Ouseph Poulo and Three Others Vs.
Catholic Union Bank Ltd. & Ors  INSC 126 (16 April 1964)
16/04/1964 GAJENDRAGADKAR, P.B.
(CJ) GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N.
GUPTA, K.C. DAS
CITATION: 1965 AIR 166 1964 SCR (7) 745
R 1992 SC 248 (59,61)
Contract-Documents executed in favour of Bank
as security for debts-Withdrawal of criminal complaint by Bank Documents, if
executed for stifling prosecution-Test-Indian Contract Act, 1872 (9 of 1872),
Two of the defendants in the two suits out of
which the present appeals arose borrowed a sum of Rs. 80,024-4-9 from the
respondent Bank in course of their business by pledging their goods. The Bank
discovered that there was shortage in the goods deposited and through its
Secretary lodged a complaint with the police that the said defendants, their
father and brother had in collusion with the local agent of the Bank
fraudulently removed part of the goods or, in the alternative, had made a
grossly inadequate deposit to cheat the Bank. The Police registered the case
and started investigation. The parties, thereafter settled their differences by
a transaction which consisted, among others, of a hypothecation bond for Rs.
30,000/covering immovable property and a Karar for Rs. 35,000/-, which were
executed in favour of the Bank by the parent of the said defendants, by the
said defendants themselves and their brother and his wife. On the Secretary of
the Bank stating to the Police that the Bank's claim had been settled and any further
action would be unnecessary the criminal proceeding was dropped. Thereafter the
said relatives of ;the two defendants who had executed the hypothecation bond
and the Karar brought a suit for the cancellation of the said documents on the
ground that they had been executed to stifle the criminal prosecution and were
as such unenforceable under s. 23 of the Indian Contract Act. The Bank sued for
recovery of the amount due on the Karar which was resisted on the same ground
that the document was unenforceable under s. 23 of the Contract Act.
The said defendant-debtors did not examine
themselves. They did not raise the plea of unenforceability in respect of a
hire-purchase agreement which formed a part of the transaction in question and
on which the Bank brought a suit against them and got a decree. After the said
settlement these defendants applied for further loan from the Bank.
There was evidence to show that an agreement
to furnish additional security had been reached between the said defendants and
the Bank even before the complaint was filed.
The trial Court held that both ;the documents
fell within the mischief of s. 23 of the Contract Act and decreed the first
suit and dismissed the second. The High Court on appeal took the contrary view
and reversed the decision of the trial Court accordingly. The plaintiffs in the
first suit appealed to this Court.
Held: It was well settled that agreements
made with the sole purpose of stifling prosecution were opposed to public
policy since the consideration which supported such agreements was itself
against public policy and could not, therefore, be 746 enforced. In India
however this doctrine was not applicable either to compoundable offences or to
offences which could be compounded with the leave of the Court.
The onus was strictly on the party that
impugned the trans-action to prove that it was based on an agreement to stifle
the prosecution. It must be able to show that on a certain consideration
proceeding from it the complainant in return promised to discontinue the
criminal proceeding and then alone the transaction would be one against public
V. Narasimha Raju v. V. Gurumurthy Raju,
 3 S.C.R.
687, Maharaja Srish Chandra Nandy v. Sapravat
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
Dasi, (1942) I.L.R. 1 Cal. 1, considered.
But in judging a particular agreement
distinction must be made between the motive for the agreement and the consideration
for it and subsequent events should not be allowed to confuse the issue.
It was clear in the present case that the
plaintiffs had failed to discharge the onus that lay on them and the decision
of the High Court was, therefore, correct.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 51 and 52 of 1962. Appeals from the judgment and order dated June 12, 1959
of the Kerala High Court in A.S. Nos. 538 and 539 of 1954.
V. A. Seyid Muhammad, for the appellants-,.
S. T. Desai and A. G.Pudissery, for the
respondent No. 1 April 15, 1964. The Judgment of the Court was delivered by
GAJENDRAGADKAR, C. J.-These two appeals arise from two suits Nos. 5 of 1947 and
32 of 1951; and the main point which they raise for our decision is whether the
two document& executed by the appellants and two of the respondents are
unenforceable as being opposed to public policy under section 23 of the Indian
Contract Act (hereinafter called the Act). The trial Court has answered this
question in the affirmative. while the High Court of Kerala has taken a
Poulo Varghese and Poulo Thommi who are the
sons of Ouseph Poulo were carrying on trade in hill produce at Always and in
the course of their business, they had borrowed from the branch of the Catholic
Union Bank Ltd. at Always large amounts. In that connection, they had pledged
goods with the Bank as security for the loan and the same had been deposited in
a godown the key of which remained with the Bank. It appears that on the 10th
February, 1947, 747 the Officers of the Head Office of the Bank inspected the
godown and it was discovered that there was considerable shortage of the goods
pledged. Thereupon, the Secretary of the Bank lodged a complaint with the
Police that Ouseph Poulo and his two sons who had dealings with the Bank as
well as Poulo Joseph, another son of Ouseph Poulo, had colluded with the local
Agent of the Bank and had fraudulently( removed a substantial part of the
pledged articles from the godown. The complaint also alleged alternatively that
if the goods had not been fraudulently removed, then the security offered by
Poulo Varghese and Poulo Thommi was grossly inadequate to cover the large amounts
advanced to them, and that was the result of cheating. The Police registered
this case and investigations began. At that time the parties settled their
differences and the two documents in question were ,executed.
The criminal complaint was filed on the 13th
February and the First Information Report was made on the 16th February, 1947.
On the 22nd February, a hypothecation bond (Ext. 26) was executed by Ouseph
Poulo, his wife, his three sons and the wife of another son in favour of the
Bank for Rs.
30,000/-. This bound covered immovable
properties belonging to the executants. On the 27th February, 1947, another
document was executed by the same parties in favour of the Bank for Rs.
35,000/-; this document was called Kollappirivu Karar (Ext. B.). On the same
day a receipt was executed by Poulo Varghese and Poulo Thommi which showed that
the goods in the godown were valued at Rs. 10,000/and were surrendered to the
Bank in partial satisfaction of the debts due from them to the Bank. This was
followed by a hirepurchase agreement by which the car owned by Poulo Thommi was
transferred to the Bank and the same was conveyed back to him on a
hire-purchase agreement-, the value of this car was taken to be Rs. 5,0001-.
The total amount due from Poulo Varghese and Poulo Thommi to the Bank was Rs.
80,024-5-9. As a result of the transactions
in which the parties entered, Rs. 10,000/were made good by surrendering to the
Bank the goods in the godown; Rs. 5,0001by transferring the car; Rs. 30,000/and
Rs. 35,000/by the hypothecation deed and the Karar respectively; that left a
balance of Rs. 24-5-9 which was paid in cash. After this transaction had thus
been concluded, on the 28th February the Secretary of the Bank made a statement
before the police that the Bank's claim had been settled and that he and the
Managing Director of the Bank was satisfied that no goods had been removed from
the godown as alleged in the complaint and that in collusion with the Agent of
the Bank, the debtors Poulo Varghese and Poulo Thommi had 748 cheated the Bank
by over-valuing the goods pledged, but that no further action was necessary to
be taken in that behalf.
In consequence, the criminal proceedings were
That, in substance, is the nature of the
transactions, the character of which falls to be determined in the present
On the 15th December, 1947, Ouseph Poulo, the
father, his son Joseph, Poulo's wife Aelia and Joseph's wife Thressia filed a
suit in forma paliperis seeking cancellation of the two documents in question
on the ground that they had been executed to stifle criminal prosecution and
that they were also vitiated by undue influence, coercion and threat. The first
defendant to this suit was the Bank and defendants 2 and 3 were the two debtors
Poulo Varghese and Poulo Thommi, the sons of Ouseph Poulo. This was suit No.
While this suit was pending, the Bank
instituted suit No. 32 of 1951 on the 26th February, 1951 and claimed to
recover the amount due on the Karar from all its executants. The persons who
had filed suit No. 5/1947 were defendants 1, 2, 5 & 6 in this suit and
defendants 3 & 4 were the debtors Poulo Varghere and Poulo Thommi. These
two sets of defendants filed two separate written statements'. but the common
plea raised by them was that the document on which the Bank's suit was based
was unenforceable under s. 23 of the Act. The trial Court substantially upheld
this defence with the result that suit No. 5 / 1947 was decreed and suit No. 32/1951
was dismissed. The Bank took this matter before the High Court by preferring
two appeals Nos. 538 & 539 of 1954.
The High Court has reversed the conclusion of
the trial Court in regard to the character of the impugned transaction and in
consequence, suit No. 5/1947 has been dismissed and suit No. 32/1951 has been
decreed. That is how the plaintiffs in suit No. 5 / 1947 have come to this
Court with a certificate issued by the High Court. During the course of this
judgment. we will refer to the Bank as the Bank. the persons who brought suit
No. 5/1947 as the plaintiffs and the two debtors as defendants 2 & 3.
Before dealing with the merits of the
controversy between the parties, it is necessary to state briefly the true
legal position in regard to the agreements which are held to be unenforceable
on the ground that the consideration for which they are made is opposed to
public policy. It is wellsettled that agreements which are made for stifling
prosecution are opposed to public policy and as such, they cannot be enforced.
The basis for this position is that the consideration which sup ports such
agreements is itself opposed to public policy. In India. this doctrine is not
applicable to compoundable offences, nor to offences which are compoundable
with the leave of the 749 court where the agreement in respect of such offences
is entered into by the parties with the leave of the Court.
With regard to non-compoundable offences,
however, the position is clear that no court of law can allow a private party
to take the administration of law in its own hands and settle the question as
to whether a particular offence has been committed or not, for itself. It is
obvious that if such a course is allowed to be adopted and agreements made
between the parties based' solely on the consideration of stifling criminal
prosecutions are sustained, the basic purpose of criminal law would be
defeated; such agreements may enable the guilty persons to escape punishment
and in some others they may conceivably impose an unconscionable burden on an
innocent party under the coercive process of a threat of the criminal
prosecution. In substance, where an agreement of this kind is made, it really
means that the complainant chooses to decide the fate of the complaint which he
has filed in a criminal court and that is clearly opposed to public policy.
In dealing with such agreements, it is,
however, necessary to bear in mind the distinction between the motive which may
operate in the mind of the complainant and the accused and which may indirectly
be responsible for the agreement and the consideration for such an agreement.
It is only where the agreement is supported by the prohibited consideration
that it falls within the mischief of the principle that agreements which intend
to stifle criminal prosecutions are invalid. The sequence of events, no doubt,
has relevance in dealing with this question; but from mere sequence it would
not be safe to infer the existence of the prohibited consideration. If in order
to put an end to criminal proceedings, an agreement is made in the execution of
which persons other than those who are charged in a criminal court join, that
may afford a piece of evidence that the agreement is supported by the
consideration that the criminal proceedings should be terminated. If the nature
of the liability imposed upon a debtor by a previous dealing is substantially
altered with a view to terminate the criminal proceedings, that itself may be
another factor which the Court may take into account in deciding whether the
agreement is supported by the prohibited consideration. But in weighing the
different relevant considerations in such a case, courts must inevitably
enquire: did one party to the transaction make his promise in exchange or part
exchange of promise of the other "not to prosecute or continue prosecuting"?
As Lord Atkin observed in Bhowanipur Banking Corporation, Ltd. v. Durgesh
Nandini Desi(1), "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 (1) (1942)I.L.R. I Cal. 1.
750 being made or promised by the offender or
his friends or relatives mercy shown by the injured party should be used as a
pretext for avoiding the reparation promised". That, however, is not to
say that if reparation is made as a consideration for a promise to give up
criminal proceedings, it would not amount to an abuse of the right of private
prosecution and would not attract the provisions of s. 23 of the Act. The main
point to remember is that the party challenging the validity of the impugned
transaction must show that it was based upon an agreement to stifle
prosecution. If it is shown that there was an agreement between the parties
that a certain consideration should proceed from the accused person to the
complainant in return for the promise of the complainant to discontinue the
criminal proceedings, that clearly is a transaction which is opposed to public
policy (vide V. Narasimha Raju v. V. Gurumurthy Raju(1), Maharaja Srish Chandra
Nandy v. Supravat Chandra(2), Sudhindra Kumar Ray Chaudhuri v. Ganesh Chandra
Ganguli(3); and Kamini Kumar Basu, v. Birendra Nath Basu(4).
What then are the facts in this case on which
the plaintiffs seek to challenge the correctness of the conclusion of the High
Court that the impugned transactions are not invalid? Dr. Seyid Muhammed for
the plaintiffs has urged that in dealing with the present dispute between the
parties, it is essential to remember that the complaint filed by the Bank
against defendants 2 & 3 is found to be not a bonafide complaint and that,
according to him, shows the true complexion of the impugned transactions. It is
true that the trial Court has found that the complaint made by the Bank was not
bonafide and the High Court has not in terms reversed that finding because the
High Court disbelieved the direct evidence led by the plaintiffs and held that
the agreement alleged by them was not proved. Dr. Seyid Muhammed, therefore,
contends that there is a finding recorded by the trial Court which has not been
reversed in appeal, and so, we should deal with the main point in the light of
this finding. If we had been satisfied that the complaint filed by the Bank was
deliberately and dishonestly filed, that no doubt would have assisted the
plaintiffs to a very large extent; but after carefully considering the material
evidence on this point, we are satisfied that the trial Court was in error in
coming to the conclusion that the Bank had filed the complaint malafide. The
complaint in terms made three material allegations. It alleged that though the
goods pledged by defendants 2 and 3 were of a very low value, they were (1)
 3 S.C.R. 687.
(3) 1939 I.L.R. I Cal. 241.
(2) A.I.R. 1940 Cal. 337.
(4) A.I.R. 1930 P.C. 100.
751 entered in the godown and in the relevant
books as being worth a much larger amount. It also alleged that the goods,
though of a cheap quality, were described as a very superior quality; and it
also said that substantial part of the goods pledged had been removed from the
godowns for the purpose of causing loss to the Bank and for making unlawful
This complaint was filed against defendants 2
and 3 and plaintiffs 1 and 2, and another son Ouseph Poulo who is not a party
to the present litigation. In regard to this last allegation of theft, the
complaint also averred that the key of the godown used to be with the agent of
the Bank at Alwaye and the said agent had absconded. The complaint mentioned
that the lorry in which the goods were removed bore the registration No. 2923
and it belonged to the Qunani Motor Service.
When the Secretary of the Bank gave evidence
he stated that on an enquiry being made on the spot, it was learnt that the
goods had been removed in the particular lorry; but, later, no evidence was
forthcoming to support that report. He, however, adhered to the case of the
Bank that the goods which were found in the godown were hopelessly inadequate
to serve as a security for the advance made to defendants 2 and
3. The argument is that the allegation as to
theft was dishonesty made by the Bank in its complaint in order to apply
coercive pressure against defendants 2 and 3 and the members of their family.
Prima facie, this argument does appear to be attractive, and if it had been
sustained, it might have helped the plaintiffs a good deal.
There is, however, clear evidence on the
record which negatives this contention. As we have already seen, a receipt was
passed in favour of the Bank surrendering the goods which were found in the
godown to the Bank and these goods have been priced at Rs. 10,000/-. It is
common ground that the goods which were pledged with the Bank were intended to
serve as a security for as much as Rs. 80,000 and odd; and so, there can be no
doubt whatever that the goods found did not satisfy that requirement. The
number of bags which were mentioned in the receipt its 534; that again does not
represent the total bags of goods pledged with the Bank. So, it is absolutely
clear that the Bank realised on inspection of the godown that the security
offered was wholly in-adequate and it may well be that on the spot some people
reported that the pledged goods had been removed.
That is why the Bank stated all the material
facts and alleged that either the substantial part of the goods which had been
pledged had been removed, or the goods which had been pledged were not at all
enough to cover the amount advanced. In any case, the agent of the Bank may
have colluded with the debtors. Now, in the view of the receipt passed by the
debtors and the members of their family in favour of the Bank in which the
value 752 of the goods found in the godown has been determined at Rs. 10,000/-,
it would be unreasonable to suggest that the complaint made by the Bank was not
Besides, in dealing with this dispute, it is
essential to remember that defendants 2 and 3 have not entered the witness-box
at all. They have left it to their father, mother, brothers and sister-in law
to fight this litigation. At every stage of the proceedings in both the suits,
we come across points of dispute on which defendants 2 and 3 alone could have
given evidence. Did they pledge goods worth the amount advanced to them? If
yes, did the Agent remove them, or were the goods which were originally pledged
not of enough value and by collusion with the Agent, representation was made
and accepted that they were valuable? On all these matters, it was necessary
that defendants 2 and 3 should have taken the oath to support the case made by
the plaintiffs when they challenged the validity of the transaction in
question. The High Court has seriously commented on the fact that defendants 2
and 3 have deliberately avoided to face the witness-box. In our opinion, in the
circumstances of this case, this comment is fully justified.
There is another piece of evidence which is
equally material and which is in favour of the Bank and that evidence relater,
to the subsequent conduct of defendants 2 and 3. We have already noticed that a
motor car belonging to one of the debtors was sold to the Bank for Rs. 5,0001and
taken back on hire-purchase agreement. Indeed, this hire-purchase agreement is
a part of the transaction which settled the dispute between the parties. It
appears that the debtors failed to pay the installments under the hire-purchase
agreement and that led to a suit by the Bank. In this suit, the debtors filed
an elaborate written statement containing 21 paragraphs; but we do not see, any
allegation that the hire-purchase agreement was a part of a transaction which
was invalid and as such, the claim made by the Bank was not sustainable. In
fact, this suit was decreed in favour of the Bank. The conduct of defendants 2
and 3 in not raising a plea against the validity of the hire-purchase agreement
is not without significance.
Similarly, it appears that after the impugned
transaction took place between the parties, defendants 2 and 3 applied to the
Bank for further advance on the 11th April, 1947 and Mr. Ramakrishna Nair who
is the principal witness for the plaintiffs in the present litigation and who
was the Legal Adviser of the Bank, Supported the debtor's request for advance.
This request was, however, turned down and it is obvious that the failure of
the Bank to accommodate the debtors ultimately led to the present plea that the
transactions in question are 753 invalid. Therefore, we are satisfied that the
subsequent conduct of defendants 2 and 3 clearly shows that they are not
prepared to take the risk of facing cross-examination and that is the reason
that they have left it to their relatives to fight the present litigation.
It is in the light of this background that we
have to consider the oral evidence in the case. The main witnesses on whose
testimony Dr. Seyid Muhammed has relied are Mr. Nair P.W. I and Mr. Pillai P.W.
3. Mr. Nair is a practising lawyer and was at the relevant time the Municipal
Chairman of Alwaye, whereas Mr. Pillai was a Municipal Councillor at that time.
According to Mr. Nair, he took part in the execution of the relevant documents
and advised the Bank.
He stated that the documents were so executed
for settling the criminal case. He also added that he told defendants 2 and 3
that if the mortgage deed and the agreement were got executed, the criminal
case could be dropped and his explanation was that he made that statement
because the Managing Director and the Bank's Secretary Joseph had told him to
that effect. It appears that for assisting the Bank in filing the criminal
complaint, this lawyer had claimed Rs. 5001-, but the Bank, paid him only Rs.
200/-. That was one reason why he was dissatisfied. It also appears that he
recommended to the Bank to give a loan to some persons including defendants 2
and 3 and his recommendation letters were ignored by the Bank. That war,
another reason why he was not feeling happy with the Bank. The High Court has
taken the view that the statements made by this witness cannot be regarded as
reliable or trustworthy; and we are not prepared to hold that the view taken by
the High Court is so erroneous that we should reverse it. In any case, reading
the evidence of this witness as a whole, we would be reluctant to come to the
conclusion that there was an agreement between the Bank and. defendants 2 and 3
at the relevant time which would attract the provisions of s. 23 of the Act.
Our reluctance is based on the somewhat unsatisfactory character of the
evidence given by this witness as well as on the fact that defendants 2 and 3
who could have given evidence on this point have not stepped.
into the witness-box. The onus to prove the
illegal character of the transactions was obviously on the plaintiffs and their
failure to examine defendants 2 and 3 must largely contributed to the final
decision on the issue.
Mr. Pillai who is the other witness on whose
evidence the, plaintiffs rely has been characterised by the High Court as
untrustworthy; but the infirmity in the evidence of this witness, is that his
evidence does not clearly or expressly lead to the conclusion that there was an
agreement between the parties 754 that the document should be executed by the
debtors in consideration for the Bank withdrawing the criminal proceedings. The
answers which he gave are somewhat vague and indefinite, and it would be unsafe
to make the said answers the basis of a definite finding against the Bank.
The last witness on whose evidence Dr. Seyid
Muhammed has relied is plaintiff No. 1, the father, P.W. 7. His evidence is
obviously interested and the fact that he has taken upon himself to speak to a
transaction when defendants 2 and 3 who were directly concerned in the
transaction did not come to give evidence, considerably detracts from the value
of his statements. Therefore, having carefully considered the evidence in the
light of criticism made by the High Court, we are not prepared to accept Dr.
Seyid Muhammad's argument that he has made out a case for reversing the
conclusion of the High Court.
In this connection, we ought to mention
another point which is not irrelevant. The evidence given by the Secretary of
the Bank, Joseph, shows that soon after the godown was inspected and before the
complaint was filed, defendants 2 and 3 offered to the Bank to make up for the
deficiency in the value of the pledged goods. They appealed to the Bank that
the discovery made by the bank on inspection of the godown should not be
disclosed to anybody and that they would immediately furnish sufficient
In order to carry out this promise, they in
fact delivered to the Bank certain documents of title in respect of the
property which was ultimately mortgaged to the Bank; but all the documents of
title were not handed over and that is where the matter stood when the
complaint war, filed.
Later, the two impugned documents were
executed and the complaint was withdrawn. The point on which Mr. Desai for the
Bank has relied is that the evidence of the Secretary shows that an agreement
to furnish additional security had been reached between defendants 2 and 3 on
the one hand and the Bank on the other even before the complaint was filed, and
so, it would be unreasonable to suggest merely from the sequence of subsequent
events that the impugned documents were executed with the object, and for the
consideration, of stifling the criminal prosecution. Mr. Desai argues, and we
think rightly, that where the validity of an agreement is impeached on the
ground that it is opposed to public policy under s. 23 of the Act, the party
setting up the plea must be called upon to prove that plea by clear and
satisfactory evidence. Reliance on a mere sequence of events may tend to
obliterate the real difference between the motive for the agreement and the
consideration for it. Did the parties offer to give security and execute the
documents in consideration for the withdrawal of the criminal complaint by the
Bank?-that is the question which has to be decided in the present appeals, 755
and in proving their case, the plaintiffs are expected to lead satisfactory
evidence; and in our opinion, the High Court is,, on the whole, right when it
came to the conclusion, that the evidence led by the plaintiffs is, far from
satisfactory. Therefore, we are satisfied that the view taken by the High Court
is right and cannot be reversed.
The result is, the appeals fail and are
dismissed with costs ( one set of hearing fees. The appellants have been
allowed to file their appeals in forma pauperis, and so, we direct that they
should pay court-fees which they would have had to pay if they had not been
allowed to appeal as paupers.