1976 (11) TMI 135 - SC - Companies Law

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

Mannalal Khetan Versus Kedar Nath Khetan

The Supreme Court held that the provisions of section 108 of the Companies Act, 1956, are mandatory, emphasizing compliance with the Act. The Court ... Whether the provisions of section 108 of the Companies Act, 1956, are mandatory in regard to transfer of shares? Can a company having been served with notice of attachment of shares register transfer of shares in contravention of the order of attachment? Held that:- Appeal allowed. The provisions contained in section 108 of the Act are, for the reasons indicated earlier, mandatory. The High Court erred in holding that the provisions are directory. Shares which had not been attached but had been surrendered 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. 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.