Seth Badri Prasad And Others vs Seth Nagarmal And Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 125 of 1955

Decision Date: 9 December 1958

Coram: S.K. Das, Syed Jaffer Imam, J.L. Kapur

In the matter titled Seth Badri Prasad and Others versus Seth Nagarmal and Others, the judgment was rendered on 9 December 1958 by a bench consisting of Justice S.K. Das, Justice Syed Jaffer Imam and Justice J.L. Kapur. The case is reported in 1959 AIR 559 and 1959 SCR Suppl. (1) 709, and it has subsequently been cited in later reports such as R 1965 SC 304, R 1979 SC 1165, and D 1988 SC 1531. The dispute concerned the maintainability of a suit brought by members of an unregistered association seeking an accounting of the association’s affairs and the recovery of profits, in light of the provisions of the Rewa State Companies Act, 1935, section 4(2), and the Indian Partnership Act, 1932, section 69(3)(a).

The factual background revealed that, when cloth control was introduced in Rewa State, twenty-five cloth dealers from Budhar, including the thirteen appellants, organized themselves into an association for the purpose of collecting a cloth quota allotted to them and selling the cloth for profit. The association operated under a President and a pioneer worker, kept accounts, and distributed profits among its members. After the decontrol of cloth ended, the work of the association ceased, and the appellants instituted a suit against the first respondent, who had served as President, demanding a rendition of accounts for part of the period of his presidency and the realization of the amount due with interest. The trial court decreed in favor of the appellants, but the judgment was set aside by the Judicial Commissioner on appeal. In the appeal before the Supreme Court, the respondent raised, for the first time, a preliminary objection that the association, having more than twenty members, was required under section 4(2) of the Rewa State Companies Act, 1935, to be registered, and that its lack of registration rendered the suit non-maintainable. The appellants objected to the introduction of this new plea and argued that, irrespective of registration, the suit should be maintainable. The Court held that the suit could not be maintained because, under the statutory provision, the association was illegal and therefore could not be treated as an entity whose accounts could be ordered for enforcement. The Court affirmed that the question of registration was a pure question of law that did not depend on any factual investigation, and that statutes governing public entities could not be ignored. The Court relied on the authorities U. Sein Po v. U. Phyu (1929) I.L.R. 7 Rang 540, Surajmull Nargoremull v. Triton Insurance Company Ltd. (1924) L.R. 52 I.A. 126, and Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi (1949) L.R. 76 I.A. 244. It also noted that the analogy of section 69(3)(a) of the Indian Partnership Act, 1932, was inapplicable because an unregistered partnership under that Act is not illegal, whereas the present suit dealt with an illegal association, not a dissolved partnership. Consequently, the Court concluded that it could not assist the plaintiffs in obtaining any share of the profits earned by the illegal association.

It was observed that the provisions of the Partnership Act, 1932, did not apply to the case because under that Act an unregistered firm was not deemed illegal. Moreover, the suit was not an action for the accounts of a dissolved firm; it concerned an illegal Association that existed at the relevant time. The judgment fell under the civil appellate jurisdiction and concerned Civil Appeal No. 125 of 1955, which was an appeal from a judgment and decree dated 20 November 1951 of the former Court of Judicial Commissioner of Vindhya Pradesh in Civil First Appeal No. 47 of 1951. That judgment itself arose from a decree dated 4 June 1951 of the Court of Additional District Judge, Umaria, in Civil Original Suit No. 17/19/17 of 1950. Counsel for the appellants was identified as Sardar Bahadur, while counsel for the respondents were listed as Achhru Ram, B. C. Misra and P. K. Chakravarty. The judgment was delivered on 9 December 1958 by Justice S. K. Das.

The appeal was presented on a certificate granted by the former Judicial Commissioner of Vindhya Pradesh, now part of Madhya Pradesh. On behalf of respondent No. 1, Nagar Mal, who had been defendant No. 1 in the original suit, a preliminary objection was raised asserting that the suit could not be maintained because of section 4 of the Rewa State Companies Act, 1935, and that consequently the appeal should be dismissed. Since this preliminary objection had not been raised in either of the lower courts, the appellants’ counsel requested time to consider the matter. Accordingly, the hearing of the appeal was adjourned on 28 October 1958 for about a month and was later heard on 27 November 1958. The Court expressed the view that the preliminary objection should succeed and therefore limited the statement of facts to those relevant to that objection. When cloth control was introduced in Rewa State, the cloth dealers of Budhar, a town in that State, formed an Association to collect their allotted cloth quota and sell it at a profit both wholesale and retail. The Budhar Association comprised twenty-five members who contributed to an initial capital of one lakh rupees. No formal Articles of Association were drafted, and the Association was not registered. The Association operated under a President and a pioneer worker who kept accounts and distributed profits. Nagar Mal served as President from January 1946 until 26 June 1946; before his tenure, Seth Badri Prasad, one of the present appellants, had been President. After 26 June 1946, Badri Prasad again assumed the presidency. The Association continued its activities until February 1948, when cloth was decontrolled and the Association’s work ceased. On 25 June 1949, thirteen of the twenty-five members instituted a suit, alleging that respondent No. 1, who had been President of the Association during the period in question, had given an account of income and expenditure for only the months of January, February and March 1946 and had omitted accounts for April, May and June 1946.

In the suit, the plaintiffs observed that the Cloth Association had produced an account of its income and expenditure for the months of January, February and March 1946, but that it had failed to furnish any accounts for the months of April, May and June 1946. Consequently, the plaintiffs prayed that the court order defendant number one, Nagar Mal, to render the accounts of the Cloth Association, Budhar, from 1 April 1946 up to 26 June 1946; that the same defendant be directed to pay to the plaintiffs whatever sum is found to be due on account of the association, together with interest at the rate of annas twelve per cent per month; and that interest be allowed for the period of the suit and until the dues are actually realised. In addition to Nagar Mal, the other eleven businessmen who were members of the Association were joined as pro-forma defendants, and some of those defendants later moved to be joined as plaintiffs. Although the plaint did not specify any particular transaction of the Association during the period when Nagar Mal acted as President, the findings of the lower courts reveal that the real dispute concerned the sale of cloth from a consignment known as the Gwalior consignment. It appears that in April 1946 a consignment of six hundred sixty-six bales of cloth arrived from Gwalior and that the Cloth Control Officer directed that the consignment be allotted to Nagar Mal, who was then required to give the Association an option to take over the consignment; if the Association declined, the consignment would remain with Nagar Mal. There was a disagreement as to whether the other members of the Association were prepared to take over the Gwalior consignment. The judgment does not need to resolve the detailed facts of that disagreement because the appeal is not being decided on merits. It is sufficient to note that ultimately an order was made whereby only three hundred ninety bales were to be allotted to the Association, of which Nagar Mal had already provided the Association with the benefit of the sale of one hundred six bales. The remaining dispute related to the share of profits arising from the sale of the balance of two hundred eighty-four bales.

Defendant number one, Nagar Mal, raised several points in his defence, the principal one being that none of the Association’s members were entitled to any share of the profits from the sale of the two hundred eighty-four bales of Gwalior cloth. The learned District Judge, who first heard the suit, issued a preliminary decree in favour of the plaintiff-appellants. That decree directed Nagar Mal to render the accounts of the Cloth Association, Budhar, for the period from 1 April 1946 to 26 June 1946. In addition, the decree stipulated that, setting aside the one hundred six bales of Gwalior cloth already provided by Nagar Mal to the Association, an account should be prepared for the remaining three hundred ninety bales and that the profits from the sale of those bales should be distributed according to the capital shares of the Association’s members. The decree therefore required the defendant to account for the transactions and to determine the amount payable to the plaintiffs, together with the interest claimed in the plaint.

Nagar Mal appealed the decision of the learned District Judge to the Judicial Commissioner of Vindhya Pradesh. The Commissioner set aside the District Judge’s finding and held that the other members of the Cloth Association were not entitled to share the profits obtained from the sale of the remaining 284 bales of Gwalior cloth. He further observed that, because Nagar Mal had already rendered accounts for all other transactions, the suit for accounts could not succeed. Consequently, the Commissioner allowed the appeal and dismissed the suit.

The preliminary issue before the Court arose under section 4 of the Rewa State Companies Act, 1935. While subsection (1) of that section deals with banking business, the Court’s present consideration concerned subsection (2), which provides that no company, association or partnership comprising more than twenty persons may be formed for the purpose of carrying on any business whose object is the acquisition of gain by the entity or by its individual members, unless the entity is registered as a company under the Act or is created pursuant to a charter from the Durbar. Counsel Sardar Bahadur, appearing for the appellants, acknowledged that this provision was in force in Rewa State at the time the Budhar Cloth Association was formed and that it remained applicable until the Indian Companies Act became operative in the area in 1950. The Court therefore resolved to decide the preliminary question on the basis of section 4(2) of the Rewa State Companies Act, 1935.

Respondent No. 1 contended that, by virtue of section 4(2), the Budhar Cloth Association was not a lawful association because it was established to carry on a business whose object was the acquisition of profit by the individual members, and it was neither registered as a company under the Rewa State Companies Act nor created under a Durbar charter. It was further argued that, due to the illegality of the partnership contract, the members of the partnership could not seek any contribution or apportionment concerning the partnership’s dealings and transactions. Accordingly, the respondents maintained that the plaintiffs-appellants, who were also members of the alleged illegal association, could not maintain a suit for accounts. The Court found this contention persuasive and concluded that it should be upheld.

In response, counsel Sardar Bahadur, on behalf of the appellants, raised several points. First, he argued that the preliminary objection should not be permitted at such a late stage in the proceedings. Second, he submitted additional arguments, the substance of which will be considered subsequently.

Counsel for the appellants argued that, notwithstanding the fact that the Association had been formed in breach of section 4(2) of the Rewa State Companies Act, 1935, the object of the Association was not illegal and therefore a suit could be maintained to recover the contributions paid by the appellants as well as to obtain a rendering of accounts. The counsel further submitted that, by analogy with section 69(3)(a) of the Indian Partnership Act, 1932, the appellants possessed a right to institute a suit for the accounts of the Association, which had been dissolved in February 1948.

The Court then turned to examine these submissions. It first addressed the contention that respondent No 1 should be barred from raising an objection at this advanced stage of the proceedings. The Court found that this objection could be disposed of straightforwardly because it was founded upon a provision of a public statute, and no court is permitted to exclude the operation of a statutory provision from its consideration. The issue was identified as a pure question of law that required no examination of factual material. It was undisputed that more than twenty individuals had formed the Association and that its formation contravened section 4(2) of the Rewa State Companies Act, 1935. The Court noted a similar point of law had arisen in the case of Surajmull Nargoremull v. Triton Insurance Company Ltd., where the Privy Council, quoting Lord Sumner, observed that a court cannot deem a statutory bar ineffective merely because it is raised late, and that a prohibition enacted by competent legislation cannot be ignored by consent of the parties or by a failure to plead the point. The Court also referred to Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi, in which the High Court had overlooked the provisions of section 72 of the Indian Contract Act, and the Privy Council held that the court could not disregard a public statutory provision. Applying the same principle, the Court concluded that the prohibitory nature of section 4(2) of the Rewa State Companies Act, 1935, precludes its exclusion from consideration, even though the objection was raised at a late stage in the proceedings.

In this case, the Court observed that the Companies Act, 1935 is a prohibitory statute and therefore its provisions cannot be ignored even though the objection to that provision was raised at a late stage of the proceedings. The appellants’ counsel, in his second argument, relied upon the decision in U. Sein Po v. U. Phyu. In that earlier case three persons who were members of an association engaged in the rice trade sought a decree that (i) declared the respective shares of the association’s subscribers and (ii) ordered that the plaintiffs be repaid their shares after the association’s property was converted into cash and after all debts and liabilities had been satisfied. The court found that the association comprised twenty-seven members, that it was not registered and that its formation violated sub-section (2) of section 4 of the Indian Companies Act. The trial court granted the decree and the High Court affirmed that judgment on appeal. The judges in that appeal referred to the authorities Sheppard v. Oxenford and Butt v. Monteaux and based their reasoning on a passage from Lindley on Partnership (quoted from page 145 of the ninth edition, also appearing at pages 148-149 of the eleventh edition). The passage states that although subscribers to an illegal company have no right to an account of the company’s dealings or to the profits, they are entitled to have their subscriptions returned, that a proper account must be taken, and that any money spent on land or other assets for the company may be reconverted into cash and applied, as far as possible, to pay the company’s debts and then to refund the subscriptions. The passage further explains that in such circumstances no illegal contract is to be enforced; rather, the law seeks to prevent the continuation of the illegal arrangement. The Court concluded that the decision in U. Sein Po does not assist the appellants here because the present applicants have not sought a refund of any subscription. Instead they have asked for a rendering of accounts in enforcement of an illegal partnership contract. Granting such relief would require the Court to acknowledge the existence of an illegal association and to order accounts of its profits, which the Court held cannot be done. When the association itself is unlawful, the Court cannot aid the plaintiffs in obtaining an account that would enable them to claim their share of the illegal profits. Accordingly, the Court indicated that the legal principles applicable to the present dispute are those governing illegal contracts and illegal associations.

The Court cited a passage from the eleventh edition of Lindley on Partnership, page 145, which states that the most significant result of illegality in a partnership contract is that the partners have no remedy against one another for contribution or apportionment concerning partnership dealings and transactions. The passage continues to observe that, however ungracious and morally reprehensible it may seem for a person who has engaged with another in various dealings to invoke their illegality as a defence against a claim for an account and payment of his share of the profits, such a defence must be allowed to prevail in a court of justice. The passage explains that if this were not so, those who, hypothetically, have breached the law would obtain the aid of the law in enforcing demands arising out of that very breach; consequently, all laws would be infringed with impunity and, worse still, the infringement itself would become a ground for obtaining relief from those whose business it is to enforce the law. For these reasons, and not because of any greater favour to one party to an illegal transaction than to his companions, when one member of an illegal partnership institutes proceedings against another in respect of partnership transactions, the defendant is competent to resist the proceedings on the ground of illegality. The passage further notes that for illegality to operate as a defence, it must affect the contract on which the plaintiff relies so as to defeat his right to the relief he seeks. It does not follow that whenever money has been obtained in breach of some law, the possessor of such money is entitled to retain it. If money is paid by A to B for an illegal purpose, A may require B to return the money if B has not yet applied it and the illegal purpose has not been carried out, as illustrated in Greenberg v. Cooperstein (1). The matter before this Court, however, is different. It involves a claim by certain members of an illegal association against another member, premised on the proposition that the association should be treated as legal so that a liability to render accounts for its transactions may arise. Such a claim is clearly untenable. When a plaintiff approaches the court with allegations that, on their face, reveal the partnership contract he relies upon to be illegal, the only proper course for the court is to hold that he is not entitled to any relief on those allegations, because the court cannot adjudicate contracts that the law declares illegal, as noted in Senaji Kapurchand v. Pannaji Devichand (2). The same view was expressed in the earlier authority cited.

The Court observed that the view expressed in Kumaraswami v. Chinnathambi (1) was correct. Regarding the final argument raised by counsel for the appellants, which relied on an analogy with section 69(3)(a) of the Partnership Act, the Court noted that the Indian Partnership Act of 1932 does not make an unregistered partnership illegal. There is no statutory requirement that every partnership be registered, although failure to register may cause significant practical disadvantages. The Court further clarified that the present suit did not seek the accounts of a partnership that had been dissolved; rather, the suit sought the accounts of an illegal association that continued to exist during the period for which the accounts were demanded. Consequently, the Court found that the appellants’ reliance on the partnership analogy offered no assistance and, in the Court’s view, the analogy was not applicable. For the reasons stated above, the Court concluded that the preliminary objection raised by the respondent was well founded and therefore succeeded. Accordingly, the appeal was dismissed. Because the preliminary objection was raised at a very late stage in the proceedings, the Court ordered that each party bear its own costs for the hearing before this Court. The appeal was thus dismissed. (1) I.L.R. [1951] Mad 593.