The Supreme Court has rejected a money recovery suit arising from an arrangement for securing bank loans, ruling that courts cannot assist parties seeking recovery under an agreement whose purpose is forbidden by law, immoral or opposed to public policy.
The court found that the arrangement disclosed in the plaint involved illegal gratification for bank officials and transactions using demonetised currency.
Supreme Court Finds Loan Arrangement Unlawful
A bench of Justices Ahsanuddin Amanullah and Manmohan allowed an appeal filed by Poosa Sri Krishna and nine others against a January 3, 2025 order of the Telangana High Court.
The High Court had upheld a trial court decision rejecting the appellants’ application under Order VII Rule 11 of the Code of Civil Procedure seeking dismissal of the plaint.
The dispute arose from a money recovery suit in which the original plaintiff claimed to have paid substantial sums to the appellants for arranging bank loans. According to the material recorded in the plaint, part of the money was intended as kickbacks or illegal gratification for bank officials in their personal capacity. Demonetised currency was also allegedly used in the transactions.
Counsel for the appellants, advocates Balaji Srinivasan, Ram Mohan Reddy and Subornadeep Bhattacharjee, argued that the claim rested on an agreement whose object was unlawful and fraudulent. They contended that once the plaint itself disclosed an illegal purpose, the suit could not be entertained and should have been rejected under Order VII Rule 11(d) of the CPC.
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Court Rejects Argument for Recovery
The respondents maintained that the money was intended for legitimate loan-processing expenses and alleged that the appellants had defrauded the plaintiff.
They relied on the Supreme Court’s 1967 decision in Sita Ram vs Radha Bai, arguing that recovery could still be permitted where an illegal transaction had not been fully carried out and rejecting the claim would result in unjust enrichment.
The Supreme Court rejected those submissions. It held that the plaint contained sufficient material to show that the consideration and object of the memorandum of understanding were forbidden by law, immoral, opposed to public policy and fraudulent.
The court consequently found the agreement void under Section 23 of the Indian Contract Act, 1872.
The bench also applied the principle of in pari delicto, under which a plaintiff who has participated in wrongdoing cannot recover damages arising from that wrongdoing. The ruling stressed that courts will not assist parties who are equally at fault in an illegal transaction.
High Court Order Set Aside
The Supreme Court noted that the illegal purpose had been substantially carried into effect. The plaintiff had parted with the money, including demonetised currency, while the appellants had failed to procure the loans.
On those facts, the bench found the reliance on Sita Ram vs Radha Bai misplaced.
The Supreme Court set aside the Telangana High Court’s order and rejected the money recovery suit pending before the Additional District Judge at Godavarikhani in Peddapalli district of Telangana.
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