Satish Aggarwal & Another vs Subhash Chand Aggarwal & Others
2000 Latest Caselaw 623 Del

ORDER

Mukul Mudgal, J.

1. This is a petition under Section 9 of the Arbitration & Conciliation Act, 1996 which seeks the appointment of a receiver for the firm M/s. Sultan Chand & Sons & M/s. Premier Book o., which were formed pursuant to a Partnership Deed dated 2.4.1976 between Shri Prakash Chand and his brother and sisters who are respondents 1, 2 & 3. The petitioners' deceased father Prakash Chand had 40 per cent share and each of the respondents had 20 per cent share, and the partnership deed contained an arbitration clause.

2. On 10.9.1997 Shri Prakash Chand, died leaving his will dated 25.1.1997 bequeathing his share in the partnership to his two sons who are the present petitioners. The defendants' 4-8 are daughters of the deceased Prakash Chand. The defendant No. 1 is the brother and respondent Nos. 2-3 are the sisters of Prakash Chand and each had 20% share in the firm. The petitioner's case is that on the death of Shri Prakash Chand, the partnership stood dissolved by operation of law under Section 42 sub-clause (c) of the Indian Partnership Act, there being no clause for the continuation 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 new partnership 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 gave notice 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 the respondents 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 the petitioners to the respondents 1-3 saying that the respondents 1-2 are misusing the properties of the firm by setting up a new firm by the name of Sultan Chand & 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 of the erstwhile firm as an Arbitrator. On 17.3.1998, the present petition under Section 9 of the Arbitration & Conciliation Act, 1996 was filed by the petitioner for appointment of a Receiver and for grant of an injunction restraining the respondents 1 & 2 from carrying on the business in the name of Sultan Chand & Sons or Premier Book Co. or using 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 & 2 are restrained from using the properties, assets and funds of M/s. Sultan Chand & Sons and M/s. Premier Book Co. for their benefits."

During the hearing of this case certain orders were passed by this Court while considering the possible terms of settlement between the parties. The following order was passed on 13.10.1999 by this Court on an offer made by the respondent No. 1:-

"On an offer of deposit of Rs. six crores in the form Fixed Deposit Receipts and Bank balances in this Court made on behalf of the learned counsel for respondent No. 1, Mr. Sahai learned senior counsel appearing on behalf of the petitioner states that he is agreeable provided:

(a) 40% of the proportionate profit of the last two years is paid to his client; and

(b) interest on the sum of Rs. six crores is also paid to his client subject to final adjustment.

The proposal of the learned counsel for the respondent No. 1 also ates that his offer also requires upon the deposit of Rs. six crores as described above, the petitioner will not interfere with the running of the firm by the respondent 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 13th October, 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 respondents and the 6 crores depost be reduced accordingly subject to the final accounting accordtng to the award of the arbitrator which is not acceptable to the respondent No.1."

4. Eventually the settlement could not be arrived at between the parties & the case was heard on merits and orders reserved.

5. In support of his plea for the appointment of a receiver, the learned senior counsel for the petitioners Shri Ishwar Sahai, has relied upon the admission by the respondent No. 1 that the partnership stood dissolved by law and has submitted that in any event in view of the provision of Section 42(c) of the Partnership Act providing for dissolution of a partnership on the death of a partner, the partnership came to an end. He has further pleaded that on the dissolution of the partnership as per the provisions of Sections 46, 48 and 49 of the Indian Partnership Act, the firm has to be wound up and after the debts & liabilities are cleared, the assets are to be distributed between the partners of the firm. He has further relied upon Section 53 of the said Act to contend that the heirs of a deceased partner may restrain the other partners from carrying out similar business in the firm name or from using any of the properties of the firm for their benefits until the affairs of the firm are completely wound up. He has further relied upon Section 55 of the Partnership Act to contend that the goodwill of the firm is one of its assets. The learned counsel has relied upon the following judgments Vidya Devi Vs. Mani Ram etc. 1974 RLR 346; Tilak Chand Vs. Darshan Lal ; Radha Kanta Pal Vs. Benode Behari Pal & Ors. contend that upon the dissolution of a partnership, by operation of law the 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 has comprehensively reviewed all the decisions on the issue to hold that the appointment of a Receiver being an equitable relief but in a dissolved partnership is a matter of course and has urged that in the present case, the appointment of a receiver should therefore be made to wind up the partnership business completely and to divide the surplus.

6. In Vidya Devi Vs. Mani Ram etc., (Supra) it has been held that on a dissolution of a firm a Receiver should be appointed as a matter of course. In so far as Tilak Chand Vs. Darshan Lal (Supra), it has been held that in a dissolved partnership appointment of a Receiver should be as a matter of course to wind up the partnership business completely and to divide the surplus between the partners of their rights. Similarly in Radha Kanta Pal Vs. Benode Behari Pal & Ors. (Supra) it has been held that a partner should not be appointed Receiver when prima facie case of suspicion of dishonesty has been made against him.

7. The respondent has taken the plea that even the petitioners are engaged in running a similar publication house in the name of Sultan Chand & Sons Pvt. Ltd., wherein both the petitioners are Directors and the said company is engaged in the similar business of educational publishing. It is further alleged that during the financial year 1996-97, a period prior to his death, Late Shri Prakash Chand, father of the petitioners, withdrew cash to the tune of Rs. 77.92 lacs from the firm in addition to the further sum amounting to Rs. 18.17 lacs. This caused heavy imbalance in the firm's funds. It was also stated that on 11.9.1997 the firm was reconstituted after the death of Shri Prakash Chand and a Deed of Partnership was signed on 25.12.1997 and registered with the Registrar of Firms. The reconstituted firm also opened a bank account on 11.9.1997. The respondents 1-2 have further submitted that the respondents had further invested funds to the tune of Rs.83 lacs in the new partnership business out of their personal funds from 1.4.1998 to 31.3.1999. It is also averred that the petitioner No. 2 was permitted to continue to look after the cash sales of the Company out of respect for the deceased partner. It is further stated that during 11.9.1997 to 18.2.1998, the petitioner No. 2 also withdrew heavy cash amount from the daily cash sales of the firm. It is further submitted by the respondent No. 1 that the petitioners were engaged in a similar business of educational publishing as conducted by the respondent No. 1's firm.

The trade names and the trading addresses of both the 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 per cent while his share in the profits was 40 per cent.

8. It is submitted by the learned counsel for respondent No. 1 that The heavy withdrawal of cash funds by Shri Prakash Chand without express consent of the other partners led to heavy and unjust imbalance in the contriution of funds by the other partners to the firm particularly when no interest was given to the other partners for higher financial contribution. The contribution of the funds by the partners was grossly disproportionate to their respective shares in the profits and losses. Reliance has been placed on the following table derived from the audited balance sheet of the firm:

"SHARE IN THE NET ASSETS AS PER AUDITED BALANCE SHEET M/S SULTAN CHAND & SONS. NEW DELHI Total Total Total Mr. S.C. Ms. Kamla Ms. Usha Assets Outside Partners Aggarwal Aggarwal Aggarwal of the current Fund (Respn. (Respn.3) (Respn. 2) Firm Liabili- (Fixed 1) SCS ties Capital Already +Current paid out A/c excep- Balances) ting Mr.PC's Successor Rs. Rs. Rs. Rs. Rs. Rs.

          Lakhs     Lakhs     Lakhs     Lakhs     Lakhs     Lakhs
10.9.97   472.37    143.33    309.39    96.99     110.38    102.02
                    **19.65             31.34%    35.67%    32.97%
                    6.35%
                    150.32
31.3.98   484.62    **12.38   321.92    122.80    117.09    82.03
                    3.84%               38.14%    36.37%    25.48%"

 

9. The Respondent No. 1's submission is that the petitioners and other legal heirs of the deceased partner have a right only to accounts of the firm and their share in the surplus. 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 for their personal use or benefit. The plea of the transfer of stock etc., made by the respondent No. 1 is rebutted as having been made by the petitioners themselves to prevent normal functioning of the firm from 23, Darya Ganj and the operation of the firm bank account. In so far as contribution to M/s. Sultan Chand Trust is concerned it is 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 that the trust is a Public Charitable Trust giving scholarships to meritorious students throughout the country. In reply to the averment that the assets of the old firm was being used by the new firm, it is stated that the firm of Sultan Chand & Sons is working with the funds of surviving partners and not with the funds of the deceased partner or his successor. On 10.9.1997 when Mr. Prakash Chand died, the sources of 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.14 has relied upon the following 5 principles culled out from the judgment reported as T. Krishna Swamy Chetty Vs. C. Thangavelu Chetty & Ors., :

"1. The appointment of a receiver pending a suit is a matter resting in the discretion of the Court;

2. The Court should not appoint a receiver except upon proof by the plaintiff that 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 to property, but, he must show some emergency or danger or loss demanding immediate action and of his own right he must be reasonably clear and free from doubt. The element of danger is an important consideration;

4. An order appointing a receiver will not be made where it has the effect of depriving a defendant of a 'de facto' possession since that might cause irreparable wrong. It would be different where the property is shown to be 'in medio', that is to say, in the enjoyment of no one; and

5. 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 usually refuse to interfere unless his conduct has been free from blame."

11. The respondents also stated that these principles have been followed in subsequent cases. Consequently the plea for denying the appointment of a Receiver has 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 of property. 
 

(iii) The amount due to the petitioners, excluding share of goodwill was merely Rs. 12 lakhs and as opposed to the said amount of Rs. 12 lakhs, over Rs. 6 crores are lying frozen in the bank accounts and the said funds are sufficient to meet the claims of the legal heirs of the deceased partner.

(iv) The two surviving partners [respondent Nos. 1 & 2) have added additional funds to the tune of Rs. 83 lacs from their own funds and resources during the period 1.4.1998 to 31.3.1999.

(v) No amount having been withdrawn by the two respondents for their personal use or benefit.

(vi) The petitioners are merely unsecured creditors under Section 37 of the Indian Partnership Act, 1932.

(vii) It is necessary to preserve the goodwill which is the most precious asset of 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 the petitioners which disentitles them to seek the appointment of a eceiver. The instances 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 subjects and 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 respondent No. 1 from the fact that repeated offers by the respondent No. 1 to pay the amount due to them have been spurned by the petitioners. Even the offer of accepting the amount without prejudice and subject to an arbitral award have been rejected by the petitioners. It is further submitted on behalf of respondent No. 1 that the aim of the petitioner is merely to ensure the closure of the business of the firm so as to usurp the good-will and reputation of the firm's tradename. I is further stated that the closure of a firm would bring the claim of the goodwill to a zero amount and the ploy of the petitioner is to whittle away the goodwill of the respondent No. 1's firm with a view to reduce it to zero so that the petitioner could trade upon the said goodwill without any extra cost. Reliance has also been placed on Section 37 of the Partnership Act to contend that at best the petitioner is entitled to his share of 40% of the profits since he ceased to be a partner in accordance with the use of his share in the property of the firm.

14. The learned counsel for respondent No. 1 has also relied upon the following judgments 1988(2) CUR. C.C. 725; Radha Kanta Pal Vs. Benode Behari Pal & Ors. AIR 1934 Calcutta; T. Krishnaswamy Chetty Vs. C. Than-

gavelu Chetty & Ors. ; Dilman Rai Vs. Srinarayan Sharma & Anr. AIR 1983 Sikkim 11; Sarada Dei Vs. Khirod Kumar Sahu & Ors., ; Laxmidas Dayabhai Kabrawala Vs. Nanabhai Chunilal Kabrawala & Ors., AIR 1964 11 SC; Sobell Vs. Boston & Ors. 1975 (2) ALL ER 282; Rajeshwar Nath Gupta Vs. Administrator General ; Bhola Nath Vs. Kaso Devi AIR (38) 1951 Allahabad 601 to contend that the appointment of a Receiver is not called for in the present case. In particular, he has relied upon the judgment of Laxmidas Dayabhai Kabrawala (Supra). The learned counsel has also sought to distinguish the judgments relied upon by the learned counsel for the petitioner by contending that the facts of the cases are different and in the present case there is no attempt to defeat the rights of the petitioners and the respondent No.1 is ready to settle the accounts and the respondents have not introduced any new partner in the partnership without capital. It is further stated that in the present case, unlike the decisions relied upon by the learned counsel for the petitioner, further funds to the tune of about Rs. 83 lacs were brought in by the respondents 1-2 from 1.4.1998 to 31.3.1999. He has also submitted that the circumstances listed in the aforesaid judgment do not apply to the facts of the present case as the firm is not being run on personal account nor are the assets being used for personal use and there is no mismanagement of the firm or asset to the detriment of the petitioners and no assets have been spirited away by the surviving partners. It is further stated that the respondent No. 1 is in continuing partnership businss having a running business and the principles applicable to a dissolved partnership will not ipso facto apply.

15. The learned counsel for the petitioners has relied upon the following provisions of the Indian Partnership Act, 1932 in support of his plea for appointment of a Receiver:

(1) Section 42(c) which postulates the dissolution of a partnership by the death of a partner;

(2) Section 46 which prescribes the right of partners to have business wound up after dissolution;

(3) Section 48 which provides for the mode of settlement of accounts between the partners;

(4) Section 49 which prescribes for the payment of firm debts and of separate debts;

(5) Section 53 which gives the right to a partner or his representative after the dissolution of the firm to restrain any other artner or his representative from carrying on a similar business in the firm name or from using the property of the firm for his own benefit until the affairs of the firm have been completely wound up and

(6) Section 55 which provides for sale of goodwill after dissolution and the inclusion of a goodwill in the assets of the firm.

16. In my view all these provisions are relevant provisions which would bviously be taken into account by the Arbitrator in coming to his deciion. However, in so far as the interim order is concerned, the petitioner's interest can be adequately safeguarded by giving the petitioner the benefit of Section 37 of the Act. Section 37 provides that when upon the death of a partner, the surviving partners carry on the business of the continuing firm with the property of the firm without any final settlement of accounts between them and the estate of the deceased partner, then the estate of the deceased partner is entitled to such profits of the profits made since the erstwhile partner ceased to be a partner as may be attributable to the use of his share of the property of the firm.

17. I am satisfied that the present case is not a case where the judgments relied upon by the learned counsel for the petitioners could apply and a Receiver could be appointed as a matter of course. Even in Tilak Chand Jain Vs. Darshan Lall Jain & Ors. (Supra) which according to the learned counsel for the petitioners is a decision which reviews all the relevant authorities, it has been eventually held in Paragraph 60 that the appointment of a receiver in respect of a dissolved firm is in the discretion of the Court and in the exercise of this discretion the Court will be guided by the consideration of preserving and protecting the property and assets of a dissolved firm and should not permit the dissipation or user to the exclusion of other partners who are excluded from such user. Thus the Court must ensure safeguards for protecting the property and assets of a dissolved firm. It is not in dispute that on 10th September, 1997, the Prakash Chand, the partner through whom the petitioners claimed, died and from 11.9.1997, the firm against which the relief for appointment of a Receiver is claimed, was formed and a partnership deed was signed on 25.12.1997 and registered with the partnership firm. It is clear that the partnership firm is functioning since 1997 and as of today is a running concern. Furthermore the interim order dated 26.3.98 passed by this Court also protects the interests of the petitioners as an interim measure. There is no such emergency or danger or loss demanding immediate action in vew of this passage of time and the running nature of this partnership firm which would lead to the adoption of the appointment of a Receiver. The de facto possession of the respondent also cannot be lost sight of and the appointment of a Receiver would have ffect of ousting the respondents from possession. It is also not in dispute that both the parties have agreed to arbitration of a commonly agreed arbitrator and since it is expected that the Arbitrator's award would come expeditiously, no useful purpose would be served by appointing a Receiver at this juncture. However, in addition to the Order dated 26.3.98 certain other interim measures are necessary to adequately protect and safeguard the interest of the petitioners. It is, therefore, directed that as a measure of protection of the interests of the petitioners the sum of Rs. 6 crores in the form of fixed deposit receipts and the bank balances is required to be deposited in this Court by respondent Nos. 1 to 3 within 6 weeks from today. The respondents Nos. 1 to 3 are directed to file the accounts of the last two years within a period of three weeks from today with advance copy to the counsel for the petitioners. Since the share of the deceased Prakash Chand was 40 per cent in the erstwhile partnership firm, it would be appropriate that 40% per cent of the last two years proportionate profit may be withdrawn by his legal heirs, i.e., the petitioners and respondent Nos. 4-8 on one hand and 60% per cent proportionate profits for the last two years be withdrawn if not alredy withdrawn by the respondent Nos.1 to 3 on the other hand and the deposit of Rs.6 crore be proportionately reduced after taking into account the aforesaid figure of division of profits for last two years in the ratio of 40:60 per cent between the petitioners and respondent Nos. 4 to 8 on the one hand and the respondent Nos. 1-3 on the other. This payment may also be made within six weeks. The withdrawal is on account and may be on such terms and conditions as the arbitrator who is being appointed by this order may choose to impose. Other and further interim orders and directions may also be sought from the learned arbitrator. The petitioners and respondents Nos. 4 to 8 are not to interfere with the functioning of the firm being presently run by the respondents Nos. 1 to 3. In my view considering the facts of the present case and the running nature of the business this order would adequately protect the interests of the petitioners.

18. With the consent of the parties, Mr. Justice P.K. Bahri, a retired Judge of this Court is appointed as Arbitrator on the term & conditions to be fixed by the Arbitrator in consultation with the parties. The Arbitrator may give his Award preferably within 4 months from the date of entering upon the reference. Parties to appear before the learned Arbitrator on 29.7.2000 to seek appropriate orders in accordance with this judgment.

Petition and arbitration application are accordingly disposed of.

List this matter on 12.9.2000 for reporting compliance.