SETH BADRI PRASAD AND OTHERS versus SETH NAGARMAL AND OTHERS

(1) S.C.R. SUPREME COURT REPORTS

SETH BADRI PRASAD AND OTHERS v.

SETH N AGARMAL AND OTHERS '

(JAFER IMAM, s. K. DAS and J. L. KAPUR, J"J.)

Maintainability of Suit-Unregistered company-Suit 'by mem-bers for accounts-New point-Rewa Companies Act, z955, s. 4(2) -Indian Partnership Act, z932 (IX of z932), s. 69(3)(a).

When cloth control was introduced in Rewa State, ~5 cloth dealers of BudQ.ar, including the thirteen appellants, formed themselves into an Association to collect the quota of clqth to be allotted to them and to sell it on profit. The Association func-tioned through President and pioneer worker; they kept accounts and distributed profits. After cloth had beeri decon-trolled and the work of the Association had come to an end, the appellants filed suit against the first respondent for rendition of accounts for portion of the period that he had been President of the Association and for realisation of the amount fo~nd due with interest. The suit was decreed by the trial Court but was, on appeal, dismissed by the Judicial Commissioner. In appeal before the Supreme Court, the first respondent raised, for the first time, preliminary objection that the suit was not main~ainable as the Association consisting of more than 20 persons was not registered as required by s. 4(2) of the Rewa State Companies Act, 1935, and that consequently the members of the Assqciation had no remedy against each other in respect of its dealings and transactions. The appellants objected to the. raising of tl;i.e new plea and contended that, nevertheless, the suit was maintainable.

Held; that the suit was not maintainable. In view of s. 4(2) of the Act the Association was illegal. The reliefs claimed for rendition of accounts in enforcement of the illegal contract of partnership necessarily implied recognition by the Court tliiat the Association existed of which accounts were to be taken The Court could not assist the plaintiffs in obtaining their s~are of the profits made by the illegal Association.

U. Sein Pov. U. Phyu, (1929) I.L.R. 7 Rang. 540, not ;i.pplic-able.

Held further, that the new point ought to be allowe<l to be raised. The question was pure question of law and did not require the investigation of any facts. The objection rested on the provisions of public statute which no court could exclude from its consideration.

Surajmull Nargoremull v. Triton Insurance Company Ltd., (1924) L.R. 52 I.A. 126; Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi, (1949) L.R. 76 I.A. 244, followed.

The analogy of s. 69(3)(a) of the Indian Partnership Act, 1932, did not apply, an under that Act an unregistered firllll was 97

Dec~mbar 9.

not illegal. Besides, the suit was not one for accounts of dissolved firm but of an illegal Association which was in existence

Seth Barlri Prasad at the relevant time.

and Others

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 125 of 1955.

Y. Seth Nagarmal and Olliers

Appeal from the judgment and decree dated Novem-

ber 20, 1951, of the former Court of Judicial Com-missioner, Vindhya Pradesh, in Civil First Appeal No. 47 of 1951, arising out of the judgment and decree dated June 4, 1951, of the Court of Additional Di8trict Judge, Umaria, in Civil Original Suit No. 17/19/17 of 1950.

Sardar Bahadur, for the appellants.

Achhru Ram, B. C. Misra and P. K. Chakravarty, for the respondents.

1958. December 9. The Judgment of the Court was delivered by

S. K. DAS, J.-This is an appeal on certificate granted by the erstwhile Judicial Commissioner of Vindhya Pradesh, which is now part of the State of Madhya. Pradesh. On behalf of respondent no .. 1, Na.gar Ma.I, who was defendant no. 1 in the suit, preliminary objection has been taken to the effect that the suit was not maintainable by reason of the provi-sions of s .. 4 of the Rewa State Companies Act, 1935, and the appeal filed by the plaintiffs must, therefore, be dismissed. As this preliminary objection was not taken in any of the two courts below, learned counsel for the appellants wanted time to consider the point. Accordingly, on October 28, 1958, we adjourned the hearing of the appeal for about month. The appeal was then heard on November 27, 1958.

s. K. Das J.

As we are of tho opinion that the preliminary objec-tion must succeed, it is necessary to state the facts only in so far as they have bearing on it. When cloth control came into force in Rewa State, the cloth dealers of Budhar town in that State, formed them-selves into an Association to collect the quota of cloth to be allotted to them and sell it on profit wholesale and retail. The Association at Budhar consisted of 25 members who made contributions to the initial

(1) S.C.R.

capita.I of the association which was one lac of rupees.

No formal Articles of Association were writteh; nor -' ' Th ' t' t' Seth Badri wa.s 1t .reg1stere . . ssoc1a. ion unc 10ne t roug and Others Others President and pioneer worker; they kept accounts v. and distributed the profits. Respondent no. 1, Nagar Seth Nagarmal Mal, was the President of the said Association from and Others January 1946 to June 26, 1946. Before that, Seth Badri Prasad, one of the plaintiffs-appellants' before s. K. Das J. us, was the President. Nagar Mal ceased to be Presi-dent after June 26, 1946, and Seth Badri Prasad again became President. The Association worked till :Febr-uary 1948 ; then cloth was decontrolled a.nd the work of the Association came to an end. On June 25, 1949, thirteen members of the Association out of the twenty-five brought suit, and in the plaint they alleged that respondent no. 1, who was President of the ,Associa-tion, from January 1946 to June 1946, had gilven an account of income and expenditure for the months of January, :February and March, 1946, but had given no accounts for the months of April, May and June, 1946. They, therefore, prayed -'

Seth Badri -Prasad and Others Others v.

(a) that defendant no. 1 (Na.gar Mal) be ordered to give the accounts of the Cloth Association, Budhar, from the beginning of the month of April 1946 to June 2(i, 1946;

(b) that defendant no. 1 be ordered to pa.y the

amount, whatever is found due to the plaintiffs on account being done, along with interest at the rate of annas 12 per cent. per month ; and

(c) that interest for the period of the suit $.nd 1 till the realisation of the dues be allowed.

Besides Nagar Mal the other eleven businessmen, who were members of the Association, were joined as pro-forma defendants, som('l of whom later filed an· appli-cation to be joined as plaintiffs. Though the plaint did not mention any particular transaction of the Association during the period when Nagar Mal was its President, the judgments of the courts belovt show that the real dispute between the parties related to the sale of cloth of consignment known as t.he Gwalior consignment. It appears that in April 1946 consign-ment of 666 bales of cloth had come from <(j-waliorz95B and an order was passed by the Cloth Control Officer Seth n::; Prasad that the consignment woul? ~e allotted t? Nagar ~al and Othm who would give the Assomat10n an opt10n of takmg v. · over the consignment; if the Association did not exer-seth Nagarmal cise the option, the consignment would be taken over and Othus by N agar Mal. It appears that there was some dis-s. K. Das J. pute as to whether the other members of the Associa-f tion were willing to take over the consignment o Gwalior cloth. We a.re not concerned now with the details of that dispute because we are not deciding the appeal on merits. It is enough if we say that ultima-tely there was an order to the effect that only 390 .bales should be allotted to the Association out of which Nagar Mal had given the Association benefit of the sales of 106 bales, and the dispute related to the share of profits made on the remaining 284 bales.

Respondent No. 1, Nagar Mal, raised various points by way of defence, his main defence being that none of the members of the Association were entitled to any shi.re in the profits on the sales of 284 bales of Gwalior cloth. ·

The learned District Judge, who dealt with the

suit in the first instance, passed preliminary decree in favour of the plaintiff-appellants. The decree directed N agar Mal to render accounts of the Cloth Association at Budhar from April 1, 1946 to June 26, 1946, and it further directed that leaving out 106 bales of Gwalior cloth which Nagar Mal gave to the Association, an account should be rendered of the rest of the 390 bales and the profits on the sale thereof shall be according to the capital shares of the members of the Association. Nagar Mal preferred an appeal to the learned Judicial Commissioner of Vindhya Prai:lesh, who reversed the finding of the learned District Judge and came to the conclusion that the other members of the Association were not entitled to participate in the profits made on the sale of 284 bales of the Gwalior cloth and inas-much as Nagar Mal had rendered accounts with regard to all other transactions, the suit for accounts must fail. He accordingly allowed the appeal and . dismissed the suit.

The preliminary point taken before us is founded on

the provisions of s. 4 of the Rewa State Com~anies I95[8 ]b Act, usmess. . 1935. Sub-section (1) W are concerne of s. 4 relates wit . su -s. 2 to ( ) banking <I> s. 4 . 5. 1, '' and B-d Others " . which is in these terms :-v.

. P '' B-d " . rnsu and B-d Others v. Seth Nagarnzal

"4(2). No company, association or partnership

consisting of more than twenty persons shall be 1[form-]e<l that for as the ior .C' purpose its object of carrying the acquisition on any of other gain business by the company, association or partnership, or by the i•1divi-dual members thereof, unless it is registered as com-pany under this Act, or is formed in pursuance of Charter from the Durbar."

and Others S. ~i. Das ].

Mr. Sardar Bahadur, who has appeared on behalf of

the appellauts and who took time to consider the point, has now conceded before us that the aforesaid pro~ision was in force in the Rewa State at the relevant time when the Association was formed at Budhar apd he has further conceded that the said provision \Vas in force till the Indian Compauies Act came into force in the said area in 1950. \Ve must,, therefore, decide the preliminary point on the basis of the provision in s. 4(2) of the Rewa State Companies Act, 1935.

Now, the preliminary point taken on behalf Qf res-pondent no. 1 is this. It is contended that by ~eason of s. 4(2) aforesaid, the Cloth Association at Budhar was not legal Association, because it was formed for .the purpose of carrying on business which had for its object the acquisition of gain by the individual members thereof and fort.her because it was not regis-tered as Company under the Rewa State Companies Act, 1935; nor \ms it formed in pursuance of charter from the Durbar. It has been contend:ed be-fore us on behalf of respondent no. 1 that by reason of the illegality in the contract of partnership the members of the partnership have no remedy ,gainst each other for contribution or apportionment n res-pect of the partnership dealings and transactions. Therefore, no suit for accounts lay at the instaince of the plaintiffs-appellants, who were also members of the said illegal Association.

We consider that this contention is sound anq must

be upheld. Ou behalf of the appellants, Mr. Sa.rdar

SUPREME COURT: REPORTS [1959) Supp.

1956 Bahadur has urged the following points in answer to the preliminary objection: firstly, he has contended S Bet and Others adri Poasa [-. ]th t we s ou Id no ow t JI th pre 1mmary o iect10n to )' ' b' ' v. be raised at this late stage; secondly, he has contend-se1h Naga.mal ed that even though the Association was in contrsven-and Othm tion of s. 4(2) of the Rewa State Companies Act, 1935, the purpose of the Association was not. illegal and suit 5 · r<. Das f. was maintainable for recovery of the contributions made by the appellants and also for accounts; thirdly, ho has contended that on the analogy of s. 69(3)(a) of the Indian Partnership Act, 1932, it should be held that tho appellants had right to bring suit for accounts of the Association which was dissolved in February 1948.

We proceed now to consider these conttintions of learned counsel for the appellants. The first conten-tion that respondent no. 1 should not be allowed to raise an objection of the kind which he .has now raised at this late stage can be disposed of very easily. The objection taken rests on the provisions of public statute which no court can exclude from its considera-tion. The question is pure question of law and does not require the investigation of any facts. Admit-tedly, more than twenty persons formed the Associa-tion in question and it is not disputed that it was formed in contravention of s. 4(2) of the Rewa State Companies Act, 1935. similar question arose for consideration in Surajmull Nargoremull v. Triton Insurance Company Ltd.('). In that case sub-s. (l) of s. 7 of the Indian Stamp Act (II of 1899) was pleaded as bar before their Lordships of the Privy Council, the section not having been pleaded earlier and having passed unnoticed in the judgments of the courts below. At p. 128 of the report Lord Sumner said:-" The suggest.ion may be at once dismissed that it is too late now to raise the section as an answer to the claim. No court can enforce as valid that which competent enactments have declared shall not be valid, nor is obedience to such an enactment ·a thing from which court can be dispensed by the consent of the parties, or by failure to plead or to (l.rgue the (t) (1924) i..R. 52 I.A. 126, 128.

point at the outset: Nixon v. A!ibion Marine· Insur-ance Co., (1867) L. R. 2 Ex. 338. I . fi t The ff' enactip.ent isd" 5 pro hi ["b" ]itory. t is not con ne o or mg It party protection, of which he may avail himself o~ not as he pleases ".

L , 1-. P , eln adn rasau; and Othm .

s eth N agamial

In Sri Sri Shiba Prasad Singh v. Maliaraja, Srish Chandra N andi ([1]), the provisions of s. 72 of the .Indian Contract Act were overlooked by the High Cou~t; the section was only mentioned in passing by the S1,1bordi-nate Judge and it appears that the bar of s. 72 of the Indian Contract Act was not argued or only faintly argued before the Subordinate Judge or in the High Court. In these circumstances, their Lordships' of the Privy Council held that they were unable to exclude from their consideration the provisions of public statute. In om· view, the same principle applies in the present case and s. 4(2) of the Rewa State Companies Act, 1935, being prohibitory in nature cannot .be excluded from consideration even though the bar of that provision has been raised at this late stage.

and Others

S. K. Das].

On his second contention learned counsel f<!>r the appellants has relied on U. Sein Po v. U. Phyu ([2]). That was case in which three members of an associa-tion formed for carrying on rice business claimed decree (i) declaring the respective shares of the sub-scribers to that association and (ii) directing that the plaintiffs be repaid their shares after reconvertimg the property of the association into cash and after payment of all debts and liabilities. The association, it was found, consisted of twenty-seven members; it wa.s not registered and its formation was in contravention of sub-s. (2) of s. 4 of the Indian Companies Act. The lower court granted the decree asked for and this was affirmed in appeal by the High Court. The leii.rned Judges referred to the decision in Sheppard v. Oxen-ford ([3]) and Butt v. Monteaux ([4]), and rested their deci-sion on the following passage of " Lindley on Partner-ship" (the learned Judges quoted the passage at p. 145 of the 9th edition but the same passage "'ill be found at pp. 148-149 of the 11th edition):

(1) (1949) L.R. 76 I.A. 244. (2) (1929) I.L.R. 7 Ran. 54\l·

(3) (1855) I K. & J. 491; 69 E.R. 552.

(4) (1854) 1 K. & J. 98; 69 E.R. 345·

z95B " Although, therefore, the subscribers to an illegal -company have not a. right t.o an account of the dea.l-S11h Badri Prasad • · Oth mgs an transact10ns o t company an o t an v. "' profits made thereby, they have right to have their Seth Nagarmal subscriptions returned; and the necessary account and Others ta.ken; and even though the moneys subscribed have. been la.id out in the purchase of land and other things s. /(.Das f. for the purpose of the company the subscribers are entitled to have thiit land and those things reconvert-ed into money, and to have it applied as far as it will go in payment of the debts and liabilities of the con-cern, and then in repayment of the su bsoriptions. In such cases no illegal contra.ct is sought to be enforced; on the contrary, the continuance of what is illegal is sought to be prevented."

We do not think that the decision aforesaid, be it correct or otherwise, is of any help to the appellants in the present case. The appellants herein have not asked for a. return or. refund of their subscriptions; on the contrary, they have asked for rendition of ac· . counts in enforcement of an illegal contract of partner-ship. The reliefs they have asked for necessarily imply a. recognition by the court that an association exists of which accounts ought to be taken. When the associa-tion is itself illegal, court cannot assist the plaintiffs in getting accounts ma.de so that they may have their full share of the profits ma.de by the illegal association. The principles which must apply in the present case a.re those referred to in the following passage at p. 145 of Lindley on Partnership (I I th edition) :"The most important consequence, however, of illegality in a. contract of partnership is that the mem-bers of the partnership have no remedy against each other for contribution or apportionment in respect of the partnership dealings and transactions. How-ever ungracious and morally reprehensible it may be for a. person who has been engaged with another in various dealings and transactions to set up their illegality as a. defence to a. claim by that other for an account and payment of his share of the profits made thereby, such a. defence must be allowed to prevail in

court of justice. Were it not so, those who-ex hypo-z95B thesi:-have ?een guilty o~ breac~ of the law, would Seth Badri Prasad. obtam the aid of the law m enforcmg demands arising aud Others out of that very breach ; and not only would all laws v. be infringed with impunity, but, what is worse, their Seth Nagarmal very infringement would become ground for ob.tain-and Others ing relief from those whose business it is to enforce , S. K. Das ]. t em. or t ese reasons, t ere1ore, an not rom any greater favour to one party to an illegal transaction than to his companions, if proceedings are instituted by one member of an illegal partnership against another in respect of the partnership transactions, it is competent to the defendant to resist the proceedingi;i on the ground of illegality".

It is true that in order that illegality may be defence, it must affect the contract on which the plaintiff is compelled to rely so as to make out his right to what he asks. It by no means follows that whenever money has been obtained in· breach of some law, the person in possession of such money is entitled to keep it in his pocket. If money is paid by to to be applied by him for some illegal purpose, it is competent for to require to hand back the money if has not already parted with it and the illegal purpose has not been carried out: see Greenberg v. Cooperstein ([1]). The case before us sta.nds on different footing. It is claim by some members of an illegal as~ociation against another member on the footing that the association should be treated as legal in order to give rise to liability to render accounts in respect of the transac-tions of the association. Such claim is clearly unten-able. Where plaintiff comes to court on allegations which on the face of them show that the· contract of partnership on which he sues is illegal, the only course for the courts to pursue is to say that he is not entitled to any relief on the allegations ma.de as the courts cannot adjudicate in respect of contracts which the law declares to be illegal (Senaji Kapurchand v. Pannaji Devichand ([2]) ). The same view, which we

(I) [1926} I Ch. 657.

(2) A.I.R. 1930 P.C. 300.

z95B think is correct, was expressed in Kumaraswami v. -. Ohinnathambi (' ).

Sith Bud" P•asaa As to the last contention of learned counsel for the and ~:h"' appellants, based on the analogy of s. 69(3)(a) of the Sith Naxa•mal Partnership Act, it is enough to point out that under and Othm the Indian Partnership Act, 1932, an unregistered firm is not illegal ; there is no direct compulsion that s. K. Das J. partnership firm must be registered, though the disabi-lities consequent on non.registration may be extremely inconvenient. Moreover, the suit before us was not ·one for accounts of dissolved firm, but for accounts of an illegal association which was in existence at the relevant period for which accounts were asked. We do not think that the argument by analogy is of any help to the appellants; in our opinion, the analogy does not really apply.

For the reasons given above, we hold that the pre-liminary objection succeeds. The appeal is accord-ingly dismissed. As the preliminary objection was taken at very late stage, we direct that the parties must bear their own costs of the hearing in this Court.

Appeal dismissed.

(1) I.L.R. [1951J Mad. 593.