Mannalal Khetan v. Kedar Nath Khetan

Facts

Members of the Khetan family held shares in private companies and ran partnership businesses with large outstanding tax arrears, on account of which their shares were attached by the State. To settle internal disputes, the family members agreed to exchange and transfer their shares, and the board passed a resolution transferring them without complying with the mandatory procedure under S.108 of the Companies Act (which requires a duly stamped and executed instrument of transfer delivered with the share certificate). A dispute arose over enforcement of the transfer agreement.

Issues

• Whether S.108 of the Companies Act mandatorily prohibits registration of share transfers not made in compliance with it.
• Whether an agreement that can be fulfilled only by doing an act prohibited by statute is void under S.23.

Arguments

The members seeking enforcement contended S.108 was merely directory and the transfer valid. The opposing members argued the negative, mandatory language of S.108 prohibited such transfers, so the agreement, performable only by violating the statute, was void and unenforceable.

Held

The Court held the words 'shall not register' in S.108 are mandatory, the negative form being a legislative device making the provision imperative and prohibitory. A contract expressly or impliedly forbidden by statute will receive no assistance from the courts; a contract is void if prohibited under a penalty, even absent an express declaration of voidness, because a penalty implies prohibition. Since the attached shares could not be transferred without contravening S.108, the agreement among the Khetan members to transfer them was void and unenforceable.

Ratio decidendi

Where a statute, by mandatory negative language or by annexing a penalty, prohibits an act, an agreement that can be fulfilled only by doing that act is forbidden by law and void under S.23, irrespective of any express declaration of voidness and irrespective of the parties' intention.

Significance

A leading Supreme Court statement of the principle that statutory prohibition (express or implied through penalty/mandatory negative words) renders a contract void under S.23, distilling the modes by which a contract becomes void: where a statute declares it void, prohibits its formation, prescribes a penalty, or where it can be fulfilled only by doing a prohibited act. Frequently cited on the directory/mandatory distinction and on penalties implying prohibition.

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