1976 (11) TMI 135 - SC - Companies Law

Supreme Court emphasizes mandatory compliance with Companies Act provisions, invalidates share registration in contravention of attachment orders.

The Supreme Court held that the provisions of section 108 of the Companies Act, 1956, are mandatory, emphasizing compliance with the Act. The Court ... Mandatory nature of section 108 of the Companies Act - effect of statutory attachment on transfer of shares - prohibition against registering transfers in contravention of attachment orders - transmission by operation of law - penalty implying prohibition and voidness of prohibited contractsMandatory nature of section 108 of the Companies Act - penalty implying prohibition and voidness of prohibited contracts - Whether the provisions of section 108 of the Companies Act, 1956, are mandatory in regard to transfer of shares. - HELD THAT: - The Court held that the language of section 108, using negative and prohibitory words such as 'shall not register', is mandatory. Tests for construing mandatory or directory provisions - the purpose of the provision, legislative intent, relation to other provisions and the language used - support a mandatory construction. Negative and exclusive words ordinarily indicate an imperative legislative command. Further, where a statute annexes a penalty or operates to prevent an act on grounds of public policy, the prohibited act or contract is incapable of judicial enforcement; a penalty may imply prohibition. Accordingly non-compliance with section 108 cannot be treated as merely directory and the provision must be obeyed for a valid registration of transfer.Section 108 is mandatory and transfer/registration in contravention of its requirements is not permissible.Effect of statutory attachment on transfer of shares - prohibition against registering transfers in contravention of attachment orders - transmission by operation of law - Whether a company served with notice or order of attachment (including prohibition in Form No. 18 and orders under Order 21, rule 46, CPC) may register transfers of shares contrary to that attachment or when shares are in possession of a receiver. - HELD THAT: - The Court found that where shares are subject to attachment under Order 21, rule 46, and a prohibitory order is issued to the company (including the Form No. 18 prohibition), the company must not register transfers in contravention of that prohibition. Registration by the company in such circumstances amounts to permitting a transfer in violation of the statutory prohibition and is contrary to law. Similarly, where shares and blank transfer forms are in the possession of a receiver appointed in execution proceedings, the original holders cannot exercise ownership rights or validly transfer the shares; the presence of the scrips and transfer forms with the receiver prevents voluntary transfers. Transmission by operation of law is distinct and preserved by the proviso to section 108, but voluntary transfers in breach of attachment or while the receiver holds possession are invalid.A company served with an attachment prohibition must not register transfers contrary to that attachment, and transfers made while shares are under attachment or in possession of a receiver are invalid.Final Conclusion: The decision of the High Court is set aside; the order of the learned single judge restoring the original shareholders in the company's register is restored, with no order as to costs. Issues Involved:1. Whether the provisions of section 108 of the Companies Act, 1956, are mandatory in regard to the transfer of shares.2. Whether a company, having been served with notice of attachment of shares, can register the transfer of shares in contravention of the order of attachment.Issue-wise Detailed Analysis:1. Mandatory Nature of Section 108 of the Companies Act, 1956:The appellant argued that the transfers of shares in the respondent-company's register were illegal due to the lack of a proper instrument of transfer, thereby contravening section 108 of the Companies Act, 1956. The High Court had previously held that the provisions of section 108 were directory, not mandatory, because non-compliance with this section was not declared an offence, and no specific penalty was prescribed for non-compliance.However, the Supreme Court emphasized that the language of section 108, particularly the words 'shall not register,' is mandatory in character. The Court noted that the negative form of the language strengthens the mandatory nature of the provision, emphasizing compliance with the Act. The Court referenced several cases, including *State of Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga* and *K. Pentiah v. Muddala Veeramallappa*, to support the interpretation that negative words in legislation are typically prohibitory and indicate a mandatory provision.The Court also highlighted that section 629A of the Companies Act prescribes a penalty for non-compliance where no specific penalty is provided elsewhere in the Act. This indicates that the legislature intended to prohibit the act altogether, not merely impose a penalty for non-compliance. The Court cited *Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur* and other legal principles to assert that contracts or actions prohibited by statute are void, even if the statute does not expressly declare them void.Thus, the Supreme Court concluded that the provisions of section 108 are mandatory, and the High Court erred in holding them as directory.2. Registration of Shares in Contravention of Attachment Orders:The appellant contended that the transfer of shares was illegal because the shares were under attachment by the income-tax authorities, and some shares had been surrendered to the receiver appointed by the Collector of Bombay. The High Court had previously held that the appointment of the receiver did not divest a party of their right to property and that the provisions of section 64 of the Code of Civil Procedure and Order 21, rule 46, prevailed over the prohibitory order.The Supreme Court examined Order 21, rule 46 of the Code of Civil Procedure, which mandates that in the case of shares in a corporation, attachment shall be made by a written order prohibiting the transfer of the shares. The Court noted that in this case, a separate prohibitory order was issued to the company, prohibiting the transfer. By registering the transfer of shares, the company violated this prohibition, making the action contrary to law.The Court further explained that shares surrendered to the receiver in the partnership suit were held along with blank transfer forms since 1953. When the receiver held the scrips and transfer forms, the original shareholders could not exercise rights of ownership or transfer the ownership to others.Conclusion:The Supreme Court set aside the decision of the High Court and restored the order of the learned single judge dated 5th March 1963, which directed the respondent-company to rectify the register of its members by removing the names of respondents Nos. 1 and 2 and restoring the names of the original shareholders. The Court held that the provisions of section 108 of the Companies Act, 1956, are mandatory and that the transfer of shares in contravention of attachment orders was illegal and void. There was no order as to costs.