M/S. Krishna Motor Service Vs. H.B. Vittala Kamath
[1996] INSC 577 (19
April 1996)
Ramaswamy,
K.Ramaswamy, K.G.B. Pattanaik (J)
CITATION:
JT 1996 (5) 162 1996 SCALE (4)412
ACT:
HEAD NOTE:
O R D
E R
Leave
granted.
We
have heard learned counsel on both sides.
These
appeals by special leave arise from the order of a Division Bench of the
Karnataka High Court made in M.F.A.No.324/86 on 3.1.1994 and in Civil Petition
No.96/94 on 25.3.1994. It is not necessary to narrate in extenso the
constitution, existence and continuance of the partnership firm prior to July 1, 1973. Suffice it to state that the
respondent, who was working in the partnership firm as a Supervisor on salary
basis, was taken as a partner on July 1, 1973, resulting a new partnership and it was agreed that he
would be entitled to 10% of the profit and loss without contribution of any
capital in the partnership. When disputes had arisen between the appellants and
the respondent, the appellants- four partners- had a notice issued on 10.5.1984
dissolving the partnership. The respondent by his reply dated 17.5.1984 had
agreed for dissolution. Subsequently, he filed an application under Section 20
of the Arbitration Act, 1940 (for short, the 'Act') on 8.6.1984, in the court
of the Civil Judge at Shimoga for reference to the arbitrator in terms of the
agreement. The trial Court rejected three out of 4 claims made by him and
referred claim No.1 to the arbitration. The High Court on further
consideration, in appeal, added two more items to the reference. Thus, these
appeals by special leave.
Shri Javali,
learned senior counsel for the appellants, contended that since admittedly the
partnership firm was not registered as required under Section 69 of the
Partnership Act, 1932, the respondent was not entitled to the reference under
Section 20 of the Act to an arbitration. He also contended that even assuming
that the court has such power of making reference, it would be only within the
parameters of the provisions in sub-section (3) of Section 69 of the Partnership
Act and no other claim is referable for arbitration. He placed string reliance
on Jagdish Chander Gupta vs. Kajaria Traders (India) Ltd. (1964) 8 SCR 50], in particular the last paragraph
thereof, overruling the judgment of the Patna High Court in Mahender vs. Guru Dayal
[AIR 1951 Patna 196]. The respondent resisted the
contention and relied on Prem Lata vs. Ishar Dass Chaman Lal [(1995) 2 SCC 145]
The question, therefore, is: whether the respondent is entitled to a reference
under Section 20 of the Act? Admittedly, the partnership firm was not
registered as required under Section 69(1) of the Partnership Act. The
partnership deed does contain a clause for reference to arbitrate the disputes
that would arise under the contract.
The
question, therefore, is: whether the exceptions to sub- section (3) of Section
69 would apply to the facts of the case Sub-section (3) of Section 69 envisages
as under:
"69.(3)
The provisions of sub- sections (1) and (2) shall apply also to a claim of
set-off or other proceeding to enforce a right arising from a contract, but
shall not effect-
(a)
the enforcement of any right to sue for the dissolution of a firm or for
accounts or a dissolved firm, or any right or power to realise the property of
a dissolved firm; or
(b)
the powers of an official assignee, receiver or Court under the
Presidency-towns Insolvency Act, 1909 (3 of 1909), or the Provincial Insolvency
1920 (5 of 1920), to realise the property of an insolvent partner,"
(Emphasis supplied) The contention of Shri Javali is that since the words
"other proceedings to enforce a right arising from a contract"
clearly envisage that When a party to the contract seeks to enforce the right
arising from the contract, the main part of sub-section (3) stands attracted, the
exceptions provided in the exclusionary clauses have no application. Therefore,
the ratio in Jagdish Chandra Gupta's case, though related to reference under
Section 8 would apply to the facts of the case and that the reference is not
maintainable. We find no force in the contention. The words "but shall not
affect" require to be given meaning and effect thereof in the operation of
the main part of sub- section (3). But as seen the exceptions engrafted in sub-
section (3) intend to exclude the embargo created by sub- section (3) and
intended to effectuate the exceptions enumerated therein. It is seen that the
proviso give an exception stating that the main part of sub-section (3) shall
not affect (a) the enforcement of any right arisen from dissolved firm, of a firm
or for account of a dissolved firm, or any right or power to realise the
property of a dissolved firm, it confied interest to the partners, i.e.,
parties to the contract. Undoubtedly, Section 69 is mandatory in character and
its effect is to render a suit by plaintiff in respect of a right vested in him
or acquired under a contract which he entered into as a partner of a firm,
whether existing or dissolved void. In other words, a partner of an erstwhile
unregistered partnership firm cannot bring a suit to enforce a right arising
out of a contract falling within the ambit of the main part of Section 69(3) of
the Act. In Jagdish Chandra's case at 60 this Court interpreting main part of
sub-section (3) had held that "In our judgment, the words 'other proceeding'
in sub-s. (3) must receive their full meaning untrammeled by the words'a claim
of set-off'. The latter words neither intend nor can be construed to cut down
the generality of the words 'other proceedings'. The sub-section provides for
the application of the provisions of sub-ss. (1) and (2) to claims of set- off
and also to other proceedings of any kind which can properly be said to be for
enforcement of any right arising from contract except those expressly mentioned
as exceptions in sub-s.(3) and subs.(4)." If the right to dissolve the
firm itself is in dispute and is subject matter of the suit for dissolution of
the partnership firm, if a party to the contract of partnership seeks a
reference for arbitration to resolve that dispute, it would be a right from a
contract arisen in the proceedings for enforcement of the right to dissolve the
firm. In that event, necessarily, the main part of sub- section (3) stands
attracted and no such reference is valid in law. But in a case where the
parties have already agreed for dissolution of the partnership by mutual
consent, the partnership stood dissolved. There is no dispute as regards the
right arising from the contract of a firm. The dispute is only with regard to
working out the rights flown from dissolution for settlement of accounts of the
dissolved firm or any right or power to realise the property of the dissolved
firm etc. That right would form part of the exception engrafted in sub-section
(3) of Section 69. The object intended by the legislature appears to be that in
spite of the defect of non-registration and the prohibition created in the main
part of non-enforceability of the right arising from a contract, the parties
having worked under that contract, to the limited extent of the enforcement of
a right to realise the assets, settlement of the accounts of the dissolved firm
or any right or power to realise the property of the dissolved firm are
exceptions engrafted therein and gives right to the parties to enforce the
same, independent of the right arising from the contract.
Therefore,
the parties are relieved from the prohibition created by operation of Section
69.
In Jagdish
Chandra Gupta's case (supra), the facts were that right to dissolution of the
partnership firm was itself in dispute and the suit was filed for that purpose.
Therefore,
when the application under Section 8(1) of the Act was filed, this Court had
held that since the partnership firm was not registered as enjoined under sub-
section (1) of Section 69, the main part of sub-section (3) excluded the
application for enforcement of the right to reference in other proceedings
including enforcement under Section 8 of the Act. In Prem Lata's case (supra),
the facts were that by a deed of partnership was executed but the firm was not
registered under Section 65 of the partnership Act, On the demise of one of the
partners, the legal representatives called upon other partners to render
accounts of the dissolved firm. It is settled law that on the demise of one of
the members of the firm, the partnership stands dissolved. Therefore, the claim
had arisen under the exception engrafted under Section 69(3). In the backdrop
of those facts and considering the effect of the provisions in the light of the
ration in Jagdish Chandra Gupta's case, another Bench of this Court to which
one of us (K.Ramaswamy, J.) was a member had held in Smt Prem Lata's case that
Section 20 stands attracted to make an application for reference. Later, ratio
clearly applies to the facts in this case.
The
question then is: what are the items that would be referable to the
arbitration? The respondent sought reference of the items mentioned below;
"1)
taking out the true and correct account of the profit and loss of erstwhile
firm with the help of competent person and carve out the share of the
petitioner as per the agreement of partnership deed dated 6.10.1973;
2) if
the respondents are willing to continue the firm in the name and style of the
erstwhile firm namely Sri Krishna Motor Service, without taking the petitioner
as partner, the quantum of goodwill and compensation payable to the petitioner,
as out going partner;
3) to
decide in respect of the vehicle bearing No.MYS5676 and to deliver the vehicle
to the petitioner, with reasonable compensation for the use of the said
vehicle; and 4) to find out the changes made in the accounts and the
transactions carried out in the name of the erstwhile firm after the
dissolution of the firm by notice dated 10.5.1984 to determine the profit and
loss of the petitioner or such other reliefs that the Court may deed fit in the
circumstances of the case." It would be seen that item
(1) clearly
falls within the exception provided in Section 69(3). In respect of items
(2),
though it is widely worded, the respondent would be entitled to the question of
entitlement towards the goodwill only upto the date of dissolution of the firm
but not thereafter. With regard to items
(3) and
(4), they arise from the contract and these items would not come under any
exceptions engrafted under Section 69(3) of the Partnership Act. Under these
circumstances, the High Court was not right in making the reference in item No.(4).
The
appeals are accordingly allowed to the above extent, but, in the circumstances,
without costs.
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