A) ABSTRACT / HEADNOTE
The Supreme Court of India, in Seth Badri Prasad and Others v. Seth Nagarmal and Others, addressed the legality and maintainability of a suit for rendition of accounts among members of an unregistered association formed for profit-making business activities under the Rewa State Companies Act, 1935. The court emphasized that any association formed by more than twenty persons for business purposes, if not registered, is illegal under Section 4(2) of the said Act. This illegality barred the courts from granting relief in the nature of accounts and profit sharing as such relief would imply recognition and enforcement of an illegal association. The court rejected the analogy drawn from Section 69(3)(a) of the Indian Partnership Act, 1932, stating that while an unregistered firm under the Indian law is not illegal, the present association stood void ab initio. The court also permitted the respondent to raise the objection regarding illegality for the first time at the appellate stage since it pertained to a pure question of law derived from a public statute. The appeal was dismissed, and the earlier decree favoring the respondent was upheld.
Keywords: Unregistered Association, Rewa State Companies Act, Illegal Partnership, Rendition of Accounts, Maintainability of Suit, Indian Partnership Act.
B) CASE DETAILS
i) Judgement Cause Title:
Seth Badri Prasad and Others v. Seth Nagarmal and Others
ii) Case Number:
Civil Appeal No. 125 of 1955
iii) Judgement Date:
December 9, 1958
iv) Court:
Supreme Court of India
v) Quorum:
Justice J.L. Kapur, Justice S.K. Das, Justice Jaffer Imam
vi) Author:
Justice S.K. Das
vii) Citation:
[1959] Supp (1) S.C.R. 769
viii) Legal Provisions Involved:
Section 4(2) of Rewa State Companies Act, 1935;
Section 69(3)(a) of Indian Partnership Act, 1932.
ix) Judgments overruled by the Case (if any):
None.
x) Case is Related to which Law Subjects:
Corporate Law, Contract Law, Commercial Law, Partnership Law.
C) INTRODUCTION AND BACKGROUND OF JUDGEMENT
When cloth control regulations were introduced in Rewa State, Budhar town’s cloth dealers, including the appellants, formed an association to manage allotment and sale of cloth quotas for profit. The association operated informally without registration or written articles of association. The respondents later contested claims made by the appellants seeking rendition of accounts and profits. The trial court initially decreed in favor of the appellants, but the Judicial Commissioner overturned the decree. The Supreme Court was thus tasked with determining whether the association’s illegality barred the appellants’ claims.
D) FACTS OF THE CASE
Twenty-five cloth dealers from Budhar formed an association during cloth control in Rewa. The association aimed to pool allotted quotas of cloth, sell the goods, and distribute profits among members. No formal articles existed; the association was not registered under the Rewa State Companies Act, 1935.
The association’s capital was ₹1,00,000. Nagar Mal, one of the respondents, acted as president between January and June 1946. Upon the decontrol of cloth in 1948, the association ceased operations. Later, thirteen members sued Nagar Mal seeking accounts for April to June 1946 and recovery of unpaid profits with interest.
The primary dispute revolved around profits from the sale of a consignment of 666 bales of cloth from Gwalior. Out of these, 106 bales were accounted for; disputes arose over profits from the remaining 284 bales.
The trial court ruled in favor of the appellants. However, the Judicial Commissioner reversed this, holding that the plaintiffs were not entitled to share in the disputed profits as Nagar Mal had already rendered other accounts.
E) LEGAL ISSUES RAISED
i) Whether the suit filed by members of an unregistered association formed for profit was maintainable.
ii) Whether Section 4(2) of the Rewa State Companies Act, 1935 rendered the association illegal, thereby barring judicial relief.
iii) Whether the defense based on illegality could be raised for the first time at the appellate stage.
iv) Whether Section 69(3)(a) of the Indian Partnership Act, 1932 applied to such associations.
F) PETITIONER/ APPELLANT’S ARGUMENTS
i) The counsels for Petitioner / Appellant submitted that:
The appellants argued that the preliminary objection raised by the respondents was belated. The issue was not raised at trial or first appeal and thus should not be entertained before the Supreme Court. They contended that allowing such a new plea violated principles of fairness and procedural justice.
Further, they argued that while the association was not registered, its purpose was not illegal per se. They emphasized that the purpose was profit distribution among members, a common commercial activity, not inherently illegal unless prohibited by law.
They sought support from U. Sein Po v. U. Phyu [(1929) ILR 7 Rang 540], where members of an unregistered association were allowed recovery of subscriptions and property division. The appellants argued that similar principles should apply to allow for accounting and profit sharing despite non-registration.
Finally, invoking Section 69(3)(a) of the Indian Partnership Act, 1932, they asserted that even unregistered firms could maintain suits for accounts post-dissolution, implying a similar relief should be available here.
G) RESPONDENT’S ARGUMENTS
i) The counsels for Respondent submitted that:
The respondents asserted that the association’s formation violated Section 4(2) of the Rewa State Companies Act, 1935, which prohibited unregistered associations of more than twenty persons from engaging in business for profit. Thus, the association was void ab initio.
They contended that any relief seeking profits or accounts from such an illegal association necessarily implied court recognition of its existence, which no court could grant without violating statutory prohibition.
They argued that the plea of illegality, though raised late, involved a pure question of law relating to a public statute and could be raised at any stage as per Surajmull Nargoremull v. Triton Insurance Co. Ltd. [(1924) LR 52 IA 126].
They further contended that the analogy to Section 69(3)(a) of the Indian Partnership Act was inapplicable since that provision dealt with valid, though unregistered, partnerships, unlike the present void association.
H) RELATED LEGAL PROVISIONS
i) Section 4(2), Rewa State Companies Act, 1935
“No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any business for gain unless registered under this Act or formed pursuant to a charter from the Durbar.”
ii) Section 69(3)(a), Indian Partnership Act, 1932
Permits suits for accounts post-dissolution of a partnership despite non-registration.
I) JUDGEMENT
a. RATIO DECIDENDI
i) The Supreme Court upheld the objection of illegality under Section 4(2) of the Rewa State Companies Act, 1935. It held that an association of more than twenty persons, not registered but formed for business profit, was illegal. The contract itself was void ab initio.
The Court emphasized that allowing a suit for accounts would indirectly recognize and enforce an illegal contract. It drew upon principles in Surajmull Nargoremull v. Triton Insurance Co. Ltd. [(1924) LR 52 IA 126] and Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi [(1949) LR 76 IA 244].
The court reasoned that where statutes prohibit certain associations, any agreement constituting such associations is void, and no party may approach courts to enforce or seek relief under such agreements. The court quoted Lindley on Partnership (11th Ed., pp. 148-149) to reaffirm this position.
The analogy drawn by appellants from Section 69(3)(a) of the Indian Partnership Act, 1932 was rejected, as unregistered partnerships under that Act remain legal while the instant association was void for want of registration under public law.
The court dismissed reliance on U. Sein Po v. U. Phyu [(1929) ILR 7 Rang 540], distinguishing that it concerned return of subscriptions, not claims to profits arising from illegal transactions.
b. OBITER DICTA
i) The court noted that defenses based on violations of public statutes could be raised at any stage as they implicate public policy, citing Surajmull Nargoremull and Shiba Prasad Singh.
c. GUIDELINES
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Statutory prohibitions on business associations render agreements void if requirements are unmet.
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Courts cannot aid parties to enforce illegal contracts.
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Defenses based on public statutes are not barred by procedural delay.
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Partnership law distinctions between unregistered and illegal associations remain critical.
J) REFERENCES
a. Important Cases Referred
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Surajmull Nargoremull v. Triton Insurance Co. Ltd. (1924) LR 52 IA 126.
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Sri Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi (1949) LR 76 IA 244.
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U. Sein Po v. U. Phyu (1929) ILR 7 Rang 540.
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Greenberg v. Cooperstein [1926] 1 Ch 657.
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Senaji Kapurchand v. Pannaji Devichand AIR 1930 PC 300.
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Kumaraswami v. Chinnathambi ILR 1951 Mad 593.
b. Important Statutes Referred
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Rewa State Companies Act, 1935, Section 4(2).
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Indian Partnership Act, 1932, Section 69(3)(a).
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Indian Stamp Act, 1899, Section 7(1).
