A FORMER PARTNER CANNOT BE FORCED TO PAY FOR ILLEGAL ACTS OF EXISTING PARTNERS: THAT’S WHAT SUPREME COURT HELD IN “M/S JUGGILAL KAMLAPAT V. M/S SEW CHAND BAGREE”

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There are innumerable partnership firms which are presently functioning in India. The constitution of these firms change with time as some partners may leave the firm due to disputes or due to new partners entering the firm or may be due to death of an existing partner. In the case of dissolution (read termination) of a partnership, it is most often seen that a former partner, who now have no business with the partnership firm, is forced either by the existing partners or by third parties to pay money for the wrongs committed by the existing partners of the partnership firm. This is due to various reasons, chief amongst which is the tendency of the existing partners to take revenge against the erstwhile partners by enmeshing them in legal disputes, the mentality of the third parties to file case against as many parties as possible as this increases the chances of getting their money back. But whatever may be the reason its an innocent person who suffers for the misdeeds of another.

In this article our effort will be to make the retired/former partners aware of their rights and how they can escape liability for the actions which were never theirs in the first place.

The Background

Sew Chand Bagree (in short SCB)had 3 sons namely Manik Chand Bagree(let’s say A), Moti Chand Bagree(let’s say B), and Janki Das Bagree(let’s say C). Initially in 1924 a Hindu Joint Family venture was established in the name of SCB but later from 1933 onwards the same was converted into a partnership, 3 sons being the partners of the said firm. This Partnership Firm was also duly registered in the Register of Firms kept with the Registrar which showed the name of all the 3 sons as partners in M/s SCB (this registration is essential because if in future someone does not pay the  partnership any sum which is legally due to the partnership, for instance when the partnership supplied goods to someone who declines to pay the money for those goods, then the partnership can only sue him if that partnership is registered).

Now, M/s Juggilal Kamlapat (in short M/s J K)raised a dispute before an Arbitrator that Rs. 31,000/- is due from M/s SCB to it. On getting favourable Award M/s J K applied for making the Award a rule of the Court which was allowed. After which an execution was filed by the Award Holder i.e. M/s J K (whenever an Award is passed by an Arbitrator it does not become enforceable by itself. For that, the Award Holder has to approach the Court to make the Award a rule of the Court. Only after this the Award becomes enforceable in a Court of Law by way of filing an Execution Petition. During the execution the Judgment Debtor is given a final option to raise objections in order to show as to why the Award should not be enforced against him and why he is not liable to pay any money ).

The Contentions

During execution two of the above mentioned 3 brothers namely A and B stated that the partnership firm has already been dissolved in October 1945 i.e. before the dealings with M/s J K and there is no longer a firm with these two brothers as partners. So if they were not partners in the firm when the partnership firm became liable there is no personal liability of these two brothers.

This argument was opposed by Award Holder on the ground that firstly the Register of Firms shows all the three brothers as partners even to this date (the date of this judgment). Secondly the outgoing partners did not tell the public by way of public notice that they have left the partnership firm and the firm has been dissolved.

Probably most of this went over your head. So, let’s first understand what Award Holder actually meant by these arguments. Actually whenever a partnership firm is dissolved this fact must be communicated to the Registrar within 90 days of such dissolution as per Section 63 of the Indian Partnership Act, 1932. The Registrar then records this fact in the Register of Firms kept with it under Section 63. Similarly under Section 72 if a registered partnership firm is dissolved this notice is to be mandatorily given to the Registrar and to the public by way of publication in the Official Gazette and in a vernacular newspaper which having circulation in the District where the dissolved partnership firm had its business (so let’s say the business of the Partnership Firm is in Lajpat Nagar, then the news of the dissolution must be published in a local newspaper circulating in South East Delhi).

Now the moot question arises that if a partner retires or a partnership firm is dissolved and no public notice is given or no intimation to Registrar is made what will be its effect? The effect will be that the people who thought that retired partners are still functioning in the partnership firm as partners and the partnership itself is still functioning can make all of the partners, including the retired ones, liable for any loss or default which partnership have caused to them.

Let’s again understand it by way of an example. Let’s assume D, E and F are partners in a partnership firm named M/s XYZ which supplies furniture to general public. Now a person M buys furniture worth Rs. 100/- on 1^st  April 2023 from M/s XYZ but as the furniture was found termite ridden, M asked M/s XYZ for the refund of Rs. 100. Now if  M/s XYZ denies any fault and hence declines to pay any refund, M can make all of them i.e. D, E and F to pay Rs. 100 jointly by filing a case against them. Now let’s say D have left the Partnership 30^th March 2023 (and hence the partnership was dissolved on the said date before the the purchase by M) but A did not give public notice of the same or intimate the Registrar about this dissolution of the firm. Even now M can file a case/suit and force D,E and F to pay though D was not even a partner on the date of the purchase. This is only because no notice was given by D of the dissolution of the firm or of the retiring of one of the partners.

M/s J K wanted to make A and B liable on this ground.

But to counter this contention one can take the aid of the exception to Section 45 of the Indian Partnership Act, 1932 as it states that in case the public notice or notice to the Registrar is not given even then a retired partner can escape liability if he is not an apparent partner in the firm. It in essence means (using again our above example) if M never knew that D was a partner in the partnership firm  M/s XYZ and bought the furniture from M/s XYZ under the impression that only E & F are running the shop then M cannot make D liable to pay Rs. 100/- or even a single paisa (though it will need an excellent cross examination to get this out from the M). Now returning to the present case, it was admitted by M/s J K that it never knew that A & B are partners in the M/s SCB and only after examining the record kept at the Registrar Of Firms much later he came to know that A & B are registered as partners.

So due to the fact that M/s J K never believed that A & B were partners in M/s SCB, A & B were exonerated of any liability to  M/s J K.

Conclusion

The tendency of the third parties and existing partners of filing cases against former partners is on the rise in India. though something must be said of the ignorance of the outgoing partners who did not take legal advice before leaving the firm as to how they can be protected from future cases against the Partnership Firm. Therefore it is important to know what rights Partnership Act and other laws give to an outgoing partner as ignorance of the same can lend an innocent former partner at the mercy of the existing partners and third parties.

Parveen Semwal

Advocate, High Court of Delhi and Supreme Court of India