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Karnati Mallikarjuna Rao and Co. Vs. Korlapati Krishna Murthy - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAndhra Pradesh High Court
Decided On
Case NumberSecond Appeal No. 1177 of 1980
Judge
Reported in[1986]60CompCas462(AP)
ActsAndhra Pradesh Chit Funds Act, 1971 - Sections 3 to 6, 10 to 12 and 56; Indian Trusts Act - Sections 84
AppellantKarnati Mallikarjuna Rao and Co.
RespondentKorlapati Krishna Murthy
Appellant AdvocateY.B. Tata Rao, Adv.
Respondent AdvocateChalla Seetharamayya, Adv.
Excerpt:
.....failed to pay anything subsequent to june 5, 1973, he became liable to pay a sum of rs. in a money-lender's suit, his failure to obtain a registration certificate is not regarded as a vital consideration. these considerations clearly indicate that section 11f was not enacted for the protection of persons dealing with the money-lenders. even otherwise the very ratio laid down therein is restricted to a case of a money-lender and it is needless for me to express whether the view taken therein is proper or not as it concerns a case of money-lender engaged in lending money without himself getting registered, and so it is clearly distinguishable from the case on hand. 233, 234) :it has been suggested before us on behalf of the petitioner that the subscribers must also be held to be..........revenue, the contract will not be regarded as prohibited by implication. the registration of a money-lender the c.p. and berar money-lenders act does not afford to his debtors any additional protection not available under the other provisions of the act. an unregistered money-lender can be punished only for the collective act of carrying on the business of money-lending and not for every loan advanced by him without a registration certificate. in a money-lender's suit, his failure to obtain a registration certificate is not regarded as a vital consideration. on the other hand, section 11h envisages that a loan advanced by an unregistered money-lender can be recovered by him if he subsequently obtains a registration certificate which is in force at the time of his suit. these.....
Judgment:

Seetharam Reddy, J.

1. Karnati Mallikharjuna and Rao Co. - a chit fund company - with its place of business at Khammam, filed a suit to recover a sum of Rs. 9,376 being the balance of principal and interest due on a promissory note executed by the defendant, a subscriber to the chit fund company, and was successful in the first court but on being unsuccessful in the second court came to this court in second appeal.

2. The relevant facts in brief giving rise to this second appeal are : The appellant - a registered partnership firm - commenced chit fund business in the year 1973 running a chit denomination of Rs. 10,000 with effect from January 1, 1973, and terminated on February 10, 1974. The members were to pay a sum of Rs. 250 in forty installments for every ten days and the respondent-defendant was one of such members. He successfully participated in the bid for Rs. 8,500 on June 1, 1973, which sum was paid to him by the appellant-plaintiff on June 2, 1973. Since the defendant-respondent had subscribed by the date of the bid a sum of Rs. 1,100, a promissory note was taken from his for a sum of Rs. 8,900 as a collateral security. The bid at the auction stipulated that the defendant was to pay the amount with interest at the rate of Rs. 1.06 per hundred per month. Subsequent to the bidding, the defendant paid Rs. 1,200 and in all the amount paid by him was Rs. 2,300 (only) and the chit was completed on February 10, 1974. Inasmuch as the defendant failed to pay anything subsequent to June 5, 1973, he became liable to pay a sum of Rs. 7,700 and interest of Rs. 1,376. Since there was refusal by the defendant stating that no sum was due, the suit is laid.

3. The trial court decreed the suit. On appeal, it was reversed holding that though the claim is supported by consideration, still since the non-compliance of the provisions of the Andhra Pradesh Chit Funds Act, 1971 ('the Act', for short) was not in dispute, it was fatal to the very maintenance of the suit and was also opposed to the provisions enacted in section 23 of the Indian Contract Act, 1872.

4. The contentions of the appellant - chit fund company - in the main are :

1. Non-compliance of the provisions enacted in the Act cannot non-suit the plaintiff as there was nothing in the said Act rendering the contract null and void, particularly so, when there is a penal provision under section 56 of the said Act non-compliance of the same, and

2. Where the object of imposing penalty for non-compliance of the said provisions is merely a protection of revenue, the transaction or contract will not be regarded as prohibited by the statute by implication.

5. Sri Challa Seetharamayya appointed as amicus curiae (as usual after deep study assisted this court, which is invaluable and for which the court is obliged) submitted :

1. The provisions of the Act are highly stringent and prohibit any one to conduct a chit without registering the bye-laws with the Registrar and without obtaining a certificate of commencement; and the statute thus renders the contract illegal either as formed or as performed - in the former the very creation of the contract is prohibited and cannot be enforced, whereas in the latter, though the contract is lawful at the inception, its performance is prohibited, and

2. there is a distinction between revenue enactments where there has been fraud on revenue and breaches of Act of Legislature, which for their object protect the public.

6. Before analysing the rival arguments, the very statutory provisions of the Act and the object for which the same was enacted may be noticed.

7. The scheme of the chit fund was to collect from the contributors certain amounts in cash and thereafter put the fund to auction. The person who offers the highest discount gets the fund less the discount (which will be distributed among the contributors). The highest bidder purchases the chit by offering (i) the highest discount, and (ii) a bond for the future payment of installments. These twin ingredient constitute consideration for the subject-matter of the chit which he purchases. The purchaser may also execute a promissory note for the said amount, which, however, is not a loan transaction and the amount mentioned in the promissory note dies not represent any debt (vide P. N. Raghavan Pattar v. S. Arumugham, AIR 1935 Mad 385). One can take judicial notice of the fact that of late there is mushroom growth of chit fund organisations wherein members of the public invest their amounts and the organisations were playing fraud on the public monies as there was no statutory control over such bodies. So, the State Legislature brought out Act IX of 1971 in March, 1971.

8. The objects and reasons of the said Act are : Of late chit fund companies are promoted or conducted without any safeguards in respect of the monies invested. In order to have proper control by the State Government over the transactions of the chit funds, and to regulate the business thereof, it is proposed to undertake legislation so as to secure the observance on the part of the promoters of the chit funds.

9. Under sections 3 to 6 of the Act, no person shall start any chit unless the proposed bye-laws are registered and invitation for subscription to the chit is prohibited without the bye-laws being registered. A copy of every chit agreement will have to be filed with the Registrar. Under section 7, no person shall commence any auction unless he has obtained a certificate of commencement from the Registrar. Under sections 10 to 12, minutes of the proceedings of every draw shall be prepared and entered in a book and a copy of the same shall have to be filed with the Registrar. Every foreman shall furnish security of property to the satisfaction of the Registrar before applying for the certificate of commencement for the realisation of the chit amount. Under section 56, penal provision for contravention of the provisions of the Act has been laid down.

10. Now, the case-law cited at the Bar for and against the appellant may be noticed :

For the appellant : A Full Bench of the Madhya Pradesh High Court in Janki Bai Chunnilal v. Ratan Melu, : AIR1962MP117 , held (head-note) :

'When an enactment merely imposes a penalty, without declaring a contract made in contravention of it to be illegal or void, the imposition of the penalty, by itself and without more, does not necessarily imply a prohibition of the contract. In such cases, the question always is whether the Legislature intended to prohibit the contract. This must be decided upon a construction of the statute. If the object of the enactment, or one of its objects, in imposing the penalty is to protect the general public or any class thereof, it will be construed, in the absence of any other indication of contrary intention expressed in the statute, as implying a prohibition of the contract. On the other hand, if the object of imposing the penalty is merely the protection of the revenue, the contract will not be regarded as prohibited by implication.

The registration of a money-lender the C.P. and Berar Money-Lenders Act does not afford to his debtors any additional protection not available under the other provisions of the Act. An unregistered money-lender can be punished only for the collective act of carrying on the business of money-lending and not for every loan advanced by him without a registration certificate. In a money-lender's suit, his failure to obtain a registration certificate is not regarded as a vital consideration. On the other hand, section 11H envisages that a loan advanced by an unregistered money-lender can be recovered by him if he subsequently obtains a registration certificate which is in force at the time of his suit. These considerations clearly indicate that section 11F was not enacted for the protection of persons dealing with the money-lenders. Its only object appears to be protection of the revenue. Therefore, a loan advanced by an unregistered money-lender cannot be regarded as impliedly prohibited by section 11F.

Hence, if a money-lender does not have, and cannot produce, a registration certificate covering the date on which he advanced a loan, his suit for recovery of that loan is for that reason alone, not liable to be dismissed. It will be sufficient compliance of section 11H if, during the pendency of the suit, he produces a registration certificate which is valid at the time of its production.'

11. Against the appellant : In Victorian Daylesford Syndicate Ltd. v. Dott [1905] 2 Ch 624, the Chancery Division was faced with a situation where under the Money-Lenders Act, 1900, a money-lender must register himself under the Act and, secondly, he shall not enter into any agreement in the course of his business as a money-lender otherwise than in his registered name, and the argument advanced was that inasmuch as the party had not complied with the first of those provisions, he shall not be amenable to the second and thus he escapes altogether from the provisions of the Act. This was not acceptable to the court and so it was held (at page 629) :

'If the unregistered money-lender be produced, ......... it would be necessary to aver that he was a money-lender, and an issue of fact might be whether he was a money-lender or not. If that issue did arise, it may be that the consent of the law officer would be necessary. It is unnecessary for me to determine that ...... To my mind it does not at all follow as a matter of construction of the Act that sub-clause 1(c) does not apply to the contract of an unregistered money-lender. In my opinion it does. It follows from this that the defendant has committed a breach of that clause of the Act of Parliament which requires him, he being a money-lender, to contract in the course of his business as a money-lender in a registered name.'

12. It was then further held (at page 629, 630) :

'There is no question that a contract which is prohibited, whether expressly or by implication, by a statute is illegal and cannot be enforced. I have to see whether the contract is in this case prohibited expressly or by implication. For this purpose, statutes may be grouped under two heads - those in which a penalty is imposed against doing an act for the purposes only of the protection of the revenue, and those in which a penalty is imposed upon an act not merely for revenue purposes, but also for the protection of the public ....... There is no question of protection of the revenue here at all. The whole purpose is the protection of the public. The money-lender has to be registered, and has to trade in his registered name obviously and notoriously for the protection of those who deal with him. The purpose is a public purpose, and, therefore, upon all the authorities the act for the doing of which a penalty is imposed is an act which is impliedly prohibited by the statute, and is consequently illegal.'

13. In Anderson Ltd. v. Daniel [1924] 1 KB 138 (CA), it is held (head-note) :

'By section 1, sub-section 1, of the Fertilizers and feeding Stuffs Act, 1906 : 'Every person who sells for use as a fertilizer of the soil any article which has been subjected to any artificial process in the United Kingdom, or which has been imported from abroad, shall give to the purchaser an invoice stating ...... what are the respective percentages (if any)' of certain chemical substances contained in the article.

By section 6, sub-section 1 : 'If any person who sells any article for use as a fertilizer of the soil ...... (a) Fails without reasonable excuse to give, on or before or as soon as possible after the delivery of the article, the invoice required by this Act; ...... he shall, without prejudice to any civil liability, be liable on summary conviction' to a penalty :-

Held, that, as the object of the statute in requiring the vendor to give the statutory invoice and imposing on him a penalty in the event of his default is to protect the purchasers of fertilisers, the effect of non-compliance with the requirement is not merely to render the vendor liable to the penalty, but also to make the sale illegal and preclude the vendor from suing for the price. The fact that, owing to the nature of the article sold as a fertiliser, an analysis of it would necessitate so expensive a process as to make it impossible to sell it after analysis at a profit, affords no 'reasonable excuse' within the meaning of section 6, sub-section 1, for omitting to give the invoice required by the Act.'

14. In Chai Sau Yin v. Liew Kwee Sam [1962] Ac 304 (PC), the Privy Council held (at page 311) :

'If, on the other hand, the contracts were prohibited by law and the prohibition was made in the public interest, no claim can be entertained : 'The court must enforce the prohibition even though the person breaking the law relies upon his own illegality.''

15. In Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185 (SC), section 108 of the Companies Act, which reads (omitting the irrelevant portions) :

'A company shall not register a transfer of shares .... unless a proper instrument of transfer duly stamped and executed by or on behalf of the transfer and by or on behalf of the transferee ...... has been delivered to the company along with the certificate relating to the shares or debentures or if no such certificate is in existence along with the letter of allotment of the shares .......'

16. fell for consideration of the Supreme Court as to whether the provisions were mandatory or not; and with reference to section 629A of the Act, which prescribed a penalty where no specific penalty was provided elsewhere, the Supreme Court held that it is a question of construction in each case whether the Legislature intended to prohibit the doing of the act altogether, or merely to make the person who did it liable to pay the penalty.

17. On the above conspectus what could be deduced is :

1. If an Act of Legislature prohibits doing of a particular act, then if it is contracted to do in non-compliance of the provisions of the said Act, it will be illegal and void.

2. If the object of the enactment in imposing penalty is to protect the general public or any class thereof, in the absence of any express provision to the contra, it will be construed as implying a prohibition of the contract.

3. If the object of imposition of penalty is merely the protection of revenue and not the public interest, the contract will not be regarded as prohibited by implication.

4. The mere provision imposing penalty on the creation or performance of a contract in non-compliance of the provisions of the Act may not necessarily lead to the conclusion that the contract is unenforceable, as the cause of action could at all be maintained and in order to non-suit, one must further satisfy that the provisions were not meant for the protection of the public interest of public policy.

18. If we bear in mind the above, it is not at all difficult in so far as the case on hand is concerned to hold that the appellant in this case shall not be allowed to maintain the suit. May be section 56 provides for the imposition of penalty for the transgression of various provisions of the Act, but that would not by itself achieve the desired result which the Legislature so avowedly intended. The dominant object is to deter the chit fund organisations from embarking upon transactions of that nature without complying with the mandatory provisions of the Act, meant to safeguard the members of the public at large with whose funds gathered by way of contributions the chit fund bodies would otherwise play ducks and drakes, but for the controlled measures which are stringent in their nature provided by the Act.

19. In this case, the aspect of revenue is very insignificant. Therefore, the appellant cannot seek refuge in it so as to attract the argument that the Act is mainly meant for the protection of the revenue and, hence, the appellant could maintain the suit by taking shelter in the decision in Janki Bai Chunnilal v. Ratan Melu, : AIR1962MP117 . Even the Full Bench of the Madhya Pradesh High Court in the above Janki Bai's case made the observations that if the object of the enactment in imposing the penalty is to protect the interests of the general public or any class thereof, it will be construed - in the absence of any indication to the contra in the statute - as implying a prohibition of the contract. On the other hand, if the object of imposition of penalty is merely as a measure of protection of the revenue, the contract will not be regarded as prohibited by implication. This observation, which is vital, cannot go to the rescue of the appellant's case. Even otherwise the very ratio laid down therein is restricted to a case of a money-lender and it is needless for me to express whether the view taken therein is proper or not as it concerns a case of money-lender engaged in lending money without himself getting registered, and so it is clearly distinguishable from the case on hand.

20. The courts of judicature have gone even to the extent of stating that a money-lender who lends amounts without getting himself registered with the authority concerned as per the Act will not be entitled to maintain the suit notwithstanding the penal provisions.

21. From the foregoing, it is manifest that the appellant cannot be allowed to hold that he is entitled to maintain the suit. Before parting with this, there is one more aspect which is fairly important that needs to be addressed and considered. The question is whether in the instant circumstances, the subscribers could be allowed to claim refund of the subscriptions from the chit fund organisation, though the organisation did not comply with the provisions of the Act. An important decision in this behalf of a Full Bench of the Madras High Court in Sesha Ayyar v. Krishna Ayyar, AIR 1936 Mad 225, may usefully be referred to.

Per Cornish J. (p. 229) :

'The general rule is that money paid or lent to a defendant to carry out an illegal purpose cannot be recovered if the purpose has been carried out either wholly or to a substantial extent ... This rule is embodied in section 84, Trusts Act. But there are exceptions. On exception is that when the Act creating the illegality has been passed for the purpose of protecting a particular class of persons, persons belonging to that class may recover payments made by them. The classic authority is 2 Cowp 792, where Lord Mansfield said : 'Where contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men, the one, from their situation and condition, being liable to be oppressed or imposed upon by the other, then the parties are not in pari delicto : and in furtherance of these statutes, the person injured after the transaction is finished and completed, may bring his action and defeat the contract.'

Per Varadachariar J. (PP. 233, 234) :

'It has been suggested before us on behalf of the petitioner that the subscribers must also be held to be guilty at least as abettors ...

In dealing with actions by subscribers against promoters, a distinction must be drawn between suits for recovery of the prize of the enforcement of any of the other terms of the contract and suits for refund of moneys paid, because in the latter case there will be no question or 'enforcement of the illegal contract' ... But the view taken in may of the Madras cases that even a claim for refund must fail seems to me with all respect equally open to question. Even here the learned judges were (if I may say so) right in holding that the subscriber cannot in such cases claim the benefit of section 65, Contract Act; but he is in my opinion entitled to rely on section 84, Trusts Act ... Lord Mansfield recognised the right of the subscriber to claim a refund from the lottery office-keeper, on the principle that lottery was prohibited by statute for the sake of protecting one set of men from another set of men', and that, therefore, the parties are not in pari delicto. This principle which has been reaffirmed in ... has not been adverted to in any of the Madras cases which disallowed the subscriber's claim for refund.'

Per Wadsworth J. : (p. 237) :

'The next question is, to what extent the plaintiff can be said to be a party to the illegality of the action of the defendants He was a mere subscriber. There is, so far as I am aware no evidence that he took part in the organisation of the lottery or even that he was present at the drawing, though under the prospectus he had a right to be present if he so wished. He certainly cannot be said to have committed an offence under section 294A. It is suggested that he may be an abettor of such an offence. Clearly he did not abet the publication of this lottery proposal for it was published presumably before he paid over his money and it was by the publication that he was induced to join the scheme. Can he be said to have abetted the keeping of the place for the drawing of the lots I do not think he can. Granted that the scheme under which he bought a ticket contemplated the keeping of a place for the drawing of the lots, the mere purchase of the plaintiff of a ticket would not in my opinion amount to such intentional aiding or conspiracy as are contemplated under section 107, Penal Code. When the plaintiff bought his ticket, he intended to buy a chance in the lottery and an incident of that lottery was the drawing at a stated place. It was presumably within the power of defendants as managers to alter that place. The plaintiff so far as we know had nothing to do with the draw. We do not know whether any expense was incurred in connection with the draw or that the plaintiff's money went to finance it. All that we know is that he bought a ticket which was to be drawn at a particular place. I do not consider that this amounts to an abetment of the keeping of the place at which the ticket was to be drawn.'

22. I have no hesitation in falling in line with the above and hold that the subscribers to the chit fund, in a situation of the kind contemplated, are entitled to the refund of their contributions; also in view of the provisions of section 84 of the Indian Trusts Act, which reads :

'Where the owner of property transfers it to another for an illegal purpose and such purpose is not carried into execution, or the transferor is not as guilty as the transfereed, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor.'

23. It may be held that the chit fund body, in such circumstances, will be deemed to be holding the monies of the subscribers in trust, and so is liable to pay back the same.

24. In the result, the appeal is dismissed. No costs.


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