Seth Badri Prasad and Others v. Seth Nagarmal and Others

\ ##### (1) S.C.R. SUPREME COURT REPORTS 769 ##### SETH BADRI PRASAD AND OTHERS ##### _v._ SETH N AGARMAL AND OTHERS ' Dec~mbar _9._ ## (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 functioned through a President and a 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 a suit against the first respondent for rendition of accounts for a 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, a 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.pplicable. _Held_ further, that the new point ought to be allowe<l to be raised. The question was a pure question of law and did not require the investigation of any facts. The objection rested on the provisions of a 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_ _U._ _Sein_ _Pov._ _U._ _Phyu,_ (1929) I.L.R. _7_ Rang. 540, not ;i.pplicable. _Held_ further, that the new point ought to be allowe<l to be raised. The question was a pure question of law and did not require the investigation of any facts. The objection rested on the provisions of a public statute which no court could exclude 770 SUPREME COURT REPORTS [1959] Supp _r958_ not illegal. Besides, the suit was not one for accounts of a - dissolved firm but of an illegal Association which was in existence _**Seth Barlri**_ _**Prasad**_ **at the relevant time.** _**and**_ _**Others**_ Y. _**Seth**_ _**Nagarmal**_ _**and**_ _**Olliers**_ CIVIL APPELLATE JURISDICTION: Civil Appeal No. 125 of 1955. Appeal from the judgment and decree dated November 20, 1951, of the former Court of Judicial Commissioner, 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. S. K. DAS, J.-This is an appeal on a 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, a preliminary objection has been taken to the effect that the suit was not maintainable by reason of the provisions 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 a month. The appeal was then heard on November 27, 1958. As we are of tho opinion that the preliminary objection must succeed, it is necessary to state the facts only in so far as they have a bearing on it. When cloth control came into force in Rewa State, the cloth dealers of Budhar a town in that State, formed themselves 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. SUPREME COURT REPORTS 771 capita.I of the association which was one lac of rupees. _1958_ No formal Articles of Association were writteh; nor ##### ' ' d Th A ' t' f t' d h Seth Badri Prasad wa.s 1t .reg1stere . . e ssoc1a. ion unc 10ne t roug _and Others_ a President and a 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 President after June 26, 1946, and Seth Badri Prasad again became President. The Association worked till :February 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 twentyfive brought a suit, and in the plaint they alleged that respondent no. 1, who was President of the,Association, 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 - ' (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 (c) 12 that per cent. per interest for month the period ; and 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 proforma defendants, som('l of whom later filed an· application 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 a consignment known as t.he Gwalior #### consignment. It appears that in April 1946 a consign ment of 666 bales of cloth had come from <(j-walior 772 SUPREME COURT REPORTS [1959] Supp. _z95B_ 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 pute as to whether the other members of the Associa_s._ _K._ _Das_ _J._ 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 a 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 inasmuch 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 (I) S.C.R. SUPREME COURT REPORTS 773 the provisions of s. 4 of the Rewa State Com~anies _I95_ _[8 ]_ Act, 1935. Sub-section (1) of s. 4 relates to banking _B-d_ . _P_ _d_ 5. 1, b usmess. . W e are concerne d wit . h su -s. 2 b ( ) <I> f s. 4 . _e_ '' _and a Others_ " _rnsu_ which is in these terms :- v. "4(2). No company, association or partnership _Seth_ _Nagarnzal_ consisting of more than twenty persons shall be [form-] _and Others_ consisting of more than twenty persons shall be 1 [form-] _and Others_ e<l for the purpose of carrying on any other business _.C'_ S. ~i. _Das_ that h as ior its object the acquisition of gain by the _.C'_ S. ~i. _Das_ _]._ that h as ior its object the acquisition of gain by the company, association or partnership, or by the i•1dividual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of a Charter from the Durbar." 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 a legal Association, because it was formed for .the purpose of carrying on a business which had for its object the acquisition of gain by the individual members thereof and fort.her because it was not registered as a Company under the Rewa State Companies Act, 1935; nor \ms it formed in pursuance of a #### 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 774 SUPREME COURT: REPORTS [1959) Supp. _1956_ Bahadur has urged the following points in answer to _d_ the preliminary objection: firstly, he has contended ### S h Bet and Others adri Poasa [-. ] th a t we s ou h Id no a ow t JI th e 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 a 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 a right to bring a 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 a public statute which no court can exclude from its consideration. The question is a pure question of law and does not require the investigation of any facts. Admittedly, 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. A 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 a 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 a court can be dispensed by the consent ##### of the parties, or by a failure to plead or to (l.rgue the **(t)** **(1924)** i..R. 52 I.A. **126, 128.** (l) S.C.R. SUPREME COURT REPORTS 775 point at the outset: Nixon v. A!ibion Marine· Insur- _r95B_ ance Co., (1867) L. R. 2 Ex. 338. The enactip.ent is L, 5 1 #### I . fi d t ff' d" 5 eln L, 1 adn -. P rasau;, pro hi ["b" ] itory. t is not con ne - a or mg It party _and_ _Othm_ . a protection, of which he may avail himself o~ not as v. he pleases ". _s eth N agamial_ ##### In Sri Sri Shiba Prasad Singh v. Maliaraja, Srish and Others _Chandra N andi_ ( [1] ), the provisions of s. 72 of the .Indian _S. K._ _Das]._ 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 a public statute. In om· view, the same principle applies in the present case and s. 4(2) of the Rewa State Companies _S. K._ _Das]._ 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. On his second contention learned counsel f<!>r the appellants has relied on _U._ _Sein_ _Po_ v. _U._ _Phyu_ ( [2] ). That was a case in which three members of an association formed for carrying on a rice business claimed a 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 decision 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· 776 SUPREME COURT REPORTS [1959) Supp. _z95B_ " Although, therefore, the subscribers to an illegal - company have not a. right t.o an account of the dea.l_S11h_ _Badri Prasad_ - d - f h d f h _d Oth_ mgs an transact10ns o t e company an - t e _an_ v. "' profits made thereby, they have a 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 reconverted 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 a 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 association is itself illegal, a 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 members of the partnership have no remedy against each other for contribution or apportionment in respect ##### of the partnership dealings and transactions. However 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 ##### (1) S.C.R. SUPREME COUJtT REPORTS 777 a court of justice. Were it not so, those who-ex _hypo-_ _z95B_ thesi:-have ?een guilty o~ a 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 a ground for ob.tain- _and Others_ ing relief from those whose business it is to enforce _c_ d f, _S._ _K._ _Das_ t em. h F or t ese reasons, t ere1ore, h h an not rom any _c_ d f, _S._ _K._ _Das_ _]._ t em. h F or t ese reasons, t ere1ore, h h 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 a 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 A to B to be applied by him for some illegal purpose, it is competent for A to require B to hand back the money if B 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 a different footing. It is a 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 a liability to render accounts in respect of the transac tions of the association. Such a claim is clearly untenable. Where a 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. 98 778 SUPREME COURT REPORTS [1959] Supp. _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 a 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 a 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 preliminary objection succeeds. The appeal is accordingly dismissed. As the preliminary objection was ##### taken at a 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.