Kerala High Court
Morarji G. Alex vs M/S. Trinity Enterprises on 12 December, 2012
Author: Thomas P.Joseph
Bench: Thomas P.Joseph
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR.JUSTICE THOMAS P.JOSEPH
WEDNESDAY, THE 12TH DAY OF DECEMBER 2012/21ST AGRAHAYANA 1934
RSA.NO. 1264 OF 2012 ()
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AS.138/2008 OF DISTRICT COURT, ALAPPUZHA
OS.511/2006 OF PRINCIPAL MUNSIFF'S COURT, ALAPPUZHA
APPELLANT(S)/APPELLANT/ PLAINTIFF:
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MORARJI G. ALEX
S/O K.C. ALEXANDER, RESIDING AT KATTATHARA
VELLAKINAR, ALAPPUZHA
BY ADV. SRI.K.V.SADANANDA PRABHU
RESPONDENT(S)/RESPONDENTS/ DEFENDANTS:
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1. M/S. TRINITY ENTERPRISES
REPRESENTED BY ITS MANAGING PARTNER N. APPUKUTTAN
S.O NARAYANAN, RESIDING AT THOMVEETTIL HOUSE
MANNANCHERRY P.O, ALAPPUZHA 688538
2. N. APPUKUTTAN, AGED 66 YEARS
MANAGING PARTNER, M/S TRINITY ENTERPRISES
THOMVEETTIL HOUSE, MANNANCHERRY P.O
ALAPPUZHA 688538
BY ADV. SRI.R.AZAD BABU(CAVEATOR) FOR R2
THIS REGULAR SECOND APPEAL HAVING COME UP FOR ADMISSION
ON 12-12-2012, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:
THOMAS P.JOSEPH, J.
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R.S.A. No. 1264 of 2012
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Dated this the 12th day of December, 2012
J U D G M E N T
The following substantial questions of law are framed for a decision:
(i) Can the non-existence of a partnership firm be inferred in the absence of such changes having not been duly brought in the record of registration?
(ii) Were the courts below justified in finding an implied dissolution and abandonment of partnership in the light of the ongoing litigation before the courts below and before departmental authorities evidenced by Extst.B6 and B10 to B15?
(iii) Does not a fiduciary relationship of trust exist among the partners and if so, a partner retaining assets of the firm and applying the same in continuing the business, is he not accountable to the other partners?
(iv) Can a trustee acting in a fiduciary capacity plead bar of limitation in an action against him for recovery of trust property or the proceeds thereof?
R.S.A. No.1264 of 2012 -: 2 :-
(v) Even when on dissolution of a firm, one of the partners retains the assets of the firm in his hands without settlement of accounts and applies them in continuing the business for his own benefit, is he not liable to account to the outgoing partners?
Then, is not the position of the 2nd defendant a constructive trustee even assuming an implied dissolution, but without final settlement of accounts?
(vi) Has not the appellate court committed a serious error of law when it did not consider the points raised in the appeal memorandum questioning the correctness of the trial court's decision?
2. The Second Appeal arises at the instance of the plaintiff in O.S. No.511 of 2006 of the Principal Munsiff's Court, Alappuzha. That is a suit filed by the appellant-plaintiff for a declaration that the FL-3 licence issued to the 2nd respondent is the asset of the 1st respondent-partnership firm and for a mandatory injunction to direct the respondents to render account of the 1st respondent. The trial court found that the prayer for declaration is barred by limitation under Article 58 of the Limitation Act. The trial court also found that by abandonment R.S.A. No.1264 of 2012 -: 3 :- by the appellant there is an implied dissolution of the partnership and hence the appellant is not entitled to the reliefs prayed for. Though the appellant challenged that judgment and decree in the District Court, Alappuzha in A.S. No.138 of 2008, it was without success. Hence this Second Appeal.
3. According to the appellant, he was the Managing Partner of the 1st respondent with two other persons including the 2nd respondent also as partners. He was authorized to obtain and hold licence from the State Government (for running business in liquor) and enter into agreement on behalf of the 1st respondent. The appellant took on lease Hotel Plaza for running a Bar restaurant for the 1st respondent. The appellant obtained FL-3 licence from the Excise Department. The firm (1st respondent) was reconstituted on 02.07.1992 and again on 17.12.1993. By the reconstitution, the appellant and the 2nd respondent alone remained as partners of the 1st respondent. The 2nd respondent was to act as Managing Partner. The FL-3 licence was transferred to the name of the 2nd respondent in his capacity as Managing Partner of the 1st respondent. The partnership functioned. While so, the 2nd respondent started asserting exclusive right as per the FL-3 licence in his name. R.S.A. No.1264 of 2012 -: 4 :- Hence the suit for declaration and rendition of accounts as above stated.
4. The respondents contended that the appellant ceased to be a partner years back and that Hotel Plaza is the proprietory concern of the 2nd respondent. Originally a partnership was formed. That partnership was dissolved on 06.12.1993. Thereon the 2nd respondent became the sole proprietor of the 1st respondent. The FL-3 licence belongs to the 2nd respondent. The further contention is that the suit is barred by limitation.
5. The learned Munsiff framed issues whether the plaintiff ceased to be a partner of the 1st respondent firm, whether the FL-3 licence issued in the name of the 2nd respondent is the property of the 1st respondent, whether the appellant is entitled to get a decree for rendition of accounts, whether he is entitled to the declaration prayed for and whether the suit is barred by limitation?
6. On the issue regarding limitation the learned Munsiff referred to Ext.A1 deed of reconstitution of the partnership on 17.12.1993, Ext.B5, notice dated 02.08.1999, Ext.B9, reply dated 13.09.1999 and Ext.B13, judgment dated 03.04.2001 in R.S.A. No.1264 of 2012 -: 5 :- O.P. No.9513 of 2001 of this Court. Learned Munsiff opined that by Ext.B9, reply dated 13.09.1999 there is a denial of right claimed by the appellant and hence the period of limitation so far as the declaration prayed for is concerned, would commence from 13.09.1999. At any rate, this Court in Ext.B13, judgment dated 03.04.2001 directed that the appellant has to agitate his dispute with the respondents in a civil court and hence the right to sue arose on 03.04.2001, but the suit having been filed in the year, 2006 it is barred by limitation. On the issue whether the appellant continued to be a partner of the 1st respondent, the learned Munsiff, referring to the evidence concluded that the appellant by his conduct has voluntarily retired from the partnership and hence there is an implied dissolution of the partnership.
7. The learned counsel for the appellant contended that the findings entered by the trial court on all the issues and confirmed by the first appellate court are erroneous. According to the learned counsel, the learned Munsiff has prejudged the issue regarding limitation even before entering a finding whether the partnership continued on the date of institution of the suit. If the appellant is able to show that there was a partnership, that R.S.A. No.1264 of 2012 -: 6 :- partnership must be deemed to continue even after Ext.B9, reply dated 13.09.1999. There is no evidence to show that following the (alleged) retirement of the appellant from partnership any change was made in the Register of Firms. If the partnership continued, the question of limitation does not arise. At any rate, declaration prayed for by the appellant is only ancillary to the main relief of rendition of accounts and hence based on the declaration prayed for, question of limitation for the suit cannot be determined. The learned counsel argued that even if it is assumed that the claim made by the appellant was denied by the respondents as per Ext.B9, reply notice dated 13.09.1999, the 2nd respondent would continue as a trustee of the appellant since there is a fiduciary relationship between the appellant and the 2nd respondent as partners. Learned counsel has placed reliance on the decision in Chandramohanan Nair v. Board of Revenue (1988 [1] KLT 1).
8. The learned counsel for the respondents contended that since the claim made by the appellant in Ext.B5, notice dated 02.09.1999 was denied by the respondents as per Ext.B9, reply dated 13.09.1999 right to sue, be it for a declaration or rendition of accounts commenced on 13.09.1999. At any rate, R.S.A. No.1264 of 2012 -: 7 :- even if it is assumed that Ext.B13, judgment dated 03.04.2001 in O.P. No.9513 of 2001 gave a right of action for the appellant, that arose on 03.04.2001 and hence also the suit instituted in the year, 2006 is barred by limitation as found by the courts below.
9. A further argument the learned counsel has raised is that the evidence is consistent with the finding of the courts below that the appellant has by abandonment, retired from the partnership and hence there is an implied dissolution of the partnership even before 13.09.1999. It is submitted that the evidence would show that the appellant had no role in the partnership business and that his name was nominally entered. The appellant has never participated in the business of the partnership and has abandoned the partnership even prior to Ext.B5, notice dated 02.09.1999. In the circumstances the finding of fact entered by the courts below involve no substantial question of law, it is argued.
10. Exhibit B23 is the partnership deed dated 02.07.1992 executed between the appellant, 2nd respondent and others for running a hotel and restaurant. At that time, the FL-3 licence stood in the name of the appellant. That licence was renewed in the name of the appellant on 21.04.1992 as revealed by Ext.A2. R.S.A. No.1264 of 2012 -: 8 :- Then came Ext.A1, partnership deed dated 17.12.1993 by which some of the partners retired and the partnership was reconstituted with the appellant and the 2nd respondent alone as partners. In Ext.A1, it is stated that the parties to it are continuing as partners of the 1st respondent from 17.12.1993 and that they have agreed to carry on business of running the hotel, restaurant, bar and lodging, etc., in accordance with the terms and conditions mentioned in Ext.A1. The parties agreed that the partnership as per Ext.A1, shall be one at Will. The capital of the firm was contributed by the appellant and the 2nd respondent. The profit and loss was to be shared by the appellant and the 2nd respondent in the ratio of 10%:90%. The 2nd respondent was to be the Managing Partner. In clause 15 it is stated that the partners shall enjoy the profits arising out of the business done under the licence (FL-3) which stood in the name of the appellant and that any licence obtained in the name of the partners shall be the property of the firm. Clause 23 states that in the event of dissolution, the Goodwill of the firm shall vests with the 2nd respondent and the appellant will have no right over the Goodwill of the partnership. There is a clause for referring any dispute between the parties to the arbitration in accordance with the R.S.A. No.1264 of 2012 -: 9 :- Indian Arbitration Act, 1940 (as on the date of Ext.A1).
11. Pursuant to Ext.A1, partnership deed there was a joint application preferred by the appellant and the 2nd respondent to the authority concerned as per which the FL-3 licence was changed to the name of the 2nd respondent. Exhibit A3 is the licence issued in the name of the 2nd respondent (which as per clause 15 of Ext.A1 was to be the asset of the partnership).
12. Then comes Ext.B5, notice dated 02.08.1999. There, the appellant informed the 2nd respondent about the serious irregularity (allegedly) being committed by the 2nd respondent in respect of the partnership business. The appellant referred to his earlier idea to go abroad (while the joint application for change of the FL-3 licence was made) and later dropping the same. In Ext.B5, notice the appellant informed the 2nd respondent that since he has dropped the idea of going abroad, he will be able to discharge his duties as the licence holder and requested the 2nd respondent to take immediate remedial action (with regard to the irregularity allegedly being committed by the 2nd respondent) by filing an application before the Excise Authority to re-transfer the FL-3 licence in the name of the appellant.
13. In response to Ext.B5, the 2nd respondent issued R.S.A. No.1264 of 2012 -: 10 :- Ext.B9, reply dated 13.09.1999. There, the 2nd respondent stated that the allegations made in Ext.B5, notice are incorrect and that the partnership deed happened to be executed when the appellant desperately intended to transfer the Bar licence in the name of the 2nd respondent. There was never any intention that Ext.A1, partnership deed was to take effect. No partnership business was ever carried on under Ext.A1, the partnership deed dated 17.12.1993. The Bar licence and the business are the personal property of the 2nd respondent and the appellant has no manner of right over the same. It is also stated in Ext.B9 that the appellant has no right to demand settlement of accounts of a non-existing partnership.
14. After Ext.B9, the appellant filed O.P. No.5437 of 2000 in this Court. Exhibit B10 is the judgment dated 22.02.2000 in the said proceeding. The appellant prayed for the issue of a writ of mandamus, order or direction to renew the FL-3 licence in the name of the 1st respondent (partnership firm) only after getting consent of the appellant. By Ext.B10, judgment this Court observed that the licence was issued in the name of the appellant as Managing Partner of the 1st respondent (before reconstitution as per Ext.A2) and that now there is a different Managing R.S.A. No.1264 of 2012 -: 11 :- Partner for the partnership firm. This Court directed the Assistant Excise Commissioner, Alappuzha to take into account Exts.P4 and P5 (produced in that case) as well while considering renewal of the FL-3 licence.
15. Then came O.P. No.9973 of 2000 filed by the appellant impleading the 2nd respondent as a party seeking a writ of mandanus, order or direction to the Deputy Commissioner of Excise, South Zone, Thiruvananthapuram to pass orders on Ext.P5, application (in that case) before renewal of FL-3 licence (issued in the name of the 2nd respondent). Thereafter the appellant filed O.P. No.9513 of 2001 in this Court against the 2nd respondent and others. Exhibit B13 is the judgment dated 03.04.2001 in the said proceeding. There, referring to the inter se dispute between the appellant and the 2nd respondent, this Court observed that the appellant has to take necessary action in the civil court.
16. There is no evidence whether the 1st respondent-firm is registered or not. The 2nd respondent when examined as D.W1 admits truth of the matters stated in Ext.B23, partnership deed dated 02.07.1992 and Ext.A1, the reconstituted partnership deed dated 17.12.1993. He claimed that though Ext.A1 R.S.A. No.1264 of 2012 -: 12 :- reconstituted deed was executed on 17.12.1993, he continued to be in absolute responsibility of the business as if he is the sole proprietor of that business. He claimed that the partnership deed was only nominal. He also stated that as per the terms and conditions of Ext.A1, partnership deed when any of the partners wanted to retire, two months' notice in writing was required. The (alleged) retirement of the appellant from the partnership was oral. No notice in writing was given by the appellant as required under Ext.A1. In answer to a question whether the 1st respondent firm was dissolved, the 2nd respondent answered that the dissolution was oral and not as per any record. He does not remember the date of (alleged) dissolution though he claimed that it was in the year, 1995.
17. As per Ext.A1, the partnership is at Will. Section 43 of the Partnership Act (for short, "the Act") deals with dissolution of a partnership at Will and states that when the partnership is at Will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. There is no case for the respondents that any such notice is given by the appellant.
18. In fact the above stand of the 2nd respondent as D.W.1 R.S.A. No.1264 of 2012 -: 13 :- runs counter to his plea in Ext.B9, reply notice. What is contended therein is that there happened to be a partnership deed executed due to the pressure exercised by the appellant for change of the FL-3 licence to the 2nd respondent. Learned counsel for the respondents relies on Ex.B1, letter of the appellant to show how badly the appellant was financially placed.
19. The contention raised in Ext.B9 does not suit the plea raised by the 2nd respondent as D.W.1 that the partnership was dissolved orally in the year, 1995 and that the appellant has voluntarily retired from the partnership. If one were to go by the evidence of the 2nd respondent as D.W.1, there was a partnership and from that partnership, the appellant either retired or caused dissolution of the firm (both [allegedly] orally).
20. The learned counsel for the respondents has argued that the fact of abandonment of the partnership is clear from Ext.B4, receipt where it is stated that the appellant has taken a cheque from the 2nd respondent as security. It is argued by the learned counsel that if the appellant continued to be a partner of the 1st respondent, there was no necessity to take any security.
21. I find myself unable to accept that contention. For, what is discernible from Ext.B4 is that a cheque as security was R.S.A. No.1264 of 2012 -: 14 :- taken by the appellant from the 2nd respondent since by that time a joint application for change of the FL-3 licence into name of the 2nd respondent had been made and orders were being awaited. In such a situation if based on the FL-3 licence which stood in the name of the appellant some action was taken by the 2nd respondent, the appellant, would be answerable for that. Security was taken in that situation.
22. Since there is no evidence of registration of the partnership, I cannot make any comment on the absence of any change in the Register of Firms. (concerning the alleged abandonment or dissolution of the partnership).
23. The contention that there was no partnership and at any rate, the appellant has voluntarily retired from the firm cannot be accepted in the light of Exts.B10, B11 and B13, judgments also. I stated that in the original proceedings which culminated in Exts.B10 and B11, judgments, the appellant claimed even in the year, 2000 (notwithstanding Ext.B9, reply dated 13.09.1999) that he is a partner of the 1st respondent. It is in view of that contention raised by the appellant that this Court issued directions to the appropriate authority to consider the objection of the appellant as well while renewing the licence in R.S.A. No.1264 of 2012 -: 15 :- the name of the 2nd respondent. In the light of the documentary evidence which gives support for the oral evidence of the appellant, the contention that there was no partnership at all, cannot be accepted.
24. Apart from the oral evidence given by the 2nd respondent as D.W1 and the documents which I have referred above (which are not sufficient to enter finding that the appellant has retired from the partnership) there is no reliable evidence to show that the appellant has retired from the partnership or abandoned it.
25. No doubt since the appellant and the 2nd respondent remained as partners as per Ext.A1, deed if one of them goes out, there will be an automatic dissolution of the partnership since it was one at Will. But as aforesaid there is no reliable evidence to show that the appellant has walked out of the partnership. The finding of the courts below to the contra being not supported by any reliable evidence cannot be accepted.
26. Then the question is whether as found by the courts below, the suit is barred by limitation? If the partnership continued even after Ext.B9 as aforesaid, question of computing period of limitation from the date of Ext.B9 does not arise. That R.S.A. No.1264 of 2012 -: 16 :- is because even without a declaration that the FL-3 licence issued in the name of the 2nd respondent is the asset of the 1st respondent, it was open to the appellant to seek rendition of accounts. For, the partnership continued and it was liable to render accounts. Hence the declaration prayed for can only be treated only as an ancillary relief which was not necessary. In the circumstances the findings of the courts below that the prayer for declaration is barred by limitation cannot be accepted.
27. Since I found that notwithstanding Ext.B9, the partnership continued, I must take it that until institution of the suit in the year, 2006 the partnership continued. The prayer for rendition of accounts made in the plaint filed in the year 2006 could be treated as a notice of dissolution of the partnership at Will constituted by Ext.A1. Viewed in that line also the question of limitation for the suit does not arise.
28. In the light of my above finding, normally it should have followed that I must pass a preliminary decree for rendition of accounts. But there is another important matter which requires decision - whether the transfer of licence as an asset of partnership and joint business in liquor would stand in view of Section 23 of the Indian Contract Act (for short, "the Contract R.S.A. No.1264 of 2012 -: 17 :- Act")? The FL-3 licence was issued in the name of the appellant and later, changed to the name of the 2nd respondent considering the joint application preferred by the appellant and the 2nd respondent. In Ext.A1, partnership deed dated 17.12.1993 it is stated in clause 15 that any licence obtained in the name of any of the partners (which takes in the FL-3 licence obtained in the name of the 2nd respondent) shall be the asset of the firm. Referring to Sec.14 of the Act, this Court pointed out in George v. George (2010 [2] KLT 692) that conversion of an asset of a partner into the asset of the partnership can happen in the course of business of the partnership. Going by clause 15 of Ext.A1, it may appear that the FL-3 licence obtained in the name of the 2nd respondent has become the asset of the partnership firm.
29. The question would arise whether it was lawful for the appellant and the 2nd respondent to transfer the FL-3 licence as the asset of the partnership and conduct joint business in liquor under the FL-3 licence issued in the name of the 2nd respondent? As per the decisions in Velu Padayachi v. Sivasooriam (AIR 1950 Madras 444), Krishna Menon v. Narayana R.S.A. No.1264 of 2012 -: 18 :- Ayyar (AIR 1962 Kerala 21), Narayanan & Co. v.
Commissioner of Income Tax (1996 [1] KLT 546), Rasamony Chowdhury v. Anil Krishna Dawn and Others (AIR 1988 Calcutta 55, Biharilal Jaiswal v.
Commissioner of Income Tax ([1996] 1 SCC 443 (paragraph 19) and Commissioner of Income Tax v. Grand Enterprises (ILR 1998 [2] Kerala 239) it may appear that transfer of FL-3 licence from the name of the 2nd respondent to the partnership firm was objectionable and not enforceable.
30. The learned counsel for the appellant relied on the decisions of the Apex Court referred in Narayanan & Co. v. Commissioner of Income Tax (supra) to contend that the law correctly laid down by the Apex Court in the said decisions was wrongly applied by the Division Bench in Narayanan & Co. v. Commissioner of Income Tax (supra). According to the learned counsel in so far as there is no prohibition in the Kerala Abkari Act and the Kerala Abkari Shops (Disposal in Auction) Rules there is no bar to the FL-3 licence being transferred in the name of the partnership firm and hence Sec.23 of the Contract Act would not apply. The learned counsel also argued that no such contention is R.S.A. No.1264 of 2012 -: 19 :- raised by the respondents or taken up in any of the courts below.
31. The learned counsel for the respondents contended that there is a bar to the transfer of FL-3 licence from the name of the licensee to any other person except in the manner provided under the law and hence transfer of FL-3 licence from the name of the 2nd respondent to the partnership is against the provisions of the Kerala Abkari Act and the Kerala Abkari Shops (Disposal in Auction) Rules and hit by Sec.23 of the Contract Act. It is also pointed out by the learned counsel that when the illegality of an agreement and its unenforceability is apparent on the face of it, no court can enforce it even if the parties did not raise such a contention. Reliance is placed on the decisions in Kurian v. Government of Kerala (1963 KLT 183) and Mandadhan v. Krishnappan Unni (1985 KLT 670). It is also contended that in such a situation the principle of in pari delicto potior est conditio possidentis should apply and the respondents are relieved of their liability under Ext.A1, reconstituted partnership deed.
32. No doubt, in view of the decisions in Kurian v. Government of Kerala and Mandadhan v. Krishnappan R.S.A. No.1264 of 2012 -: 20 :- Unni it is open to this Court to even suo motu raise a question as to the enforceability of Ext.A1, partnership deed in view of clause
15. But since the parties were not at issue on that question in the courts below, I consider that rather than myself suo motu raising that question and entering a finding one way or the other which may affect the right of the parties to an appeal against the finding on that issue, the appropriate course is to direct the trial court to consider that question, if necessary after giving opportunity to parties to amend their pleadings and adduce further evidence, if any.
33. In that view while setting aside the findings entered by the courts below as above stated and holding that the partnership with the appellant also as a partner continued till the institution of the suit and that the suit is not time barred, I am inclined to remit the case to the trial court for a decision whether in the light of clause 15 of Ext.A1, the partnership is hit by Sec.23 of the Contract Act and hence Ext.A1 is enforceable or not.
34. The substantial questions of law framed are answered as above.
The Second Appeal is allowed by way of remand as under: R.S.A. No.1264 of 2012 -: 21 :-
(i) While reversing the findings entered by the trial court as confirmed by the first appellate court and holding that the partnership between the appellant and the 2nd respondent existed until the institution of the suit and that the suit is not barred by limitation, the judgment and decree of the courts below dismissing the suit are set aside.
(ii) O.S. No.511 of 2006 is remitted to the Principal Munsiff's Court, Alappuzha for a decision on the question whether in view of clause 15 of Ext.A1, the partnership between the appellant and the 2nd respondent for joint business in liquor based on the FL-3 licence issued in the name of the 2nd respondent is hit by Sec.23 of the Contract Act.
(iii) The parties shall be given sufficient opportunity to amend their pleadings (if they are so advised) and to adduce further evidence if any.
(iv) In case the parties do not amend their pleadings, the trial court shall suo motu raise an issue regarding enforceability of the partnership agreement for doing business in liquor as per the FL-3 licence issued in the name of the 2nd respondent and after hearing the parties, answer that issue as provided under R.S.A. No.1264 of 2012 -: 22 :- law.
(v) Based on the finding on the said issue, the trial court shall decide the other issues not answered in this judgment and dispose of the suit.
(vi) The parties shall appear in the Principal Munsiff,
Court, Alappuzha on 28.01.2013.
The Registry shall send back the trial court records to the trial court forthwith.
All pending Interlocutory Applications will stand dismissed.
THOMAS P. JOSEPH, JUDGE.
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