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?
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…..”
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)
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.
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.