Whether deft can invoke arbitration clause in agreement at late stage of proceeding?

There is no merit in the challenge that since the partnership contained an arbitration clause the suit was not maintainable. If at all such a challenge was available the defendants should have raised it at the appropriate stage as provided under Section 8 of the Arbitration Act 1996. Before defendant sets forth his defence in the suit, at its first hearing after his appearance, jurisdiction of Court on a ground referable to Arbitration Act, if available, should be raised and decision thereof has to be invited. That having not been done, at this stage, in the appeal against the preliminary decree passed by the Court below such a challenge cannot be entertained. Plaintiffs among other reliefs sought for a decree of injunction to restrain the defendants from alienating the assets of the firm. Learned Sub Judge has passed a prohibitory order in the decree restraining defendants from alienating or encumbering the assets of the firm. It has come out in evidence that all the assets of the firm had already been disposed of or alienated and, thus, the prohibitory decree serves no purpose. Liability to render accounts of the firm by defendants irrespective of the alienations still continue and a decree has been provided thereof. Prohibitory order passed by the Court under the preliminary decree shall stand vacated.

IN THE HIGH COURT OF KERALA

R.F.A. No. 355 of 2005 (Arising against the Order/Judgment in O. S. No. 311 of 1995)

Decided On: 27.01.2014

Appellants: Muraleedharan T.P. and Anr.
Vs.
Respondent: M. Ibrahimkutty and Ors.

Hon'ble Judges/Coram:S.S. Satheesachandran, J.

Citation: AIR2014Ker90, 2014 (1) KHC 550, 2014(1)KLT820

1. Appeal is directed against the preliminary decree and judgment in OS 311/1995 passed by the learned First Additional Sub Judge, Ernakulam. Defendants 1 and 6 in the suit are the appellants. Suit was one for dissolution of a partnership firm, settlement of accounts and other reliefs. After trial a preliminary decree was passed dissolving the partnership and directing the defendants to render accounts. Defendants were also restrained from alienating or encumbering the assets of the firm. That decree is assailed by appellants filing this appeal.

2. Short facts necessary for disposal of the appeal can be summed up thus: A firm by name Lotus Constructions, dissolution of which was sought for by plaintiffs, was constituted under the original of Ext. A1 deed and it consisted of plaintiffs, two in number, and defendants 1 to 5 as partners. That partnership is one at Will and it was constituted for doing business in real estate and construction. First defendant was managing partner of the firm and he was empowered to open and operate bank accounts on behalf of the firm. He was liable to maintain accounts of the firm, but, he mismanaged the affairs and misappropriated the funds of the firm was the case of plaintiffs. He had executed sale deeds over the properties of firm without authority and sanction from the other partners, and, such alienations made are not binding on plaintiffs, was their further case. The first defendant has constituted a rival firm, 6th defendant, with him as its managing partner to do the same business was the case of plaintiffs to seek a decree of injunction against him from continuing as a partner of 6th defendant. After issuing a notice for dissolution of firm demanding defendants to render accounts, which was not responded to, the suit was laid for dissolution of the firm, rendition of accounts and also for an injunction to restrain the defendants from alienating and encumbering the assets of the firm.

3. Among the defendants first and fourth defendants and also additional defendants 7, 9 and 10, who were brought in as legal heirs of deceased second defendant, entered appearance, and the others remained ex parte. Suit was resisted by first defendant alone contending that plaintiffs did not contribute their share to the capital of firm, and, therefore, they have no right to share profit or loss and claim anything based as partners of the firm. Allegations made over the mismanagement of firm and misappropriation of its funds by first defendant were denied. As managing partner of the firm he has been managing its affairs properly, the accounts of the firm are properly audited and communicated to all partners and the firm has availed financial loan from banks, for which the firm and partners are liable, according to this defendant. Disputing the allegations imputed against him it was contended that no notice was sent for dissolution of firm and the suit was barred for want of such notice. This defendant also contended that the assignments made over the assets of firm are valid and binding on all partners. Maintainability of the suit was also challenged setting forth a contention that partnership deed provided for reference to arbitration and that having not been invoked plaintiffs are liable to be non-suited.

4. On the issues cast over the pleadings of parties, which among others included whether plaintiffs are partners of the firm, whether first defendant maintained its account properly, and, is he liable to render the accounts, and, also whether plaintiffs are entitled to question the assignment deeds executed by defendants, trial proceeded. Plaintiffs examined one of them as P.W. 1 and exhibited Exts. A1 to A25. No evidence was tendered by defendants either oral or documentary. Appreciating the pleadings and evidence learned Sub Judge upheld the claim of plaintiffs for dissolution of the firm and rendition of accounts by defendants passing a preliminary decree as hereunder.

(a) The partnership viz. M/s. Lotus Constructions stands dissolved with effect from the date of decree.

(b) The defendants are directed to render accounts in respect of the partnership firm.

(c) The defendants are restrained from alienating or encumbering the assets of the firm.

(d) The plaintiffs are found entitled to the amounts towards their share if any amount is found so during the final decree stage

(e) The defendants are directed to pay the costs of the plaintiffs,

Aggrieved by the decree defendants 1 and 6, both of them together, have come up with this appeal.

5. I heard the counsel on both sides. Learned counsel for appellants challenged the decree contending that it has not been passed in consonance with the rules covered by Rules 218 and 220 of the Kerala Civil Rules of Practice. The decree is vague, and findings entered on many of the issues in the suit show total non-application of mind by learned Sub Judge over the pleadings and evidence let in the case, is the submission of counsel. Only two among the issues, issue Nos. 1 and 7, have been considered with reference to the materials, and all other issues are decided without even appreciating the challenges raised by the first defendant, is the further submission of counsel. The finding entered on issue No. 7 that there was constructive notice even if notice had not been served on defendants for dissolution of the firm by plaintiffs, is erroneous and unsustainable, according to the counsel. Learned counsel also submitted that when partnership deed contained an arbitration clause suit filed before Civil Court for dissolution of the firm was not maintainable, and decree passed allowing dissolution is liable to be set aside. On the other hand learned counsel for respondents 1 and 2 (plaintiffs) adverting to Order XX Rule 15 of the Code of Civil Procedure, for short the Code, submitted that the procedural requirements covered by Rules 219 and 220 of the Civil Rules of Practice for passing a preliminary decree in a suit for dissolution of a firm have been complied with in the present case. The Court below has found that a notice had been given by plaintiffs for dissolution of the firm as required under Section 43 of the Partnership Act, according to counsel. As dissolution of the firm under the decree had been given effect to only from the date of decree first defendant cannot have any grievance against such decree, submits the counsel. Referring to the provisions covered by Ext. A1 deed, copy of partnership deed, where shares of partners in the firm are given, it is submitted by counsel that omission to show such shares in the preliminary decree cannot be a ground to assail the decree, and, if need be, it can be clarified by this Court declaring the shares of partners as stated under the deed. At any rate challenges raised to impeach the decree passed in the suit are devoid of merit, is the submission of counsel urging for dismissal of the appeal.

6. Second appellant (6th defendant) which has joined the other appellant (first defendant) in filing the appeal was impleaded in the suit as a rival firm carrying on the same business conducted by the firm M/s. Lotus Constructions, the dissolution of which was sought for. First defendant (first appellant) as a partner of that rival firm has misconducted himself was the case of plaintiffs to seek a decree of injunction to restrain him from functioning as a partner of sixth defendant. Though an issue thereto was raised in the suit Court below has stated that none of the parties pursued that question in the trial of the suit and as such the issue has not come up for consideration. Sixth defendant remained ex parte in the suit. No decree has been passed against sixth defendant, and, also no ground has been raised in the appeal memorandum in what way it is aggrieved by the preliminary decree passed in the suit. When that be so, appeal against the decree by second appellant (6th defendant) alone or jointly with any other party in the suit has no merit.

7. Now before looking into the challenges canvassed against the decree, it has to be noticed that finding entered on the evidence that plaintiffs are partners of the firm, which was disputed by first defendant, and also that the defendants have to render accounts of the firm holding that sale deeds executed by first defendant over properties of the firm are not binding on the plaintiffs, is not impeached on any ground. Perusing the materials produced in the suit I find findings entered thereof by the learned Sub Judge are unassailable.

8. Preliminary decree passed by the Court below is challenged on the ground that it does not satisfy Rules 218 to 220 of the Civil Rules of Practice. At the stage of passing of preliminary decree in a case where partnership and books are admitted Rule 218 applies and in other cases Rules 219 and 220 have application. Rule 219 contemplates of determination of the persons who are partners of the firm and who are entitled to the share and profits thereof and the proportion in which they are entitled to share profits and liable for losses. It also contemplates consideration of the question whether the partnership books have been regularly and properly kept and if any allegations are made thereof to consider the nature of errors and irregularities therein and who is culpable for the same. If errors or irregularities in the accounts are noticed or fraud has been committed, it shall declare generally the nature of such errors, irregularities or fraud. Rule 220 contemplates of giving directions in the matter of taking accounts of the firm and also publication of notice if necessary over the dissolution of firm and also appointment of receiver.

9. I do not find any merit in the challenge canvassed that the decree has not been passed in terms of Rules 218 to 220 of the Civil Rules of Practice. Rule 219 of the above Rules alone has application to the suit at this stage. What is stipulated under that rule in passing of a preliminary decree for dissolution of a firm has to be read with Order 20 Rule 15 of the Code, which reads thus:

Where a suit is for the dissolution of a partnership, or the taking of partnership accounts, the Court, before passing a final decree, may pass a preliminary decree declaring the proportionate shares of the parties, fixing the day on which the partnership shall stand dissolved or be deemed to have been dissolved, and directing such accounts to be taken, and other acts to be done, as it thinks fit.

In the present case where liability of defendants to render accounts of the firm to plaintiffs, two partners, has been established, and, partnership being one at Will, the decree directing accounts to be taken is proper and valid. The question is whether that decree has been passed in terms of the rule prescribed by the Code. While passing a preliminary decree ordering dissolution of the firm the proportionate shares of the partners over the assets of the firm after taking of accounts cannot be declared solely on the basis of the proportionate shares fixed and agreed upon them over sharing of profits and loss of the firm. Very often shares may be fixed in lieu of remuneration for services rendered by one or other partner in carrying the business of the firm, and, in such cases on dissolution proportionate shares already fixed cannot be a guideline to declare the shares of partners over the assets of firm. If partnership agreement provides not only share of profits by partners but also share of the assets on dissolution, of course, that has to be accepted and given effect to while passing a preliminary decree for dissolution of the firm. Merely because one of the partners is entitled to 1/3rd share of profit by way of remuneration in a firm, it cannot be stated that he would be entitled to 1/3rd share in the assets of the firm on dissolution. However, in the given facts of the case, where the contesting partner (first defendant) has not placed any material why proportionate share of the partners over the assets of the firm determined after taking of accounts be not fixed in terms proportionate shares as under Ext. A1 for sharing a profits and loss of the firm remission of the case to declare the proportionate shares of partners for passing a preliminary decree is not required. First defendant continued as the managing partner of the firm and his liability to account to other partners over the transactions effected by the firm has been established. Ext. A1 provides proportionate ratio for sharing a profits and loss of the firm by partners. The ratio fixed is thus: First and second petitioner 22% each 3rd and 4th 16.5%, 5th and 6th partner 10.5% each and 7th partner 2%. Preliminary decree passed by the Court below has to be modified declaring the shares of partners in accordance with the proportionate shares as fixed under Ext. A1 to claim amount, if any, due to them in the assets of the dissolved firm after taking accounts.

10. Section 43 of the Indian Partnership Act states that a partnership at Will is dissolved by a partner giving notice, in writing, to all other partners, of his intention to dissolve the firm. It also makes clear that the firm is dissolved as on the date mentioned in the notice as a date of dissolution or if no date is mentioned as from the date of communication of the notice. No notice was given by plaintiffs is the case of first defendant to challenge the decree passed for dissolving the firm, which is given effect to only from the date of such decree. Even if the suit for dissolution of firm has been filed without giving notice a decree can still be passed declaring that the partnership would stand dissolved from the date of the decree. In an action by one of the partners in the case of partnership at Will the denial of the partnership by the defendant is sufficient to dissolve the partnership. However mere filing of a suit for dissolution of the partnership does not amount to a notice for dissolution of such partnership. This is so since Section 43(2) of the Partnership Act mandates dissolution of the firm either from the date mentioned in the notice as the date of dissolution or if no date is so mentioned as from the date of the communication of the notice. The Apex Court in Banarsi Das v. Kanshi Ram MANU/SC/0302/1962 : 1963 KHC 604 : AIR 1963 SC 1165 : 1964 (1) SCR 316 has held that the term "notice" in Section 43(2) is wide enough to include within it a plaint filed in a suit for dissolution of partnership. But in such a case the partnership would be deemed to be dissolved when the summons accompanied by a copy of the plaint is served on the defendant, where there is only one defendant, and on all defendants, when there are several defendants. Since a partnership Will be deemed to be dissolved only from a particular date, it is further clarified that the date of dissolution would have to be the date on which the last summons was served. So in the present case where the Court below has passed the preliminary decree fixing the date of dissolution of firm from the date of decree, no grievance can be raised by first defendant on the ground of want of notice under Section 43 of the Partnership Act.

11. There is no merit in the challenge that since the partnership contained an arbitration clause the suit was not maintainable. If at all such a challenge was available the defendants should have raised it at the appropriate stage as provided under Section 8 of the Arbitration Act 1996. Before defendant sets forth his defence in the suit, at its first hearing after his appearance, jurisdiction of Court on a ground referable to Arbitration Act, if available, should be raised and decision thereof has to be invited. That having not been done, at this stage, in the appeal against the preliminary decree passed by the Court below such a challenge cannot be entertained. Plaintiffs among other reliefs sought for a decree of injunction to restrain the defendants from alienating the assets of the firm. Learned Sub Judge has passed a prohibitory order in the decree restraining defendants from alienating or encumbering the assets of the firm. It has come out in evidence that all the assets of the firm had already been disposed of or alienated and, thus, the prohibitory decree serves no purpose. Liability to render accounts of the firm by defendants irrespective of the alienations still continue and a decree has been provided thereof. Prohibitory order passed by the Court under the preliminary decree shall stand vacated.

In the result, the preliminary decree passed by the Court below dissolving the firm directing for taking its accounts is upheld subject to the modifications that partners of the firm shall be entitled to share in the proportionate ratio as fixed in Ext. A1 for sharing profit and loss of accounts over the assets of the dissolved firm after taking of and finalising of accounts. Prohibitory order issued against the first appellant (first defendant) from alienating or encumbering the assets of the firm which has become infructuous shall stand vacated.

Appeal is disposed with the modification of the preliminary decree as indicated directing both sides to suffer their costs.

Print Page