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Mewa Ram Vs. Ram Gopal and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAllahabad
Decided On
Reported inAIR1926All591
AppellantMewa Ram
RespondentRam Gopal and ors.
Excerpt:
- - i am by no means satisfied that a claim for a refund of the original subscriptions in the present case could be maintained. another difficulty is that it is an admitted fact that for all these years since 1902 a good deal of profits that were made by the factories has been distributed amongst the various partners. it seems to me that the case for the prisoner is gone the moment his counsel is obliged to admit that if his contention be good the property belonged to nobody, and could of to speak be scrambled for. it would be a very strong thing to hold that an association, not expressly sanctioned by law, yet not criminal, is incapable of holding any property at all. the fact that the property was acquired by a contract void in law may, as between parties to the transaction under.....sulaiman, j.1. the dispute relates to two ginning factories started under an agreement, dated the 10th november, 1902. according to the plaint, as originally filed, there were more than 20 shareholders in the factories from the very beginning and the partnership was invalid, though it was alleged that the shareholders had no knowledge of its invalidity. the main reliefs claimed were:(a) (1) for declaration that the partnership was invalid;(2) for a refund of the plaintiff's subscription out of the proceeds realized by an auction sale of the factories, or(3) for exclusion of the plaintiff from the partnership and a refund of his subscription in some other proper way.(b) in the alternative a division of the properties of the factories and, if proper, an auction sale of the property and an.....
Judgment:

Sulaiman, J.

1. The dispute relates to two ginning factories started under an agreement, dated the 10th November, 1902. According to the plaint, as originally filed, there were more than 20 shareholders in the factories from the very beginning and the partnership was invalid, though it was alleged that the shareholders had no knowledge of its invalidity. The main reliefs claimed were:

(A) (1) For declaration that the partnership was invalid;

(2) for a refund of the plaintiff's subscription out of the proceeds realized by an auction sale of the factories, or

(3) for exclusion of the plaintiff from the partnership and a refund of his subscription in some other proper way.

(B) In the alternative a division of the properties of the factories and, if proper, an auction sale of the property and an award to the plaintiff of a 1/8th share in their sale proceeds.

2. Subsequently the plaintiff amended his plaint and added a clause that though the partnership was originally invalid it became valid in 1915 because the number of shareholders became less than 20. Accordingly a further relief was added for a dissolution of the partnership or a declaration that it was dissolved and taking of accounts. In the plaint there was no mention of the amount of the subscriptions contributed by the plaintiff or the other partners, but in paragraph 9 it was alleged that the rights of the plaintiff in respect of the properties of the factories subsisted and he was the owner of a 1/8th share. In paragraph 10 it was stated that the defendant, Lala Mewa Ram, was the manager of the factories ln his written statement the defendant-appellant admitted that the plaintiff was the owner of 1/8th share and also that the defendant was the manager. The substantial pleas raised in defence were that the partnership was illegal, that the suit was not maintainable and that the claim was barred by time. Although admitting his liability to render accounts for one year, the defendants denied any further liability. In the trial Court the plaintiff abandoned the position that the partnership became legal at any stage and conceded that the number of partners had always been more than 20 since 1902. It therefore became common ground that the partnership which admittedly had been formed for the purpose of gain was for want of registration illegal under Section 4 of the Indian Companies Act.

3. The learned Subordinate Judge found that the plaintiff was not entitled to obtain dissolution or any decree for accounts. He further found that a claim for a refund of the subscription was barred by time. He however came to the conclusion that although the association was an illegal one the various parties to the agreement did not lose their right as owners of properties. He accordingly gave the plaintiff a decree for partition of the property and appointed a Receiver. He further held that inasmuch as the property was not capable of partition by actual division the stock-in-trade should be sold by auction. Only L. Mewa Ram, Defendant No, 1 who is the manager of the factories, has appealed. The other defendants have submitted to the decree. It cannot be doubted for a moment that this partnership contravened the provision of Section 4 of the Indian Companies Act which requires that any company or association or partnership, consisting of more than 20 persons formed for the purpose of carrying on any business that has for its objects the acquisition of gain must be registered as a company. The Association, therefore, is wholly illegal and cannot as such be recognized by the Court. Any person who comes to Court and asks for its assistance in a way which would necessarily imply a recognition of the existence of such an association is out of Court. The Court must refuse to help him even though he may have to suffer an injustice. On the other hand if the plaintiff does not want anything in furtherance of the objects of illegal association nor asks the Court to recognize the association as such, but seeks remedy in order to put a stop to this illegal association, his claim cannot be dismissed so summarily. If his position as owner of some property even though that property might have been acquired in some way not recognized by law or even prohibited by it, can be recognized then he may have a locus standi to ask the Court to do justice between the parties. It is therefore, necessary to consider in detail each of the reliefs claimed by the plaintiff and see whether it is possible to grant any of them.

4. A declaration that the partnership is illegal and invalid cannot obviously be refused. If an illegal association is carrying on business, it is possible that under certain circumstances its members may be liable to a third party who in ignorance of his illegality deals with it. It is, therefore, only fair that if a member is anxious to relieve himself from all further liabilities he should be allowed to come to Court and obtain a declaration that the association is illegal. Under certain circumstances he may even ask for some kind of injunction restraining the other members from proclaiming that he is associated with them. The relief for dissolution however has no meaning. When the partnership is illegal ab initio no question of its dissolution, or even a declaration that it is dissolved, can arise. An illegal partnership never came into existence and no legal partnership has therefore dissolved or can be dissolved. A relief for the taking of account of the illegal association (as distinct from an account from some person who may be an agent) is also out of the question. For such a relief necessarily implies 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 plaintiff in getting accounts made, so that he may have his full share of the profits made by the illegal association.

5. Connected with dissolution or account taking would be a relief for its winding up. The grant of such a relief also would imply a recognition of the association as such. There is ample justification for holding that a winding up order of an illegal association cannot be made. Padstow Total Loss and Collision Assurance Association In re (1882) 20 Ch D 137 is a clear authority for the proposition that a winding up order cannot be properly made in the case of an association which is required by law to be registered and yet is unregistered, for the law cannot take cognizance of such a partnership. Similarly, in South West Atlantic Steamship Company Ch D 763, a petition for winding up presented by solicitors, who had themselves helped in establishing an illegal association, was refused. The case of Lowes v. Governor and Company for Smelting down Lead with Pit and Sea Oobl (1904) 2 Ch D 196 where Warington, J.,had ordered the winding up of a society formed in the year 1817, is distinguishable. The judgment does not show that the learned Judge regarded the Society as one carried on for the purpose of gain so as to offend against the statute. It nowhere states that the society was an illegal one because it was not registered. That seems to be the reason why the earlier case in Padstow Total Loss and Collision Assurance Association (1882) 20 Ch D 137 was not referred to. The prayer for a refund of the original subscription stands on a slightly different footing. Where a person has subscribed to the funds of an illegal association and wants to recover his subscription back before the legal object has been carried out, there may be no difficulty in decreeing his claim. But there may be something to be said against him if the illegal association has already been formed and is being carried on for a considerably long time; but there is some authority in support of a claim for refund of such subscription. Lindley no Partnership (8th Edition, Chapter 6, Section 2, p. 131) says:

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 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 re-converted into money and to have it applied as far as it will go in payment of the debts and liabilities to the concern and then in re-payment 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.

6. The authority relied upon by Lindley is Harvey v. Collett (1846) 15 Sim 332. It may, however, be questioned whether the case relied upon was a direct authority in point. That was not a case of an illegal association but one which was shown by the directors to be impracticable. The plaintiff's case, in fact, was that the defendants were projecting a manifest fraud, a mere bubble, a mere scheme to cheat. On those allegations the Vice-Chancellor declined to consider it as a bill for the purpose of recovering from the defendants the amount or what may have been paid for his shares or the original value of thorn and grant him the detailed reliefs asked for by his bill. He did, however, suggest that if the project had not appeared to be a fraud in the knowledge of the directors at the time when they issued the prospectus, the position might have been different.

7. The learned Subordinate Judge has conceded that the claim for a refund of the original subscription would lie; but he has hold that it had become time-barred. I am by no means satisfied that a claim for a refund of the original subscriptions in the present case could be maintained. In the first place, the plaint nowhere suggests what amounts were subscribed by the plaintiff and the other partners. It merely specifies the shares which they hold under the agreement. It is, therefore, not clear what amount the plaintiff can be said to claim as a refund. Another difficulty is that it is an admitted fact that for all these years since 1902 a good deal of profits that were made by the factories has been distributed amongst the various partners. The plaintiff therefore might have got back much more than what he originally contributed. Ho cannot be allowed to ignore the amount, which ha has already received as a share of the profits, and yet claim a refund of the whole of his original subscription. This may not be quite just and fair to the other partners; for if there has been an ultimate loss, the plaintiff would not be sharing in the loss at all.

8. On the other hand, there may be some difficulty in holding that the claim for a refund has become barred by time. No doubt there is authority for this view to be found in the case of Ram Kumar v. Nemchand AIR 1921 All 73 where the relief claimed by the plaintiff, as modified by his vakil's statement, was to be paid the capital put into the partnership out of the sale proceeds of the partnership property. The claim was held to have become barred by limitation as the cause of action was deemed to have accrued as soon as the money was paid. In the present case, however, there are two circumstances which may distinguish it. In the first place, amounts have been paid to the plaintiff and other partners up to the year 1976-7 Sambat. In the second place, the contesting defendant is admittedly the manager of these factories on behalf of the members. Under the deed of partnership it was his duty to manage and supervise the goods and the articles appertaining to the factories, to keep the entire accounts in order and prepare balance-sheets, to divide the profits among the partners and to render account to them, to realize money from the partners, to spend it and in fact to do all the business relating to the factories as the representative of all the partners.' He was authorized on behalf of all the partners to take all legal steps and he was to be treated as 'the authorized agent of all the partners.'

9. If the defendant-appellant realized the subscription from the plaintiff as his agent and has kept it or converted it into some other form of property and has all these years been paying sums to the plaintiff supposed to be his share of the profits on the original outlay, there may be considerable difficulty in holding that the claim is barred by time. I, however, hold that after the illegal association has been formed and has been carried on for nearly 19 years and the plaintiff himself has been deriving profits out of it and has received considerable sums of money, it is no longer open to him to claim a refund of his original subscription on the mere ground that he has now decided to sever his connexion from this illegal association. The question whether the plaintiff is entitled to ask for a partition of the properties of the factories is a much more difficult one. No direct authority in point has been cited before us either Indian, English or American.

10. The question has, therefore, to be answered on the basis of general principles and inferences to be drawn from observations made by eminent Judges in some cases. Although an illegal association as such cannot be recognized at all, the point to consider is whether property which has been acquired in the name of such an illegal association out of money contributed by its members, does not vest in the members; and, if it does so vest, whether any one of them is not entitled to ask for a partition as a co-owner. It is obviously not only expedient but just and proper, that the business carried on by an illegal association should be put a stop to and that its organization be broken up. If this is to happen, what is to become of the assets supposed to belong to such an association? Are those assets to be deemed to belong to the members, or are they to be nobody's property? If they are to be nobody's property and are to be remain in the possession of anyone who happens to seize them, there is likely to be a scramble for possession. I can find no authority for holding that properties, which have been acquired out of moneys contributed by a group of persons who have formed themselves into an association not recognized by law, do not vest in the persons who contributed the amounts. On the other hand, in several cases there are remarks by learned Judges suggesting that such a property does belong to them.

11. In Queen v. Tankard [1894] 1 QBD 548 Lord Coleridge, C.J., observed:

It is true that they have no legal existence as a company, association, or co-partnership, but they are none the less beneficial owners of property.... It is untrue to say that they are not beneficial owners in fact. It seems to me that the case for the prisoner is gone the moment his counsel is obliged to admit that if his contention be good the property belonged to nobody, and could of to speak be scrambled for. It would be a very strong thing to hold that an association, not expressly sanctioned by law, yet not criminal, is incapable of holding any property at all.

12. The case was a criminal case and on facts it bears no analogy whatsoever to the present case, but the view expressed by Lord Coleridge that the members of an illegal association were beneficial owners in fact carries weight. The other five learned Judges concurred.

13. Gordon v. Chief Commissioner of Metropolitan Police [1910] 2 KBD 1080 also has no analogy to the present case on its facts. Vaughan Williams, L.J., however, observed:

It is not sufficient to induce the Court to refuse its assistance to a plaintiff that ho has acquired the property under a contract which is void in law. The property must have been acquired in an illegal transaction. The fact that the property was acquired by a contract void in law may, as between parties to the transaction under which the property is alleged to have passed to the plaintiff, afford a good defence, but it will not be a good ground upon which the Court will refuse its assistance.

14. Fletcher Moulton, L.J., observed:

Here the plaintiff became possessed of the money under circumstances which did not prevent the property passing to him with the possession. He is, therefore, simply in the position of a man suing for money belonging to him which has been taken and is being retained by a person who has no right to it. There is no turpis cause in the matter The money is admittedly money of the plaintiff, and his action to obtain the re-payment of it from the defendant rests on nothing but that fact. He is not asking the Court to enforce any illegal contract or to grant relief but solely on the unjustifiable detention by the defendant of his money.

15. Later on he observed;

But I know of no principle of law or decision or even dictum which renders money which has become the property of an individual liable to be taken and kept with impunity by any person who chances to get hold of it merely because it has been acquired by some wrongful or prohibited act.

16. Buckley, L.J. observed:

The plaintiff here is not enforcing any rights directly resulting to him from his carrying on business as a book-maker; he is not recovering bets; he is seeking to recover from the defendant, who has seized it, money which was his and nonetheless his because it became his by virtue of a gambling transaction.

17. I admit that the case is no authority in point, but the observations of Vaughan Williams, Fletcher Moulton and Buckley L. JJ., shows that they recognized that a person may own property although the same has been acquired in the course of some illegal transaction. In the case of One and All Sickness and Accident Assurance Association, In re. [1909] 25T LK 674 the association was not found by Parker, J., to have been an illegal association, because it did not appear that it was for the purpose of carrying on any business. The learned Judge however observed:

Even if this was an illegal association, he would not have said at any rate without further consideration, that those who received these moneys from persons invited to subscribe their moneys wore not liable to account for those moneys.

18. He was apparently inclined to the view that persons who were in possession of moneys as trustees, though on behalf of an illegal association, might be liable to account for them. In the case of Marrs v. Thompson [1902] 96 LT 759 the County Court Judge has held that, assuming that the association represented by the plaintiffs was an illegal association yet the action to recover money from its treasurer was not in furtherance of the objects of the association and could be maintained. Lord Alverstone, C.J., agreed with the County Court Judge in regard to what the relations of the parties were and that he was justified in coming to the conclusion that this was not an action in furtherance of an illegal or improper purpose and that the trustees were merely obtaining their own property which was held for the members. Darling, J., observed: 'With regard to the point that the Courts could not recognize this association, it is sufficient to look at the facts of this case.' If the argument for the defendant is right the burglar who was said to have entered his house could not be convicted, because the money was not the money of the association and was not the property of anybody in this sense that the Courts could not recognize it as being anybody's. And therefore the Courts would have to say that the burglar might take it, because it was not the property of anybody. The Courts recognize this money as the property of somebody for some purposes. Channel, J., however beyond expressing that the point was one of considerable difficulty, did not express any definite opinion.

19. Even in South West Atlantic Steamship Company (1875) 2 Ch D 763, where a petition to recover costs presented by solicitors who had themselves helped in establishing the illegal association was disallowed and a winding up order refused, James, L.J., observed:

Even if there were such a winding up, it could not, as it appears to me, go beyond dealing with existing assets and providing for existing liabilities, and could not be made the means of enforcing contribution from some members who had not paid in order to reimburse other members who had paid, there being, as it seems to me, no right or contribution whatever either at law or in equity as between the members of such an illegal association as this was.

20. Mellish, L.J., though agreeing that the solicitors who must be taken to have been fully aware of the illegality of the contract, suggested that he was not without a remedy. He observed.

I should wish, as far as I am concerned, to keep the question open whether when an illegal association is actually going on with its business, if a man who may have signed in ignorance of the law, or not knowing that there were more than twenty members, finds out that he is engaged in an illegal company with more than twenty, he cannot obtain a winding up order. He must somehow or other be liable to stop it and I have no doubt that such a person could file a bill to restrain all his companions from persisting in carrying on the illegal adventure, and have the property, the ships or whatever it might be, which were actually engaged in the illegal adventure, divided among them, For instance in this case supposing after one voyage had been made and before the second voyage has begun a man wished to stop it who had really a beneficial interest in equity in the ship, he must be entitled somehow or other to stop the ships from going on any further illegal adventure and to have them divided among the persons who owned them. Upon the question whether that could be done by a winding up order or whether it must be done by an action in the Chancery Division, I do not wish to give any conclusive opinion.

21. Beggally, L.J., also observed:

I only upon this point desire to say that I am not, as at present advised, satisfied that any such order could be made. It appears to me that a company of this kind, illegally constituted, and illegally constituted for the express purpose of avoiding the requirements of the Act of Parliament, could not be properly wound up under that statute, though it is possible that under certain circumstance results equivalent to the winding up might be obtained by means of other proceedings.

22. Lastly I may quote a passage from Buckley on Companies Act, 10th Edition p. 551:

If an order be made to wind up an illegal association, judicial opinion is varied as to whether the winding up can deal only with the existing assets and liabilities or can further be used to enforce contributions as between members.

23. The passages quoted by me above are all of them obiter dicta and therefore none of them conclusive. At the same time no direct authority in point has been produced before us where a suit brought by a member of an illegal association for actual partition of the property purchased in the name of that association has been dismissed on the ground that the Court cannot assist such a plaintiff. The observations of so many Judges do certainly go to show that in their opinion members of an illegal association can have and do have an interest in the property. The ownership of a property cannot remain in abeyance. The property must vest in somebody. It cannot vest in the association, because that association is illegal and in the eye of law does not exist and the Court cannot recognize it. It follows necessarily that the property must therefore vest in the group of persons who had purported to form themselves into an association, which in the eye of the law never came into existence. There is no law under which it can escheat to the Crown. The only conclusion then to which one can come is that the various persons forming themselves into an association not recognized by law are the joint owners of the property acquired with moneys contributed by them. If they all have a joint interest in the properties, then it is immaterial now to consider through what illegal means such properties were acquired. To take an example, a man may have obtained money by extortion, or blackmail or bribery or through a gambling transaction, but, if with the money so acquired he has purchased certain property, it would be impossible to hold that the ownership of such property has not vested in him. And if two such persons have jointly acquired a property by means of illegal association it would be impossible to throw out a suit by one of them for partition of the property held by them jointly. In the present case there are certain properties and assets existing on the spot in which the various members have proprietary interest. Every joint owner therefore has a right to have these properties held by them jointly divided and distributed among the various co-owners.

24. The plaintiff however cannot be granted a relief which but for a different name would for all practical purposes be like ordering a dissolution or a winding up. He must ask for actual partition of the existing properties and nothing more. He cannot, for instance, ask for on account to be taken and contributions ordered against supposed shareholders and contributories when they have never legally formed themselves into an association. The reliefs granted to the plaintiffs can only be such reliefs as can be granted in a simple suit for petition of the property moveable or immovable. It is not necessary for me to consider the rights of creditors of this illegal association at this stage. They have a right to sue all the members and even to attach the properties before an actual partition takes place. Under certain circumstances the Court has power to appoint a receiver of the properties as a receiver may be appointed in a partition suit; but such receiver would not have power to bring suits no behalf of this illegal association against debtors of this supposed association. As to the proceeds being realized by sale of property such a relief cannot be granted on the analogy of dissolution of partnership or winding up order; but if the case falls under Section 2, Partition Act. (No. IV of 1893), and it appears to the Court that by reason of the nature of the property to which the suit relates or of the number of share-holders therein or of any other special circumstance a division of the property cannot reasonably or conveniently be made and that a sale of the property and distribution of the proceeds cannot be more beneficial for all the shareholders, the Court, if it thinks fit on the request of any such shareholders, interested individually or collectively to the extent of one moiety or upwards, may direct a sale of the property and a distribution of the proceeds.

25. The order of the Subordinate Judge directing a sale of the properties is not in strict accordance with the requirements of Section 2 or other sections of the Partition Act which ought to have been followed.

26. I would therefore allow the appeal in part and modify the decree of the Court below to this extent that I would decree the plaintiff's suit for separation of 1/8th share in the existing assets by partition subject to the assets being sold if an application under Section 2 is made on behalf of shareholders interested individually or collectively to the extent of one moiety or upwards in which case the procedure laid down in the Partition Act (No. IV of 1893) would have to be followed.

Mukerji, J.

27. (His Lordship stated the facts as given in the judgment of Sulaiman, J., and proceeded). The case has been argued mainly on English authorities, but it would be desirable to consider it from the stand point of the Indian Law. The first question that arises is: What is the relief that Respondent 1, the plaintiff in the case, seeks? The relief he seeks is the winding up of a company or the dissolution of a partnership. Both the reliefs are incidents of a valid contract. These reliefs can be asked only in enforcement of a contract which is enforcible under the law. The Contract Act (IX of 1872) defines a void agreement as an agreement not enforcible by law. Section 23, Contract Act, lays down that every agreement of which the object or consideration is unlawful is void. Under the same section the consideration or object of an agreement is lawful unless it is forbidden by law, etc. By Section 4, Companies Act, which corresponds to Section 1 of the Companies Act of England (1908), no company or association or partnership consisting of more than 20 persona shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain, etc, unless, it is registered as a company, etc. It is clear, therefore, that a partnership or association such as is before the Court, the membership of which consists of more than 20 persons, is forbidden by law. This is recognized in the plaint itself. Then the question is:

28. Will the Court enforce an agreement which is void under the law? There can be only one clear answer, viz,, in the negative. The learned Judge of the Court below was of the same opinion. But ho thought that he might make a distinction and held that he was dividing the property belonging to the parties and that there was no objection to this course of proceeding. But the question is: Is not the learned Judge doing the same act which he himself holds is prohibited by law and only gives another name for the act in order to make it lawful. The partition which he has ordered will involve, as it must do, realization of the assets of the company, payments of its just debts, sale of its property and distribution among its members. In the relief of dissolution of partnership or of winding up the same thing has to be done and nothing beyond that. I am, therefore, clearly of opinion that the decree made by the learned Judge of the Court below cannot be sustained.

29. Coming to authorities: The case of In re. Padstow Total Loss and Collision, etc. (1882) 20 Ch D 137 seems to be exactly in point. There a creditor having obtained a decree against an unregistered company consisting of more than 20 members sought the winding up of it as the only means available to him for the realization of his debt. His application was granted, but the order had to be set aside. Jessel M.R. says at p. 143:

If the case falls within the terms of the 4th section, the tornation of the company is prohibited and it is impossible to suppose that the Legislature could have intended that a company which is prohibited from being formed under the fourth section (of the Act of 1862) can be wound up under the l99th with all the consequences that follow from it, etc.

30. The same view is expressed by the two other L. JJ., Lindley and Brett. The latter Judge, at p. 141, said:. there never existed at anytime any company, association or partnership of which the law could probably take cognizance and with regard to which the Court could properly make a winding up order.

31. Lord Lindley said at p. 149:

When therefore such a company is not registered, it is illegal in this sense that it is a prohibited thing and the law cannot take notice of it except perhaps in a penal point of view, etc.

32. This case is entirely undistinguishable from the one before us. The learned Counsel for the Respondent No. 1 has taken his stand on four cases and it is due to him that those cases were considered. In the case In re. The One and All Sickness, etc. [1909] 25T LK 674 certain persons issued advertisements and asked people to be members of an association. The latter were to receive certain benefits in case of sickness, etc. The suit was brought by certain of the subscribers against the trustees of the association for the administration of the funds. The objection was taken that it was an illegal association not being registered, and the suit was not maintainable. Mr. Justice Parker, who heard the case, was of opinion that it was not at all a case of illegal association as members were not working for gain and it was only an association to share in a fund. After having said so the learned Judge went on to say:

Even if this was an illegal association his Lordship would not have said, at any rate, without further consideration, that those who received these moneys from persons invited to subscribe their moneys were not liable to account for those moneys.

33. The authority is not at all relevant in our case, first because it was not a case of illegal association in any sense of the word; and secondly what was said after assumption that it was an illegal association was a mere obiter dictum.

34. The next case cited was Marrs and Ors. v. Thompson [1902] 96 LT 759. In this case a certain servant of the association who was entrusted with money had misapproiated it and the trustees sued to recover the money. The unregistered association was meant for the members who were all workmen at a certain colliery and the society was established for the purpose of mutual insurance against death and accident. The learned Judges said that it was not at all an association which required to be registered under the law and further they said that the suit was not brought in furtherance of an illegal and improper purpose and the trustees were merely obtaining their properties which were held for the members: (see p. 761, per Lord Alverstone, C.J.). It is quite clear that this case has no bearing on the case before this Court. The present suit is not on behalf of the entire association against a person who is not a member, but is on behalf of one member against the rest. One or more such members must carry on the business on behalf of the rest and therefore the selection of Defendant No. 1 for the purpose does not bring the case within the principle of the case cited.

35. Gordons. Chief Commissioner of Police [1910] 2 KBD 1080 has no relevancy whatsoever. It was a suit by a certain person who had acquired money by illegal means against the Chief Commissioner of Police for refund of the money which had been taken away on a search. It was pointed out that the police had no right to keep the money and it did not matter how the money had been acquired by the plaintiff. The method of acquisition of the money by the plaintiff was no part of his cause of action and therefore has no relevancy.

36. The last case is of Lowes v. Governor and Co. for Smelting down Lead with Pit and Coal (1904) 2 Ch D 196. The association was started in 1817 when there was no company law requiring compulsory registration and in a suit for its winding up Warrington, J,, held that the funds had vested in members and to dismiss the suit would amount to giving such members more benefit than they were entitled to. A winding up order was made. It appears that no authority was cited before the learned Judge, for he says so at page 204. The facts that the association had been formed in 1917 and that it was for the benefit of the workmen by means of mutual assurance amongst its members would clearly take the case out of Section 4 of the Indian Companies Act. The learned Judge of the Court below quoted from the footnote (h) of Lord Halsbury's Laws of England, Vol. 22, p. 18 and stated as the law, that though the members of an illegal association had no corporate right and did not form a legal partnership, they did not lose their legal right as owners of the property. This is a general proposition stated on foot of a criminal case Reg. v. Frakaland (1863) L & C 276. No attempt has been made at the bar to support this proposition of law. In the result the appeal should succeed and I would allow it with costs throughout and dismiss the suit of the Respondent No. 1 in to.

37. As this appeal has been heard by a Bench consisting of two Judges, who have differed in opinion on a point of law, namely, whether when an association, formed for the purpose of gain, is unregistered although under the law it ought to have been registered and the business of the association has been going on for some years, one of its members can sue in a Court of law for partition of the existing assets, or whether be can be granted any other relief under the circumstances of this case.

38. We accordingly direct under Section 98 of the Civil Procedure Code that this point of law should be referred to one or more Judges as the learned Chief Justice may be pleased to direct.

38. [The case was referred to Walsh, J. who delivered the following judgment:]

Walsh, J.

39. In my opinion this appeal must succeed, and the plaintiff's suit must be dismissed. The plaintiff obtained a decree from the Court of the Subordinate Judge and on an appeal being brought to this Court by the defendant difference of opinion arose between my two brothers, Mr. Justice Sulaiman and Mr. Justice Mukerji, who heard that appeal. The difference of opinion arose upon a point of law, namely, whether having regard to the fact that the Association to which the plaintiff belonged was an illegal one by reason of the provisions of Section 4 of the Companies Act, the Court was unable to grant any relief, or, on the other hand, could grant some form of relief in the nature of restitution by a decree somewhat modified from that which had been granted by the first Court.

40. The question is not free from difficulty, and has not been decided definitely in the form in which it now arises, so far as one knows, either by any Court in England or by any Court in India. The considerations in favour of the two views respectively are set out; so clearly in the opinions of my learned brothers that it is not necessary to cover the whole ground again, but it seems to me desirable, before disposing of the point upon which the difference of opinion has arisen to state the facts which give rise to the controversy. I do not find any comprehensive statement of them in the judgment of the first Court, It is admitted on both sides that the plaintiff became one of an Association of more than 20 persons, such Association having been formed for the purpose of carrying on a ginning factory with the object of making profit. The Association was formed in the year 1902 when the plaintiff joined it and has been carried on uninterruptedly until the commencement of the suit which was on 24th of August 1921. The agreement creating the Association and prescribing the respective rights and liabilities of its members, was in writing, dated the 10th of November 1902. There is no copy of it on the record, but it is admitted that in substance it provided that the capital of the Association was to be contributed by the various members including the plaintiff in agreed shares and was to be utilized for carrying on the trade of a ginning factory. The business was to be managed by a manager and the profits or losses of this trade Association were to be borne in agreed proportions. It is admitted that this document contains and regulates the contract between the parties. It is admitted that this Association was 'an Association of partnership' consisting of more than 20 persons' formed for the purpose of carrying on business that had after its object the acquisition of gain by the Association or partnership within the meaning of Section 4 of the Companies Act of 1913 which is in the same terms as Section 4 of the English Companies Act of 1862.

41. It is further admitted that the capital introduced into the business and contributed in varying shares by the members including the plaintiff was contributed in money and that such money has long ago been merged in the general assets of the business. The existing assets at the date of the commencement of the suit were alleged in the plaint to be the factory or factories and the property of the Association without any more particularity. It is admitted that it is impossible to earmark and it had long become impossible before the suit was brought to earmark any chattel, money or property as being the share contributed by the plaintiff. It is admitted that for the purpose of partition, in order to give the plaintiff the 1/8th share, which it is admitted he contributed to the capital and which he now claims to be repaid, it is necessary to sell the said factories and to turn them into liquid assets. It is further admitted that there are creditors of the Association who have not been paid their debts, the amount and number of which are as yet unascertained, and that the net proceeds of the sale would certainly not represent the net surplus assets of the Association and that before the plaintiff's share could be ascertained and distributed there would have to be a general taking of account and payments to such creditors as were sufficiently alive to assert their rights out of the gross assets before distribution of the surplus.

42. Sir Tej Bahadur Sapru, who argued for the respondent before me (I may add that by consent I sat alone to hear the arguments on either side after studying the judgments of my learned brothers) candidly admitted that in substance there was no difference between, on the one hand, the decree of the lower Court appointing a Receiver and directing a sale and directing also a final decree by which, after accounts had been taken, the net surplus assets would be ascertained and the share of the plaintiff separated, and on the other hand the appointment of a liquidator and a distribution of the assets in due course of winding up. He relied very strongly on four cases to which I will refer.

43. He admitted of course that the case In re Padstow Total Loss and Collision Assurance Association (1882) 20 Ch D 137 was a direct authority that the Court could not recognize such an association as having any existence and that no order for winding up could be made. In the first place, he relied upon the decision of Mr. Justice Warrington, In re. Lead Company's Workmen Fund Society (1904) 2 Ch 196. In my opinion that case is not applicable. It was not an illegal association. It was an unregistered friendly society belonging to the mutual benefit class of society to which the workmen who were members themselves contributed and from which they received benefits. It carried on no business for gain.

44. The next case was In re. The One and All Sickness and Accident Assurance Association [1909] 25T LK 674. That case has no application. It was also a mutual benefit society, and it was held not to be an illegal association. The dictum of the learned Judge in that case as to following moneys in the hands of trustees, even in the case of an illegal association, has no application. I apprehend that it was intended to apply to following moneys which could be earmarked. No such claim arises in this suit.

45. The third case is the case of Marrs and Ors. v. Thompson [1902] 96 LT 759. It was a suit against a Treasurer of an unregistered society who had lost the funds belonging to all the members. The facts have no analogy to the facts in this case and the ratio decidendi was that the society was not one which was rendered illegal by the Companies Act for want of registration and that the members were not precluded from suing their Treasurer for the money which he had lost merely by reason of the fact that the association was not registered under the Friendly Societies Act. The judgment of Mr. Justice Channel expressed precisely the difficulty which I feel about this. There had been some argument and some reference in the judgment of the learned Chief Justice to the question of the illegality of the association under the Companies Act. Mr. Justice Channel said as follows:

While I do not desire to differ on the other point, I think it is a point of considerable difficulty. As to whether or not the contract with the treasurer (assuming that this was an illegal association under the Companies Act) was a contract so tainted with illegality that the ordinary maxim melior est conditio possidentis would apply seems to me a question of difficulty. The application of that maxim would involve such extraordinary consequences that one would not be inclined to follow it, but that maxim would involve injustice in many cases.

46. With reference to that last observation it is proper to observe that there is no suggestion in this case of any overreaching or impropriety on the side of the defendant more than on the side of the plaintiff and if there is hardship it is merely the ordinary hardship of belonging to an association not recognized by law which the Courts are unable to administer.

47. The last case relied upon has also in my judgment no application. The case of Queen v. Tankard [1894] 1 QBD 548 was a criminal case and the prosecution merely asserted that the property or the money which the prisoner had stolen was vested in the whole body of members.

48. Further reliance was placed upon a passage in Lindley on Partnership, p. 131 of the 8th Edition and p. 139 of the 9th Edition which at first sight reads like an opinion in favour of the power of the Court to make a sort of winding up order of an illegal association. I have looked at the authorities cited in the foot-note. They do not seem to me to go anything like the length of supporting the claim in this suit. It seems to me that there is a complete answer to the plaintiff's claim upon the principle expressed in the maxim referred to by Mr. Justice Channel in the judgment which I have already quoted. The cases are of course set out in Broom's Legal Maxims and the principle where it seems to me to bear on the plaintiff's claim in this case is contained in two or three passages on pp. 559 and 561 in the 1911 Edition. On p. 559 it is said:

If a loss must fall upon one or other of two innocent parties who are both free from blame, justice being thus in equilibrio, the application of the maxim melior est conditio possidentis frequently turns the scale.

49. On p. 561 it is said:

Where each party is equally in fault the law favours him who is actually in possession, a wall known rule which is in fact included in that more comprehensive maxim to which the present remarks are appended.

50. If, said Buller, J., a party comes into a Court of justice to enforce an illegal contract, two answers may be given to his demand: the one, that he must draw justice from a pure fountain, and the other, that potion est conditio possidentis. The maxim is well illustrated by the decision of the Court of appeal in the case of Kearle v. Thompson (1890) 24 QBD 742. The facts there of course were quite different, the contract being an illegal one in relation to certain bankruptcy proceedings, but the general principle is affirmed by the Court of appeal:

Where money is paid under an illegal contract which has been partially carried into effect, the money cannot be recovered back.

51. This principle does not seem to me to be inconsistent with the dicta which have been referred to during this appeal which recognize that a plaintiff who has joined an Association which he discovers to be illegal, may take steps by a suit to stop it and to recover back his contribution if the contract has not been performed and his contribution can still be found. I now turn to the consideration of the decree granted in the lower Court, and the modified form suggested by my brother Mr. Justice Sulaiman. The decree of the first Court is a preliminary decree in a partition suit appointing a Receiver, directing a sale and postponing the final decree for the distribution of the net assets until after an account has been taken of the proceeds of the sale, which would certainly, whether the learned Judge intended it or not, open the door for the creditors to come in and establish their claims. My learned brother Mr. Justice Sulaiman has modified that decree by cancelling the appointment of the Receiver and the direction to file an account. I am not quite sure what difference there is in substance between the order of Mr. Justice Sulaiman and the order of the first Court except that the Court itself takes charge of the sale instead of doing it through a Receiver. He speaks of existing assets, but I am not quite sure whether in that expression he includes the net proceed contemplating the possibility of claims by creditors, or whether he means the gross proceeds of the sale.

52. But for my own part I am of opinion that however the decree in this case were framed it would be in substance and in fact an order to wind up this association, realize the assets, discharge the liabilities and distribute the same, and whether you call the gentlemen charged with carrying out that duty a Receiver or an Amin or a Commissioner, he would be in substance a liquidator, and liquidation is clearly prohibited by the language of Section 4 of the Companies Act, which treats an association such as this as one not recognized by law. I am influenced to some extent in arriving at the opinion at which I have arrived by the consideration that if a decree of this kind were to be granted in a suit framed as this suit has been in the case of such an association as this, it would be in substance to entertain an application for winding up the association and would, therefore, render Section 4 a nullity, because if such a precedent were once established I can see nothing to prevent the formation of an unlimited number of such associations consisting of more than 20 persons carrying on trade for the purpose of gain, any one of the members of which could come to the Courts and ask for relief in a suit in the nature of a winding up of the assets of the association. The result would be to give such associations under another guise the cloak of legality although the statute has forbidden them.

53. I need hardly say that, in my opinion, the defendant who is said to be a gentleman of position and honour certainly ought to take steps to return each member his share, after he has been properly remunerated for his own trouble in looking after the property, and the better plan would be to submit to the arbitration of some High Court vakil to decide on what basis such distribution should take place or to turn the association now into a limited liability company. Let this opinion be laid before the members of the Bench who heard the appeal for final orders to be passed.

54. The opinion of the majority of the Judges is that Section 4 of the Companies Act is a bar to the maintenance of the suit. We accordingly allow this appeal, and setting aside the decree of the Subordinate Judge dismiss the suit with costs throughout.


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