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2000 DIGILAW 489 (DEL)

SATISH AGGARWAL v. SUBHASH CHAND AGGARWAL

2000-06-14

MUKUL MUDGAL

body2000
MUKUL MUDGAL ( 1 ) THIS is a petition under Section 9 of the Arbitration and Conciliation Act, 1996which seeks the appointment of a receiver for the firm M/s. Sultan Chand and Sons andm/s. Premier Book Co. , which were formed pursuant to a Partnership Deed dated2. 4. 1976 between Shri Prakash Chand and his brother and sisters who arerespondents 1, 2 and 3. The petitioners deceased father Prakash Chand had 40 percent share and each of the respondents had 20 per cent share, and the partnershipdeed contained an arbitration clause. ( 2 ) ON 10. 9. 1997 Shri Prakash Chand, died leaving his will dated 25. 1. 1997bequeathing his share in the partnership to his two sons who are the presentpetitioners. The defendants 4-8 are daughters of the deceased Prakash Chand. Thedefendant No. 1 is the brother and respondent Nos. 2-3 are the sisters of Prakashchand and each had 20% share in the firm. The petitioner s case is that on the deathof Shri Prakash Chand, the partnership stood dissolved by operation of law undersection 42 sub-clause (e) of the Indian Partnership Act, there being no clause for thecontinuation of the partnership subsequent to the death of one of the partners. Pursuant to the death of the Shri Prakash Chand efforts were made to form a newpartnership including the two petitioners, as the new partners of the firm. However,these efforts did not fructify and consequently on 13. 2. 1998 the petitioners gavenotice to respondents 1 -3 to execute a partnership with the petitioners within 7 days. No reply was received to this Notice. On 27. 2. 1998 the petitioners asked therespondents 1-3 to agree to make a reference of the disputes to arbitration. However,no reply was received by the petitioner. On 9. 3. 1998 notice was given by thepetitioners to the respondents 1 -3 saying that the respondents 1-2 are misusing theproperties of the firm by setting up a new firm by the name of Sultan Chand and Sons/premier Book Co. and the daily proceeds were being taken away by respondents. This notice also proposed the name of Shri R. N. Sawhney, the Income-tax Adviser ofthe erstwhile firm as an Arbitrator. On 17. 3. and the daily proceeds were being taken away by respondents. This notice also proposed the name of Shri R. N. Sawhney, the Income-tax Adviser ofthe erstwhile firm as an Arbitrator. On 17. 3. 1998, the present petition under Section 9of the Arbitration and Conciliation Act, 1996 was filed by the petitioner for appointmentof a Receiver and for grant of an injunction restraining the respondents 1 and 2 fromcarrying on the business in the name of Sultan Chand and Sons or Premier Book Co. orusing any properties of the dissolved firm or receiving cash sale of books. ( 3 ) ON 26. 3. 1998, the following order was passed by this Court: "respondents No. 1 and 2 are restrained from using the properties, assets andfunds of M/s. Sultan Chand and Sons and M/s. Premier Book Co. for theirbenefits. "during the hearing of this case certain orders were passed by this Court whileconsidering the possible terms of settlement between the parties. The followingorder was passed on 13. 10. 1999 by this Court on an offer made by the respondentno. 1:- "on an offer of deposit of Rs. six crores in the form Fixed Deposit Receiptsand Bank balances in this Court made on behalf of the learned counsel forrespondent No. 1, Mr. Sahai learned senior counsel appearing on behalf ofthe petitioner states that he is agreeable provided: (a) 40% of the proportionate profit of the last two years is paid to hisclient; and (b) interest on the sum of Rs. six crores is also paid to his clientsubject to final adjustment. The proposal of the learned counsel for the respondent No. 1 also statesthat his offer also requires upon the deposit of Rs. six crores as describedabove, the petitioner will not interfere with the running of the firm by therespondent No. 1. "subsequently another order was passed on 2. 12. 1999 in the following terms;- "apart from the suggestions contained in the order of this Court dated 1 3/10/1999 it was suggested to the parties that the last two years profit be-divided into 40 per cent to the petitioner and 60 per cent to the respondentsand the 6 crores deposit be reduced accordingly subject to the final accountingaccording to the award of the arbitrator which is not acceptable to therespondent No. 1. " ( 4 ) EVENTUALLY the settlement could not be arrived at between the parties and the casewas heard on merits and orders reserved. ( 5 ) IN support of his plea for the appointment of a receiver, the learned seniorcounsel for the petitioners Shri Ishwar Sahai, has relied upon the admission by therespondent No. 1 that the partnership stood dissolved by law and has submitted thatin any event in view of the provision of Section 42 (c) of the Partnership Act providingfor dissolution of a partnership on the death of a partner, the partnership came to anend. He has further pleaded that on the dissolution of the partnership as per theprovisions of Sections 46, 48 and 49 of the Indian Partnership Act, the firm has to bewound up and after the debts and liabilities are cleared, the assets are to be distributedbetween the partners of the firm. He has further relied upon Section 53 of the said Actto contend that the heirs of a deceased partner may restrain the other partners fromcarrying out similar business in the firm name or from using any of the properties ofthe firm for their benefits until the affairs of the firm are completely wound up. He hasfurther relied upon Section 55 of the Partnership Act to contend that the goodwill ofthe firm is one of its assets. The learned counsel has relied upon the followingjudgments Vidya Devi Vs. Mani Ram etc. 1974 RLR 346 ; Tilak Chand Vs. Darshanlal AIR 1985 Jandk 50 and Radha Kante Pal Vs. Benode Behari Pal and Ors. ,mr 1934calcutta 444 to contend that upon the dissolution of a partnership, by operation of lawthe appointment of a Receiver is a matter of course. In particular he has relied upon. Tilak Chand (Supra) which according to the learned counsel of the petitioners hascomprehensively reviewed all the decisions on the issue to hold that the appointmentof a Receiver being an equitable relief but in a dissolved partnership is a matter ofcourse and has urged that in the present case, the appointment of a receiver shouldtherefore be made to wind up the partnership business completely and to divide thesurplus. ( 6 ) IN Vidya Devi Vs. Mani Ram etc. , (Supra) it has been held that on a dissolutionof a firm a Receiver should be appointed as a matter of course, in so far as Tilakchand Vs. ( 6 ) IN Vidya Devi Vs. Mani Ram etc. , (Supra) it has been held that on a dissolutionof a firm a Receiver should be appointed as a matter of course, in so far as Tilakchand Vs. Darshan Lal (Supra), it has been held that in a dissolved partnershipappointment of a Receiver should be as a matter of course to wind up the partnershipbusiness completely and to divide the surplus between the partners of their rights. Similarly in Radha Kanta Pal Vs. Benode Behari Pal and Ors. (Supra) it has beenheld that a partner should not be appointed Receiver when prima faciw case ofsuspicion of dishonesty has been made against him. ( 7 ) THE respondent has taken the plea that even the petitioners are engaged inrunning a similar publication house in the name of Sultan Chand and Sons Pvt. Ltd. ,wherein both the petitioners are Directors and the said company is engaged in thesimilar business of educational publishing. It is further alleged that during the financialyear 1996-97, a period prior to his death, Late Shri Prakash Chand, father of thepetitioners, withdrew cash to the tune of Rs. 77. 92 lacs from the firm in addition to thefurther sum amounting to Rs. 18. 17 lacs. This caused heavy imbalance in the firm sfunds. It was also stated that on 11. 9. 1997 the firm was reconstituted after the deathof Shri Prakash Chand and a Deed of Partnership was signed on 25. 12. 1997 andregistered with the Registrar of Firms. The reconstituted firm also opened a bankaccount on 11. 9. 1997. The respondents 1-2 have further submitted that therespondents had further invested funds to the tune of Rs. 83 lacs in the new partnershipbusiness out of their personal funds from 1. 4. 1998 to 31. 3. 1999. It is also averredthat the petitioner No. 2 was permitted to continue to look after the cash sales of thecompany out of respect for the deceased partner. It is further stated that during11. 9. 1997 to 18. 2. 1998, the petitioner No. 2 also withdrew heavy cash amount fromthe daily cash sales of the firm. It is further submitted by the respondent No. 1 that thepetitioners were engaged in a similar business of educational publishing as conductedby the respondent No. 1 s firm. The trade names and the trading addresses of boththe Companies are almost similar. Large-scale withdrawals of cash funds by Mr. It is further submitted by the respondent No. 1 that thepetitioners were engaged in a similar business of educational publishing as conductedby the respondent No. 1 s firm. The trade names and the trading addresses of boththe Companies are almost similar. Large-scale withdrawals of cash funds by Mr. Prakash Chand during his lifetime resulted in the assets of the firm shrinking to 6 percent while his share in the profits was 40 per cent. ( 8 ) IT is submitted by the learned counsel for respondent No. 1 that The heavywithdrawal of cash funds by Shri Prakash Chand without express consent of the otherpartners led to heavy and unjust imbalance in the contribution of funds by the otherpartners to the firm particularly when no interest was given to the other partners forhigher financial contribution. The contribution of the funds by the partners was grosslydisproportionate to their respective shares in the profits and losses. Reliance hasbeen placed on the following table derived from the audited balance sheet of the firm: "share IN THE NET ASSETSAS PER AUDITED BALANCE SHEETM/s SULTAN CHAND and SONS. NEW DELHITotaltotal Outsidetotal Partnersmr. S. C. Ms. Kamlams. Ushaassetscurrent Liabilitiesfund (Fixedaggarwalaggarwalaggarwalof thealready paidcapital + (Respn. 1) (Respn. 3) (Respn. 2)Firmout exceptingcurrent A/cscsmr. PC sbalances)Successorrs. Rs. Ps. Rs. Rs. Rs. Lakhslakhslakhslakhslakhslakhs10. 9. 97 472. 37143. 33309. 3996. 99110. 38 102. 02**19. 6531. 34%35. 67%32. 97%6. 35%150. 3231. 3. 98 484. 62 **12. 38321. 92122. 80117. 0982. 033. 84%38. 14%36. 37%25. 48%" ( 9 ) THE Respondent No. 1 s submission is that the petitioners and other legal heirsof the deceased partner have a right only to accounts of the firm and their share in thesurplus. It is also submitted that the auditors have certified that any of the partners (respondents 1-2 herein) of the reconstituted firm have not withdrawn any amount fortheir personal use or benefit. The plea of the transfer of stock etc. , made by therespondent No. 1 is rebutted as having been made by the petitioners themselves toprevent normal functioning of the firm from 23, Darya Ganj and the operation of thefirm bank account. In so far as contribution to M/s. Sultan Chand Trust is concerned itis submitted by the respondent No. 1 that during the lifetime of Shri Prakash Chand,the firm had voluntarily given Rs. 10 lacs to the said trust. In so far as contribution to M/s. Sultan Chand Trust is concerned itis submitted by the respondent No. 1 that during the lifetime of Shri Prakash Chand,the firm had voluntarily given Rs. 10 lacs to the said trust. It has also been stated thatthe trust is a Public Charitable Trust giving scholarships to meritorious studentsthroughout the country. In reply to the averment that the assets of the old firm wasbeing used by the new firm, it is stated that the firm of Sultan Chand and Sons isworking with the funds of surviving partners and not with the funds of the deceasedpartner or his successor. On 10. 9. 1997 when Mr. Prakash Chand died, the sourcesof the funds of the firm were as follows: "- Surviving Partners Capital contribution to the total asset of the firm 4%- Advances by surviving partners to the firm 61. 5%- Amount due to external creditors of the firm 34. 5%on 31. 3. 98, however, the sources of funds of the firm were as under:-- Capital contribution of surviving partners 20. 6%- Advances by surviving partners 45. 8%- Amount due to external creditors 33. 6%100. 0%" ( 10 ) IN so far as the appointment of the Receiver is concerned, the respondent No. 14has relied upon the following 5 principles culled out from the judgment reported as T. Krishna Swamy Chetty Vs. C. Thangavelu Chetty and Ors. , AIR 1955 MAD 430 : "1. The -appointment of a receiver pending a suit is a matter resting in thediscretion of the Court:2. The Court should not appoint a receiver except upon proof by the plaintiffthat prima facie he has a very excellent chance of succeeding in the suit;3. Not only must the plaintiff show a case of adverse and conflicting claims toproperty, but, he must show some emergency or danger or loss demandingimmediate action and of his own right he must be reasonably clear and freefrom doubt. The element of danger is an important consideration:4. An order appointing a receiver will not be made where it has the effect ofdepriving a defendant of a de facto possession since that might causeirreparable wrong. It would be different where the property is shown to be inmedio , that is to say, in the enjoyment of no one; and5. The element of danger is an important consideration:4. An order appointing a receiver will not be made where it has the effect ofdepriving a defendant of a de facto possession since that might causeirreparable wrong. It would be different where the property is shown to be inmedio , that is to say, in the enjoyment of no one; and5. The Court, on the application made for the appointment of a receiver,looks to the conduct of the party who makes the application and will usuallyrefuse to interfere unless his conduct has been free from blame. " ( 11 ) THE respondents also stated that these principles have been followed insubsequent cases. Consequently the plea for denying the appointment of a Receiverhas been founded mainly on the following grounds: (I) There can be no appointment of a Receiver as a matter of course. (ii) There is no real and well-founded apprehension of loss or dissipation ofproperty. (iii) The amount due to the petitioners, excluding share of goodwill wasmerely Rs. 12 lakhs and as opposed to the said amount of Rs. 12 lakhs, overrs. 6 crores are lying frozen in the bank accounts and the said funds aresufficient to meet the claims of the legal heirs of the deceased partner. (iv) The two surviving partners [respondent Nos. 1 and 2) have added additionalfunds to the tune of Rs. 83 lacs from their own funds and resources duringthe period 1. 4. 1998 to 31. 3. 1999. (v) No amount having been withdrawn by the two respondents for theirpersonal use or benefit. (vi) The petitioners are merely unsecured creditors under Section 37 of theindian Partnership Act, 1932. (vii) It is necessary to preserve the goodwill which is the most preciouse setof the firm. (viii) It is further necessary to pay royalty to the authors in time. ( 12 ) THE respondent No. 1 has also given various instances of the conduct of thepetitioners which disentitles them to seek the appointment of a Receiver. Theinstances of the fraudulent conduct of the petitioners according to the respondent No. 1 are as under:- (A) running the same business of educational publishing in the same subjectsand with the same authors and (b) creating various obstacles in the smooth running of the business. ( 13 ) THE approach of the petitioners is further discernible according to the respondentno. Theinstances of the fraudulent conduct of the petitioners according to the respondent No. 1 are as under:- (A) running the same business of educational publishing in the same subjectsand with the same authors and (b) creating various obstacles in the smooth running of the business. ( 13 ) THE approach of the petitioners is further discernible according to the respondentno. 1 from the fact that repeated offers by the respondent No. 1 to pay the amountdue to them have been spurned by the petitioners. Even the offer of accepting theamount without prejudice and subject to an arbitral award have been rejected by thepetitioners. It is further submitted on behalf of respondent No. 1 that the aim of thepetitioner is merely to ensure the closure of the business of the firm so as to usurp thegoodwill and reputation of the firm s tradename. It is further stated that the closure of afirm would bring the claim of the goodwill to a zero amount and the ploy of thepetitioner is to whittle away the goodwill of the respondent No. 1 s firm with a view toreduce it to zero so that the petitioner could trade upon the said goodwill without anyextra cost. Reliance has also been placed on Section 37 of the Partnership Act tocontend that at best the petitioner is entitled to his share of 40% of the profits since heceased to be a partner in accordance with the use of his share in the property of thefirm. ( 14 ) THE learned counsel for respondent No. 1 has also relied upon the followingjudgments 1988 (2) CUR. C. C. 725: Radha Kanta Pal Vs. Benode Behari Pal andors. AIR 1934 Calcutta; T. Krishnaswamy Chetty Vs. C. Thangavelu Chetty andors. AIR 1955 Madras 430; Dilman Rai Vs. Srinarayan Sharma and Anr. , AIR 1983sikkim 11; Sarada Dei Vs. Khirod Kumar Sahu and Ors. , AIR 1983 Ori 155 ;laxmidas Dayabhai Kabrawala Vs. Nanabhai Chunilal Kabrawala and Ors. , AIR1964 11 SC; Sobell Vs. Boston and Ors. 1975 (2) ALL ER 282; Rajeshwar Nathgupta Vs. Administrator General AIR 1989 Delhi 179 and Bhola Nath Vs. Kasodevi AIR (38) 1951 Allahabad 601 to contend that the appointment of a Receiver isnot called for in the present case. In particular, he has relied upon the judgment oflaxmidas Dayabhai Kabrawala (Supra ). Boston and Ors. 1975 (2) ALL ER 282; Rajeshwar Nathgupta Vs. Administrator General AIR 1989 Delhi 179 and Bhola Nath Vs. Kasodevi AIR (38) 1951 Allahabad 601 to contend that the appointment of a Receiver isnot called for in the present case. In particular, he has relied upon the judgment oflaxmidas Dayabhai Kabrawala (Supra ). The learned counsel has also sought todistinguish the judgments relied upon by the learned counsel for the petitioner bycontending that the facts of the cases are different and in the present case there is noattempt to defeat the rights of the petitioners and the respondent No. 1 is ready tosettle the accounts and the respondents have not introduced any new partner in thepartnership without capital. It is further stated that in the present case, unlike thedecisions relied upon by the learned counsel for the petitioner, further funds to thetune of about Rs. 83 lacs were brought in by the respondents 1 -2 from 1. 4. 1998 to31. 3. 1999. He has also submitted that the circumstances listed in the aforesaidjudgment do not apply to the facts of the present case as the firm is not being run onpersonal account nor are the assets being used for personal use and there is nomismanagement of the firm or asset to the detriment of the petitioners and no assetshave been spirited away by the surviving partners. It is further stated that the respondentno. 1 is in continuing partnership business having a running business and theprinciples applicable to a dissolved partnership will not ipso facto apply. It is further stated that the respondentno. 1 is in continuing partnership business having a running business and theprinciples applicable to a dissolved partnership will not ipso facto apply. ( 15 ) THE learned counsel for the petitioners has relied upon the following provisionsof the Indian Partnership Act, 1932 in support of his plea for appointment of areceiver: (1) Section 42 (c) which postulates the dissolution of a partnership by thedeath of a partner; (2) Section 46 which prescribes the right of partners to have business woundup after dissolution; (3) Section 48 which provides for the mode of settlement of accountsbetween the partners; (4) Section 49 which prescribes for the payment of firm debts and of separatedebts; (5) Section 53 which gives the right to a partner or his representative afterthe dissolution of the firm to restrain any other partner or his representativefrom carrying on a simitar business in the firm name or from using theproperty of the firm for his own benefit until the affairs of the firm have beencompletely wound up and (6) Section 55 which provides for sale of goodwill after dissolution and theinclusion of a goodwill in the assets of the firm. ( 16 ) IN my view all these provisions are relevant provisions which would obviously betaken into account by the Arbitrator in coming to his decision. However, in so far asthe interim order is concerned, the petitioner s interest can be adequately safeguardedby giving the petitioner the benefit of Section 37 of the Act. Section 37 provides thatwhen upon the death of a partner, the surviving partners carry on the business of thecontinuing firm with the property of the firm without any final settlement of accountsbetween them and the estate of the deceased partner, then the estate of the deceasedpartner is entitled to such profits of the profits made since the erstwhile partnerceased to be a partner as may be attributable to the use of his share of the property ofthe firm. ( 17 ) I am satisfied that the present case is not a case where the judgments reliedupon by the learned counsel for the petitioners could apply and a Receiver could beappointed as a matter of course. Even in Tilak Chand Jain Vs. Darshan Lall Jainand Ors. ( 17 ) I am satisfied that the present case is not a case where the judgments reliedupon by the learned counsel for the petitioners could apply and a Receiver could beappointed as a matter of course. Even in Tilak Chand Jain Vs. Darshan Lall Jainand Ors. (Supra) which according to the learned counsel for the petitioners is adecision which reviews all the relevant authorities, it has been eventually held inparagraph 60 that the appointment of a receiver in respect of a dissolved firm is inthe discretion of the Court and in the exercise of this discretion the Court will beguided by the consideration of preserving and protecting the property and assets of adissolved firm and should not permit the dissipation or user to the exclusion of otherpartners who are excluded from such user. Thus the Court must ensure safeguardsfor protecting the property and assets of a dissolved firm. It is not in dispute that on 10/09/1997, the Prakash Chand, the partner through whom the petitionersclaimed, died and from 11. 9. 1997 the firm against which the relief for appointment ofa Receiver is claimed, was formed and a partnership deed was signed on 25. 12. 1997and registered with the partnership firm. It is clear that the partnership firm isfunctioning since 1997 and as of today is a running concern. Furthermore the interimorder dated 26. 3. 98 passed by this Court also protects the interests of the petitionersas an interim measure. There is no such emergency or danger or loss demandingimmediate action in view of this passage of time and the running nature of thispartnership firm which would lead to the adoption of the appointment of a Receiver. The ate facto possession of the respondent also cannot be lost sight of and theappointment of a Receiver would have effect, of ousting the respondents frompossession. It is also not in dispute that both the parties have agreed to arbitration ofa commonly agreed arbitrator and since it is expected that the Arbitrator s awardwould come expeditiously, no useful purpose would be served by appointing areceiver at this juncture. However, in addition to the Order dated 26. 3. 98 certainother interim measures are necessary to adequately protect and safeguard theinterest of the petitioners. It is, therefore, directed that as a measure of protection ofthe interests of the petitioners the sum of Rs. However, in addition to the Order dated 26. 3. 98 certainother interim measures are necessary to adequately protect and safeguard theinterest of the petitioners. It is, therefore, directed that as a measure of protection ofthe interests of the petitioners the sum of Rs. 6 crores in the form of fixed depositreceipts and the bank balances is required to be deposited in this Court by respondentnos. 1 to 3 within 6 weeks from today. The respondents Nos. 1 to 3 are directed to filethe accounts of the last two years within a period of three weeks from today withadvance copy to the counsel for the petitioners. Since the share of the deceasedprakash Chand was 40 per cent in the erstwhile partnership firm, it would beappropriate that 40% per cent of the Last two years proportionate profit may bewithdrawn by his legal heirs, i. e. , the petitioners and respondent Nos. 4-8 on onehand and 60% per cent proportionate profits for the last two years be withdrawn if notalredy withdrawn by the respondent Nos. 1 to 3 on the other hand and the deposit ofrs. 6 crore be proportionately reduced after taking into account the aforesaid figureof division of profits for last two years in the ratio of 40:60 per cent between thepetitioners and respondentNos. 4 to 8 on the one hand and the respondent Nos. 1-3on the other. This payment may also be made within six weeks. The withdrawal is onaccount and may be on such terms and conditions as the arbitrator who is beingappointed by this order may choose to impose. Other and further interim orders anddirections may also be sought from the learned arbitrator. The petitioners andrespondents Nos. 4 to 8 are not to interfere with the functioning of the firm beingpresently run by the respondents Nos. 1 to 3. In my view considering the facts of thepresent case and the running nature of the business this order would adequatelyprotect the interests of the petitioners. " ( 18 ) WITH the consent of the parties, Mr. Justice P. K. Bahri, a retired Judge of thiscourt is appointed as Arbitrator on the term and conditions to be fixed by the Arbitratorin consultation with the parties. The Arbitrator may give his Award preferably within 4months from the date of entering upon the reference. Parties to appear before thelearned Arbitrator on 29. 7. 2000 to seek appropriate orders in accordance with thisjudgment. The Arbitrator may give his Award preferably within 4months from the date of entering upon the reference. Parties to appear before thelearned Arbitrator on 29. 7. 2000 to seek appropriate orders in accordance with thisjudgment. Petition and arbitration application are accordingly disposed of. List this matter on 12. 9. 2000 for reporting compliance.