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Mohanasundaram and ors. Vs. Neelambal and ors. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtChennai High Court
Decided On
Case NumberO.S.A. No. 138 of 1951
Judge
Reported inAIR1955Mad442
ActsPartnership Act, 1932 - Sections 16, 37, 50 and 53; Code of Civil Procedure (CPC) , 1908 - Sections 34
AppellantMohanasundaram and ors.
RespondentNeelambal and ors.
Appellant AdvocateG. Ramakrishna Iyer, Adv.
Respondent AdvocateG. Jagadesa Iyer, Adv.
DispositionAppeal dismissed
Cases ReferredHakim Rai v. Gangaram
Excerpt:
.....or outgoing partner under section 37 dependent on surviving or continuing partners carrying on business of firm with property of firm - principle does not apply to case where business of partnership not being continued - carrying on business in same line by surviving partner does not by itself made him liable to obligation enacted by section 37 - section 37 not attracted enabling plaintiffs to claim share of profit of subsequent business started by respondent in his own name - held, plaintiff not entitled to claim share under section 37. - - 10,000 but this was not immediately paid on the ground that notwithstanding all efforts to wind up the affairs of the firm, there were constituents who had gone away to pakistan and that without ascertaining how much could be recovered from..........chetti after july 1947 was also in hides and skins, it was not in the same name as the old firm's business and it was financed by borrowing on arunachala's own credit. this the surviving partner was entitled in law to do. in this connection reference may be made to certain other provisions of the partnership act which renders the position clear. under section 16 : 'subject to contract between the partners, (a) if a partner derives any profit for himself from any transaction of the firm, or the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm; (b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by.....
Judgment:

Rajagopala Aiyangar, J.

1. This is an appeal by the plaintiffs from the judgment of Mack J. and is directed against the terms of a preliminary decree for the taking of the accounts of a dissolved partnership.

2. The facts of the case ate not in controversy and may be briefly stated. On or about 31-7-1945 one G. K. Narasimha Mudaliar entered into a partnership with the defendant P. Arunachalam Chettiar (who died pending the suit and is now represented by his widow and sons who are the respondents before us) for the purpose of carrying on a business in hides and skins under the name and style of 'K. N. Arunachalam Chetti and Co.' Each of the partners contributed a capital of Rs. 10,000 and while Narasimha Mudaliar was entitled to a one-third share in the profits and loss, Arunachala was to have the rest of the two-thirds. During the subsistence of the term of the partnership Narasimha Mudaliar died on 2-6-1947 leaving the plaintiffs as his representatives with the result that the partnership stood dissolved on that date.

3. The books of account of the partnership showed that they were made up to the end of March 1947 showing a credit of Rs. 10,198-12-8 to Narasimha Mudaliar the deceased and Rs. 13,413-13-0 to Arunachala the subsisting partner. There had been subsequent drawings both by Narasimha and Arunachala upto the dissolution of the partnership. Arunachalam withdrew some small sums even after the dissolution and on 30-6-1947 he drew a sum of Rs. 20,000 while the amount standing to his credit on that date was Rs. 13,800 odd. In other words he overdrew to the extent of about Rs. 6000. It might be mentioned that Arunachala paid a sum of Rs. 1000 to the representatives of Narasimha Mudaliar in July 1947 for the funeral expenses of the deceased, paid the income-tax due by the firm to the tune of about Rs. 7,500 and also paid to the representatives of the deceased a sum of Rs. 10,000 in May 1948 on account and subject to the taking , of accounts.

4. In July 1947 Arunachala Chetti started a business, in hides and skins in his own name as P. Arunachala and Co. The drawing of Rs. 20,000 appears to have been utilised for this purpose but it is admitted no assets of the firm of K. N. Arunachalam and Co. in the shape of the stock-in-trade etc. were utilised for the venture newly started.

5. When Narasimha Mudaliar died in June 1947 interstate he left four sons -- all of them minors and a widow. Three of them were sons by a deceased wife while the last was the son of a second wife who survived her husband. Having regard to the minority of the legal representatives and there being no legal guardian for the three elder sons, Arunachalam appears to have suggested the necessity for an application to the court for the appointment of a guardian for the minors so that he could deal with such persons without any question being subsequently raised as regards the authority or competence of the guardian. An application was accordingly made to this court and the paternal grandfather of the four minors was appointed on 21-8-1947 as their property guardian. The guardian then started correspondence with Arunachala as regards the settlement of the accounts and the latter expressed his willingness to have this done; only he desired the income-tax assessment to be completed so that this liability might be known and taken into account. It was in the course of this correspondence that the sum of Rs. 10,000 already referred to was sent to the guardian on account. A statement of account was sent to the guardian which showed that a sum of over Rs. 7000 was still due to the minors and the second wife after the payment of Rs. 10,000 but this was not immediately paid on the ground that notwithstanding all efforts to wind up the affairs of the firm, there were constituents who had gone away to Pakistan and that without ascertaining how much could be recovered from them the amount of bad debts could not be worked out. Other matters holding up the final ascertainment of the figure of profit or loss were set out but it is unnecessary to detail them.

6. The guardian of the minors on their behalf and the widow of the deceased not being satisfied filed the present suit for the taking of the account of the dissolved partnership. In the plaint after setting out the facts regarding which there was no dispute it was stated in paragraph 9 :

'The plaintiffs charge that they are entitled to an account being taken of the dissolved partnership of K. N. Arunachalam and Co. and of the profits earned on the business subsequent to the death of Narasimha Mudaliar by the use of his assets

IN accordance with this the plaintiffs prayed for judgment:

i. that an account may be taken of the partnership of K.N. Arunachalam and Co., that became dissolved on 2-6-1947 and of the business of the firm since carried on by the defendant;

ii. that the amounts due to the plaintiffs on account of the amount due to Narasimha Mudaliar for capital and share of profits be ascertained at the time of his death and also their share on the profits made by the defendant since that date by the use of Narasimha Mudaliar's share in the property of the firm;

iii. that the plaintiffs should be paid the sums due to Narasimha Mudaliar at the time of his death less payments made on account together with the share of profits in the subsequent business of interest at 6 per cent per annum whichever is advantageous to the plaintiffs.

7. In his defence Arunachala Chetti who was alive at the date of the written statement asserted that he had always been willing and anxious to settle the account and detailed the impediments which stood in the way of ascertaining the figures of the sums due to each of the partners. He denied the claim for a share of the profits of the business carried on by him subsequent to the dissolution and asserted that

'the plaintiffs would be entitled only to such amounts, if any, as might be found due on account of the share of Narasimha Mudaliar after accounts are taken and interest on the amount found due from date of such ascertainment and the final decree following thereon.'

8. The defendant Arunachala died on 5-9-1950 after the filing by him of the written statement and his heirs were impleaded in 'the place of the deceased. At the hearing before Mack J. the facts as set out above were admitted and the only question for consideration by the Court was whether the plaintiffs were entitled to a claim to a share of the profits of the business conducted by Arunachala Chettiar after 2-6-1947. This obviously 'referred to the business in hides and skins carried on by the surviving partner in the name of P. Arunachala and Co. after July 1947 till September 1950 there being no allegation that the business of K. N. Arunachalam and Co. had been continued after 2-6-1947.

9. Besides the account books of the firm of K. N. Arunachalam and Co. and the books of the business of P. Arunachalam and Co., there was no evidence placed before the learned Judge except that of the accountant of the dissolved firm. In his evidence he deposed that the new business started by Arunachalam was carried on with the borrowings to the extent of about 5 lakhs all of which appeared in the accounts of the business. This was accepted by the learned Judge and indeed there was no dispute as regards this. The plaintiffs claimed that they were entitled to a share of the profits of the business of P. Arunachalam and Co., which the surviving partner started.

10. The learned Judge held that on the facts the terms of Section 37, Indian Partnership Act were not attracted and that the business started by Arunachala was an entirely new one though he had overdrawn from the dissolved firm to the extent of about Rs. 6000 or Rs. 7000. The learned Judge however held that though the plaintiffs were not entitled to claim a share in the profits of the new business as a continuation of the dissolved firm, they were nevertheless entitled to interest at six per cent per annum on the amount of Narasimha Mudaliar's share as on 2-6-1947 on the final taking of the accounts.

11. This appeal is by the plaintiffs from this disallowance by the learned Judge of their claim to a share of the profits of the business of P. Arunachalam and Co. The argument advanced on behalf of the appellants by Mr. G. Ramakrishna Aiyar their learned counsel was that the new business must be deemed to be a continuation of the business of the dissolved firm by reason of two facts: (1) that the new business was also one in hides and skins, (2) that the surviving partner had overdrawn from his account to the extent of about Rs. 6000 or Rs. 7000 when he drew Rs. 20,000 on 30-6-1947 and that if this money was utilised by him in his new venture the principle of the provision in Section 37, Partnership Act, 1932 was attracted.

12. We are clearly of the opinion that on the facts of this particular case the rule laid down in Section 37, Partnership Act is not attracted, The material portion of this provision runs in these terms:

'Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary the outgoing partner, or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.'

13. It will be seen that this right of the deceased or outgoing partner is dependent on the surviving or continuing partner 'carrying on the business of the firm with the property of the firm.' The claimant has therefore to establish that the business of the firm has been carried on by the partner notwithstanding the dissolution. The carrying on of a similar business by the partner after the termination of the partnership does not bring the case within the equitable principle enunciated by the section. The entire basis of the rule is that if the surviving partner in breach of the right of the quondam partner or his representatives under Section 46, Partnership Act to have the accounts settled and the affairs of the firm wound up and the surplus if any distributed, continues the business, the partner who thus wrongly acts is subject to the obligations of a partner but not entitled to claim rights in such capacity. That is why the ex-partner or his representative are entitled to claim their share of the profits if the venture proves to be profitable and not being liable for losses are entitled to claim interest if there is loss or even where there is profit, at 6 per cent per annum where this is more advantageous.

14. This principle however cannot apply to a case where the business of the partnership is not being continued. In the present case though the business which was carried on by Arunachalam Chetti after July 1947 was also in hides and skins, it was not in the same name as the old firm's business and it was financed by borrowing on Arunachala's own credit. This the surviving partner was entitled in law to do. In this connection reference may be made to certain other provisions of the Partnership Act which renders the position clear. Under Section 16 :

'Subject to contract between the partners, (a) if a partner derives any profit for himself from any transaction of the firm, or the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.'

15. This represents the rights and obligations of partners during the continuance of the partnership. But after the dissolution of the firm the governing. provision is to be found in Section 50 of the Act which runs thus:

'Subject to contract between the partners, the provisions of Clause (a) of Section 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up; Provided that where any partner or his representative has bought the good-will of the firm, nothing in this section shall affect his right to use the firm name.'

16. It will be seen that while the surviving partner is subject to the obligations enacted by Section 16(a) the embargo imposed by Section 16(b) against carrying on a business of the same nature competing with that of the firm is not applicable to him after the dissolution. There is one other provision to which reference may be made, viz., Section 53 of the Act which in a sense is a corollary to Section 37. Section 53 runs thus:

'After a firm is dissolved, every partner Or hisrepresentative may in the absence of a contractbetween the partners to the contrary, restrainany other partner or his representative fromcarrying on a similar business in the firm nameor from using any of the property of the firm forhis own benefit, until the affairs of the firm havebeen completely wound up;

Provided that where any partner or his representative has bought the good-will of the firm, nothing in this section shall affect his right to use the firm name.'

17. The prohibition is to the carrying on of asimilar business in the firm name and not to the carrying on of a similar business in his own name. The position is thus summarised in Lindley on Partnership, 11th Edn., p. 724. Dealing with the effect of the dissolution of a firm as regards the partners themselves it is slated:

'Each partner has a right to commence a new business in the old line and in the old neighborhood either alone or in partnership with other people.'

18. It follows from the foregoing that the carrying on of a business in the same line by a surviving partner does not by itself render him liable to the obligation enacted by Section 37, Partnership Act.

19. The next point to be considered is the effect of withdrawal by Arunachala of Rs. 20,000 on 30-6-1947 and its utilisation in the new venture. On the facts of the present case, we are of the opinion that this does not render the new business one carried on with the property of the dissolved firm within the meaning of Section 37. It will be seen that on the date of the withdrawal, the surviving partner had admittedly about Rs. 14,000 to his credit so that the overdrawing was to the extent of a little over Rs. 6,000. The funds necessary for the new business was of the order of five lakhs and these were obtained by a borrowing on sole credit of Arunachala. It is not stated that the surviving partner took over to his new business even the stock-in-trade of the old firm. Even at the time of the overdrawing the income-tax had not been assessed and paid and it is in evidence that the tax which came over Rs. 7,000 was paid by the surviving partner. In these circumstances the withdrawal of June 1947 can only be treated as an overdrawing which I does not 'ipso jure' bring in Section 37, Partnership Act.

20. We are therefore clearly of the opinion that the learned Judge was right in holding that Section 37, Partnership Act is not attracted to the present case enabling the plaintiffs to claim a share of the profits of the subsequent business started by Arunachala in his own name.

21. The learned Judge however has passed a decree in favour of the plaintiffs allowing 'interest at 6 per cent per annum on the amount of C. K. Narasimha Mudaliar's share as on 2-6-1947.' The legal basis on which this relief has been rested by the learned Judge is not clear, though there is a reference to the overdrawing of Rs. 6,000 or Rs. 7,000 by Arunachala being treated as a temporary loan. The representatives of the defendant not having appealed against the decree, the correctness of the learned Judge's direction does not fall to be considered. But by affirming this decree of the learned Judge we must not be taken to have accepted the direction as correct. This question has not been argued and hence we do not feel called upon or deem it proper to express any final opinion whether the decree awarding interest on the deceased partner's share from the date of his death was correct. It was mentioned at the bar that this direction was justified by the present suit being one for taking the accounts of a dissolved partnership as if in every such suit the plaintiff is entitled to interest from the date of the dissolution. In our opinion there is no warrant for this assumption. The decision of the Privy Council reported in --'Suleman v. Abdul Latif is authority for the position that normally the decree in a suit for dissolution of partnership and accounts should provide for the payment of interest upon the amount due from the date of the final decree by which the amount if any is found due and not from the date of the plaint. The reason for the rule was stated to be that 'until the accounts are taken it is impossible to say what if anything is due from one partner to his co-partners.'

Though this is the usual rule, we had occasion recently to point in -- 'Thulasi Animal v. Ramchandra Naidu', (S) : AIR1955Mad171 (B) that there might be exceptional cases of fraudulent or improper conduct on the part of the partners which might attract the principle of Section 37, Partnership . Act even to a case where the suit was one for dissolution and accounts. The later case reported in -- 'Hakim Rai v. Gangaram AIR 1942 PC 61 (C) was one in which the suit was for the taking of accounts of a dissolved partnership. There had been improper conduct on the part of the former managing partner against whom the action was laid he having retained in his hands and for his own purposes the assets of the firm without accounting for them or their proceeds to his co-partner. Even in this case, interest was awarded not from the date of the dissolution but from the date of the plaint in the action, Lord Romer stating 'That interest should only run as from the date of the institution of the suit and not from the date of the dissolution of the partnership is now conceded by the plaintiff.' The contention raised on behalf of the defendant that interest should run only from the date of the final ascertainment of the plaintiff's share was repelled by distinguishing the earlier case in , in these terms: 'But that case was concerned with an ordinary ' suit for the dissolution and winding up of the affairs of a going partnership. The present case is widely different. It is a suit brought nearly two years after the dissolution of the partnership against the former managing partner who has been retaining in his hands and for his own purposes assets of the firm without accounting for them or their proceeds to his co-partner.' (22) This in our opinion means that the mere fact that the suit is one for the taking of the accounts of a dissolved partnership does not by itself give the plaintiff a right to interest even from the date of the plaint, the case being merely an application of Section 34, C. P. Code. There must he some conduct on the part of the defendant to justify the award, such as the failure of his obvious duty to wind up the affairs of the firm with promptitude, failure to submit accounts and improper retention in his hands of the assets of the firm. One thing is clear namely if the mere fact that the suit is one for the taking of the accounts of a dissolved firm involved the consequence that the plaintiff was entitled to interest even from the date of the plaint, it stands to reason that the plaintiff also should be bound to pay interest if on the taking of the accounts it is found that the quondam partner has overdrawn. It need hardly be mentioned that interest from the date of the final decree stands on a different footing and no distinction can be made between a plaintiff and a defendant in that matter. Apart from contract there is no right to interest in respect of overdrawings by partners. As stated in Lindley on Partnership (pp. 478-479, 11th Edn.)

'Except however where there has been a fraudulent retention or an improper application of the money of the firm, it is not the practice of the court to charge a partner with interest on money of the firm in his hands; for example, under ordinary circumstances a partner is not charged with interest on sums drawn out by him or advanced to him.'

23. These questions are, as stated before, academic in this appeal but we have considered it necessary to mention our views to prevent any misunderstanding of the legal position by our affirming the decree of the learned Judge.

24. The appeal fails and is dismissed with costs. The appellant's guardian will take his costs out of his estate.


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