1950 (4) TMI 11 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the partnerships under Section 4 of the Indian Companies Act.
2. Plaintiffs' entitlement to shares in the new company.
3. Plaintiffs' right to an account of the partnerships' assets.
4. Limitation period for claims.
5. Plaintiffs' cause of action against the new company and the defendants managing the old partnerships.

Detailed Analysis:

1. Legality of the Partnerships:
The partnerships, Sri Krishna & Co. (Boiler) and Krishna & Co. (Rice Mill), were deemed illegal under Section 4, sub-section (2) of the Indian Companies Act. This section prohibits any company, association, or partnership consisting of more than twenty persons from being formed for the purpose of carrying on any business for gain unless registered as a company under the Act. It was conceded that the partnerships started in 1923 fell within this prohibition, making them illegal. Consequently, members of an illegal partnership cannot sue for its dissolution or for taking accounts, as the court will not assist in enforcing demands arising out of an illegal association.

2. Plaintiffs' Entitlement to Shares in the New Company:
The plaintiffs sought a declaration of their entitlement to three out of fifty-nine shares in the assets and properties of the old partnerships, now vested in the new company, and a proportionate allotment of shares in the new company. However, the court noted that the plaintiffs could not maintain an action for partition or similar relief in respect of the assets of an illegal partnership. The argument that partners of an illegal partnership have a beneficial co-ownership in the property was rejected, as no case was cited where such relief was granted on that basis.

3. Plaintiffs' Right to an Account of the Partnerships' Assets:
The plaintiffs' claim for an account of the partnerships' assets was dismissed. The court emphasized that the illegality of the partnerships precluded any action for an account of the dealings and transactions of the partnerships. The principle that the court will not permit what cannot be lawfully done directly to be done indirectly was upheld, thereby denying the plaintiffs' request for an account of the partnerships' assets.

4. Limitation Period for Claims:
The court addressed the issue of limitation, noting that any claim for a refund of share money contributed by the plaintiffs or their predecessors would be barred by limitation. The businesses were started in 1923, and the suit was brought in 1942, making any such claim hopelessly barred. The starting point for computing limitation would be the date on which the money was paid, with no recurring cause of action.

5. Plaintiffs' Cause of Action Against the New Company and Defendants:
The court found no basis for the plaintiffs' claims against the new company or the defendants managing the old partnerships. The new company, Manachanallur Sri Krishna Rice Mills Ltd., was deemed an entirely different entity from the old partnerships. The plaintiffs could not establish any privity with the new company. The court also noted that if the plaintiffs affirmed the validity of the sale of the old partnerships' assets to the new company, their only remedy would be in respect of the sale proceeds, namely Rs. 5,000. However, the suit was not framed as one for recovery of the plaintiffs' share in the proceeds. Therefore, the plaintiffs had no cause of action against the new company or the defendants managing the old partnerships.

Conclusion:
The suit was dismissed against all defendants by both the District Munsif and the Subordinate Judge on the grounds that the plaintiffs had no remedy against the members of the illegal partnerships and no cause of action against the new company. The second appeal was also dismissed with costs, upholding the lower courts' decisions.