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Chennuru Sitharamamurthi Chetty and ors. Vs. Chennuru Guruswami Chetti and ors. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtChennai
Decided On
Reported in(1949)1MLJ400
AppellantChennuru Sitharamamurthi Chetty and ors.
RespondentChennuru Guruswami Chetti and ors.
Cases ReferredSmith v. Mules
Excerpt:
- - five persons namely chennuru appalanarasayya setti, the father of defendants 2 to 7 in the suite, chennuru guruswami setti, the first defendant, chennuru appanna setti, the first plaintiff, chennuru gavarayya, the father of plaintiffs 2 to 4 and vajrapu venkataratnam setti, the fifth plaintiff entered into an agreement that each of them should offer bids at the auction, and if the sale was confirmed in favour of any one or more of them, all the five should enjoy the profit or bear the loss thereof, according to particular shares. the 5th plaintiff, in his evidence, deposes that there were 4 or 5 resolution books like ex. good faith requires that a partner shall not secure an advantage to himself at the expense of the firm. he is bound, in all transactions affecting the partnership,.....p.v. rajamannar, c.j.1. this appeal and the memorandum of objections arise out of a suit filed in the court of the subordinate judge at chicacole for reliefs in respect of an alleged partnership formed to work a salt factory called the badjanapara. salt factory in the naupada division, vizagapatam district.2. in this province the right to manufacture and sell salt is generally obtained by the grant of a licence issued by the government subject to the rules under the madras salt act of 1889 in pursuance of a lease of salt pans belonging to government. the leases are usually for long periods, and in common practice are granted to the highest bidder or bidders at auctions held by the salt department, unless the salt department chooses to renew an expired lease already granted. in or about.....
Judgment:

P.V. Rajamannar, C.J.

1. This appeal and the memorandum of objections arise out of a suit filed in the Court of the Subordinate Judge at Chicacole for reliefs in respect of an alleged partnership formed to work a salt factory called the Badjanapara. salt factory in the Naupada division, Vizagapatam district.

2. In this Province the right to manufacture and sell salt is generally obtained by the grant of a licence issued by the Government subject to the rules under the Madras Salt Act of 1889 in pursuance of a lease of salt pans belonging to Government. The leases are usually for long periods, and in common practice are granted to the highest bidder or bidders at auctions held by the Salt Department, unless the Salt Department chooses to renew an expired lease already granted. In or about the later half of the year 1925, the Salt Department put up for auction the leasehold interest in a salt factory called the Badjanapara salt factory. Five persons namely Chennuru Appalanarasayya Setti, the father of defendants 2 to 7 in the suite, Chennuru Guruswami setti, the first defendant, Chennuru Appanna Setti, the first plaintiff, Chennuru Gavarayya, the father of plaintiffs 2 to 4 and Vajrapu Venkataratnam Setti, the fifth plaintiff entered into an agreement that each of them should offer bids at the auction, and if the sale was confirmed in favour of any one or more of them, all the five should enjoy the profit or bear the loss thereof, according to particular shares. They each contributed their share to the amount of the bid At the auction held by the Salt Department, the sale was confirmed in favour of Appalanarasayya and Guruswami out of the five The lease was for a period of 17 years from 1st January, 1926 to 31st December, 1942 In pursuance of the lease executed by the Government, necessary licences were also granted to work the factory. On 18th March, 1926, a formal deed of partner ship was executed between the five individuals, and registered on 25th March The shares of the five partners were as follows : Chennuru Appalanarasayya five annas, Chennuru Guruswami, five annas, Chennuru Appanna, two annas Chennuru Gavarayya, two annas, and Vajrapu Venkatratnam Setti two annas in the rupee Appalanarasayya and Guruswami in whose names the licence stood were to be the managing partners. The capital was a sum of Rs. 30,000 contributed m accordance with the respective shares of the five partners. It was inter alia provided in the deed that the two managing partners should consult the remaining partners and act according to the majority in case a sum exceeding Rs. 100 was required for any expense, and that the resolutions that may be passed at the meetings of the partners should be entered in a resolution book, maintained for the purpose. The other provisions are not material for the disposal of this

3. As already mentioned, the lease was to expire by 31st December 1942 In August, 1941, the Salt Department began to take steps to ascertain if the lessees who were working salt factories under leases which would expire during the course of the year 1942 required renewal for a further period of 25 years from the date of expiry of the subsisting lease. A notice was served on the joint licensees of M.E. No. 5, the suit salt factory, informing them that their lease would expire by 31st December, 1942, and requesting them to submit a petition to the office before 20th August 1941, if they required the renewal of their lease for a further period of 25 years. It may be mentioned that prior to this, Appalanarasayya had died, on or about 23rd August, 1935, and his sons, defendants 2 to 7 were recognised by the Government as the joint lessees in the place of their father, and they were also admitted into the partnership in his place. On 23rd July, 1942, defendants 1 to 7 as joint lessees of the suit salt factory put in a petition to the Collector of Customs and Salt Revenue Madras through the Factory Officer, Naupada, requesting that they may be granted a fresh lease of the factory for a further period of 25 years commencing from 1st January, 1943. In this petition, they mentioned the fact that they had been granted a lease current up to 31st December, 1942, and that they had faithfully observed the terms and conditions of the lease to the entire satisfaction of the department On this petition, the officers of the Salt Department reported that the work and conduct of the lessees were satisfactory. On 11th November 1942 the Collector sanctioned renewal of the lease in the names of the existing lessees in respect of the areas held by them, if they accepted the terms and conditions of the draft lease prepared by the department. On 18th December defendants 1 and 2 to 7 represented by the 2nd defendant, issued a notice to the fifth plaintiff intimating that the period of the partnership agreement would terminate by 31st December 1942, and that in respect of the 2 annas share belonging to the fifth plaintiff a sum of Rs. 1586-11-0 was due by him to the firm There was a reference to a settlement of account arrived at on 21st January 1939 A demand was made to agree to settle profits and losses for the period from 21st January, 1939 upto 31st December, 1942, after verifying the accounts. It was acknowledged that about 82, too maunds of salt remained undisposed of, which would be sold subsequently and the net proceeds divided. There was no reference whatever in this notice (Ex. P-9) to the renewal of the lease which had been sanctioned by the Collector on nth November, 1942. Under instructions from the fifth plaintiff, his advocate replied to this notice (Vide Ex. P-g-a). In this reply, the fifth plaintiff characterised the conduct of defendants 1 to 7, in issuing the notice as fraudulent, because the renewal of the lease for a further period of 25 years was. for the benefit of the partnership which had to be continued as before, and that they were actuated by the evil intention of obtaining wrongful gain, alleging that the renewed lease was their private property. The settlement of account on 21st January, 1939 alleged in the notice of defendants 1 to 7 was denied. The fifth plaintiff even invoked the operation of the penalty clause in the partnership deed, Ex. P. 2, under which he charged that defendants 1 to 7 were liable to a penalty at the rate of Rs. 2,500 per individual. This reply was dated 28th December, 1942, and on 5th January, 1943, the suit out of which this appeal arises was instituted by the fifth plaintiff, along with Chennuru Appanna Setti as the first plaintiff, and the sons of Gavarayya as plaintiffs 2 to 4. Besides defendants 1 to 7, other defendants were added as pro forma defendants as persons who might have an interest in the benefits of the partnership indirectly. The plaintiffs. originally prayed for the following reliefs:

(a) For a declaration that the defendants 1 to 7 have forfeited their rights in the suit partnership, and

(b) For a declaration that the suit partnership is continuing and that the renewal of the salt lease contained in the names of defendants 1 to 7 for a further period of 25 years is one of the assets; of the said partnership enuring to the benefit of the partnership, and

(c) For an injunction restraining defendants 1 to 7 from carrying on the salt works or salt business independently of the partnership and for their personal benefit by using the firm name ' Chennuru Guruswami Chetty and Venkataramanayya Chetty and Bros., Lessees of Badjanapara Extension Naupada,' the goodwill of the firm and the material and the properties of the firm or partnership-arid its business connections, and

(d) That an account be directed to be taken of the profits that arose annually from the suit partnership since the beginning of the partnership, till this day and the plaintiffs' share of such annual profits be directed to be paid by defendant 1 to 7 with interest at 6 per cent, per annum alternatively, if for any reason the Court were to hold that the suit partnership terminated or legally dissolved by virtue of any construction put on the partnership agreement dated 18th March, 1926 and therefore not possible to grant the aforesaid reliefs, the plaintiffs pray that

(e) It be declared that the renewal of the suit lease obtained in the names of defendants 1 to 7 for a. further period of 25 years is also an asset of the suit partnership concern, and

(f) A general account of all the assets and liabilities and 6f all the profits arising from the partner-ship from its beginning be directed to be taken, and defendants 1 to 7 be directed to pay, deliver and distribute to the plaintiffs their share of the profits and assets that may be found due and payable on taking such accounts, and

(g) That defendants 1 to 7 be further restrained by a permanent injunction from carrying on the partnership salt works or business or similar salt works or business and from using any of the partnership assets, material and utilities such as the salt works, trollies, channels, and other facilities and business connections, established or created for salt manufacture with partnership funds in the pans described in the A schedule in such business and from using the goodwill of the firm and the firm's name ' Chennuru Guruswami and Venkataramanayya, Bros., Lessees of Badjanapara. Extension, Naupada' in the carrying on of any such business, and '

(h) Grant the costs of the suit and such further or other relief which the Court might deem fit and proper after taking into consideration all the circumstances, pleadings and evidence of the case.

At the trial, reliefs (a), (b) and. (c), were abandoned, and the plaintiffs filed a memdrandum on the 8th February, 1946 electing to seek for the reliefs (d), (e), (f) and (h) only.

4. The contesting defendants 1 to 7 raised several pleas in defence, some of which have been found to be obviously untenable, such as, for instance, the plea that there was no partnership at all. Very properly, the arguments of learned Counsel in appeal on both sides, were confined to the rights of parties in respect of the renewal; of the lease which expired on 31st December, 1942 for a further period of 25 years from 1st January, 1943. The plaint allegations relating to this renewed lease are contained in paragraph 12 which runs as follows:

As the term of the partnership's salt lease was to expire by the end of 1942, and as enormous sums were being continuously expended for extensions and improvements to the pans, channels, reservoirs etc., both from the capital and from out of the large profits accruing to the partnership, and in pursuance of the object of the partnership, and as a continuation of the venture of the partnership, it was unanimously resolved by the partners to seek for a renewal of the partnership's salt lease and obtained a renewal of the same from the salt authorities for a further period, for the benefit of the partnership. To this end the managing partners made necessary application and trials using the goodwill of the partnership. The said managing partners accordingly obtained a renewal of the partnership salt lease which was granted by the salt authorities solely on account of the goodwill earned by the firm. The said renewal was obtained for the purposes of the partnership during its continuance and in the trade name of the firm and therefore the benefits of the renewed lease enured also in favour of the other partners. Even apart from the unanimous resolve of the partners to obtain the renewal, the obtaining of the renewal of the lease in the name of defendants 1 to 7 accrues to the. benefit of the partnership.

The plaintiffs claimed the benefit of the lease both on the footing that the partnership had not become dissolved and on the alternative footing which they adopted at the trial that the partnership terminated on 31st December, 1942, in which case they alleged that the lease must be treated as an asset of the partnership and an acquisition by it, to be dealt with as such in settling the accounts, as defendants 1 to 7 had obtained a renewal of the previous lease by utilising the goodwill of the firm and while the partnership was continuing and in existence. Relief (e) has reference to-this part of the plaintiffs' case. Defendants 1 to 7 in their written statement denied that their application for renewal was in pursuance of a resolve on the part of all the partners to make such an application for the benefit of the partnership. They then made the following assertion in paragraph 7 of their statement:

Defendants 1 to 7 applied for a licence in their own name to commence from 1st January, 1943 and the Collector of Salt Revenue agreed to grant the same. This new licence cannot enure to the benefit of any of the plaintiffs or any others. No lease is as yet executed by these defendants though the draft lease submitted by them was approved by the salt authorities. There was never any attempt on the part of these defendants to obtain any wrongful gain to themselves.

5. The learned Subordinate Judge held that it was not open to defendants 1 to 7 to contend that there was no partnership at all between them for working the factory, I hat the shares of the several partners were as provided in Ex. P-2, that the suit must be treated as one for settlement of accounts of a dissolved partnership and accounts had to be settled on the footing that it became dissolved on 31st December, 1942, that there was no settlement of accounts on 21st January, 1939 as alleged by defendants 1 to 7, that the renewal of the lease was not obtained in virtue of the goodwill of the partnership, and that otherwise the goodwill of the old firm may be sold for what it was worth in the realisation of the assets of the dissolved firm. He, therefore, granted a preliminary decree declaring the shares of the parties in the partnership and that the partnership shall be deemed to have been dissolved as from 31st December, 1942. He appointed a Commissioner for the taking of partnership accounts and directed the goodwill of the business and the stock-in-trade to be sold by the commissioner, and also gave other directions as regards the manner of taking accounts. Plaintiffs 2 to 5, 9th defendant, the undivided son of the 1st plaintiff, who had been transposed as the 6th plaintiff and defendants 14 and 15, the divided brothers of the 5th plaintiff, have filed the above appeal, while defendants 1, 2, 4, 5 and 6 have filed a memorandum of cross-objections.

6. The only question for decision in the appeal is what are the rights, if any, of the plaintiffs in and to the lease for the further period of 25 years from 1st January, 1943. On the one hand, the plaintiffs contend that the new lease should be treated as an asset of the suit partnership which stood dissolved on 31st December, 1942; on the other hand, the contesting defendants contend that the plaintiffs have no manner of right to the benefits of that lease.

7. For the appellants, Mr. T.L. Venkatarama Aiyar, their learned Counsel rested their case on two alternative grounds : (r) that the application made by the defendants 1 to 7 for a renewal of the expiring lease was made on behalf of, and for the benefit of, all the partners in pursuance of a resolution, and therefore, the grant of the lease must enure for the benefit of all the partners, and (2) that the new lease was obtained by defendants 1 to 7 as partners or co-owners by availing themselves of their character and position as such, and therefore they must hold for the benefit of all the partners and co-owners the advantage so gained by them.

8. There is very little evidence bearing on the first part of the appellants' case. There is no documentary evidence on record of any resolution of the partners deputing defendants 1 to 7 to apply on behalf of the partnership for a renewal of the lease. Even the 5th plaintiff, who ought to know everything about it, does not say definitely that on any particular date the partners met and passed a resolution and entered it in a book of resolutions. A resolution book, Ex. P-4, was produced, but that admittedly does not contain any such resolution. The 5th plaintiff, in his evidence, deposes that there were 4 or 5 resolution books like Ex. P-4, and in particular, that there was a book which contained resolutions passed subsequent to January, 1940. We are unable to believe him. It is extremely improbable that there should have been another resolution book from January, 1940 when only a few pages in Ex. P-4 had been used and there were several pages still left blank. In the reply notice sent by the 5th plaintiff on the eve of the institution of the suit, the allegation made is that with the consent of all the partners the lease was renewed. We have no hesitation in holding that the case of a specific resolution having been passed by all the partners that defendants 1 to 7 should apply for a renewal of the lease was an after-thought, for which there is no support in the oral or documentary evidence in the case. It is not the case of the contesting defendant that their application was made to the knowledge of the other partners. The 3rd defendant, as D.W. 1 said ' we did not say that we were obtaining a fresh licence on behalf of all the partners.' If there had been unimpeachable evidence that the correspondence between the Salt Department and defendants 1 to 7 was known to the plaintiffs and to the other partners, then we might have been inclined to hold that on the probabilities it was most likely that the application was made on the understanding that the renewal would enure to the benefit of all the partners. Otherwise, the plaintiffs would certainly have made their individual attempt to obtain a lease, at an auction or otherwise. But as the evidence now stands, it appears clear to us that the application by defendants 1 to 7 was made without the knowledge and therefore without the consent of the other partners. It is not necessary for us to decide whether at the time of making the application defendants 1 to 7 intended to give the benefit of the renewed lease to the other partners.

9. The plaintiffs, therefore, can lay any claim to the new lease only on a legal basis, which their learned Counsel found in Section 88 and Section 90 of the Trusts Act, which embody the general equitable principles established by course of decisions in England. There is no substantial divergence in the principles applicable to the case between the law in England and the law in India.

10. The general rule in England is thus stated in Lewin on Trusts, 14th edition, page 160:

A constructive trust is raised by a Court of equity wherever a person, clothed with a fiduciary character, gains some personal advantage by availing himself of his situation as trustee.

He says that a common instance of such constructive trust occurs in the renewal of leases; the rule being, that if a trustee, or executor, renews a lease in his own name, he will be deemed in equity to be a trustee for those interested in the original term. The new lease is deemed to be a graft upon the old one. The leading authority upon this subject is Keech v. Sandford (1726) 2 Wh. & T.L.C. 9th Ed. 648 : 25 E.R. 223. Upon the same principle, if a person possessing only a partial interest in a lease as a tenant for life, mortgagee, or partner, renews the term upon his own account, he shall hold it for the benefit of all parties interested in the old lease.

11. A slight difference in the application of the rule is made between the case of trustees and personal representatives on the one hand and the case of mortgagees, joint tenants, and partners, on the other. In the former case, the presumption of personal incapacity to retain the benefit is treated as irrebuttable, inasmuch as the basis of the presumption is considered to be public policy. In the latter case, the presumption is treated as rebuttable, and depends upon the facts and circumstances of each case.

12. The above doctrine has been thus developed, in its application to partners. Good faith requires that a partner shall not secure an advantage to himself at the expense of the firm.

He is bound, in all transactions affecting the partnership, to do his best for the common body, and to share with his co-partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate.

In accordance with this principle, numerous decisions in England have laid down that one partner is not at liberty to acquire a gain or a benefit which he ought to have acquired, if at all, for the common advantage of the firm. With respect to renewal of leases, with which we are concerned in this appeal, Lindley sums up the authorities thus (page 385, tenth edition) :

It has been decided more than once, that if one partner obtains in his own name, either during the partnership or before its assets have been sold, a renewal of a 'lease of the partnership property, he will not be allowed to treat this renewed lease as his own and as one in which his co-partners have no interest.

In Halsbury, 2nd edition, Volume 24, at page 450, the rule is stated thus:

The renewal of a lease of the partnership property by one or more of the partners without the privity of the others enures for the benefit of all.

It has been held that this rule obtains equally whether the term of the partnership is definite or indefinite, and even when the lessors would have refused to renew to the partners who are not privy to the renewal. The rule will apply also when the intention to renew is communicated to the other partners, if the latter are prompt to assert their rights.

13. The law is substantially the same in India. It is contained in two sections of the Indian Trusts Act, namely, Sections 88 and section go. They run thus:

Section 88 : Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.

Section 90 : Where a tenant for life, co-owner, mortgagee or other qualified owner of any property, by availing himself of his position as such, gains an advantage in derogation of the rights of the other persons interested in the property, or where any such owner, as representing all persons interested in such property, gains any advantage, he must hold, for the benefit of all persons so interested, the advantage so gained, but subject to repayment by such persons of their due share of the expenses properly incurred, and to an indemnity by the same persons against liabilities properly contracted in gaining such advantage.

The following illustrations to Section 88 relate to partners:

(d) A, a partner, buys land in his own name with funds belonging to the partnership. A holds such land for the benefit of the partnership.

(e) A, a partner, employed on behalf of himself and his co-partners in negotiating the terms of a lease, clandestinely stipulates with the lessor for payment to himself of a lakh of rupees. A holds the lakh for the benefit of the partnership.

(f) A and B are partners. A dies. B instead of winding up the affairs of the partnership retains all the assets in the business. B must account to A's legal representative for the profit arising from A's share of the capital.

14. Section 258 of the Indian Contract Act, which has since been repealed, and which has been re-enacted as part of Section 16 of the Partnership Act of 1932, had the following illustration:

A, B, and C are partners in trade. C, without the knowledge of A and B obtains for his own sole benefit a lease of the house in which the partnership business is carried on. A and B are 'entitled to participate, if they please, in the benefit of the lease.

Now, this illustration is clearly based upon the ruling in the leading case of Featherstonhaugh v. Fenwick (1810) 17 Ves. Jun. 297 : 34 E.R. 115, and demonstrates the fact that the Indian law on the point is much the same as the law in England. It will, therefore, be useful to refer to some of the decisions in England made on facts more or less similar to the facts of the present case.

15. In Featherstonhaugh v. Fenwick (1810) 17 Ves. Jun. 297 : 34 E.R. 115, the facts were as follows : In the year 1783; Featherstonhaugh entered into partnership with one George Fenwick and two others in the business of manufacturing glass, for a term of 14 years from 13th February, 1783. The partnership also obtained from one Lambton a lease of glass house and premises and free-stone quarry. The partners worked the stone quarry upon the same terms on which the manufactory was carried on. At the expiration of the partnership, on 13th February, 1797, all shares were, by purchase, vested in Featherstonhaugh and George Fenwick who became interested in equal moieties and continued to carry on the business without any new agreement. In 1801, Addison Fenwick, the son of George Fenwick, was admitted to a moiety of his-father's interest. In September, 1804, George Fenwick and his son applied to the persons in charge of Mr. Lambton's estate for a renewal of the lease of the premises taken from him, making the application in their own names without any communication with Featherstonhaugh. An agreement was executed by them and the trustee of Lambton's estate for a renewal of the lease to them exclusively for a term of 8 years from 22nd November, 1804. On the 19th October, the Fenwicks informed Featherstonhaugh that they had obtained the renewal and gave him notice of their intention to dissolve the partnership on the 22nd November following. At this time, various contracts entered into by one of the Fenwicks in the name of the partnership with glass manufacturers were still subsisting. They offered to take the partnership property and utensils at a valuation, but their offer was refused and they continued the business with the partnership machinery and stock. Thereupon, Featherstonhaugh commenced an action, which was tried before Sir William Grant, M. R. Several contentions were raised on behalf of the plaintiffs, for example, that the partnership could not be dissolved without notice as stipulated in the original deed of partnership, and that the notice of dissolution was not sufficient. These contentions are not material in this case. Sir Samuel Romilly then contended that the renewal enured for the benefit of all the partners interested in the old lease, relying on the rule in Keech v. Sandford (1726) 2 Wh. and T.L.C. (9th Ed.) 648 R. 25 E.R. 223. Sir William Grant dealt with this last contention thus:

There is still remaining what I consider a separate question; whether the renewed lease formed any part of the partnership property at the time of the dissolution....It is clear, that one partner cannot treat privately, and behind the backs of his co-partners, for a lease of the premises, where the joint trade is carried on, for his own individual benefit; if he does so treat, and obtains a lease in his own name it is a trust for the partnership; and this renewal must be held to have been so obtained. Consider what an unreasonable advantage one partner would upon a different principle obtain over the rest. In this respect there can be no distinction, whether the partnership is for a definite or indefinite period.... Is it possible to permit one partner to take such an advantage When the application was made for a renewal, no notice of dissolution had been given; nor had the plaintiff notice of any intention of renewing the lease....This clandestine conduct was very unfair towards the plaintiff. The defendants had not intimated to him that they would not have any further connection with him; and that they intended to apply for a lease on their own account. They ought first to have given him notice; and to have placed him on equal terms with them.... Instead: of that, they clandestinely obtained an advantage, which would enable them to dissolve the partnership on terms very unfavorable to the plaintiff and they evidently had that object in view.

The learned Judge also held that the circumstance that the representative of Lambton's estate was unwilling to admit the plaintiff into the agreement for renewal, would not make any difference. It was therefore held that under the circumstances in which the new agreement was made, the lease must be considered as taken for the benefit of the partnership and was, therefore, partnership property at the time of the dissolution. The effect of this declaration would not, of course, entitle the plaintiff to the profits that might be made during the continuance of that lease. The plaintiff's interest was to his extent only, that in taking an account of the value of the partnership stock as it existed on the 22nd November, 1804 this lease should be included in the estimate of value as part of the joint property. An account was. accordingly directed of the partnership property upon the 22nd November, 1804; the renewed lease to be considered as partnership property and to be sold. The other reliefs granted to the plaintiff there do not concern us.

16. The next leading case which is of assistance to us in the case of Clegg v. Fishwick (1849) 1 Mac. & G. 293 : 41 E.R. 1278. In that case, the plaintiff's husband being engaged in a partnership with other persons, they took a lease in 1828 of certain coal mines for the purpose of the partnership. He died in 1836. The partnership was carried on between the other partners and the plaintiff up to the year 1849. In that year, the old lease having expired, a new lease was taken by some of the other partners without the privity of the plaintiff. But they assumed to themselves the right of taking the exclusive benefit of the new lease, and denied that the plaintiff was entitled to any interest in it. Cottenham, L.C., upheld the plaintiff's claim to the new lease, and observed as follows:

Now, when the contract for it was made, and the new lease was taken, the plaintiff had an equal; interest with them, according to the share her husband was entitled to in the firm. The old lease was the foundation of the new lease, the tenant-right of renewal arising out of the old lease giving the partners the benefit of this new lease; at least the law assumes it to be so. Without saying at all what circumstances there may be to interfere with that ordinary right, we know that the rule of equity is, that parties interested jointly with others in a lease cannot take to themselves the benefit of a renewal to the exclusion of the other parties interested with them.

It was held that the plaintiff was entitled to the new lease as part of the partnership property.

17. In Clements v. Hall (1857) 2 De G: 44 E.R.954 the same principle was applied, when, on the death of a partner a survivor renewed a lease which was the property of the partnership, and the representative of the deceased partner was held to be entitled to an interest in the new lease. Cranworth, L.C., tersely summed up the legal position thus:

If the property of the partnership consists in part of leaseholds the representative of the deceased partner may treat the survivor as a trustee and if the survivor renews the lease he is considered to do so for the benefit of the partnership.

18. In Clegg v. Edmondson (1857) 8 De G. M : 44 E.R.593. on the facts, the plaintiffs were denied any right to a renewed lease obtained by the managing partners after notice of dissolution, because the plaintiffs with full knowledge of their rights allowed the managing partners to carry on a mining concern at their own risk for a long time without taking any steps to assert those rights by legal proceedings. They were therefore not permitted to assert them after long a lapse of time. But the general principle laid down in Featherstonhaugh v. Fenwick (1810) 17 Ves. Jun. 297 : 34 E.R. 115, was reiterated. Sir George Turner, L.J., in repelling an argument founded on the partnership being dissoluble at will, said:

The principle on which the Court proceeds in cases of this nature is the confidence which subsists between partners and that confidence exists whether the partnership subsists for a limited time or is. dissoluble at will.

The learned Lord Justice was not prepared to say that in no case could a partner, during the continuance of the partnership contract for a new lease to be granted to himself without the new lease being held to be for the benefit of the partnership. The authorities did not warrant that position. He then observed : .but this, I think, is plain upon all the authorities, that it is very difficult for any partner to secure to himself to the exclusion of his co-partners the benefit of a lease so contracted for; and the difficulty is certainly greater where the contracting partners are, as in this instance they were, the managing partners. In order to give validity to such a transaction, all the parties ought to be placed upon an equal footing arid it is difficult to see how this is to be accomplished in the case of managing partners.

19. Though the case of Biss (1903) 2 Ch. 40., In re, did not relate to partners, there is a full discussion by the learned Judges of the Court of Appeal of general principles which would also apply to partners. Both Mr. T. L. Venkatarama Aiyar and the Advocate-General were willing to accept and adopt the law as enunciated in this case. Collins, M.R., drew the distinction already adverted to between a presumption of law which arises in the case of a trustee and a rebuttable presumption of fact in the case of mortgagees, joint tenants and partners. Romer, L.J., after refusing assent to a general proposition that if any person partly interested in an old lease obtains from the lessor a renewal, he must be held to be a constructive trustee of the new lease, whatever be the nature of the interest or the circumstances under which he obtained the new lease, also refused to limit the application of the equitable doctrine of constructive trust to cases where the old lease was renewable by agreement or custom or where the new lease was obtained by surrender or before the expiration of the old lease. He said:

There may well be, and often is, an advantage for the purpose of obtaining a new lease, in being in the position of an old lessee; and that advantage may be of appreciable value in the view of a Court administering equity, even though the landlord is under no obligation to grant a new lease to the old tenant.

He dealt with the case of partners thus:

Take next the case of a partner obtaining a renewal of a partnership lease. Here apart from the fact that in ordinary cases concerning the carrying on of the partnership business he is an agent for the partners, he clearly owes a duty to his co-partners not to acquire any special advantage over them by reason of his position. And, therefore, as a rule, even if a partnership lease has come to an end, yet if that partner by virtue of his position obtains a renewed lease, he will be held to have acquired it on behalf of all the partners.

20. Warrington, J., in Bevan v. Webb (1905) 1 Ch. 620 , considered it as beyond dispute that the principle, that when a person in the position of a trustee holding as part of his trust property a lease takes a renewal of that lease, that renewed lease is treated as a graft or addition to the trust property, is equally applicable to the relations between partners. And if part of the assets of the firm consists of leasehold premises, one partner cannot take a new lease of those premises and then insist on keeping that for his own benefit.

21. That the general doctrine enunciated in Keech v. Sandford 2 Wh. & T.L.C. (9th Edn.) 648 : 25, is equally applicable to the case both of leases renewable by right or custom and of leases not so renewable is clear, and the renewed lease in both cases is prima facie looked at as a graft on the original interest and subject to the same trusts or limitations. Only, in some cases the person who obtains the renewal, is allowed, and in others, he is not allowed, to show that there is in the particular circumstances nothing inequitable in his claiming the renewed lease for his own benefit. Vide Parket, J., in Griffith v. Owen (1907) 1 Ch. 195

22. The only Indian decision to which reference was made at length by both sides was a ruling of a Division Bench of this Court in Ramalinga Reddi v. Ramalinga Setty : AIR1938Mad929 . A mica mining business began with A and two others as partners in 1924. A acquired by assignment the share of one of them. On 7th October, 1925, the partnership took on lease for the purpose of opening mica mines a block of land for a term of five years. In 1929, B joined the partnership. Before the termination of the lease, on 10th June, 1930, A obtained a fresh lease in his own name for 10 years commencing from the date of the termination of the old lease. Early in October, 1930, A sent a notice to B asserting that the new lease was his own and asking him to come and settle the accounts of the partnership which, according to him, was terminated on 6th October, 1930, that is, the date of the termination of the old lease. The question which the Court was called upon to decide was whether the new lease formed part of the partnership assets. The learned Judges held that B was not entitled to claim an interest in the new lease or to insist that it should be treated as part of the assets of the old partnership. Varadachariar, J., who delivered the judgment of the Bench discussed the leading authorities in England and observed that the statute law in India had not substantially deviated from the rules of the English law. In his opinion, there was no absolute rule of law or irrebuttable presumption in respect of the renewal of a partnership lease by one of the partners, and in India a constructive trust can be held to arise only if the conditions of Section 88 or Section 90 of the Trusts Act were satisfied. The learned Judge proceeded to examine the evidence in the case to decide whether the partner availed himself of his character to obtain the new lease, and held that he did not. The evidence showed that far from imagining that the old lease gave any particular claim for renewal, the landlords started negotiations with others for a new lease, and even after A approached them for a new lease, they had no hesitation in entertaining a stranger's offer to negotiate a lease for himself. The negotiations were carried on by A openly and no advantage was clandestinely obtained. There was also nothing in the evidence to suggest that A was in the position of a managing partner. In view, of these and other circumstances, the learned Judge agreed with the lower Court that B, was not entitled to claim an interest in the new lease.

23. In the state of authorities discussed above, it may be conceded that there is no irrebuttable presumption of law that a renewal of a lease belonging to the partnership by one of the partners enures to the benefit of all the partners. A partner no doubt occupies a fiduciary position in relation to the other partners in the affairs of the firm, but he does not suffer under an absolute disability by virtue of his position to acquire any benefit or advantage for himself in any circumstances. There may be cases when a partner, during the continuance of a partnership, can secure a new lease to himself without the new lease being held to be for the benefit of the partnership. It would depend upon the facts and circumstances in each case. Section 88 of the Trusts Act consists of two parts. The condition laid down in the first part is that the partner or other person occupying a fiduciary position should gain for himself any pecuniary advantage by availing himself of his character. The condition in the second part is that he should gain for himself a pecuniary advantage by a dealing under circumstances in which his own interests are, or may be, adverse to those of the others.

24. Now, what are the facts and circumstances in the present case. Mr. T.L. Venkatarama Aiyar, the learned advocate for the appellants, relied upon the following facts : (1) Defendants 1 to 7 were in the position of the managing partners; (2) for over three years prior to the date of the termination of the old lease, there was no distribution of the profits, and admittedly accounts were not settled. Nearly Rs. 90,000 of the partnership moneys were with defendans 1 to 7; (3) the Government adopted a policy of renewing old leases, if their working had been satisfactory; and (4) no notice was given to the other partners of the application for renewal.

25. That the evidence discloses all these facts and circumstances there can be no doubt. According to the terms of the partnership deed, Ex. P-2, the first defendant, and the father of defendants 2 to 7 were the partners responsible for the management of the factory. This may be due to the reason that the licences stood in their name. But on that ground, the importance of their position cannot beminimised. The 3rd defendant, as D.W. 1, deposed as follows:

My father Appala Narasayya Chetti died on 23rd August, 1934, (Sic.) Till his death himself and the defendant 1 were managing the Badajanapara Salt Factory. After his death, myself and the defendant 1 were managing the business .... The other partners mentioned in Ex. P-2 did not take part in the management of our business and my father and the 1st defendant alone managed it since 1926.

26. Though the defendants 1 to 7 raised a plea that accounts had been settled in January, 1939, the plea was found to be false at the trial, and there was no attempt to revive that plea before us. It was admitted that large sums of money aggregating to over Rs. 90,000 belonging to the partnership were with defendants 1 to 7, and the profits were not divided among the partners. According to the 5 th plaintiff, his was because it was agreed among them that the amount should be kept as a reserve fund to be utilised for a renewed lease. (Vide P.W. 2.)

27. As already mentioned, the Salt Department called for proposals for the renewals of leases that would expire during the course of the year 1942, and defendants 1 to 7 were informed that they should submit a petition for renewal for a further period of 25 years, if they required it (Ex. P-17-a). In the ordinary course of events, the other partners could not have any knowledge of the correspondence between the Government and defendants 1 to 7 as regards the renewal of the lease. There is no evidence that defendants 1 to 7 informed the other partners of their desire to obtain a new lease for their own individual benefit. No doubt, the only persons who could make an application for renewal were defendants 1 to 7 so far as the Salt Department was concerned, because they were the licencees. But actually, the money which was utilised to obtain the old lease and licence had been contributed by all the partners, and therefore all of them had interest in the old lease and the licence. It is not as if defendants 1 to 7 alone had the entire interest therein. In fact, the learned Advocate-General, during the course of the arguments, conceded that the other partners had such interest in the lease as members of a joint family would have in a lease taken for the benefit of the family in the name of the manager.

28. The learned Advocate-General contended that the legal title, so far as the lease and the licence were concerned, vested in the grantees, that is, defendants 1 to 7, and it was in a sense personal to the grantees. Though he was prepared to concede that the others had some interest, he confined this right to money and profit. They were not co-lessees, and the lease and the licence could not in law be deemed to be assets of the partnership. He referred us to Clause 12 of Ex. P-16, the draft lease, which provided as follows:

Nothing herein contained shall prevent the lessees at any time from taking any partner or partners into the business carried on by them under the present lease who may be approved by the Collector.

He sought to make a distinction between the business carried on by the partnership and the lease and licence which belonged according to him to the grantees. We are unable to accept his contention. On the facts of this case, it must be held that the lease itself was obtained by the first defendant and the father of defendants 2 to 7 as partners. This is not a case in which persons owning a leasehold interest in their own right entered into a partnership to carry on a business utilising the leasehold interest which they possessed, making a capital contribution of it, as it were. Though, so far as the Salt Department was concerned, only two persons and later the seven persons were the lessees, the rights and obligations inter se were those of partners. In Ex. P-2, it is recited that there was an agreement prior to the auction by the Salt Department that even if the sale was confirmed in favour of anyone of the five individuals, all should enjoy the profit or bear the losses thereof according to the shares mentioned therein. Section 12 of the Madras Salt Act runs thus:

For the purposes of this Act, the licencee shall be taken to be the owner of the licence and of the salt works specified therein : provided that nothing herein contained shall affect the liability of the licencee towards any person who may have an interest in, or lien upon, such licence or salt works.

In the case before us, we are only concerned with the rights of third parties and not the rights of the Government. If, by reason of contractual relationship, the persons who became the successful bidders at the auction sale were under any legal liability, such liability can be the subject of adjudication in a Civil Court, without infringement of the provisions of the Salt Act or of the terms and conditions of the lease and the licence granted by the Salt Department. We hold that the old lease must be deemed to be a partnership asset belonging to all the partners, according to their shares.

29. It was next contended by the learned Advocate-General that the partnership was for a fixed term, namely, the period of the old lease, and it was for a single venture, and as the new lease was to commence only on 1st January, 1943, that is, after the cessation of the partnership, it could not become the asset of the old partnership. This contention of his must fail, because the doctrine of constructive trust in respect of the renewal of a lease applies even to a case when the renewal is made after the termination of the partnership but before its assets have been sold (vide Lindley on Partnership, page 385). The fact that the renewed lease would commence after the termination of the partnership cannot make any difference, so far as the application of this doctrine is concerned, if the renewal was obtained either during the partnership or before its assets have been sold. There were similar facts in Clegg v. Fishwick (1848) 1 Mac. and G. 293 : 41 E.R. 1278 and Clements v. Hall (1857) 2 De G. & J. 173 : 44 E.R. 954. In both these cases, the renewed lease commenced after the termination of the partnership. It is clear on the authorities that whether the partnership is for a limited time or is dissoluble at will the rule equally applies. (See Featherstonhaugh v. Fenwick (1810) 17 Ves. Jun. 297 : 34 E.R. 115 at 120 ). It should not be overlooked that though the new lease was to commence from 1st January, 1943, the application for renewal was made, and the sanction of the Collector obtained, well before the termination of the partnership.

30. The learned Advocate-General tried to escape from the terms of Section 88 of the Trusts Act by arguing that defendants 1 to 7 did not avail themselves of their position as partners but that they availed themselves only of their position as licensees. But this line of escape is not open to him, because, in respect of the old (lease and the licence, defendants 1 to 7 were in the position of partners. It cannot be denied that it was because they held a subsisting lease that they obtained the new lease. We hold that the plaintiffs are entitled to the benefit of the renewed lease.

31. Lastly, the learned Advocate-General strenuously relied upon the fact that neither the lease nor the licence could be sold as an asset of the partnership, as such a sale is not permitted by the Madras Salt Act. That may be so. But this circum-stance does not present to us any insuperable difficulty in moulding the decree properly and granting the proper relief to the appellants. It is quite true that defendants 1 to 7 cannot be compelled to continue the partnership against their will, so that the business of working the new lease may be carried on by all the parties jointly. It is also obvious that the appellants will not be entitled to a share in the profits that may be earned on account of the new lease. This was recognised in the earliest of the English case cited above, namely, Featherstonhaugh v. Fenwick (1810) 17 Ves. Jun. 297: 34 E.R. 115. The lease will only be included as part of the property belonging to the partnership subject to the rights of defendants 1 to 7.

32. The question, therefore, remains, what is the relief which the plaintiffs can obtain with respect to the new lease Apart from the fact that they will not be entitled to the profits made on its account, to the making of which they have not contributed in any manner, there is another fact which introduces a complication, namely, that the lease cannot be sold as other assets of the partnership can be. In such cases, the only practicable course is to direct a value to be put upon the benefit of the lease, which value will be available for distribution between the partners, according to their shares. Lindley, at page 647, deals with unsaleable but valuable assets in the following manner:

If one of the partners holds an appointment on behalf of the firm which is not saleable, but the profits of which are by agreement to be accounted for by him to the partnership, the partner holding the appointment will be debited with its value; for that is the only mode in which, upon a dissolution, such a source of gain can be dealt with. The same principle applies to other unsaleable but valuable assets, to which one partner has no exclusive right.

The same rule will apply to mines which are not saleable without the consent of the landlord. The case of Smith v. Mules (1852) 9 Hare. 555 : 68 E.R. 633., furnishes an instructive example of the application of the rule. In that case, there was a partnership between certain persons as solicitors, one of whom was entitled to offices or clerkships, the emoluments of which were to be shared by the partners. During the continuance of the partnership, the partner who held these offices and his son, who was also a partner, obtained other offices and clerkships. It was held that the partners who had acquired the said offices could not be allowed to retain the offices for their exclusive benefit. But inasmuch as from the nature of the offices, they could not be sold nor could any manager or receiver be appointed to carry them on, these partners were charged with the value of the offices in the partnership accounts. Appropriate directions were, therefore, given to the Master to set a value on the offices after making a reasonable allowance for conducting the business of the same.

33. In conclusion, we hold' that the new lease obtained by defendants 1 to 7 in renewal of the old lease which formed the subject-matter of the partnership, must be held by them for the benefit of the other members of the partnership, who are entitled to share in the advantage gained by defendants 1 to 7. As the lease itself was executed after the termination of the partnership and as it is not the case of the appellants that any one other than defendants 1 to 7 had furnished the consideration for the new lease, the benefit of the renewal alone will be treated as an asset: of the partnership which terminated on 31st December, 1942 and a value placed on it. The Commissioner appointed by the lower Court may, after taking such evidence as may be necessary, be directed to fix the value in the first instance. In arriving at a value, the liability of defendants I to 7 to furnish capital and incur the necessary expenses for carrying on the new business with its attendant risks and also possibilities of profits, are factors to be taken into account. The appeal is allowed to this extent. The contesting respondents will pay the appellants the costs of this appeal.

34. The memorandum of objections filed by respondents 1, 2, 4, 5 and 6 was not seriously pressed, except as regards ground 8, namely, that the lower Court erred in. directing a sale of the good-will of the firm. We agree with the learned Advocate-General that the good-will of a partnership such as we are concerned with in this case, is merely notional and cannot be of any practical value. The learned Subordinate Judge himself was aware of this, because he authorised the good-will to be sold for what it was worth. We do not think that the contesting respondents-should feel themselves aggrieved by this direction. There is no necessity to interfere with it. The memorandum of objections is dismissed. No order as to costs.


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