KESHAVLAL LALLUBHAI PATEL Vs. PATEL BHAILAL NARANDAS
HIGH COURT OF GUJARAT
KESHAVLAL LALLUBHAI PATEL
PATEL BHAILAL NARANDAS
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(1.) The short question that arises for determination in this appeal is as to the date of dissolution of a partnership constituted of the plaintiffs and the defendants. By a deed of partnership dated 4th July 1954 the plaintiffs and the defendants agreed to carry on business in partnership in the firm name of National Construction Company on the terms and conditions recorded in the partnership deed. The business of the partnership was stated in Clause 1 of the partnership deed to be construction of buildings roads dams canals and other structures in various parts of India and production and transport work in connection with the same. Clause 2 of the partnership deed provided that none of the partners should withdraw the amount of capital invested by him until all the construction works undertaken by the firm were completed. The partners were divided into three groups: the first group consisting of the plaintiff and defendant No. 8 the second group consisting of defendants Nos. 2 and 3 and the third group consisting of defendants Nos. 4 to 7 and under Clause 5 of the partnership deed the management of the partner ship business was entrusted to three Managing Partners one drawn from each group. Clauses 6 and 7 of the partnership deed which are material Clauses for the determination of this appeal were in the following terms as translated in English:-
6 The duration of this partnership is not fixed and it will therefore be a partnership at will.
7 Each partner will be entitled to a share in the goodwill of the firm according to his share in the partnership. If any partner wishes to retire from the firm he can do so by Giving Notice in writing to the other partners of his intention to retire after completion of the pending construction works and the retirement shall take effect after the pending construction works are completed accounts in respect thereof are taken and the amount due at the foot of the accounts is paid or received by him as the case may be. If the continuing partners take up any new construction work after receipt of such written notice from the retiring partner the retiring partner shall not be liable in any manner in respect of such construction work. The retiring partner will have no claim in respect of the goodwill of the firm and the goodwill shall belong to the continuing partners according to the shares mutually agreed between them. The partnership obtained a contract for the construction of Raigadh Rattan Pole Section of National Highway No. 8 but before the completion of construction of the said work the plaintiff gave a notice dated 15th December 1956 to the defendants dissolving the firm This action was taken by the plaintiff because according to him various irregularities and illegalities were being committed by defendant No. 6 in the management of the business of the partnership but we are not concerned with this allegation of the plaintiff since it has no bearing on the question whether the notice operated to dissolve the partnership. That question depends entirely on the construction of the partnership deed. The notice was received by all the defendants and the last date of receipt was 18th December 1956. The plaintiff therefore contended that the partnership was dissolved on 18th December 1956 and he filed a suit in the Court of the Civil Judge Senior Division Ahmedabad against the defendants for taking accounts of the dissolved partnership. The plaintiffs also prayed in the alternative that in any event by reason of the facts and circumstances set out in the plaint the partnership be dissolved by the Court. Originally in the suit apart from the partners one Ratilal Dahyabhai Patel was also impleaded as defendant No. 9 on the ground that he was a cashier in charge of the account books of the firm but at the hearing of the appeal before us Mr. J. M. Shah learned advocate appearing on behalf of the plaintiff applied that he may be permitted to drop defendant No. 9 from the suit and the name of defendant No. 9 was accordingly ordered to be struck off from the suit. Defendants Nos. 5 to 7 contended in their written statement that the partnership was not a partnership at will and was therefore not dissolved by the notice dated 15th December 1956 but it was a partnership for a venture and since the venture namely the construction of the road undertaken by the firm was not complete the suit for dissolution of the partnership was not maintainable. In this stand defendants Nos. 5 to 7 were supported by defendant No. 4 who belonged to their group. The other defendants however agreed with the plaintiff that the partnership was a partnership at will and was therefore dissolved by the notice dated 15th December 1956. The main dispute so far as the issues for determination in a preliminary decree are concerned therefore was as to what was the date of dissolution of the partnership. The trial Court on a consideration of the provisions of the partnership deed held that the partnership was a partnership at will and must therefore be held to be dissolved from 18th December 1956 being the date of receipt of the notice dated 15th December 1956 by the defendants. The trial Court accordingly passed a preliminary decree on the basis that the partnership was dissolved from 18th December 1956. Defendants Nos. 5 to 7 were aggrieved by this determination of the trial Court and hence they preferred the present appeal in this Court.
(2.) The notice dated 15th December 1956 given by the plaintiff to the defendants dissolving the partnership was avowedly given under sec. 43 of the Partnership Act and under that section it could operate to dissolve the partnership from the date of its receipt by the defendants only if the partnership was a partnership at will. The controversy between the parties therefore centred round the question whether the partnership was a partnership at will. Now what is a partnership at will is defined in sec. 7 and according to that definition :
Where no provision is made by contract between the partners for the duration of their partnership or for the determination of their partnership the partnership is partnership at will. On a plain reading of the definition two conditions must be satisfied before a partnership can be regarded as a partnership at will. The first condition is that there should be no provision in the contract between the partners for the duration of their partnership and the second condition is that there should be no provision in the contract for the determination of that partnership. If either of these provisions exists the partnership would not be a partnership at will. Now the duration of a partnership may be expressly provided for in the contract but even where there is no express provision it has been held that the partnership will not be at will if any stipulation as to the duration can be implied. See Halsburys Laws of England Third Edition Vol. 28 page 502 para 964 where it is said that where there is no express agreement to continue a partnership for a definite period there may be an implied agreement to do so. In Crawshay v. Maule (1818) 1 Swan 495: 35 ER 473 the same principle has been laid down in the following words:
The general rules of partnership are well-settled. Where no term is expressly limited for its duration and there is nothing in the contract to fix it the partnership may be terminated at a moments notice by either party... Without doubt in the absence of express there may be an implied contract. as to the duration of a partnership. The same principle also applies to a case of determination. The contract may expressly provide that the partnership will determine in certain circumstances but even if there is no such express term an implied term as to when the partnership will determine may be gathered from the contract and the nature of the business. Vide Thiagarajan v. Muthappa A.I.R. 1961 Supreme Court 1225. What we have therefore to see is whether there is in the present case in the contract of partnership any express or implied provision as to the duration of the partnership or as to when the partnership will determine. It was conceded on behalf of defendants Nos. 5 to 7 that there was no provision in the contract of partnership express or implied in regard to the duration of the partnership and this concession was inevitable in view of Clause 6 of the partnership deed; but the contention of defendants Nos. 5 to 7 was that Clause 7 of the partnership deed contained an express provision for the determination of the partnership within the meaning of sec. 7 and the partnership was therefore not a partnership at will. Now Clause 7 on the face of it dealt with the subject of retirement of a partner and not dissolution of the partnership and the contention of defendants Nos. 5 to 7 therefore appeared to be unsustainable but defendants Nos. 5 to 7 sought to equate retirement with dissolution and contended that retirement of a partner operated to disrupt jural relationship of partners not only between the retiring partner on the one hand and the continuing partners on the other but also amongst all the partners inter se and a provision for retirement of a partner was therefore in effect and substance a provision for determination of the partnership within the meaning of sec. 7. It was also urged on behalf of defendants Nos. 5 to 7 that in any event even if retirement of a partner did not have the effect of dissolving the jural relationship of partners between all the partners inter se but merely disrupted the jural relationship between the retiring partner on the one hand and the continuing partners on the other such disruption of the jural relationship between the retiring partner and the continuing partners constituted determination of the partnership within the meaning of sec. 7 and a provision for retirement of a partner was therefore in any view of the matter a provision for determination of the partnership as contemplated in sec. 7. It is evident that if either of these contentions is wellfounded it would not be possible to say that there was no provision in the partnership deed for the determination of the partnership for Clause 7 would clearly constitute such provision but in our view both the contentions are unsustainable.
(3.) We cannot assent to the proposition that retirement of a partner has the effect of dissolving the jural relation of partnership inter se amongst all the partners. The law of partnership draws a distinction between retirement of a partner and dissolution of a firm. sec. 39 defines dissolution of a firm as dissolution of partnership between all the partners partnership is the jural relation between partners who are collectively called a firm and when this jural relation is snapped between all the partners inter se that constitutes dissolution of the firm. But there may be cases where a partner may wish to withdraw from the firm without affecting the jural relation subsisting between the other partners. He may wish to sever his jural relation as a partner with the other partners leaving the jural relation to the other partners inter se unaffected. He can do so in the cases set out in sec. 32 and when he does so he is said to retire from the firm. When a partner retires from a firm there is no dissolution of partnership between all the partners: there is no severance of the jural relation of partnership inter se between all the partners: the only alteration of jural relationship which takes place is that the jural relation of the retiring partner with the other partners is severed but the jural relation of partnership subsisting between the other partners remains unaffected. Out of several strands of jural relations which go to make up the juridical concept of partnership between certain specified individuals those connecting the retiring partner with the continuing partners are snapped but the others connecting the continuing partners inter se remain intact and the partnership continues as between the continuing partners. There is thus a clear and well recognised distinction between retirement of a partner from a firm and dissolution of a firm. These terms are not synonymous either in their juridical content or their legal implications and consequences. They are treated separately by the law of partnership: one is dealt with in sec. 32 while the other is dealt with in Chapter VI commencing with sec. 39. If as alleged by defendants Nos. 5 to 7 retirement of a partner from a firm has the effect of bringing about dissolution of the partnership between all the partners it is difficult to imagine what should have induced the Legislature to treat retirement as a separate topic under Chapter V and not regard it as one of the modes of dissolving the firm dealt with under Chapter VI. Secs. 32(1)(c) and 43 would also in that event overlap for a notice of retirement under sec. 32(1)(c) would have the effect of dissolving the partnership between all the partners that is of dissolving the firm which according to sec. 43 must needs be done by a notice of dissolution. This distinction between retirement of a partner from a firm and dissolution of a firm is also recognised by judicial decisions of which we may cite only two namely Sohanlal Pachisia & Co. v. Bilasray A.I.R. 1954 Calcutta 179 and Meenakshi Achi v. P. S. M. Subramaniam Chettiar A.I.R. 1957 Madras 8. In the former case Bose J. said:-
But it is clear from sec. 32 of the Partnership Act read with the relevant sections in Chapter VI of the said Act that by mere retirement of a partner a firm is not dissolved but the retiring partner must give notice of his intention to dissolve the firm in order to bring about a dissolution. The old firm continues with the continuing partners as its members. and in the latter case Division Bench of the Madras High Court reiterated the same view in the following words:-
Retirement is not the same as dissolution. On retirement of a partner the firm continues to exist as such which is not the case when a partnership is dissolved. This proposition of law was however disputed on behalf of defendants Nos. 5 to 7 and it was contended that under the law of partnership in India a firm is not a legal entity but is merely a compendious name for the partners and therefore when a partner A retires from a firm of A B and C the firm of A B and C comes to an end and the firm which continues is the firm of B and C which is not the same as the firm of A B and C. It is therefore not correct to say that on retirement of a partner the firm continues to exist as such. The firm consisting of the retiring partner and the continuing partners that is of A B and C in in the illustration taken by us ceases to exist and the firm of the continuing partners that is of B and C continues to carry on the partnership business. There is therefore necessarily in the eye of the law argued defendants Nos. 5 to 7 a dissolution of the firm when a partner retires from the firm. This contention rests on a too literal emphasis on the theory that in the law of partnership in India a firm is not recognised as a legal entity but is merely a compendious name for the persons who constitute the partnership and it ignores the scheme of the Act and some of its basic provisions. It is undoubtedly true that under the law of partnership in India as in England a firm has no legal existence apart from the partners composing it and it is merely a compendious name to describe the partners collectively and therefore according to the strict view of the law on any change amongst the partners comprising a firm there would in fact be a new firm but the law has in conformity with mercantile usage which recognizes a firm as a distinct person or quasi- corporation departed from the strict legal view and extended a limited personality to a firm so that a firm continues to exist despite changes in its constitution brought about by introduction retirement expulsion death or insolvency of a partner. Chapter V contains provisions relating to introduction retirement expulsion death or insolvency of a partner without disolution of the firm. Where a parson is introduced as a partner in a firm under sec. 31 or a partner retires from a firm under sec. 32 or is expelled from a firm under sec 33 there is no dissolution of the firm but the firm continues as such with its constitution changed by the introduction of a partner or the retirement or expulsion of a partner. The language of secs. 31 32 and 33 clearly postulates that the firm continues to exist as if it were a legal persona despite changes in the constitution contemplated in those sections. Sec. 36(1) also supports this conclusion and the words an outgoing partner may carry on a business competing with that of the firm and he may not...solicit the custom of persons who were dealing with the firm before he ceased to be a partner in that section indubitably suggest that the firm is not dissolved by the outgoing of a partner but continues to exist as it were a legal entity despite such outgoing. If introduction retirement or expulsion of a partner had the effect of bringing about dissolution of the firm we should have expected provisions relating to those topics to find a place in Chapter VI which deals with the subject of dissolution of a firm rather than in Chapter V. As a matter of fact cases where a firm is dissolved by death or insolvency of a partner are dealt with in sec. 42 which occurs in Chapter VI and it is only where by reason of a contract to the contrary the firm is not dissolved by death or insolvency of a partner but continues to exist that provision is made in secs 34 and 35 in Chapter V. Secs. 34 and 35 on their plain terms deal with cases where death or insolvency of a partner does not operate to dissolve the firm but the firm continues as such with changed constitution. Sec. 38 also postulates that changes in the constitution of a firm do not affect the continuity of existence of the firm. It provides that a continuing guarantee given to a firm or to a third party in respect of the transaction of a firm is in the absence of agreement to the contrary revoked as to future transactions from the date of any change in the constitution of the firm. This provision would have been totally unnecessary if a change in the constitution of a firm had the effect of dissolving the firm and bringing into existence a new firm. The provisions in Chapter V therefore clearly extend a limited personality to a firm and recognize continuity of existence of the firm despite internal changes in the constitution of the firm such as introduction retirement expulsion death or insolvency of a partner. In this respect the law of partnership in India represents a compromise between the strict view of the English Law which refuses to accord a legal personality to a firm and regards it merely as a compendious name for the partners and the mercantile usage which recognizes a firm as a distinct entity or quasi-corporation. This view is clearly supported by the following observations of Mahajan J. in I.T. Commissioner v. A. W. Figgis & Company A.I.R. 1953 S.C. 455 at 456 :-
It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firms name till dissolution. The law with respect to retiring partners as enacted in the partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi-corporation. The conclusion which we must therefore inevitably reach is that retirement of a partner from a firm does not dissolve the firm that is determine the partnership inter se between all the partners but merely severs the partnership between the retiring partner and the continuing partners leaving the partnership amongst the continuing partner unaffected and the firm continues with the changed constitution comprising the continuing partners. The first contention on behalf of defendants Nos. 5 to 7 must therefore be rejected.;
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