Contract Is Void If Prohibited Even Without Express Declaration: SC

KEY TAKEAWAYS 

The three-judge bench of the Supreme Court recently observed that a contract is void if it is prohibited by a statute under a penalty, even if it is not expressly declared void. The issue dealt with in the present case was whether the contract in question, in violation of section 31 of the FERA, is void, or only voidable and can be voided at whose instance. The bench stated that the condition established by section 31 of the Foreign Exchange Regulation Act, 1973, of seeking ‘prior’ permission of the Reserve Bank of India for the transfer or disposal of immovable property situated in India by a non-citizen of India is mandatory.

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The bench comprising Justice A.M. Khanwilkar, Justice Indu Malhotra, and Justice Ajay Rastogi noted that in Section 31 of the Foreign Exchange Regulation Act, 1973, states that it is mandatory for a person, who is not a citizen of India, to seek ‘prior’ general or special permission of the Reserve Bank of India for transfer/disposal of immovable property situated in India (by sale or mortgage). 

According to section 31 of the FERA, a non-citizen of India is not competent to dispose of, by sale or gift any immovable property situated in India without prior general or special permission of the RBI. Section 31, r/w sections 47, 50 and 63 of the Foreign Exchange Regulation Act, 1973, it was observed that failure to fulfil the requirement of taking ‘previous’ or ‘prior’ permission of the RBI is unenforceable by law. It was also noted that the Foreign Exchange Regulation Act was repealed and replaced by Foreign Exchange Management Act in 1998. 

The bench observed that even without an express declaration, a contract is void if it is prohibited by a statute under penalty, as the penalty implies prohibition. The aforesaid was observed in light of the general rule that foreigners should not be permitted to deal with real estate in the country. The pre-determined condition of seeking permission of the RBI beforehand to engage in transactions under section 31 of the 1973 Act and penalty in case of infringement, includes the transfer of an immovable property situated in India by a non-citizen of the country without prior permission of the RBI, and must thus be unenforceable and deemed as a prohibited act. 

“From the analysis of section 31 of the 1973 Act and upon conjoint reading with sections 47, 50, and 63 of the same Act, we must hold that the requirement of taking ‘repvious’ permission of the RBI before executing the sale deed or the gift deed is the quintessence, and failure to do so must render the transfer unenforceable in law. The dispensation under section 31 mandates ‘previous’ or ‘prior’ permission of the RBI before the transfer takes effect, for, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post-facto permission being granted by the RBI under section 31 of the 1973 Act, unlike in the case of section 29 as noted in Life Insurance Corporation of India (supra). Before grant of such permission, if the sale deed or the gift deed is challenged by a person affected by the same directly or indirectly and the Court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under section 31 of the 1973 Act to such transaction. In light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India, the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly affected by such a transaction. He can set up challenge thereto by dire.”

Observing the same, it was also noted that simply because of the absence of an express provision in the Act making a transaction void or states that the purchaser shall not receive a title in the property, cannot be held valid, and hence it does not validate the transfer referred to in section 31 as it is not backed by ‘previous’ permission of the RBI.

“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 prohibited 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 three-judge bench of this Court in Mannalal Khetan & Ors. v. Kedarnath Khetan & Ors. In every case where a statute imposes a penalty for doing an act, though the act not prohibited, 18 (1977) 2 SCC 424 26 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.”

CONCLUSION

Conclusively, the Supreme Court set aside the judgement given by the Trial Court while awarding the appellant/petitioner with the entitlement for the possession of the suit property as the owner, along with mesne profits for the stipulated period, The Court, however, stated that transactions that have already been finalised by the virtue of the court of competent jurisdiction need not be disturbed in any case due to the ruling pronounced. 

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