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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

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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

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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

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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

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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,

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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-

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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. 779