Commercial Agreements & Contracts In IndiaA contract is void if prohibited by a statute under a Penalty

March 2, 20210

A contract is void if prohibited by a statute under a Penalty

In Asha John Divianathan Vs Vikram Malhotra & Ors.,CIVIL APPEAL NO. 9546 OF 2010, a three member Bench of Supreme Court of India comprising of Justices AM Khanwilkar, Indu Malhotra and Ajay Rastogi while dealing with Section 31 of  the   Foreign   Exchange   Regulation   Act,   1973 decided upon as to whether a transaction (specified in Section 31 of the 1973 Act) entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance?

Decided

26th February,2021

Factum

The fact being that a foreigner and the owner of the property in question, gifted it to respondent No.1  without obtaining previous permission of the Reserve Bank of India  under Section 31 of the 1973 Act.

Analysis of Provisions

The Court firstly observed that

“13. Before we analyse Section 31 of the 1973 Act, it is essential to understand the object and purpose for which the 1973 Act was brought into force.   It was to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign   exchange   resources   of   the   country   and   the   proper utilisation thereof in the interests of the economic development of the country………….

14.   The avowed object of Section 31 of the 1973 Act was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of disposal of property by a person, who is not a citizen of India.  As is noticed from the title of Section 31, it is to put restriction on acquisition, holding and disposal of immovable property in India by foreigners – non citizens……………….

15. In   other   words,   a   person,   who   is   not   a   citizen   of   India, holding immovable property situated in India was obliged to make disclosure and declaration in that behalf to the RBI; and in any case,   if   he/she   intended   to   dispose   of   such   property   by   sale, mortgage,  lease,  gift, settlement  or  otherwise,  was  expected  to obtain previous general or special permission from the RBI. Only then, transfer so intended could be given effect to.  It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section 31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings  constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63…….”

 

“Void” or “Voidable”

The Court analysed as to what is the difference between invalidity by way of  void and voidable.

The Court went on to rely upon the ratio as laid down in  Dhurandhar   Prasad   Singh   v.   Jai Prakash   University  &   Ors. ,  which had noted the dictum of Lord   Denning   in  R.   v.   Paddington   Valuation   Officer,   ex   p Peachey Property Corpn. Ltd. and also in Judicial Review of Administrative   Action  by de Smith, Woolf and Jowell and in Judicial Remedies in Public Law by Clive Lewis. The respective observations were as under;

It is necessary to distinguish between two kinds of invalidity. The one kind is where the invalidity is so   grave   that   the   list   is   a   nullity   altogether.   In which case there is no need for an order to quash it. It is automatically null and void without more ado. The other kind is when the invalidity does not make the list void altogether, but only voidable. In that case it stands unless and until it is set aside. In the present case the valuation list is not, and never   has   been,   a   nullity.   At   most   the   first respondent   —   acting   within   his   jurisdiction   — exercised that jurisdiction erroneously. That makes the list voidable and not void. It remains good until it is set aside.”

“Behind   the   simple   dichotomy   of   void   and voidable acts (invalid and valid until declared to be invalid)   lurk   terminological   and   conceptual problems of excruciating complexity. The problems arose   from   the   premise   that   if   an   act,   order   or decision   is   ultra   vires   in   the   sense   of   outside jurisdiction, it was said to be invalid, or null and void. If it is intra vires it was, of course, valid. If it is flawed by an error perpetrated within the area of authority or jurisdiction, it was usually said to be voidable; that is, valid till set aside on appeal or in the past quashed by certiorari for error of law on the face of the record.

The reliance was further on para 22 of Dhurandhar   Prasad   Singh supra as under; 

Thus   the   expressions   “void   and   voidable”   have been   the   subject­ matter   of   consideration   on innumerable   occasions   by   courts.   The   expression “void”   has   several   facets.   One   type   of   void   acts, transactions,   decrees   are   those   which   are   wholly without jurisdiction, ab initio void and for avoiding the same no declaration is necessary, law does not take any notice of the same and it can be disregarded in collateral proceeding or otherwise. The other type of void   act,   e.g.,   may   be   transaction   against   a   minor without being represented by a next friend. Such a transaction is a good transaction against the whole world. So far as the minor is concerned, if he decides to   avoid   the   same   and   succeeds   in   avoiding   it   by taking   recourse   to   appropriate   proceeding   the transaction   becomes   void   from   the   very   beginning. Another type of void act may be which is not a nullity but   for   avoiding   the   same   a   declaration   has   to   be made. Voidable act is that which is a good act unless avoided, e.g., if a suit is filed for a declaration that a document is fraudulent and/or forged and fabricated, it is voidable as the apparent state of affairs is the real state of affairs and a party who alleges otherwise is obliged to prove it. If it is proved that the document is forged and fabricated and a declaration to that effect is given,   a   transaction   becomes   void   from   the   very beginning. There may be a voidable transaction which is required to be set aside and the same is avoided from the day it is so set aside and not any day prior to it. In cases where legal effect of a document cannot be taken away without setting aside the same, it cannot be treated to be void but would be obviously voidable.”

Void if Prohibited by a Statute under a Penalty

The Court while relying upon the law laid down by another three­ Judge Bench of Supreme Court in Mannalal Khetan & Ors. v. Kedar  Nath  Khetan  & Ors. observed as

“20. It is well established that 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. Further,   it   is   settled   that   prohibition   and   negative   words   can rarely be directory.   In the present dispensation provided under Section 31 of the 1973 Act read with Sections 47, 50 and 63 of the same   Act,   although   it   may   be   a   case   of   seeking   previous permission it is in the nature of prohibition as observed by a three­Judge Bench of this Court in Mannalal Khetan & Ors. v. Kedar  Nath  Khetan  &   Ors.18 .   In every case where a statute imposes a penalty for doing an act, though, the act not prohibited yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act.  When 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 if imposed is not enforceable…..” 

Inference

The Court proceeded and took aid of paragraphs 18 to 22 of Mannalal Khetan & Ors. supra, as below;

“18. The High Court said that the provisions contained in Section 108 of the Act are directory because noncompliance 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 non­compliance   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   prescribes   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 merely to  make   the  person  who  did   it   liable   to  pay   the penalty.

19. 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   L.B. [(1885)   16   QBD   446   :   55 LJQB   143   :   2   TLR   360]   )  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, but 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 [(1957)   1   QB   267].)   (See also Halsbury’s Laws of England, 3rd Edn., Vol. 8, p. 141.)

20. 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.)  What   is   done   in   contravention   of   the provisions  of   an  Act   of   the   legislature   cannot  be made the subject of an action.

21. 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.

22. Penalties are imposed by statute for two distinct purposes: (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 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 if imposed is not enforceable.” (emphasis supplied) 

 

Concluding Observations

The Court further placed their reliance upon the following decisions:

a.Union of India & Ors. v. A.K. Pandey , wherein it was held that that where a contract, express or implied, is expressly or by implication forbidden by statute, no court will lend its assistance to give it effect.  Further, 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.

b.Union  of   India   v.  Colonel  L.S.N.  Murthy  &  Anr., the Court opined that the contract would be lawful, unless the consideration and object thereof is of such a nature that, if permitted, it would defeat the provisions of law and in such a case the consideration or object is unlawful and would become void and that unless the effect of an agreement results in performance of an unlawful act, an agreement which is otherwise legal cannot be held to be void and if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered   into   by   the   parties   and   the   solemn   promises   made thereunder.

In conclusion the Court held that

35……………………….In our opinion, the requirement of seeking previous general or special permission of the RBI in respect of transaction covered by Section 31 of the 1973 Act is mandatory.  Resultantly, any sale or gift of property situated in India by a foreigner in contravention thereof would be unenforceable in law.

37. As noticed above, the contrary decisions of High Courts have completely missed the legislative intent and the spirit of enactment of   Section   31,   as   is   manifest   from   the   statement   of   the   then Finance Minister while tabling the Bill in the Lok Sabha that as a general policy foreign national cannot be allowed to deal with real estate   in   India.     Besides   that   clear   indication,   the   legislative scheme impels us to take a view which is reinforced from conjoint reading of Section 31 along with Sections 47, 50 and 63.  There is little doubt that the requirement of “previous” permission of the RBI, to be taken by a foreign national before transacting in real estate, is mandatory.  In other words, without previous permission of the RBI, such a transaction is forbidden and if entered into, would be unenforceable in law…….

38. We hold that the condition predicated in Section 31 of the 1973 Act of obtaining “previous” general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.   Until such permission is accorded, in law,  the transfer cannot be given effect to; and for contravening with that   requirement,   the   concerned   person   may   be   visited   with penalty under Section 50 and other consequences provided for in the 1973 Act. 

Ratio

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.

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