Case Laws Companies Act Seth Badri Prasad and others Vs Seth Nagarmal and Others

PETITIONER:

SETH BADRI PRASAD AND OTHERS

Vs.

RESPONDENT:

SETH NAGARMAL AND OTHERS

DATE OF JUDGMENT:

09/12/1958

BENCH:
DAS, S.K.
BENCH:
DAS, S.K.
IMAM, SYED JAFFER
KAPUR, J.L.

CITATION:
1959 AIR 559 1959 SCR Supl. (1) 709
CITATOR INFO :
R 1965 SC 304 (4)
R 1979 SC1165 (15)
D 1988 SC1531 (185)
ACT:
Maintainability of Suit-Unregistered company-Suit by members
for accounts-New Point-Rewa Companies Act, 1955, s. 4(2)
Indian Partnership Act, 1932 (IX of 1932), s. 69(3)(a).

 

HEADNOTE:
When cloth control was introduced in Rewa State, 25 cloth
dealers of Budhar, including the thirteen appellants, formed
themselves into an Association to collect the quota of cloth
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 been decontrolled 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 found 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
maintainable 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 Association had no remedy against each other
in respect of its dealings and transactions. The appellants
objected to the raising of the 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 that the Association existed of
which accounts were to be taken. The Court could not assist
the plaintiffs in obtaining their share of the profits made
by the illegal Association.
U.Sein Po v. U. Phyu, (1929) I.L.R. 7 Rang. 540, not
applicable.
Held further, that the new point ought to be allowed 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 firm
was
97
770
not illegal. Besides, the suit was not one for accounts of
a dissolved firm but of an illegal Association which was in
existence id at the relevant time.

 

JUDGMENT:
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 District Judge, Umaria, in Civil Original Suit
No. 17/19/17 of 1950.
Sardar Bahadur, for the appellants.
Achhru Ram, B. C. Misra and P. K. Chakravarty, for the
respondents.
1958. December 9. The Judgment of the Court was delivered
by
S.K. DAS, J.-This is an appeal on 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, Nagar Mal, 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 the 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
771
capital of the association which was one lac of rupees. No
formal Articles of Association were written; nor Se was it
registered. The Association functioned through a President
and a pioneer worker; they kept accounts and distributed the
profits. Respondent no. 1, Nagar Mal, was the President of
the said Association from January 1946 to June 26, 1946.
Before that, Seth Badri Prasad, one of the plaintiffs
appellants before 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 Febr-
uary 1948 ; then cloth was decontrolled and the work of the
Association came to an end. On June 25, 1949, thirteen
members of the Association out of the twenty-five 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 given 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 (Nagar Mal) be ordered to give the
accounts of the Cloth Association, Budhar, from the
beginning of the month of April 1946 to June 26, 1946;
(b)that defendant no. 1 be ordered to pay the amount,
whatever is found due to the plaintiffs on account being
done, along with interest at the rate of annas 12 per cent.
per month; and
(c)that interest for the period of the suit and 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, some 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 below show that the real dispute between the parties
related to the sale of cloth of a consignment known as the
Gwalior consignment. It appears that in April 1946 a
consignment of 666 bales of cloth had come from Gwalior
772
and an order was passed by the Cloth Control Officer that
the consignment would be allotted to Nagar Mal who would
give the Association an option of taking over the
consignment; if the Association did not exercise the option,
the consignment would be taken over by Nagar Mal. It
appears that there was some dispute as to whether the other
members of the Association were willing to take over the
consignment of Gwalior cloth. We are 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 ultimately
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 share 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 Nagar 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 Pradesh, 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
773
the provisions of s. 4 of the Rewa State Companies Act,
1935. Sub-section (1) of s. 4 relates to banking business.
We are concerned with sub-s. (2) of s. 4 which is in these
terms:-
” 4(2). No company, association or partnership, consisting
of more than twenty persons shall be formed for the purpose
of carrying on any other, business that has for its object
the acquisition of gain by the company, association or
partnership, or by the individual 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
appellants and who took time to consider the point, has now
conceded before us that the aforesaid provision was in force
in the Rewa State at the relevant time when the Association
was formed at Budhar and he, has further conceded that the
said provision was in force till the Indian Companies Act
came into force in the said area in 1950. We 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 of respondent no.1 is
this. It is contended that by reason 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 further because it was
not registered as a Company under the Rewa State Companies
Act, 1935; nor was it formed in pursuance of a charter from
the Durbar. It has been contended before 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 against each other for contribution or
apportionment in respect of the partnership dealings and
transactions. Therefore, no suit for accounts lay at the
instance of the plaintiffs-appellants, who were also members
of the said illegal Association.
We consider that this contention is sound and must be
upheld. On behalf of the appellants, Mr. Sardar
774
Bahadur has urged the following points in answer to the
preliminary objection: firstly, he has contended that we
should not allow the preliminary objection to be raised at
this late stage; secondly, he has contended that even though
the Association was in contravention of s. 4(2) of the Rewa
State Companies Act, 1935, the purpose of the Association
was not illegal and a suit was maintainable for recovery of
the contributions made by the appellants and also for
accounts; thirdly, he has contended that on the analogy of
s. 69(3)(a) of the Indian Partnership Act, 1932, it should
be held that the 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 contentions of learned
counsel for the appellants. The first contention 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
Association 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. (1). In that case sub-s. (1) of s. 7 of the
Indian Stamp Act (11 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 suggestion 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 argue the
(1)(1924) L.R. 52 I.A. 126, 128.
775
point at the outset: Nixon v. Alibion Marine Insurance Co.,
(1867) L. R. 2 Ex. 338. The enactment is prohibitory. It
is not confined to affording a party a protection, of which
he may avail himself or not as he pleases “.
In Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra
Nandi (1), the provisions of s. 72 of the Indian Contract
Act were overlooked by the High Court; the section was only
mentioned in passing by the Subordinate 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 our view, the same principle applies in the
present case and s. 4(2) of the Rewa State Companies Act,
1935, being prohibitory in nature cannot be excluded from
consideration even though the bar of that provision has been
raised at this late stage.
On his second contention learned counsel for 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 (1) declaring the
respective shares of the subscribers to that association and
(ii) directing that the plaintiffs be repaid their shares
after reconverting 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 was 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 learned
Judges referred to the decision in Sheppard v. Oxenford(3)
and Butt v. Monteaux (4), and rested their decision on the
following passage of ” Lindley on Partnership ” (the learned
Judges quoted the passage at p. 145 of the 9th edition but
the same passage will 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. 540.
(3) (1855) 1 K. & J. 491 ; 69 E.R. 552.
(4) (1854) 1 K. & J. 98; 69 E.R. 345.
776
Although, therefore, the subscribers to an illegal company
have not a right to an account of the dealings and
transactions of the company and of the profits made thereby,
they have a right to have their subscriptions returned; and
the necessary account taken; and even though the moneys
subscribed have been laid out in the purchase of land and
other things for the purpose of the company the subscribers
are entitled to have that 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 concern, and
then in repayment of the subscriptions. In such cases no
illegal contract 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 accounts in enforcement
of an illegal contract of partnership. 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 made so
that they may have their full share of the profits made by
the illegal association. The principles which must apply in
the present case are those referred to in the following
passage at p. 145 of Lindley on Partnership (11th 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
777
a court of justice. Were it not so, those who-ex hypothesi-
have been guilty of a breach of the law, would obtain the
aid of the law in enforcing demands arising out of that very
breach; and not only would all laws be infringed with
impunity, but, what is worse, their very infringement would
become a ground for obtaining relief from those whose
business it is to enforce them. For these reasons,
therefore, and not from 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
proceedings 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 stands on a different
footing. It is a claim by some members of an illegal
association 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 unten-
able. 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 made 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
(1) [1926] 1 Ch. 657.
(2)A.I.R. 1930 P.C. 300.
98
778
think is correct, was expressed in Kumaraswami v.
Chinnathambi (1).
As to the last contention of learned counsel for the
appellants, based on the analogy of s. 69(3)(a) of the
Partnership Act, it is enough to point out that under the
Indian Partnership Act, 1932, an unregistered firm is not
illegal; there is no direct compulsion that a partnership
firm must be registered, though the disabilities 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. [1951] Mad- 593.
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