Ouseph Poulo And Three Ors. vs Catholic Union Bank Ltd. And Ors.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 15 April 1964

Coram: P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta

In the matter titled Ouseph Poulo and three others versus Catholic Union Bank Limited and others, decided on 15 April 1964, the Supreme Court of India delivered a judgment authored by Chief Justice Gajendragadkar, with Justices K. N. Wanchoo and K. C. Das Gupta forming the bench. The case before the Court comprised two appeals that arose out of suit numbers 5 of 1947 and 32 of 1951. Both appeals presented the same central issue for determination: whether two documents that had been executed by the appellants and two of the respondents should be held unenforceable because they were opposed to public policy under section 23 of the Indian Contract Act, hereinafter referred to as “the Act.” The trial court had answered the question affirmatively, holding the documents void, whereas the High Court of Kerala had reached the opposite conclusion, holding them enforceable. Consequently, the parties sought the Supreme Court’s ultimate decision on the enforceability of the documents under the statutory provision.

Poulo Varghese and Poulo Thommi, who were the sons of Ouseph Poulo, were engaged in the trade of hill produce at Alwaye. In the ordinary course of their business they obtained large loans from the Alwaye branch of Catholic Union Bank Limited. To secure the loans they pledged goods which were placed in a godown; the key to the godown remained in the possession of the Bank. On 10 February 1947 officers from the Bank’s head office inspected the godown and discovered a substantial shortage of the pledged goods. Following this inspection, the Bank’s Secretary lodged a formal complaint with the police. The complaint alleged that Ouseph Poulo, his two sons who dealt with the Bank, and another son, Poulo Joseph, had colluded with the Bank’s local agent to fraudulently remove a large portion of the pledged articles from the godown. The complaint also contained an alternative allegation that, even if no fraud had occurred, the security offered by Poulo Varghese and Poulo Thommi was grossly inadequate to cover the large sums advanced to them, thereby constituting cheating. The police registered the case and commenced investigations. During the course of these investigations the parties negotiated a settlement of their differences, and at that time the two documents in dispute were executed.

The criminal complaint was formally filed on 13 February, and a First Information Report was recorded on 16 February 1947. Subsequently, on 22 February a hypothecation bond (Exhibit 26) was executed in favour of the Bank by Ouseph Poulo, his wife, his three sons and the wife of another son. The bond created a security interest over immovable property belonging to the executants for a sum of Rs 30,000. Five days later, on 27 February 1947, the same parties executed another document in favour of the Bank for Rs 35,000; this second document was identified as a “Kollappirivu Karar” (Exhibit B). On the very same day Poulo Varghese and Poulo Thommi executed a receipt which stated that the goods stored in the godown were valued at Rs 10,000, and that these goods were being surrendered to the Bank as partial satisfaction of the debts owed by them. These actions were undertaken as part of the settlement arrangement that had been reached following the police investigation.

In the transactions that followed, the Bank first obtained a hire‑purchase agreement whereby the car owned by Poulo Thommi was transferred to the Bank and then conveyed back to him under a hire‑purchase arrangement; the car was valued at Rs 5,000/‑. The total amount that Poulo Varghese and Poulo Thommi owed to the Bank was recorded as Rs 80,024‑5‑9. Of this amount, Rs 10,000/‑ was satisfied by surrendering goods that had been stored in the godown, Rs 5,000/‑ was satisfied by the transfer of the car, and the sums of Rs 30,000/‑ and Rs 35,000/‑ were satisfied respectively by the hypothecation deed and the Karar. After these payments, a balance of Rs 24‑5‑9 remained, which the debtors paid in cash. Following the completion of these transactions, on 28 February the Secretary of the Bank gave a statement to the police indicating that the Bank’s claim had been settled and that he and the Managing Director were satisfied that no goods had been removed from the godown as alleged in the criminal complaint. The Secretary further asserted that, in collusion with the Bank’s Agent, the debtors Poulo Varghese and Poulo Thommi had cheated the Bank by over‑valuing the pledged goods, but that no further legal action was required. Consequently, the criminal proceedings were withdrawn. The nature of these transactions and their legal character formed the subject matter of the present appeals.

On 15 December 1947, Ouseph Poulo, his son Joseph, Ouseph’s wife Aelia and Joseph’s wife Thressia filed a suit in forma pauperis seeking the cancellation of the two documents that had been executed. They alleged that the documents had been executed to suppress criminal prosecution and that they were also tainted by undue influence, coercion and threat. The Bank was named as the first defendant, while the second and third defendants were the debtors Poulo Varghese and Poulo Thommi, the sons of Ouseph Poulo. This suit was recorded as suit No. 5/1947. While suit No. 5/1947 was pending, the Bank commenced suit No. 32 of 1951 on 26 February 1951, claiming recovery of the amount due under the Karar from all its executants. The parties who had instituted suit No. 5/1947 appeared as defendants 1, 2, 5 and 6 in suit No. 32/1951, and the debtors Poulo Varghese and Poulo Thommi were designated as defendants 3 and 4. Both sets of defendants filed separate written statements, but both raised the same defence that the document on which the Bank’s claim was based was unenforceable under section 23 of the Act. The trial Court largely upheld this defence, decreeing suit No. 5/1947 and dismissing suit No. 32/1951. The Bank appealed this decision, and the High Court, by way of appeals numbered 538 and 539 of 1954, reversed the trial Court’s view regarding the character of the disputed transaction, resulting in the dismissal of suit No. 5/1947 and the decree of suit No. 32/1951.

In the earlier proceedings the trial Court dismissed suit No. 5/1947 and decreed suit No. 32/1951. The High Court reversed that decision, dismissing suit No. 5/1947 and granting a decree in favour of suit No. 32/1951. As a result of that reversal the plaintiffs who were parties to suit No. 5/1947 obtained a certificate from the High Court and brought the matter before this Court. For the purposes of this judgment the Court will refer to the Catholic Union Bank Ltd. simply as “the Bank”, to the parties who instituted suit No. 5/1947 as “the plaintiffs”, and to the two debtors who were defendants 2 and 3 in the present proceedings as “the defendants”. Before the Court can consider the substantive dispute between these parties, it is necessary to set out briefly the established legal position concerning agreements that are held to be unenforceable because the consideration on which they are based is contrary to public policy.

It is firmly settled that any agreement whose purpose is to suppress or discontinue a criminal prosecution is contrary to public policy and therefore cannot be given effect by a court. The rationale for this rule is that the very consideration that supports such an agreement – namely, the promise not to prosecute – is itself opposed to the public interest in the administration of criminal law. In the Indian legal context this doctrine does not apply to offences that are compoundable, nor does it apply to offences that are compoundable only with the permission of the court when the agreement is entered into with that judicial leave. By contrast, where the offence is non‑compoundable, the law is clear that no court may permit a private individual to take upon himself the administration of justice by deciding, for himself, whether a particular criminal act has been committed. Allowing such a course would defeat the essential purpose of criminal law, would enable offenders to escape punishment, and could also place an unreasonable and coercive burden on an innocent party who might be threatened with prosecution.

In substance, an agreement of this sort permits the complainant to determine the outcome of a criminal complaint that he has lodged, and that determination directly contravenes public policy. While examining such agreements, it is important to distinguish between the motive that may have driven the complainant or the accused to reach the settlement and the actual consideration that underpins the agreement. Only when the agreement is supported by the prohibited consideration – the promise not to prosecute – does it fall within the mischief that the principle seeks to prevent. Although the sequence of events leading up to the agreement can be relevant, the mere chronology of actions does not, by itself, prove the existence of the prohibited consideration. For example, if an agreement to end criminal proceedings is executed by persons who are not the ones charged in the criminal case, that fact may serve as an indication that the agreement is supported by the consideration of terminating the prosecution. Likewise, if the nature of a debtor’s liability arising from a prior transaction is substantially altered with the intention of ending criminal proceedings, that alteration may be another factor the Court will consider in determining whether the prohibited consideration is present. Ultimately, in weighing all relevant circumstances, the Court must inquire whether one party made a promise in exchange for the other party’s promise not to institute or continue criminal prosecution, as that is the decisive inquiry for deciding the enforceability of such agreements.

In this case, the Court observed that the presence of a third party in an agreement could provide evidence that the agreement was supported by the consideration that criminal proceedings should be terminated. The Court further noted that if the liability previously imposed on a debtor is substantially altered with the purpose of ending criminal proceedings, such alteration may constitute an additional factor for the Court to consider when determining whether the agreement is supported by a prohibited consideration. The Court explained that, in evaluating the relevant factors, it is necessary to inquire whether one party made a promise in exchange for, or as a partial exchange of, the other party’s promise not to prosecute or to continue prosecuting. Referring to the observations of Lord Atkin in Bhowanipur Banking Corporation Ltd. v. Durgesh Nandini Desi [(1942) I.L.R. I Cal. 1], the Court quoted that “In all criminal cases reparation where possible is the duty of the offender, and is to be encouraged. It would be a public mischief if on reparation being made or promised by the offender or his friends or relative mercy shown by the injured party should be used as a pretext for avoiding the reparation promised.” The Court clarified, however, that this statement does not imply that a reparation made as consideration for a promise to abandon criminal proceedings is permissible; rather, such a transaction may constitute an abuse of the right of private prosecution and may attract the provisions of section 23 of the Act. The Court emphasized that the party challenging the validity of the impugned transaction bears the burden of demonstrating that the transaction was based upon an agreement to suppress prosecution. If it is established that the parties agreed that a certain consideration would flow from the accused person to the complainant in return for the complainant’s promise to discontinue the criminal proceedings, the Court held that this clearly represents a transaction opposed to public policy, citing V. Narasimha Raju v. V. Gurumurthy Raju, Maharaja Srish Chandra Nandy v. Supravat Chandra, Sudhindra Kumar Ray Chaudhuri v. Ganesh Chandra Ganguli [1939 I.L.R. I Cal. 241] and Kamini Kumar Basu v. Birendra Nath Basu. Turning to the facts of the present litigation, the Court noted that the plaintiffs were challenging the High Court’s conclusion that the impugned transactions were not invalid. Counsel for the plaintiffs urged that the complaint filed by the bank against defendants 2 and 3 had been found to be not bona‑fide, and that this finding revealed the true nature of the transactions. The Court acknowledged that the trial court had indeed found the bank’s complaint to be not bona‑fide, and that the High Court had not expressly reversed that finding because it doubted the direct evidence presented by the plaintiffs and held that the alleged agreement had not been proven. Consequently, the plaintiff’s counsel argued that the trial court’s finding, which remained unaltered on appeal, should be given effect when assessing the principal issue.

The Court observed that the trial Court’s finding, which had not been overturned on appeal, required the matter to be examined in that context. The Court explained that if it had been convinced that the Bank’s complaint had been filed deliberately and dishonestly, such a conclusion would have greatly assisted the plaintiffs; however, after a careful review of the material evidence, the Court concluded that the trial Court had erred in holding that the Bank’s complaint was filed with malafide intent. The complaint, as framed, set out three substantive allegations. First, it claimed that the goods pledged by defendants 2 and 3, although of very low value, had been entered in the godown and recorded in the relevant books as being worth a substantially larger amount. Second, it alleged that the pledged goods, despite being of cheap quality, were described as being of a very superior quality. Third, it asserted that a substantial portion of the pledged goods had been removed from the godown for the purpose of causing loss to the Bank and for the defendants to obtain an unlawful profit. This complaint was filed against defendants 2 and 3, plaintiffs 1 and 2, and also named a son, Ouseph Poulo, who was not a party to the present litigation. Regarding the allegation of theft, the complaint further stated that the key to the godown was supposed to be with the Bank’s agent at Alwaye, and that this agent had absconded. It also identified the lorry used to remove the goods as bearing registration number 2923 and belonging to Qunani Motor Service. When the Bank’s secretary gave evidence, he said that an inquiry made at the scene had revealed that the goods had indeed been taken in the specified lorry; however, no subsequent evidence was produced to substantiate that report. Nevertheless, the secretary maintained the Bank’s position that the goods found in the godown were hopelessly inadequate to secure the advance made to defendants 2 and 3. The plaintiffs argued that the theft allegation was a dishonest fabrication by the Bank intended to exert coercive pressure on defendants 2 and 3 and their families. At first glance this argument appeared persuasive, and, had it been upheld, it could have significantly advanced the plaintiffs’ case.

Upon further examination, the Court noted clear evidence on the record that countered the plaintiffs’ contention. It pointed out that a receipt had been executed in favour of the Bank, in which the debtors and their family members surrendered the goods that had been found in the godown, and that these goods were valued at Rs 10,000/-. It was accepted as common ground that the goods pledged to the Bank were intended to secure a loan of approximately Rs 80,000, and therefore there could be no doubt that the goods actually discovered failed to satisfy the security requirement. The receipt listed 534 bags of goods, a figure that did not represent the total quantity of goods originally pledged. Consequently, the Bank had realised, upon inspection of the godown, that the security offered was wholly insufficient, and it was plausible that some persons present on the spot reported that the pledged goods had been removed. For this reason, the Bank set out all material facts and alleged either that a substantial part of the pledged goods had been taken away or that the goods remaining were far inadequate to cover the amount advanced. While the Court acknowledged the possibility of collusion between the Bank’s agent and the debtors, it concluded that, given the receipt establishing the value of the goods at Rs 10,000/-, it would be unreasonable to suggest that the Bank’s complaint was not filed in good faith.

The receipt that was prepared listed a total of five hundred thirty‑four bags, but this number did not correspond to the entire quantity of goods that had originally been pledged to the Bank. Because of this discrepancy, the Bank discovered, when it inspected the godown, that the security offered was completely inadequate. It is possible that, at the time of inspection, some persons reported that the pledged goods had already been removed from the premises. For that reason, the Bank set out all material facts and claimed that either a substantial portion of the pledged goods had been taken away or, alternatively, that the goods that remained were insufficient to cover the amount of the advance. The Court observed that, even if the Bank’s agent had colluded with the debtors, the receipt signed by the debtors and their family members valued the goods found in the godown at ten thousand rupees. In view of that valuation, it would be unreasonable to conclude that the Bank’s complaint was made in bad faith.

In addition, the Court noted that defendants two and three never appeared in person as witnesses. Instead, they left their father, mother, brothers and sister‑in‑law to conduct the litigation on their behalf. Throughout the proceedings in both suits, there were numerous issues that could only have been clarified by the testimony of defendants two and three. The Court listed several such issues: whether the defendants had actually pledged goods of a value equal to the amount advanced; if they had, whether the Bank’s agent had removed those goods; or whether the goods originally pledged were themselves of insufficient value and, through collusion with the agent, were misrepresented as valuable. The Court emphasized that the defendants should have sworn an oath to support the plaintiffs’ case when the validity of the transactions was challenged. The High Court had already remarked that defendants two and three deliberately avoided taking the witness stand, and the Court agreed that this observation was fully justified under the circumstances.

The Court further recorded another piece of evidence that favoured the Bank and concerned the later conduct of defendants two and three. It had been established that one of the debtors’ motor cars was sold to the Bank for five thousand rupees and subsequently taken back under a hire‑purchase agreement. This hire‑purchase arrangement formed part of the settlement of the dispute between the parties. The debtors later failed to pay the instalments required under that agreement, prompting the Bank to commence a suit. In that suit, the debtors filed an extensive written statement composed of twenty‑one paragraphs, but they made no allegation that the hire‑purchase agreement itself was void or part of an invalid transaction.

In this case, the Court observed that the claim made by the Bank could not be sustained, yet the suit in question was ultimately decreed in the Bank’s favour. The Court noted that the refusal of defendants 2 and 3 to challenge the validity of the hire‑purchase agreement was significant, indicating a deliberate avoidance of cross‑examination. The Court further explained that after the disputed transaction, the two defendants applied on 11 April 1947 for an additional advance from the Bank. The principal witness for the plaintiffs, Mr Ramakrishna Nair, who had previously served as the Bank’s Legal Adviser, supported this request, but the Bank ultimately declined it. The Court inferred that the Bank’s refusal to grant the further advance prompted the present plea asserting the invalidity of the earlier transactions. Consequently, the Court concluded that the subsequent conduct of defendants 2 and 3 demonstrated an unwillingness to face direct testimony, leading them to rely on relatives to contest the litigation. Turning to the oral evidence, the Court identified the principal witnesses on whose testimony the plaintiff’s counsel, Dr Seyid Muhammed, relied: Mr Nair, identified as PW 1, and Mr Pillai, identified as PW 3. The Court recorded that Mr Nair was a practising lawyer who, at the relevant time, held the position of Municipal Chairman of Alwaye, while Mr Pillai served as a Municipal Councillor. According to Mr Nair, he participated in executing the relevant documents and advised the Bank, stating that the documents were intended to settle a criminal case. He further claimed that he advised defendants 2 and 3 that execution of the mortgage deed and agreement would enable the criminal case to be dropped, attributing this advice to instructions from the Bank’s Managing Director and Secretary, Joseph. The Court noted that Mr Nair alleged he had claimed a fee of Rs 500 for assisting the Bank in filing the criminal complaint but received only Rs 200, leading to his dissatisfaction. Additionally, he claimed that his recommendations to extend loans to certain persons, including defendants 2 and 3, were ignored, contributing to his discontent. The High Court had held that Mr Nair’s statements could not be regarded as reliable or trustworthy, and the Court expressed no intention to overturn that view. After reviewing the totality of Mr Nair’s evidence, the Court remained reluctant to conclude that a binding agreement existed between the Bank and defendants 2 and 3 at the relevant time that would invoke the provisions of section 23 of the Act, given the overall unsatisfactory nature of the witness’s testimony and the absence of direct evidence from the defendants themselves.

In this case the Court expressed reluctance to find an illegal agreement under section 23 of the Act because the evidence supplied by the first witness was rather unsatisfactory and because defendants two and three, who were capable of testifying on the matter, did not appear before the Court. The burden of proving the illegal nature of the transactions rested on the plaintiffs, and the plaintiffs’ failure to call defendants two and three to give evidence weighed heavily in the Court’s final assessment of the issue.

The second witness relied upon by the plaintiffs, identified as Mr Pillai, had been described by the High Court as untrustworthy; nevertheless the deficiency in his testimony lay in its inability to clearly or expressly demonstrate that the parties had agreed that the debtors would execute a document in exchange for the Bank withdrawing the criminal proceedings. The answers he provided were vague and indefinite, and the Court considered it unsafe to base a conclusive finding against the Bank on such uncertain statements. The third witness, plaintiff No 1 who was the father and designated as PW 7, gave evidence that was obviously self‑interested. His decision to speak about the transaction while defendants two and three, who were directly involved, did not appear, substantially reduced the credibility of his testimony. After a careful review of all evidence together with the criticisms raised by the High Court, the Court was not prepared to accept Dr Seyid Muhammad’s contention that the material before the Court warranted overturning the High Court’s conclusion.

Another relevant point, which the Court found worthy of mention, concerned the testimony of the Bank’s Secretary, Joseph. According to his evidence, shortly after the inspection of the godown and before the criminal complaint was lodged, defendants two and three offered the Bank additional security to compensate for the shortfall in the value of the pledged goods. They requested that the Bank keep the findings of the inspection confidential and promised to provide sufficient extra security immediately. To fulfil that promise, they delivered to the Bank certain title documents relating to the property that was ultimately mortgaged, although not all the required title documents were handed over at the time the complaint was filed. Subsequently, the two contested documents were executed and the criminal complaint was withdrawn. Mr Desai, counsel for the Bank, relied on this testimony to argue that an agreement to furnish additional security had been reached between defendants two and three and the Bank prior to the filing of the complaint, and that it would therefore be unreasonable to infer from the mere sequence of events that the documents were executed solely to suppress the criminal prosecution.

In reviewing the matter, the Court observed that it could not conclude, merely from the subsequent conduct of the parties, that the documents which were later executed were intended to suppress the criminal prosecution. The learned counsel for the Bank, Mr. Desai, contended – a contention with which the Court agreed – that when the validity of an agreement is challenged on the ground that it contravenes public policy under section 23 of the Act, the party invoking that ground must be required to prove it by clear and satisfactory evidence. The Court warned that reliance on an unexamined chronology of events might blur the essential distinction between the true motive for entering into the agreement and the consideration that gave rise to it. The central issue, therefore, was whether the parties had offered additional security and executed the documents with the express purpose of obtaining the withdrawal of the criminal complaint by the Bank. To resolve this issue, the plaintiffs were required to produce convincing evidence establishing the absence of such a motive. After evaluating the material placed before it, the Court found that the evidence adduced by the plaintiffs fell far short of the required standard of satisfaction. Consequently, the Court affirmed the High Court’s overall conclusion that the plaintiffs had failed to meet their evidentiary burden, and it held that the High Court’s view could not be set aside.

The Court accordingly dismissed the appeals, ordering that they be dismissed with costs and a single set of hearing fees. Although the appellants had been permitted to proceed in forma pauperis, the Court directed that they nevertheless be required to pay the court‑fees that would have been payable had they not been allowed to lodge the appeal as paupers. In the final operative part of the judgment, the Court expressly stated that the appeals were dismissed.