1. The petitioner brought the present suit in 1936 against the Panchayat Board of Venkatapuram to recover from it the balance said to be due upon an alleged loan of Rs. 400 made by him to the Board in March, 1933, which was to carry interest at Re. 1-9-0 per cent. per mensem. It is admit-ed by the petitioner that the Board has not obtained any sanction from the Local Government to borrow the money, as it was bound to do under the rules framed by the Government under Section 4 of the Local Authorities Loans Act. The Board accordingly contended that the contract was void and no suit to enforce it would lie. Petitioner accepted this proposition of law, but pleaded that though he could not enforce the contract as such, he was entitled to the restoration of his money under' Section 65 of the Contract Act.
2. The learned Subordinate Judge of Masulipatam refused to allow petitioner to amend his plaint so as to found his claim upon Section 65, and also held that, even if the plaint were so amended such a claim was unsustainable. Whether that view of the law is right or wrong is the question which I have now to decide.
3. There is nothing in the language of Section 65 which prevents the petitioner from arguing that his claim falls within it, as that language is very wide and general, and the burden, it seems to me, is upon the respondent to show that Section 65 does not apply. That burden cannot be discharged by a mere reference to Section 7 of the Local Authorities Loans Act which prohibits the present loan, as Section 65 deals necessarily with contracts that are void, and it is this very prohibition which makes the present contract void. Respondent has therefore fallen back upon the argument that the Board in the matter of this contract occupies the same position in law as a minor or a lunatic; or in other words that it was 'disqualified from contracting' in the words of Section 11. In Motilal Mansukram v. Maneklal Dayabhai I.L.R.(1920) 45 Bom. 225, it has been held that Section 65 cannot be invoked in the case of a contract which was void because one of the contracting parties was a minor; and in Punjabhai v. Bhagwandas Kisandas I.L.R. (1928) 53 Bom. 309, the same principle has been followed in the case of a contract with a lunatic. To extend this principle to the case of a local body which enters into a contract which the law forbids would appear to be at first sight a simple and logical solution of the problem, but the current of authority in this country is against it. There are three cases in Madras in which municipalities have entered into contracts which infringe positive provisions of law--Arunachala Nadar v. Srivilliputhur Municipal Council (1934) 67 M.L.J. 38 : I.L.R. 58 Mad. 65, Mohammad Rowther v. Tinnevelly Municipal Council (1938) 47 L.W. 668 and Ramakrishna Ranga Rao Bahadur Garu v. Vanguri Suryaprakasa Rao Garu I.L.R. (1940) Mad. 149 and in all these cases Section 65 has been applied. And there is also one case in Calcutta, Mohammad Ebrahim Molla v. Commissioners for the Port of Chittagong I.L.R. (1926)Cal. 189, in which the section has been applied to a contract entered into by the Port Commissioners of Chittagong in contravention of the requirements of law.
4. It is argued for the respondent that these cases deal with mere formalities. For instance the only defect in the contracts in Mohammad Rowther v. Tinnevelly Municipal Council (1938) 47 L.W. 668 and Ramakrishna Ranga Rao Bahadur Garu v. Vanguri Suryaprakasa Rao Garu I.L.R. (1940) Mad. 149 was the failure by the Committee to whom the power to contract had been delegated by Section 68 (1) of the Madras District Municipalities Act to obtain the previous sanction of the Council under Section 68 (2). In those cases there could never be any doubt as to the competency of the Council to contract. Here the defect is more serious as the Panchayat Board cannot borrow any money at all without the previous sanction of the Local Government. But if I am to hold that this is a contract void under Section 11 of the Contract Act as one which the Board was disqualified by law from entering into, it is clear that the Municipalities were equally disqualified in Mohammad Rowther v. Tinnevelly Municipal Council (1938) 47 L.W. 668 and Ramakrishna Ranga Rao Bahadur Garu v. Vanguri Suryaprakasa Rao Garu I.L.R. (1940) Mad. 149 from entering into the contracts there dealt with. I can see no difference in principle between those cases and this case. In all the cases the power to make the contract exists (as Section 3 of the Local Authorities Loans Act gives power to borrow subject to the prescribed conditions), and all that has been done is failure to comply with the conditions laid down by the Act or rules. It is significant that in the judgment of the learned Subordinate Judge the word 'formalities' is used more than once to describe the rule which the Board has in this case infringed. I am of opinion therefore that I am bound by the decisions above referred, to hold that the petitioner in this case can be permitted to sue under Section 65 of the Contract Act.
5. My attention has been called to a number of very interesting cases decided in England in which the powers of a company or a Corporation to borrow money have been very closely scrutinized and strictly construed. But there is no case in which it has been held that there is no right of recovery of money lent merely because some previous necessary sanction has not been obtained. In The Queen v. Sir Charles Reed (1880) 5 Q.B.D. 483 and Attorney-General v. West Ham Corporation (1910) 2 Ch. 560, the cases which come nearest in subject-matter to the case now before me, most stress was laid upon the fact that money was borrowed for purposes not sanctioned by law and that, as I shall show, is a matter concerned not with the exclusion of Section 65, but with the way in which it is to be interpreted.
6. I have now given reasons for holding that petitioner's suit cannot be dismissed out of hand on the ground that Section 65 can in no circumstances apply. The suit will therefore have to be remanded for disposal under Section 65 after a full consideration of all the facts. The Court below must find (i) whether the Board has received any advantage or not under the contract and (ii) whether the petitioner has in any way disqualified himself from applying to the Court for the equitable remedy which Section 65 affords. In deciding both these issues the consideration of the purpose for which the money was borrowed and applied will be of considerable importance. If such purpose does not fall within the purposes enumerated in Section 3 of the Local Authorities Loans Act it is difficult to argue that the Board has received any advantage; and if petitioner intended that the money should be used for a purpose not so enumerated he has deliberately lent the money in order to break the law and is entitled to no equitable relief.
7. There was no serious objection before me to the amendment of petitioner's plaint on any other ground than those discussed. He will be permitted to amend it so as to claim relief under Section 65. The respondent will be permitted to file an additional written statement and the learned Subordinate Judge will then proceed to dispose of the suit in the light of this judgment. The question of what interest, if any, is to be allowed to the petitioner will of course be dealt with under Section 65 as there can be no question of enforcing the terms of the agreement as such. Costs of this revision will be costs in the cause.