Seth Badri Prasad & Ors Vs. Seth
Nagarmal & Ors  INSC 127 (9 December 1958)
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
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).
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
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
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,
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,
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 February 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,
(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
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
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. Oxen ford(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 transactions of the association. Such a claim is clearly untenable.
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)  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.
(1) I.L.R.  Mad593.