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2002 DIGILAW 754 (KAR)

B. M. DEVAIAH v. CANARA BANK, YELWAL BRANCH

2002-12-04

D.V.SHYLENDRA KUMAR, T.S.THAKUR

body2002
THAKUR, J. ( 1 ) THIS is a defendants appeal arising out of a suit for recovery of money decreed by the Prl. Civil Judge, mysore, in favour of the respondent-Bank. The facts leading to the institution of the suit and the filing of the present appeal may be summarized as under : ( 2 ) M/s. Simone Enterprises was at the relevant point of time, a Partnership concern comprising Mrs. Kitty Mandanna and sri. C. P. Muthanna. The partnership was carrying on hotel and restaurant business in the name and style of Dew Drop Inn the firm it appears approached the plaintiff-respondent-Bank for a loan of Rs. 2,5,000/- which the Bank granted upon the borrower executing a Promissory Note and creating a mortgage by deposit of title deeds in respect of property mentioned in schedule B to the plaint. A deed of hypothecation in regard to the property described in Schedule-C to the plaint was also executed by the Borrower by way of an additional security. ( 3 ) A few months after the loan transaction was completed, the partners of the firm informed the plaintiff-Bank that the firm had been reconstituted and Sri B. M. Devaiah inducted as partner. The plaintiffs case before the trial Court was that the defendantfirm having failed to liquidate the outstanding liability on account of the principal and interest accruing on the same, it had no option but to file a suit seeking recovery of the money recoverable from the defendant firm and its three partners. A decree for a sum of Rs. 2,08,529. 55 with interest pendente lite and future was accordingly prayed for. ( 4 ) DEFENDANTS 1 (a) and 1 (b) initially filed a written statement raising several contentions, but during the pendency of the suit before the trial Court, they filed separate memos admitting the suit claim and conceding a decree- against them as prayed for. Defendant l (c) however contested the suit primarily on the ground that as per the terms of the reconstituted Partnership, he was not liable for any loan that had been borrowed or was outstanding by the original Partnership before the date of his induction. Reliance in support of that plea was placed by the said defendant upon Clause11 of the Partnership Deed dt. 23-6-1983 by which the said defendant had been inducted as a Partner into the Partnership. Reliance in support of that plea was placed by the said defendant upon Clause11 of the Partnership Deed dt. 23-6-1983 by which the said defendant had been inducted as a Partner into the Partnership. On the pleadings of the parties, the trial court framed the following issues :"1. Whether the plaintiff proves that the defendants borrowed Rs. 2,50,000/- from the plaintiff on executing a promissory note dt. 16-5-1983 as alleged? 2. Whether the plaintiff proves that the plaint A schedule properties were mortgaged and plaint C schedule properties were hypothecated in favour of the plaintiff as security? 3. Whether the plaintiff proves the execution of Article of agreement dt. 16-5-1983 in favour of the plaintiff? 4. Whether the defendant No. l (c) prove that the suit is not maintainable against him? 5. Whether defendant No. l (c) further proves that defendant No. l (b) alone is liable to clear the debt of the plaintiff? 6. Whether the suit is bad for non joinder of necessary parties? 7. To what reliefs are the parties are entitled? ( 5 ) THE parties led evidence in support of their respective cases. While the plaintiff examined 3 witnesses and placed reliance upon 13 documents marked Exs. PI to 13, the defendants did not adduce any oral evidence except getting their documents recorded. Reliance was however placed by them on certain documents which were marked exs. P. 1 to 26. By the judgment impugned in this appeal the trial Court recorded a finding to the effect that the defendant-firm had indeed borrowed a sum of Rs. 2,50,000/- from the plaintiff-Bank upon execution of the documents referred to earlier. It also came to the conclusion that the property mentioned in Schedule-A had been mortgaged while that mentioned in Schedule-C had been hypothecated as security for the repayment of the principal and the interest due on the same. On the question whether defendant 1 (c) appellant in this appeal was liable to pay the amount outstanding against the firm, the Court repelled the contention of the said defendant and held him liable to pay the amount jointly and severally with the other defendants. On the question whether defendant 1 (c) appellant in this appeal was liable to pay the amount outstanding against the firm, the Court repelled the contention of the said defendant and held him liable to pay the amount jointly and severally with the other defendants. The suit filed by the bank was accordingly decreed with cost and simple interest at the rate of 15% p. a. and a preliminary decree directed to be drawn up in terms of Order 34 of the CPC giving 6 months time to the defendant to pay the decreetal amount. The present appeal calls in question the correctness of the said judgment and decree. ( 6 ) MR. Ramesh Kulkarni, learned counsel appearing for the appellant confined his challenge to the judgment and decree only to the extent the same hold that the appellant is also liable to pay the decreetal amount. He urged that the Court below had fallen in error in holding that the appellant who had been inducted into the Partnership much after the liability forming the subjectmatter of the suit was incurred, was also liable to liquidate the same. He contended that the Court below had ignored the provisions of S. 31 of the Partnership Act and the terms and conditions stipulated in the partnership Deed dt. 23-6-1983 by which the Partnership had been reconstituted. ( 7 ) ON behalf of the respondent-Bank, it was on the other hand argued that the trial court had correctly appreciated the material on record and rightly come to the conclusion that the reconstituted Partnership had taken over the outstanding liability against the original borrower. It was submitted that although a newly inducted partner does not in view of the provisions of Section 31 of the Indian Partnership Act become liable for any act of the firm done before his induction as a partner yet the said provision did not prevent any such newly inducted partner from agreeing to take over or discharge a pre-existing liability. That is what according to the respondent-Bank had happened in the instant case. The appellant who was inducted into the Partnership had by his owner acts taken over and even partly discharged the liability that existed against the original Partnership. The material on record, it was contended, sufficiently justified the conclusion drawn by the trial court in this connection which called for no interference in appeal. The appellant who was inducted into the Partnership had by his owner acts taken over and even partly discharged the liability that existed against the original Partnership. The material on record, it was contended, sufficiently justified the conclusion drawn by the trial court in this connection which called for no interference in appeal. ( 8 ) THE only question that falls for consideration in this appeal is whether the appellant was also liable to discharge the preexisting debt against the firm before he was inducted into the partnership. The fact that the partnership as it existed before its re- constitution had borrowed a loan and executed documents in favour of the lender Bank is beyond dispute not only because the partners who comprised the Partnership at the time the loan was borrowed have conceded a decree against them by filing memos before the trial Court but also because the trial Court has on proper appreciation of the evidence on record correctly concluded that the loan transaction and the execution of related documents creating a mortgage and hypothecation by way of security had been established. The only issue that needs determination is whether the liability so adjudged by the Court could be fastened upon the appellant also. ( 9 ) CHAPTER 5 of the Partnership Act deals with incoming and outgoing partners. Section 31 appearing under the said Chapter relates to introduction of a partner and the consequences thereof. It runs thus :"section 31 : Introduction of a partner: (1) Subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as partner into a firm without the consent of all the existing partners. (2) Subject to the provisions of Section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. " ( 10 ) A bare reading of sub-section (2) supra makes it abundantly clear that a person who is introduced as a partner into" the firm does not by reason only of such introduction become liable for any act of the firm that was done before he became a partner. The expression "any act of the firm" is wide enough to include an act by which the firm may have incurred a liability qua a third party. The expression "any act of the firm" is wide enough to include an act by which the firm may have incurred a liability qua a third party. In other words, an outstanding liability against a Partnership does not by reason of the introduction of a new partner into the same get shifted to the new partner either wholly or in part. But then what is important is that the provision does not forbid or otherwise render impermissible the newly inducted partner taking over the existing liability of the Partnership to which he is introduced. That is because what sub-section (2) envisages is the introduction of a new partner ipso facto making him liable for the acts of the firm done before he was so introduced. The provision is much too clear in declaring that a partner merely because of his induction into an existing Partnership concern cannot become liable for the acts of the Partnership firm done before his induction. It does not go on to make any such take over of liability impermissible even if the partner so introduced wishes to own or share any such liability. The net effect therefore is that while Section 31 of the Partnership act does not by itself make a newly inducted partner liable for the debts of Partnership to which he is inducted, in the absence of any statutory or other provision against such a partner taking over any such liability, it will be permissible for the partner to take over such a liability. That however is not the be all and end all of the matter. The liability which is sought to be taken over or shared qua a third party cannot be enforced against such a newly introduced partner unless the creditor to whom the firm owes the liability accepts the new entity as its debtor in substitution of the old. A reconstitution of the Partnership may while introducing some new partners also in terms of Section 32 of the Partnership Act involve the retirement of some others. The liability of any such retiring partner qua a third party cannot by reason of such retirement be extinguished unless the third party agrees to its extinction or transfer to the reconstituted firm. So also vis-a-vis the newly inducted partner the creditor must accept the reconstituted partnership as its debtor in place of the entity which had borrowed the loan. The liability of any such retiring partner qua a third party cannot by reason of such retirement be extinguished unless the third party agrees to its extinction or transfer to the reconstituted firm. So also vis-a-vis the newly inducted partner the creditor must accept the reconstituted partnership as its debtor in place of the entity which had borrowed the loan. To sum up, two conditions must be satisfied before a newly introduced partner can be held liable for the debts outstanding against the Partnership before its reconstitution e. g. (1) that the new firm must assume the liability to pay the debt and (ii) the creditor must accept the new firm as his debtor in substitution of the old Partnership who should stand discharged from its liability. Failure of either of the two requirements will render transfer of liability to a newly introduced partner unenforceable at the instance of the creditor. The decisions of the High court of Madras in Russa Engineering Works ltd. v. Kanara Transport Co. AIR 1926 Madras 1138, V, Panduranga Bhatta v, M. Krishna Nayak and Sons, AIR 1927 Madras 889, Meenakshi Achi v. P. S. M. Subramanlan Chettiar, AIR 1957 Madras 8 and those of the High Court of Patna in Deoraj tewari v. Indrasan Tewari, AIR [1929 Patna 258 (2), Janki Nath Paul v. Dhokar Mall kedar Bux, AIR 1935 Patna 376 and Madho prasad v. Court Dutt Ganesh Lal, AIR 1939 patna 323 support that similar view. ( 11 ) COMING then to the question whether there has been any assumption of liability by the new Partnership, the trial Court has relied upon to documents the genuineness whereof is not in dispute. The first of these in Ex. P10 which is a document addressed to the plaintiff-Bank and signed by all the 3 partners of the reconstituted Partnership. Since the answer to the question whether the liability has been assumed by the newly constituted Partnership turns on a true and correct interpretation and understanding of the said document, it will be fruitful to reproduce the same in extenso. "i have been informed by the Manager, canara Bank, Yelwal, that the debt owed by the partnership concern to the bank is about to be barred by time as it is reaching the stage of maturity. "i have been informed by the Manager, canara Bank, Yelwal, that the debt owed by the partnership concern to the bank is about to be barred by time as it is reaching the stage of maturity. You are aware that I have been trying my best to clear the debt but a portion of the debt still exists. As per the instructions of the Manager I have signed the renewal papers of the debt transaction well in time". ( 12 ) A careful reading of the above would show that the reconstituted Partnership had continued its business in the name and style of M/s. Simone Enterprises and Drew Drop inn. More importantly, the document all the 3 persons constituting the said Partnership in no uncertain terms state that all transactions entered into with the Bank by all or anyone or more of the signatories to the document whether under the signature of the firm or subscribed by the individual person or persons entering upon the transaction or incurring the obligation shall be regarded as entered into and incurred for and on behalf of the partners of the reconstituted firm Jointly and severally. The document unequivocally takes over and assumes the liability arising from any such previous transaction whether such transaction was entered into by all or some of them, The words "all of us jointly and severally and also the assets of the firm shall be liable for the amount due to the bank" used in Ex. P. 10 leave no manner of doubt that the Partnership as reconstituted with 3 instead of the original 2 partners bad unconditionally taken over the liability already existing against M/s. Slmone Enterprises and Dew drop Inn no matter that liability had been incurred by some only of the partners now constituting the same. The document is executed by the firm and its partners with a specific request that the liability of the partners or the firm towards the bank shall not in any way be affected even if any third party joins in the transaction as a co-obligant. The execution of the above document which assumes the pre-existing liability by the reconstituted firm has been acknowledged by the appellant in a letter marked Ex. The execution of the above document which assumes the pre-existing liability by the reconstituted firm has been acknowledged by the appellant in a letter marked Ex. P13 which reads as under :"i have been informed by the Manager, canara Bank, Yelwal, that the debt owed by the partnership concern to the Bank is about to be barred by time as it is reaching the stage of maturity. You are aware that I have been trying my best to clear the debt but a portion of the debt still exists. As per the instructions of the Manager I have signed the renewal papers of the debt transaction well in time. I have been informed by the manager that he has requested you by letters to sign the renewal papers. It is further informed that you are yet to sign them. I hereby request you to sign the papers which are with the Manager and co-operate for the renewal of the debt. A word in reply is very much elicited at this end. " ( 13 ) IT is evident from the above that not only did the Partnership Intend to take over the liability that was already existing qua the Bank but an effort had been made by the reconstituted firm to clear the same. This positions conceded by the appellant even in his own statement where he has said thus:"it is true that after I became the Managing Partner of the firm, I was making payments towards the suit loan account out of the proceeds of the business of "due Drop inn. " ( 14 ) IN the light of the above, it is difficult to see how the appellant can possibly argue that the newly constituted firm had never assumed the liability of the Partnership as it stood before its reconstitution, The explanation given by the appellant was that the assumption of liability was on account of certain threats held out by the Bank Manager by which unless the; liability was accepted, the facility given to the Partnership would have been terminated and a suit for recovery of the amount outstanding, filed against the firm. Such an action by the Bank would have in the opinion of the appellant affected the business of the Partnership adversely. It was in that background that letters referred to above were written to the bank. Such an action by the Bank would have in the opinion of the appellant affected the business of the Partnership adversely. It was in that background that letters referred to above were written to the bank. It is difficult to construe the submission of the letters to be a result of any coercion nor has the appellant set up any such defence to get rid of their legal effect. If that be so, the only inference that can be drawn is that even the Bank wished the newly constituted Partnership to assume and take over the pre-existing liability failing which it would not allow the newly constituted firm to continue to avail of the facility and would have in that case terminated the facility and instituted a suit for recovery of the outstanding amount. Since however, the newly constituted firm fell in line and took over the pre-existing liability, the immediate filing of the suit was obviated. The fact situation therefore proves the existence of both the conditions necessary for holding the incoming partner liable towards the debts that were outstanding against the Partnership before its reconstitution. The trial Court was in that view perfectly justified in holding that the appellant too was liable for paying the outstanding amount. The fact that the Partnership Deed reconstituting the partnership allegedly contained a clause under which the outstanding liability was not to be assumed by the new Partnership would pale into insignificance. That is because although there is a serious dispute whether the Partnership was constituted on the terms suggested by the appellant, even if it is assumed that any clause like the one referred to by the appellant was agreed to at the time of reconstitution, nothing prevented the partner for whose benefit that clause was introduced to undertake the liability of his own volition. That makes it unnecessary, or this Court to consider whether the document which the appellant has relied upon for purposes of proving clause 11 is a genuine document as asserted by him or forged one as alleged by the other partners. It is also in that view unnecessary to go into the question whether a document which purports to have been executed on 23-6-2002 could have been so executed if the stamp papers on which the same is typed were themselves purchased nearly a month later on 18-7-1983. It is also in that view unnecessary to go into the question whether a document which purports to have been executed on 23-6-2002 could have been so executed if the stamp papers on which the same is typed were themselves purchased nearly a month later on 18-7-1983. ( 15 ) IN the result, there is no merit in this appeal which fails and is hereby dismissed but in the circumstances without any orders as to costs. Appeal dismissed. --- *** --- .