over to the Receiver with blank in-
struments of transfer did not make any difference.
The provision contained in section 108 of the Act states
that "a company shall not register a transfer of
share’s ...... unless a proper instrument of transfer duly
stamped and executed by or on behalf of the transferor and
by or on behalf of the transferee ........ has been deliv-
ered to the company along with the certificate relating to
the shares or debentures ........ or if no such certifi-
cate is in existence along with the letter of allotment of
the shares". There are two provisos to section 108 of. the
Act. We are not concerned With the first proviso ’in these
appeals. The second proviso states that nothing in this
section shall prejudice any power of the company to register
as shareholder or debenture holder any person to whom the
right to any shares in, or debentures of, the company has
been transmitted by operation of law. The words "shall not
register" are mandatory in character. The mandatory charac-
ter is strengthened by the negative form of the language.
The prohibition against transfer without complying with the
provisions of the Act is emphasised by the negative lan-
guage. Negative language is worded 10 emphasise the insist-
ence of compliance with the provisions of the Act. (See
State of Bihar v. Maharajadhiraj Sir Kameshwar Singh of
Darbhanga & Ors.(1), M. Pentiah & Ors. v. Muddala Veeramal-
lappa & Ors. (2) and Additional District Magistrate, Jabal-
pur v. Shivakant Shukla(3). Negative words are clearly
prohibitory and are Ordinarily used as a legislative. device
’to make a statutory provision imperative.
In Raza Buland Sugar Co. Ltd. v. Municipal Board
Rampur(4) this Court referred to various tests for finding
out when a provision is mandatory or directory. The purpose
for which the provision has been made, its nature, the
intention of the legislature in making the provision, the
general inconvenience or injustice which may result to the
person from reading the provision one way or the other, the
relation of the particular provision to other provisions
dealing with the same subject and the language of the provi-
sion are all to be considered. Prohibition and negative
words can rarely be directory. It has been aptly stated
that there is one way to obey the command and that is com-
pletely to refrain from doing the forbidden act. Therefore,
negative, prohibitory and exclusive words are indicative of
the legislative intent when the statute is mandatory. (See
Maxwell on Interpretation of Statutes 11th Ed. p. 362 seq.;
Crawford Statutory Construction, Interpretation of Laws p.
523 and Seth Bikhraj Jaipuria v. Union of India(5).
(1) [1952] S.C.R. 889, 988-89.
(2) [1961] 2 S.C.R. 295, 308.
(3) [1976] Supp. S.C.R. 172.
(4) [1965] 1 S.C.R. 970.
(5) [1962] 2 S.C.R. 880, 893-94.
196
The High Court said that the provisions contained in
section 108 of the Act are directory because non-compliance
with section 108 of the Act is not declared an offence. The
reason given by the High Court is that when the law does not
prescribe the consequences or does not lay down penalty for
non-compliance with the provision contained in section 108
of the Act the provision is to be considered as directory.
The High Court failed to consider the provision contained in
section 629(A) of the Act. Section 629(A) of the Act pre-
scribes the penalty where no specific penalty is provided
elsewhere in the Act. It is a question of construction in
each case whether the legislature intended to prohibit the
doing of the act altogether, or namely to make the person
who did it liable to pay the penalty.
Where a contract, express or implied, is expressly or by
implication forbidden by statute, no court will lend its
assistance to give it effect. (See Mellis v. Shirley(1). A
contract is void if prohibited by a statute under a penalty,
even without express declaration that the contract is void,
because such a penalty implies a prohibition. The penalty
may be imposed with intent merely to deter persons from
entering into the contract. or for the purposes of revenue
or that the contract shall not be entered into so as to be
valid at law. A distinction is sometimes made between
contracts entered into with the object of committing an
illegal act and contracts expressly or impliedly prohibited
by statute. The distinction is that in the former class one
has only to look and see what acts the statute prohibits; it
does not matter whether or not it prohibits a contract; if a
contract is made to do a prohibited act, that contract will
be unenforceable. In the latter class, one has to consider
not What act the statute prohibits, by what contracts it
prohibits. One is not concerned at all with the intent of
the parties, if the parties enter into a prohibited
contract, that contract is unenforceable. (See St. John
Shipping Corporation v. Joseph Rank("). See also
Halsbury’s Laws of England Third Edition Vol. 8, p.141).
It is well established that a contract which involves in
its fulfilment the doing of an act prohibited by statute is
void. The legal maxim ’A pactis privatorum publico juri non
derogatur means that ’private agreements cannot alter the
general law. Where a contract, express or implied, is
expressly or by implication forbidden by statute, no court
can lend its assistance to give it effect. (See Mellis v.
Shirley L.B.) (Supra). What is done in contravention of the
provisions of an Act of the Legislature cannot be made the
subject of an action.
If anything is against law though it iS not prohibited
in the statute but only a penalty is annexed the agreement
is void. In every case where a statute inflicts a penalty
for doing an act, though the act be not prohibited, yet the
thing is unlawful, because it is not intended that a statute
would inflict a penalty for a lawful act.
Penalties are imposed by statute for two distinct pur-
poses (1) for the protection of the public against fraud, or
for some other object of public policy; (2) for the purpose
of securing .certain sources of
(1) L.R. (1885) 16 Q.B.D, 446. (2) [1957] 1 Q.B. 267.
197
revenue either to the state or to. certain public bodies. If
it is clear that a penalty is imposed by statute for the
purpose of preventing something from being done on some
ground of public policy, the thing prohibited, if done, will
be treated as void, even though the penalty imposed is not
enforceable.
The provisions contained in section 108 of the Act are
for the reason indicated earlier mandatory. The High Court
erred in holding that the provisions are directly.
Some of the shares were attached by the Collector of
Deoria pursuant to two certificates issued by the Collector
of Bombay. Other shares were surrendered along with blank
transfer forms to the Receiver appointed by the
Collector .of Bombay in execution proceedings.
Order 21 Rule 46 of the Code of Civil Procedure lays
down that in the case of shares in the capital of a corpora-
tion the attachment shall be made by a written order prohib-
iting in the case of the share, the person in whose name the
share may be standing from transferring the same. In the
present case, in addition to the prohibition issued under
Order 21 Rule 46 a separate prohibitory order was issued to
the company in Form No. 18 in Appendix E of the First Sched-
ule of the Code of Civil Procedure. Therefore, the company
by registering the transfer of ’shares was obviously permit-
ting the transfer and such action on the part of the company
being in violation of the prohibition is contrary to law.
Shares which had not been attached but had been surren-
dered to the Receiver appointed by the Collector of Bombay
came from the possession of the Receiver in the partnership
suit. The Receiver in the partnership suit took possession
of the shares along with blank transfer forms in the year
1953. When the Receiver held the scrips and the transfer
forms it was not open to the persons in whose names the
shares originally stood to exercise rights of ownership in
respect thereof or to transfer their ownership to anyone
else.
For the foregoing reasons we set aside the decision of
the High Court. The order of the learned Single Judge
dated 5 March, 1963 is restored. There will be no order as
to costs.
P.B.R. Appeal
allowed.
198