Company Law

Mannalal Khetan v. Kedar Nath Khetan

(1977) 2 SCC 424

Citation: (1977) 2 SCC 424
Court: Supreme Court of India
Date: 25 November 1976
Bench: A.N. Ray C.J.I.; H.R. Khanna, M.H. Beg, Y.V. Chandrachud and P.N. Bhagwati JJ.

Facts

Members of different branches of the Khetan family held shares in Lakshmi Devi Sugar Mills Pvt. Ltd. and other family companies.
Because of substantial income-tax arrears, certain shares were attached by revenue authorities.
A receiver took possession of share certificates together with blank transfer deeds.
The family members later agreed to exchange blocks of shares as part of a settlement.
Their agreement itself recognised that the attached shares could be transferred only when the attachment was removed or permission was obtained.
Despite this, the board of the company registered transfers in favour of another family group.
No proper instruments of transfer, duly completed and delivered with the share certificates as required by Section 108 of the Companies Act, 1956, were before the company.
The original holders sought rectification of the register.
The High Court’s Division Bench treated Section 108 as directory rather than mandatory.
The dispute reached the Supreme Court.

Whether the statutory procedure under Section 108 for transfer of shares was mandatory.
Whether a company could register a transfer without a duly stamped and executed transfer instrument.
Whether transfers could be registered while the shares were subject to an attachment and held by a receiver.
Whether a private family agreement could override statutory requirements.

Section 108 stated that a company “shall not register” a transfer unless:
a proper instrument of transfer was duly stamped;
it was executed by or on behalf of transferor and transferee; and
it was delivered with the share certificate or letter of allotment.
Negative and prohibitory statutory language ordinarily indicates a mandatory command.
A private agreement cannot override a statutory prohibition.
A transfer by voluntary act differs from transmission by operation of law.
Registration made contrary to a court or revenue attachment is unlawful.

The Supreme Court focused on the words “shall not register.”
These words did not merely guide the company toward a preferred administrative procedure.
They expressly prohibited registration unless every stated condition was satisfied.
The provision protected:
the company’s register;
existing shareholders;
transferees;
creditors; and
the integrity of title to shares.
Treating it as directory would permit ownership records to be changed without reliable evidence of consent and title.
The absence of a specific penalty in Section 108 did not make it optional.
The Act contained a general penalty provision, and the negative language itself showed legislative intention.
The family settlement could create personal contractual obligations, but it could not authorise the company to register a transfer prohibited by company law.
Nor could the transaction be described as transmission.
Transmission occurs automatically through death, insolvency or another operation of law.
Here, the proposed change arose from a voluntary family arrangement and was therefore a transfer.
The shares were also under attachment, and the certificates and transfer forms were controlled by a receiver.
The registered owners could not lawfully exercise ownership or complete a transfer contrary to those orders.
The company’s board therefore acted without legal authority in altering the register.

The Supreme Court allowed the appeal.
Section 108 was declared mandatory.
The registrations made without proper transfer instruments and in violation of attachment orders were illegal.
The register was required to be corrected.
The case remains important under the corresponding statutory regime because it confirms that formal share-transfer requirements protect title and cannot be displaced by private convenience.
Use this case for: a company cannot register a voluntary share transfer unless the mandatory statutory documents and procedures are satisfied.