Ouseph Poulo And Three Others 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: Civil Appeals Nos. 51 and 52 of 1962

Decision Date: 16/04/1964

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

The Court recorded that the matter titled Ouseph Poulo and Three Others versus Catholic Union Bank Ltd. and Others had been decided on 16 April 1964 by a bench of the Supreme Court of India consisting of Chief Justice P. B. Gajendragadkar, Justice K. N. Wanchoo and Justice K. C. Das Gupta, and that the judgment was reported in 1965 AIR 166 and 1964 SCR (7) 745. The petitioners were Ouseph Poulo and three other individuals, and the respondents were Catholic Union Bank Ltd. and other associated parties. The principal issue concerned contracts executed in favour of the bank as security for debts and the effect of a withdrawal of a criminal complaint on the enforceability of such documents under section 23 of the Indian Contract Act, 1872. In the factual backdrop, two of the defendants in the two suits that gave rise to the present appeals had borrowed a sum of Rs 80,024‑4‑9 from the bank in the ordinary course of their business by pledging their goods as security. The bank later discovered a shortage in the goods that had been deposited and, through its secretary, lodged a police complaint alleging that the defendants, together with their father and brother and in collusion with the bank’s local agent, had either fraudulently removed part of the goods or had made an inadequate deposit to cheat the bank. The police registered the case and commenced an investigation. Subsequently the parties settled their differences by executing a transaction that included, among other things, a hypothecation bond for Rs 30,000 securing immovable property and a Karar for Rs 35,000, both executed in favour of the bank by the parent of the defendants, by the defendants themselves, and by their brother and his wife. After the bank’s secretary informed the police that the bank’s claim had been settled and that further action was unnecessary, the criminal proceeding was withdrawn. Following the settlement, the relatives who had executed the hypothecation bond and the Karar instituted a suit seeking the cancellation of those documents on the ground that they had been executed to suppress the criminal prosecution and were therefore unenforceable under section 23 of the Indian Contract Act. The bank, in turn, sued for recovery of the amount due under the Karar, and the defendants resisted on the same ground of unenforceability under section 23. The defendants‑debtors did not examine themselves and did not raise the defence of unenforceability in respect of a hire‑purchase agreement that formed part of the transaction, on which the bank had also sued and obtained a decree. After the settlement the defendants applied for an additional loan from the bank, and evidence showed that an agreement to provide further security had been reached between the defendants and the bank before the criminal complaint was filed. The trial Court held that both the hypothecation bond and the Karar fell within the mischief contemplated by section 23 of the Contract Act.

In the earlier proceedings, the trial court had granted relief in the first suit and had dismissed the second suit. When the aggrieved party appealed, the High Court examined the same matters and reached a conclusion that differed from that of the trial court; it therefore set aside the trial court’s judgment and restored the opposite result. The plaintiffs who were successful in the first suit before the trial court were dissatisfied with the High Court’s reversal and consequently filed an appeal before this Court. The Court observed that it was a well‑settled principle of law that any agreement whose sole purpose was to suppress a criminal prosecution contravened public policy, because the very consideration supporting such an agreement was itself repugnant to public policy and consequently could not be enforced. However, the Court noted that the doctrine did not extend to offences that were compoundable, nor to offences that could be compounded with the permission of the Court. The Court further explained that the burden of proof rested entirely on the party challenging the transaction; that party had to demonstrate that the transaction was founded on an agreement to silence prosecution. Specifically, the challenger must show that, in exchange for a defined consideration, the complainant promised to discontinue the criminal proceeding, and only on that basis would the transaction be void as contrary to public policy. The Court referred to earlier authorities such as V. Narasimha Raju v. V. Gurumurthy Raju, [1963] 3 S.C.R. 687, Maharaja Srish Chandra Nandy v. Sapravat Chandra A.I.R. 1940 Cal. 337, Sudhindra Kumar Ray Chaudhuri v. Ganesh Chandra Ganguli, 1939 I.L.R. I Cal. 241 and Kamini Kumar Basu v. Birendra Nath Basu, A.I.R. 1930 P.C. 100, referred to. Bhowanipur Banking Corporation Ltd. v. Duresh Nandini Dasi, (1942) I.L.R. 1 Cal. 1, considered. The Court warned that in evaluating any particular agreement, one must distinguish between the motive behind the agreement and the consideration given for it, and must not permit subsequent events to obscure that distinction. Applying this principle to the present case, the Court concluded that the plaintiffs had not discharged the burden placed on them, and therefore affirmed the High Court’s decision.

The matter before this Court fell under the civil appellate jurisdiction, involving Civil Appeals numbered 51 and 52 of the year 1962. Both appeals were directed against the judgment and order dated 12 June 1959 issued by the Kerala High Court in appeal numbers 538 and 539 of 1954. Counsel for the appellants and counsel for the first respondent appeared on 15 April 1964, and the judgment was delivered by Chief Justice Gajendragadkar. The two appeals originated from two separate suits, one instituted in 1947 and the other in 1951. The central question that the Court was called upon to determine was whether the two documents executed by the appellants together with two of the respondents were unenforceable because they were opposed to public policy under section 23 of the Indian Contract Act. The trial court had answered this question in the affirmative, holding the documents void, whereas the Kerala High Court had taken the opposite view and upheld their enforceability. The factual background involved Poulo Varghese and Poulo Thommi, who were the sons of Ouseph Poulo, and who were engaged in the trade of hill produce at a place called Always. In the ordinary course of their business, they obtained large loans from the branch of Catholic Union Bank Limited situated at Always. To secure these advances, they pledged certain goods to the bank, and those pledged articles were subsequently

The goods that had been pledged by Poulo Varghese and Poulo Thommi were stored in a godown whose key was retained by the Catholic Union Bank Ltd. On 10 February 1947 officers from the Bank’s head office inspected the godown and discovered that a substantial portion of the pledged inventory was missing. Following this discovery the Secretary of the Bank lodged a police complaint alleging that Ouseph Poulo, his two sons who dealt with the Bank, and another son, Poulo Joseph, had conspired with the Bank’s local agent to fraudulently remove a large part of the pledged articles from the godown. The complaint further asserted, as an alternative allegation, that if the goods had not been removed dishonestly, the security offered by Varghese and Thommi would have been grossly insufficient to cover the large sums advanced to them, and that this insufficiency amounted to cheating. The police registered the case and commenced investigations. Shortly thereafter the parties settled their disputes and executed two documents that are now the subject of the present proceedings. The criminal complaint was formally filed on 13 February and the First Information Report was recorded on 16 February 1947. On 22 February a hypothecation bond (Exhibit 26) was signed by Ouseph Poulo, his wife, his three sons and the wife of another son, granting the Bank a charge of Rs 30,000 over the executants’ immovable property. Five days later, on 27 February 1947, the same parties executed another instrument in favour of the Bank for Rs 35,000, identified as a Kollappirivu Karar (Exhibit B). On the same day Varghese and Thommi executed a receipt indicating that the goods remaining in the godown were valued at Rs 10,000 and were surrendered to the Bank as partial satisfaction of their debts. Subsequently a hire‑purchase agreement was entered into whereby a car owned by Thommi, valued at Rs 5,000, was transferred to the Bank and later conveyed back to him under a hire‑purchase arrangement. The total liability of Varghese and Thommi to the Bank amounted to Rs 80,024 ½. Through the series of transactions, Rs 10,000 was satisfied by the surrender of the godown goods, Rs 5,000 by the transfer of the car, and Rs 30,000 and Rs 35,000 by the hypothecation deed and the Karar respectively, leaving a cash balance of Rs 24,529 to be paid. After these settlements, on 28 February the Bank’s Secretary gave a statement to the police that the Bank’s claim had been fully settled, that he and the Managing Director were satisfied that no goods had been removed from the godown as originally alleged, and that, in collusion with the Bank’s agent, the debtors Varghese and Thommi had cheated the Bank by over‑valuing the pledged goods, concluding that no further action was required.

It was observed that the goods which had been pledged were valued at an amount higher than their actual worth, yet the authorities concluded that no further steps were required in that respect. Accordingly, the criminal proceedings that had been initiated were discontinued. The substance of those transactions, and the true character of the dealings, were identified as matters that needed to be examined in the appeals presently before the Court. On 15 December 1947, Ouseph Poulo together with his son Joseph, Ouseph’s wife Aelia and Joseph’s wife Thressia instituted a suit in forma pauperis. Their objective was to obtain cancellation of two particular documents, alleging that those documents had been executed for the purpose of suppressing a criminal prosecution and that they were also tainted by undue influence, coercion and threat. In that suit, the Bank was named as the first defendant, while the second and third defendants were the two debtors, Poulo Varghese and Poulo Thommi, who were the sons of Ouseph Poulo. This action was recorded as suit number 5 of 1947. While suit 5 of 1947 remained pending, the Bank commenced another proceeding, identified as suit number 32 of 1951, on 26 February 1951. In that second suit the Bank sought recovery of the amount due under the Karar from all persons who had executed it. The parties who had originally instituted suit 5 of 1947 appeared as defendants 1, 2, 5 and 6 in suit 32 of 1951, whereas defendants 3 and 4 in the latter suit were the debtors Poulo Varghese and Poulo Thommi. Both groups of defendants filed separate written statements, yet each set raised a common defence, contending that the document on which the Bank relied was unenforceable pursuant to section 23 of the governing Act. The trial court gave substantial support to that defence, resulting in a decree in favour of the plaintiffs in suit 5 of 1947 and the dismissal of suit 32 of 1951. The Bank appealed that outcome to the High Court, filing appeals numbered 538 and 539 of 1954. The High Court set aside the trial court’s findings concerning the nature of the disputed transaction, consequently overturning the earlier decree. As a result, the High Court dismissed suit 5 of 1947 and granted a decree in suit 32 of 1951. Following that decision, the plaintiffs from suit 5 of 1947 obtained a certificate from the High Court and brought the matter before this Court.

For the purpose of this judgment, the Bank will be referred to simply as “the Bank”, the individuals who instituted suit 5 of 1947 will be termed “the plaintiffs”, and the two debtors will be identified as defendants 2 and 3. Prior to addressing the substantive issues raised by the parties, it is necessary to outline briefly the established legal position concerning agreements that are deemed unenforceable because the consideration underlying them is contrary to public policy. It is a well‑settled principle that agreements entered into for the purpose of suppressing a criminal prosecution are contrary to public policy and, therefore, cannot be enforced. The rationale for this rule is that the consideration supporting such agreements is itself opposed to public policy. In the jurisdiction of India, this principle does not apply to offences that are compoundable, nor to offences that may be compounded with the permission of the court where the agreement concerning those offences is entered into by the parties having obtained the requisite court leave.

In this portion of the judgment the Court explained that with respect to non‑compoundable offences the law is clear: no court may permit a private individual to assume the functions of the State by determining for himself whether a particular offence has been committed. The Court stressed that allowing such private administration would defeat the core purpose of criminal law, because it would enable agreements that are based solely on the aim of suppressing criminal prosecution to be enforced. Such agreements could allow guilty persons to escape punishment and could also, in some instances, place an unreasonable burden on an innocent party through the coercive threat of criminal prosecution. In substance, the Court noted that when an agreement of this type is entered into, it effectively permits the complainant to decide the fate of the criminal complaint he has lodged, a result that the Court held to be plainly opposed to public policy.

The Court further observed that it is necessary to distinguish between the motive that may be present in the minds of the complainant and the accused and the consideration that actually supports the agreement. Only where the agreement is supported by the prohibited consideration—namely, a promise not to prosecute—does it fall within the principle that agreements intended to stifle criminal prosecutions are void. While the chronological sequence of events may have some relevance to the inquiry, the Court warned that mere sequence alone does not reliably indicate the presence of the prohibited consideration.

The Court pointed out that if, in order to bring an end to criminal proceedings, an agreement is executed with the participation of persons who are not themselves charged in the criminal case, that participation may serve as evidence that the agreement is motivated by the desire to terminate the prosecution. Similarly, if the liability imposed on a debtor by a prior transaction is substantially altered with the purpose of ending the criminal proceedings, the Court may regard that alteration as another factor suggesting that the agreement is supported by the prohibited consideration.

In weighing all relevant considerations, the Court stated that a court must inevitably ask whether one party made a promise in exchange for, or as part of an exchange for, the other party’s promise not to prosecute or to continue prosecuting. Referring to Lord Atkin’s observation in Bhowanipur Banking Corporation Ltd. v. Durgesh Nandini Desi, the Court quoted that reparation by the offender is a duty to be encouraged, and that it would be a public mischief if such reparation were used as a pretext to avoid the restitution that had been promised.

The Court explained that when a payment is offered as consideration for a promise to abandon criminal proceedings, such a payment does not constitute an abuse of the right of private prosecution and therefore does not trigger the provisions of section 23 of the Act. The essential requirement for a party seeking to invalidate a transaction on this ground is to demonstrate that the transaction was based on an agreement to suppress prosecution. If it is shown that the parties agreed that the accused would provide a specified consideration to the complainant in exchange for the complainant’s promise to discontinue the criminal action, the transaction is clearly contrary to public policy, as reiterated in the authorities of V. Narasimha Raju v. V. Gurumurthy Raju, Maharaja Srish Chandra Nandy v. Supravat Chandra, Sudhindra Kumar Ray Chaudhuri v. Ganesh Chandra Ganguli, and Kamini Kumar Basu v. Birendra Nath Basu.

The plaintiffs in the present case challenge the High Court’s conclusion that the disputed transactions are not void. Counsel for the plaintiffs argued that the bank’s complaint against defendants 2 and 3 was not a genuine complaint, and that this lack of bona‑fide complaint revealed the true nature of the impugned transactions. The trial court had indeed held that the bank’s complaint was not bona‑fide, and the High Court had not expressly overturned that finding; instead, the High Court dismissed the direct evidence presented by the plaintiffs and held that the alleged agreement was not proved. Consequently, counsel contended that the trial‑court finding, which remained unreversed on appeal, should be given effect. The Court noted that if it were satisfied that the bank’s complaint was filed deliberately and dishonestly, it would have greatly assisted the plaintiffs. However, after a careful review of the material evidence, the Court concluded that the trial court erred in finding the bank’s complaint to be malicious. The complaint contained three material allegations: first, that although the goods pledged by defendants 2 and 3 were of very low value, they had been entered in the godown and related books as being worth a much larger amount; second, that the goods, although of cheap quality, were described as being of very superior quality; and third, that a substantial portion of the pledged goods had been removed from the godowns with the intent of causing loss to the bank and obtaining unlawful profit.

The complaint alleged that the Bank had suffered a loss and an unlawful profit because the goods pledged by defendants 2 and 3 were of low value yet were entered in the godown records as being worth a much larger amount, described as of superior quality, and that a substantial portion of the pledged goods had been removed, causing loss to the Bank and allowing the defendants to make an unlawful profit. The complaint was filed against defendants 2 and 3, plaintiffs 1 and 2, and another son, Ouseph Poulo, who was not a party to the present litigation. Regarding the allegation of theft, the complaint further asserted that the key to the godown had been in the possession of the Bank’s agent at Alwaye and that this agent had absconded. The complaint identified the lorry that allegedly conveyed the removed goods as bearing registration number 2923 and belonging to Qunani Motor Service. When the Secretary of the Bank gave evidence, he stated that an enquiry made on the spot revealed that the goods had been removed in that particular lorry; however, no further evidence was produced to substantiate that report. Nevertheless, the Secretary adhered to the Bank’s position that the goods found in the godown were hopelessly inadequate to serve as security for the advance made to defendants 2 and 3. The contention advanced by the respondents was that the allegation of theft was a dishonest fabrication by the Bank intended to exert coercive pressure on defendants 2 and 3 and their family members. Prima facie, that argument appeared attractive and, if sustained, could have significantly aided the plaintiffs. Nonetheless, the record contained clear evidence that negated this contention.

The evidence showed that a receipt had been passed in favour of the Bank, surrendering the goods discovered in the godown, and that those goods were valued at Rs 10,000. It was a common admission that the goods originally pledged to the Bank were intended to secure an amount of approximately Rs 80,000, and consequently the goods found could not satisfy that requirement. The receipt listed 534 bags, a figure that did not represent the total number of bags originally pledged. It was therefore evident that, upon inspection of the godown, the Bank realised that the security offered was wholly inadequate and that, perhaps, some persons had reported the removal of the pledged goods on the spot. For that reason, the Bank stated all material facts and alleged either that a substantial part of the pledged goods had been removed or that the pledged goods were insufficient to cover the amount advanced. In either event, it was possible that the Bank’s agent had colluded with the debtors. Considering the receipt signed by the debtors and their family members, which fixed the value of the goods found at Rs 10,000, it would be unreasonable to suggest that the Bank’s complaint was not made in good faith.

The Court noted that the Bank was not acting in good faith. It was also essential to remember that defendants two and three never appeared in the witness box; instead, they relied on their father, mother, brothers and sister‑in‑law to conduct the litigation. Throughout the proceedings in both suits, the Court encountered several disputed issues that could have been resolved only by testimony from defendants two and three. The Court asked whether those defendants had pledged goods equal to the amount advanced to them. If they had, the Court considered whether the Bank’s agent had removed the goods, or whether the goods originally pledged were insufficient in value and, through collusion with the agent, were represented as being valuable. For each of these questions, the Court held that defendants two and three should have taken an oath and testified to support the plaintiffs’ case when the validity of the transaction was challenged. The High Court had previously remarked that defendants two and three deliberately avoided appearing as witnesses, and the Court agreed that this observation was fully justified given the circumstances. The Court further identified another piece of evidence that favored the Bank and related to the later conduct of defendants two and three. It had been observed that a motor car belonging to one of the debtors was sold to the Bank for Rs. 5,0001‑ and subsequently taken back under a hire‑purchase agreement. That hire‑purchase agreement formed part of the overall settlement between the parties. The debtors later failed to pay the instalments under that agreement, prompting the Bank to file a suit. In that suit, the debtors filed an extensive written statement of twenty‑one paragraphs, but they made no allegation that the hire‑purchase agreement was part of an invalid transaction; consequently, the Bank’s claim remained sustainable. The suit was ultimately decreed in favour of the Bank. The Court observed that the failure of defendants two and three to challenge the validity of the hire‑purchase agreement was significant. Moreover, after the disputed transaction, defendants two and three applied to the Bank for an additional advance on 11 April 1947. The Bank’s principal witness, Mr. Ramakrishna Nair, who also served as the Bank’s legal adviser, supported the debtors’ request, but the Bank refused the advance. The Court found that the Bank’s refusal led the debtors to contend that the earlier transactions were invalid. Consequently, the Court was satisfied that the subsequent conduct of defendants two and three demonstrated their unwillingness to risk cross‑examination, which explained why they left their relatives to conduct the present litigation.

In this case, the Court examined the oral evidence presented in the litigation against the background previously described. The principal witnesses whose testimony Dr. Seyid Muhammed relied upon were identified as Mr. Nair, designated as plaintiff‑witness I, and Mr. Pillai, designated as plaintiff‑witness III. Mr. Nair was a practising lawyer and, at the relevant time, held the office of Municipal Chairman of Alwaye, while Mr. Pillai served as a Municipal Councillor during the same period. According to the testimony of Mr. Nair, he participated in the execution of the documents that are the subject of the dispute and provided legal advice to the Bank concerning those documents. He asserted that the documents were executed for the purpose of settling a criminal case that was then pending against the debtors. He further stated that he informed defendants 2 and 3 that, should the mortgage deed and the accompanying agreement be executed, the criminal proceedings could be withdrawn, and he explained that this instruction came from the Bank’s Managing Director and its Secretary, Joseph. It emerged from the evidence that the lawyer claimed a fee of Rs 5,001 for assisting the Bank in filing the criminal complaint, but the Bank discharged only Rs 200, a shortfall that the witness said contributed to his dissatisfaction with the Bank. The witness also alleged that he had recommended that the Bank extend a loan to several persons, including defendants 2 and 3, and that his recommendation letters were disregarded by the Bank, providing another reason for his unhappiness. The High Court had concluded that the statements of this witness could not be regarded as reliable or trustworthy, and the present Court is not prepared to find that the High Court’s assessment was so erroneous as to require reversal. Even after reading the entirety of Mr. Nair’s evidence, the Court remains reluctant to infer that a binding agreement existed between the Bank and defendants 2 and 3 at the relevant time that would bring the transaction within the scope of section 23 of the Act. This reluctance is based both on the unsatisfactory nature of the witness’s testimony and on the fact that defendants 2 and 3, who could have clarified the matter, did not appear as witnesses. The burden of proving the illegality of the transactions lay with the plaintiffs, and their failure to examine defendants 2 and 3 substantially influenced the final decision on that issue. The second principal witness, Mr. Pillai, was described by the High Court as untrustworthy, and his evidence fails to clearly or expressly demonstrate the existence of an agreement whereby the debtors would execute documents in return for the Bank withdrawing the criminal proceedings. His answers were found to be vague and indefinite, and the Court considers it unsafe to base a definitive finding against the Bank on such uncertain testimony. The last witness on

In this case the Court observed that the evidence presented by plaintiff No. 1, who is the father and identified as P.W. 7, was plainly interested. The Court noted that the father had taken it upon himself to describe the transaction while defendants 2 and 3, who were directly concerned with the transaction, had not appeared to give testimony. This circumstance, according to the Court, substantially reduced the credibility and value of the father’s statements. After a careful examination of the evidence together with the criticisms previously expressed by the High Court, the Court declined to accept the argument advanced by Dr Seyid Muhammed that a reversal of the High Court’s conclusion was warranted.

The Court then turned to the evidence of the Bank’s Secretary, Joseph. That evidence showed that, shortly after the godown was inspected and before the criminal complaint was filed, defendants 2 and 3 offered to the Bank to remedy the deficiency in the value of the pledged goods. They appealed to the Bank that the findings of the inspection should not be disclosed to anyone and that they would immediately provide sufficient additional security. In order to fulfil that promise, the two defendants actually delivered to the Bank certain documents of title relating to the property that was eventually mortgaged to the Bank; however, not all the documents of title were handed over, and that was the state of affairs when the complaint was filed. Subsequently, the two disputed documents were executed and the complaint was withdrawn. The representative for the Bank, Mr Desai, relied on the Secretary’s evidence to argue that an agreement to furnish additional security had been reached between defendants 2 and 3 on the one side and the Bank on the other before the complaint was filed. Consequently, the Bank contended that it would be unreasonable to infer, solely from the subsequent sequence of events, that the disputed documents were executed with the purpose of, and for the consideration of, suppressing the criminal prosecution.

Mr Desai further argued, and the Court agreed, that when the validity of an agreement is challenged on the ground that it is opposed to public policy under section 23 of the Act, the party raising that plea must prove it by clear and satisfactory evidence. Reliance on a mere sequence of events, the Court held, may obscure the essential distinction between the motive for the agreement and the consideration for it. The critical question, therefore, was whether the parties offered additional security and executed the documents in consideration for the withdrawal of the criminal complaint by the Bank. The burden of proving this proposition lay with the plaintiffs, who were required to lead satisfactory evidence. In the Court’s opinion, the High Court’s assessment that the plaintiffs’ evidence was far from satisfactory was correct. Accordingly, the Court was satisfied that the view taken by the High Court should not be disturbed.

In this case, the Court concluded that the judgment of the High Court was legally correct and that there were no grounds on which that judgment could be set aside. Accordingly, the Court found that the appeals brought before it could not succeed. As a result, the Court ordered that the appeals be dismissed. In addition to dismissing the appeals, the Court directed that the appellants bear the costs of the proceedings. Specifically, the Court required the appellants to pay one set of hearing fees that had been incurred during the appeal process. The Court also noted that the appellants had been permitted to lodge their appeals in forma pauperis, which meant they were allowed to proceed without paying the usual court fees at the time of filing because of their inability to pay. Nevertheless, the Court held that, despite this temporary relief, the appellants were still liable to pay the court fees that would have been payable had they not been allowed to appeal as paupers. Consequently, the Court ordered that the appellants satisfy that fee liability. The final order of the Court therefore dismissed the appeals, imposed the costs, and required payment of the applicable court fees.