Full Judgment Text
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PETITIONER:
M/S.KRISHNA MOTOR SERVICE BY ITS PARTNERS
Vs.
RESPONDENT:
H.B. VITTALA KAMATH
DATE OF JUDGMENT: 19/04/1996
BENCH:
RAMASWAMY, K.
BENCH:
RAMASWAMY, K.
G.B. PATTANAIK (J)
CITATION:
JT 1996 (5) 162 1996 SCALE (4)412
ACT:
HEADNOTE:
JUDGMENT:
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
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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)
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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
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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.