Suit Not Maintainable To Recover Money Paid For Illegal Purpose, Must Be Rejected Under O VII R 11 CPC : Supreme Court

A bench of Justice Ahsanuddin Amanullah and Justice Manmohan ruled so while hearing appeal against a Telangana High Court order by which it had upheld the trial court's order, by which appellant's plea seeking rejection of the plaint under Order VII Rule 11 of the CPC was rejected.

The dispute relates to a money recovery suit filed by the original plaintiff (respondent) seeking recovery of money allegedly paid to the appellants for procuring loans from various banks, purportedly to cover unspecified “overhead expenses.” The appellants had filed an application for rejection of the plaint, contending that the plaint itself disclosed an illegal and fraudulent object. The trial court, however, dismissed the plea. Subsequently, the dismissal was upheld by the Telangana High Court.

Aggrieved by the High Court's finding, the appellant approached the Supreme Court.

Before the Supreme Court, the appellants contended that although styled as a money suit, the plaint's own disclosures showed that part of the money was meant to be paid to bank officials in their individual capacity as consideration for facilitating sanction of loans, an object that was “designed to achieve an unlawful object by fraudulent means.” It was submitted that the plaint also indicated that the payments were intended as kickbacks with the predetermined motive of later securing waiver of the illegally sanctioned loans. On this basis, it was contended that where the very foundation of a claim is patently illegal and fraudulent, no court could entertain the proceeding. The plaint, thus, ought to have been rejected under Order VII Rule 11(d) of the CPC.

Per contra, the respondents argued that the language of the plaint indicated the money was meant for legitimate loan-processing formalities and could not be construed as being for gratifying illegal demands of bank officials. It was further argued that the appellants had fraudulently induced the original plaintiff to part with a large sum on the promise of manifold returns. Reliance was placed on Sita Ram v Radha Bai & Ors, to argue that where a transaction founded on an illegal purpose has not fructified, a suit for recovery of the money paid remains maintainable, and that rejecting the plaint would result in unjust enrichment of the appellants.

Examining the plaint, the Supreme Court found that the consideration or object of the underlying Memorandum of Understanding between the parties was “forbidden by law, immoral, opposed to public policy and would defeat the provisions of law besides being fraudulent,” rendering the agreement void under Section 23 of the Indian Contract Act, 1872.

The Court identified two specific grounds on which the money was shown, from the plaint itself, to have been paid for an illegal and fraudulent purpose. “We find substance and concur with the submissions of the learned counsel for the appellants that the plaint discloses that the so-called money given was for an illegal and fraudulent purpose on two grounds. Firstly, that it was for the purpose of satisfying the demands of the bank officials in their personal capacity and secondly, after demonetization, it is the specific averment in the plaint itself that the demonetized notes were collected/procured and given for exchange to the appellants for consideration, which was legally impermissible,” the bench noted.

Applying the principle of in pari delicto (parties equally at fault in an illegal transaction are both denied relief), the Court cited Black's Law Dictionary's definition of the doctrine as “the principle that a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrong doing.” It further referred to US Supreme Court's decision in Bateman Eichler, Hill Richards, Inc v Berner, to reiterate that “the defense is grounded on two premises : first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality.”

The Court further relied on its decision in G Pankajakshi Amma v Mathai Mathew (Dead) Through LRs, wherein it had held that courts cannot come to the aid of a party to an illegal, unaccounted transaction, and that in such cases “the loss must be allowed to lie where it falls.” The Court further noted that this principle had also been followed in Vinod Popli v Ragini Popli & Ors (in which Justice Manmohan was also on bench).

Rejecting the respondents' reliance on Sita Ram v Radha Bai, the bench held that the exceptions carved out in that decision by permitting recovery where an illegal transaction has not been carried into effect, did not assist the respondents on the facts of the present case.

“Here, as far as the original plaintiff was concerned, on her part, the entire act was complete as she alleges to have parted with the money which was demanded by the appellants, but the appellants had not performed their side of the obligation as per the so-called agreement of procuring the loans. Moreover, as stated hereinabove, the illegal purpose has been substantially carried into effect as there is specific averment in the plaint that demonetized notes had been procured as consideration for the agreement executed between the parties,” the bench held.

Since the plaintiff had already parted with the money for a purpose that stood substantially executed, including the demonetised currency exchange, the transaction could not be treated as one which had not fructified so as to attract the Sita Ram exception.

“For the reasons aforesaid, the appeal is allowed. The application under Order VII Rule 11 stands allowed and the Suit bearing O.S. No.18 of 2018 pending before the Additional District Judge at Godavarikhani, Peddapalli District, Telangana stands rejected,” the Supreme Court, thus, rejected the plaint pending before the trial court.

Case: Poosa Sri Krishna & Ors v Gattu Kishan Rao & Anr

Citation : 2026 LiveLaw (SC) 928

For Appellants: Mr Balaji Srinivasan, AOR; Mr Subornadeep Bhattacharjee, Adv.; Mr M Ram Mohan Reddy, Adv.; Ms Harsha Tripathi, Adv.

For Respondents: Mr Gopal Jha, AOR; Mr Tadimalla Bhaskar Gowtham, Adv.; Mr Shravan Kumar Yammanur, Adv.; Mr M Chandrakanth Reddy, Adv.; Mr Shambhunath Bhanja, Adv.; Mr Aman Shukla, Adv.; Mr S Prasada Rao, Adv.; Ms Shambhawi Siva, Adv.