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Bombay High CourtIndian Cases

Abbashbhai K. Golwala vs R.G. Shah And Ors. on 16 October 1987

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Bombay High Court
Abbashbhai K. Golwala vs R.G. Shah And Ors. on 16 October, 1987
Equivalent citations: AIR1988BOM187, AIR 1988 BOMBAY 187, (1988) MAHLR 1133
Author: Sujata Manohar
Bench: Sujata Manohar
ORDER
1. The plaintiff, the three defendants and Kantilal Ochhavlal Sheth were carrying on business in partnership in the name of M/s. Goodwill Light House on the terms and conditions recorded in the Deed of Partnership dated 19th June, 1971. The partnership business consisted of manufacturing and/or dealing in Stoves, Lanterns, Blow lamps, Pressure Cookers, Milk Cookers etc. The business was carried on at Ryfa Buildings. Block No. 1, Safedpool, Kurla-Andheri Road, Bombay. Each of the 5 partners had 20% share in the said partnership business. Under clause 2 of the partnership deed it was provided as follows :

“2. The Partnership with the change in the constitution of the firm, has commenced the partnership business on and from the 1st day of January, 1971 and shall continue unless dissolved or determined by and with the mutual consent of all the partners provided that any of the parties hereto may retire from the partnership after giving to the others a previous notice in writing of not less than three calendar months of his intention to retire from the partnership and he shall be deemed to have retired from the partnership at the expiration of the period of the said notice and remaining partners shall be entitled to continue to carry on the said business in partnership among themselves or with any other person or persons.”

The other relevant clauses of the partnership deed were Clause 18, 19 and 20. These are as follows :

” 18. In the case of retirement of any of the partners, as provided for herein he shall be paid the amount standing to his credit in the books of account of the partnership and his proportionate share in the goodwill and profits of the firm up to the date of his retirement within six months from the date of his retirement. If in case there is a loss for the said period the same shall also be likewise deducted from the amount standing to the credit of the retiring partner.
19. Death, retirement or insolvency of any partner shall not dissolve the partnership but the same shall be continued between the remaining partners. In such a case, the amount standing to the credit of the deceased, retiring or insolvent partner together with the share of the goodwill and the profit up to the date of his death, retirement or insolvency shall be paid to him or to his legal heris and if there is any loss then proportionate share of loss up to the date of death, retirement or insolvency shall be deducted from the amount standing to his credit.
20. On the dissolution of the partnership, the business shall be wound up and the assets thereof sold as provided by the Indian Partnership Act or any other statutory modification or re-enactment thereof for the time being in force provided that each partner shall be at liberty to bid at any sale of the partnership assets.”
2. On or about 4th March, 1975 Kantilal Ochhavlal Sheth, who was one of the partners, died. On his death the remaining four partners, that is to say, the plaintiff and the three defendants continued the said partnership; the share of each of the partners became 25% share in the said partnership business.

3. Thereafter the defendants addressed a letter dated 6-5-1975 to the plaintiff. By this letter, interalia, all the three defendants gave a notice to the plaintiff of their intention to retire from the suit partnership under Clause 2 of the said partnership deed. The relevant paragraph of the said letter is as follows :

“However, without prejudice, we hereby give you notice of our intention to retire from the partnership as required under Clause 2 of the said Partnership Deed dated 19th June, 1971 and we shall be deemed to have retired from the partnership at the expiration of the period of three months from the date of receipt hereof by you. On our retirement as aforesaid, the partnership will stand dissolved which please note.”
The defendants contend that since there were only four partners at the relevant date, on the retirement of 3 partners only the plaintiff remained. The partnership therefore came to an end on their retirement. The defendants submit that in effect, therefore, by virtue of their retirement the partnership stands dissolved. They submit that under Clause 20 of the partnership deed, the business is required to wound up and the assets of the partnership sold as on dissolution of the partnership.

4. The plaintiff, however, contends that by their notice dated 6th May, 1975 the three partners have retired from the suit partnership. Therefore, under the deed of partnership, Clause 18 comes into operation. The defendants are entitled to payments as provided under Clause 18 of the partnership deed. The plaintiff submits that he is entitled to continue the partnership business either as the sole proprietor or in partnership with some other persons. The present suit by the plaintiff is, therefore, for a declaration that the defendants have retired from the firm of M/s. Goodwill Light House on 26th Aug., 1975 and that on such retirement the plaintiff is entitled to continue the business of the said firm either as the sole proprietor or in partnership with others. He has also prayed that the defendants do hand over to the plaintiff the possession of the factory and other premises belonging to the said partnership firm as also all books of account etc. In the alternative and in the event of it being held that the said partnership stands dissolved, he has asked for various other reliefs in that connection.

5. Although in the pleadings there were some disputes on the facts, both sides have agreed not to press any factual dispute in the present suit. They have agreed to proceed on the basis that by reason of the notice of retirement given by the defendants’ said letter dated 6-5-1975 the defendants ceased to be the partners of the firm as from 26th August, 1975. Thus, only the following issues survive :

(1) Whether the defendants retired from the partnership firm from 26-8-1975 as alleged in para 6 of the plaint?
(2) Whether the partnership was dissolved on 26-8-1975?
(3) Whether, the plaintiff became the sole proprietor of the partnership business as alleged in paragraph 8 of the plaint?
(4) Whether the plaintiff is entitled to any reliefs, and if so, what reliefs?
6. Under Clause 2 of the partnership deed the partnership shall continue unless dissolved or determined by and with the mutual consent of all partners. Under Section 40 of the Indian Partnership Act, 1932 “A firm may be dissolved with the consent of all partners or in accordance with a contract between the partners.” In the present case, the parties have contracted that the partnership shall continue unless it is dissolved by mutual consent of all the partners. There is therefore a specific mode of dissolution which is provided under the partnership deed. Under Clause 19 of the partnership deed, it is further provided that death, retirement or insolvency of any partner shall not dissolve the partnership but the same shall be continued between the remaining partners. The clause also provides for payment to be made in respect of the share of the deceased retiring or insolvent partner. The intention, therefore, was that the partnership should continue unless all the partners agreed to a dissolution.

7. Section 41 of the Partnership Act provides for compulsory dissolution of the firm in certain circumstances. Under Section 41(a), it is dissolved by operation of law upon adjudication of all partners or all but one partner as insolvents. Under Section 41(b) the firm is dissolved upon the happening of any event which make it unlawful for the business of the firm to be carried on. There is also a proviso which is not relevant. Under Section. 42,which is subject to contract between the partners, a firm is dissolved, inter alia, upon the death of a partner or by the adjudication of a partner as an insolvent. In the case of a partnership for a fixed term, it is dissolved on the expiry of the term. If the partnership is constituted to carry out one or more adventures or undertakings, the firm is dissolved upon the completion thereof. Section 43 provides for dissolution of a partnership at will by any partner giving a notice in writing to all the other partners of his intention to dissolve the firm. This section does not apply to the present case. Under Section 44 the Court may dissolve a firm on any of the grounds set out therein.

8. Neither the partnership deed nor any of the above sections of the Partnership Act dealing with the dissolution of a firm provide for dissolution of a firm on retirement of one or more partners. In fact, it is an accepted position in law that retirement of a partner’ from the partnership firm is distinct from the dissolution of a firm. As observed by Bhagwati J. (as he then was) in the case of Keshavlal Lallubhai v. Patel Bhailal Narandas, reported in AIR 1968 Guj l57at P. 161 “………..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 merecantile usage which recognises a firm asa distinct entity or quas-corporation……..”. Thus, on the retirement of a partner the partnership firm continues to exist as such, which is not the case when a partnership is dissolved. In a strict sense, on retirement of one of the partners the firm which continues would be a firm consisting of different partners with possibly different shares. In this sense it would be a different firm from the firm which existed prior to retirement of one of the partners. The Partnership Act, however, makes a distinction between the retirement of a partner and dissolution of the firm. Chapter VI of the Partnership Act deals with dissolution of a firm white Chapter V deals with incoming and outgoing partners. In the case of Suresh Kumar v. Amrit Kumar reported in AIR 1982 Del 131 in Paragraph 15 it has been observed, “It is well settled that retirement is not the same thing as dissolution. On retirement of a partner the firm continues to exist as such which is not the case when a partnership is dissolved. Technically speaking retirement is a severance of the interest of a partner from the partnership business and is not tantamount to determination of the partnership as a whole, the other partners continue to carry on the business of the firm. On the contrary, the dissolution of a partnership completely destroys jural relationship as partners between all the partners and the question of partnership business being carried on by partners other than the outgoing partner does not arise.”

9. In the present case however, it is contended by the defendants that on account of retirement of 3 out of 4 partners, only one person is left behind and he cannot carry on partnership business because there is no partnership. The business of partnership, however, can be carried on even by an individual as a sole proprietor or in partnership with others. Hence the contention of the defendants is fallacious. Secondly, this contention must be examined in the light of Clause 2 of the partnership deed in the present case. The first part of Ci. 2 sets out that the partnership business shall continue unless it is dissolved by the mutual consent of all the partners. Obviously, by retirement of three partners, the partnership is not dissolved with the mutual consent of all the partners. Only 3 out of 4 partners, at the highest have decided to “dissolve” the firm. Since the partnership cannot be dissolved without mutual consent of all the partners, three partners out of four cannot dissolve the partnership without the consent of the fourth partner, The second part of Clause 2 deals with retirement. It sets out that a partner may retire from the partnership after giving to others a notice in writing of not less than three calendar months. This is the provision under which a notice of retirement was given by the defendants. The clause further provides that the remaining partners shall be entitled to continue to carry on the said partnership business amongst themselves or with any other person or persons. On retirement, therefore, the remaining partners have a right to continue the partnership business.

10. Mr. Kapadia, learned Counsel for the defendants, has emphasised the plurality of the word “remaining partners” in Clause 2 . He has submitted that the provision relating to the remaining partners being entitled to continue the partnership business comes into operation only when more than one partner remains on retirement of other partners. He has submitted that this provision does not apply when only one partner remains. This interpretation ignores the last part of this clause which entitles the remaining partners to carry on the business in partnership with any other person or persons. It would not, therefore, be correct to interpret this phrase to mean that only if there are two partners or more remaining that they would be entitled to continue the business in partnership. Even if one partner remains, he would be entitled to carry on the business in partnership with any other person or persons. Under Section 13 of the General Clauses Act, 1897 in interpreting any Act or Regulation the words in the singular shall include the plural and vice versa. The same principle applies in interpreting the terms of the partnership deed. The phrase “remaining partners” includes ‘a remaining partner’ also, especially in the context of this clause where he is entitled to carry on business in partnership with any other person or persons. Under Clause 2 , therefore, on retirement of some of the partners, the partnership does not stand dissolved because the remaining partner or partners have a right to continue the said business in partnership either among themselves or with any other person or persons.

11. This distinction drawn clearly in Clause 2 between dissolution and retirement is further emphasised in Clause 18 and 20 of the partnership deed which provides for different consequences in the case of retirement and in the case of dissolution. Under CL 18 in the case of retirement of any of the partners, he shall be paid the amount standing to his credit in the Books of account and his proportionate share in the goodwill and profits of the firm up to the date of his retirement. This amount has to be paid within 6 months from the date of his retirement. In the case of dissolution of the partnership under Clause 20, the business is required to be wound up and assets sold as provided therein. In the present case, it is Clause 18 which comes into operation and not Clause 20. Clause 18 is in furtherance of the right granted under Clause 2 to the remaining partners to continue to carry on the business in partnership either amongst themselves or with other person or persons. It is true that in the present case, on the retirement of 3 partners there is no question of the plaintiff continuing to carry on the business in partnership by himself. He can however, carry on the business in partnership with any other person or persons.

12. There would have been no room for any argument if, on the retirement of the defendants, more than one partner had remained. Does it make any difference if on retirement of the defendants only one partner remains? In my view, looking to the language of Clause 2, 18 and 20, it makes no difference whether on retirement of some of the partners, only one partner remains to carry on the partnership business or more than one remain. In this connection Mr. Sanghavi, learned Counsel for the plaintiff, drew my attention to certain observations of the Supreme Court in the case of Thiagarajan v. E. M. Muthappa . The Court in that case was concerned with the question whether the partnership was a partnership at Will or whether it was a partnership to carry on a specific undertaking. In the latter case the partnership would come to an end when the purpose for which the partnership was constituted came to an end. In order to decide whether the deed of partnership provided for any duration of the partnership either expressly or by implication, the Court examined various provisions of the partnership deed. The Supreme Court examined a term in the contract to the effect that either party may withdraw from the partnership by relinquishing his right of management to the other partners. It held that the relinquishment of one partner’s interest in favour of the other was different from the right of a partner to dissolve the partnership by giving a notice. It said : “It is true that in this particular case there were only two partners and the partnership will come to an end as soon as one partner relinquishes his right in favour of the other. That however is a fortuitous circumstances; for, if (for example) there had been four partners in this case and one of them relinquished his right in favour of the other partners, the partnership would not come to an end. That clearly shows that a term as to relinquishment of a partner’s interest in favour of another would not make the partnership one at will. Clearly these observations are in connection with construing a clause in the partnership deed to determine whether the partnership was a partnership at will or not. It does not throw any light on the question whether the partnership business should be wound up as on a dissolution when only one partner remains and all the other partners retire from the partnership.

13. As against these observations, Mr. Kapadia, learned Counsel for the defendants, drew my attention to the observations of the Supreme Court in the case of Erach v. Minoo . In this case the partnership was between only two partners. The partnership deed provided expressly that the duration of the partnership was at will. There were disputes between the two partners. The respondent claimed that the parties reached an oral agreement stipulating that the appellant shall retire from the partnership and shall assign and transfer to the respondent his right, title and interest in the partnership business against payment of the price to be fixed by a named arbitrator. Clause 15 of the partnership deed had provided that the disputes he referred to arbitration. One of the contentions raised was that the reference to arbitration was not covered by Clause 15 of the partnership deed. The Supreme Court held that a dispute whether the partnership was dissolved by mutual agreement was clearly a dispute between the parties touching the partnership agreement. They negatived the contention that the agreement which was set out was not an agreement which was covered by the arbitration clause because it was not an agreement for dissolution of the partnership. In this limited context the Supreme Court observed : “When the partnership consisted of only two partners and one partner agreed to retire, there can be no doubt that the agreement that one of the partners will retke amounts to dissolution of the partneship.” These observations have to be read in the context in which they were made namely whether the reference to arbitration was covered by Clause 15 of the partnership deed in that case. These observations do not deal with the question whether the partnership is dissolved by operation of law when all partners but one retire.

14. The provisions of the Partnership Act relating to dissolution are comprehensive. Section 40 deals with dissolution by consent of all partners or in accordance with an agreement between them. Section 41 deals with compulsory dissolution of the firm. Section 42 deals with dissolution on the happening of certain contingencies which is subject to contract between the partners. Section 43 deals with dissolution of a partnership at will and Section 44 deals with dissolution by the Court. None of these sections provide for dissolution of the firm on the retirement of all partners except one. In this connection Mr. Kapadia drew any attention to the provisions of Sections. 41 and 42 of the Partnership Act. Under Section 41(a) firm is dissolved by the adjudication of all the partners or of all the partners but one as insolvent. He submits that by operation of this clause the firm is dissolved when all partners but one of a firm became insolvent. This is because, if only one solvent partner remains, the partnership cannot exist. He also drew my attention to Section 42(d) under which a firm is dissolved by the adjudication of a partner as an insolvent. In this case, however, the contract between the partners may provide that the firm may not be dissolved on the adjudication of a partner as an insolvent. By analogy he submitted that on the retirement of all partners but one, the firm must stand dissolved. There is however, ho such provision under Section 41 or anywhere else in the Partnership Act. In fact the argument is fallacious because it does not phrase the point at issue precisely. The question is not whether the particular partnership stands dissolved or not on the retirement of all but one partner. The question is : Does the remaining partner have a right to continue the business carried on by the partnership or must the business be wound up?

15. In the present case there is an express provision under Clause 2 , which enables a remaining partner to continue the business in partnership with other parties also. In other words, there is a provision for taking new partners into the partnership. The person who remains therefore can continue the business in partnership by taking other persons as partners. In this sense, therefore, the business of the firm may be continued even when all partners but one retire. The submission, therefore, that the firm must stand dissolved when all partners but one retire must be rejected. On retirement of the other partners the remaining partner is entitled to continue the said business.

16. To hold that the partnership stands dissolved when all but one partner retire would in fact be contrary to the provisions of Clause 2 of the partnership deed under which it is expressly provided that the partnership shall continue unless dissolved by mutual consent of all partners. If three partners agreed to retire, they would, without the consent of the remaining partner, be able to dissolve the suit partnership, if the contention of Mr. Kapadia is to be accepted. On this ground also the argument of Mr. Kapadia must, therefore, be rejected.

17. In the premises, it is declared that the defendants have retired on 26th August, 1975 from the firm M/s. Goodwill Light House under the partnership deed dated 19th June, 1971. On such retirement the plaintiff is entitled to continue the partnership business on his making payments to the defendants as provided under Clause 18 of the deed of partnership. For ascertainment of the amounts due and payable by the plaintiff to the defendants, the matter is referred to the Commissioner for taking Accounts. In view of the various consent orders and other orders which have been passed at the interlocutory stages, a number of issues in this connection have been decided by mutual consent, making the task of the Commissioner somewhat simple. The Commissioner to submit his report within 6 months from today.

18. The Court Receiver to continue as Receiver pending the disposal of the matter by the Commissioner and final orders being passed on the Report of the Commissioner for taking Accounts.

19. The defendants under an order of this Court dated 13-1-1977 have been appointed as Agents of the Court Receiver on the terms and conditions and for the reasons which are set out in that order. The defendants to continue as such agents pending the Report of the Commissioner for Taking Accounts and the final orders thereon. In the event of there being any change of circumstances in connection with the continuation of the interim arrangement pertaining to the defendants being the agents of the Court Receiver, liberty to the parties to apply.

20. Defendants to pay to the plaintiff the costs of the suit.

21. The Commissioner for Taking Accounts to act on the certified copy of the Minutes.