MOTILAL CHIMANRAM Vs. SARUPCHAND PRITHIRAJ

JUDGEMENT

(1.) On June 24, 1930, the plaintiffs took out this originating summons against the defendants for dissolution of the partnership firm known as the New Bombay Flour Mills Company, and for an order that the accounts of the partnership should be taken and its affairs wound up by and under the directions of the Court. The partners of the firm, which I will shortly refer to as " the suit partnership ", were the firm of Chimanram Motilal consisting of the plaintiffs and defendants Nos. 2, 3 and 4 with a ten annas share, and the 1 defendant firm of Messrs. Sarupchand Prithiraj with a six annas share in the rupee. In the firm of Chimanram Motilal the plaintiffs had a ten annas share, defendants Nos. 2 and 3 had a share of four annas, and defendant No. 4 a share of two annas in the rupee. The suit partnership purchased a flour mill in Bombay in October, 1926, after which it commenced doing business. On or about November 2, 1927, the suit partnership was dissolved, and an agreement to sell off the mills was entered into about the same time. The sale of the mills was completed in June, 1929. Prior to the dissolution of the suit partnership the firm of Chimanram Motilal was dissolved in or about June, 1927, and the disputes between the partners of that firm were referred to arbitration, but, it appears, have not yet been settled. On October 12, 1934, a decretal order of reference was made to the Commissioner to take the usual partnership accounts of the suit partnership. The Commissioner made his report on March 14, 1935, and ascertained that a sum of Rs. 76,192-3-9 was due by the suit partnership to the firm of Chimanram Motilal, that a sum of Rs. 57,692-3-9 was due by the 1 defendant firm to the suit partnership, and that a sum of Rs. 18,500 belonging to the suit partnership was in the hands of Messrs. Mulla & Mulla, its solicitors.

(2.) Two sets of exceptions to the report have been filed, one by the 1 defendant firm on April 1, 1935, and the other by the plaintiffs on April 3, 1935. I will first deal with the exception filed on behalf of the 1 defendants. The first six exceptions relate to a sum of Rs. 50,000 which, according to the 1 defendants, was paid by them to defendant No. 2, a partner of the firm of. Chimanram Motilal, for and on account of that firm. The payment was made by making certain havala entries to which I will subsequently refer. Plaintiffs denied the payment, and objected to the item of Rs. 50,000. The objection was allowed by the Commissioner, and the 1 defendants contend that the objection should have been disallowed. It is common ground that the sum of Rs. 50,000 was not paid to defendant No. 2 in cash. The 1 defendants case, according to the evidence of Brijlal Ramjidas, the son of one of its partners, and who subsequently became a partner himself, is that when the business of the suit partnership was closed, and the sale proceeds of the mill were realised, moneys were due to the firm of Chimanram Motilal in its account with the suit partnership, that defendant No. 2 as a partner of the firm of Chimanram Motilal asked Brijlal for payment of a sum of Rs. 60,000 to Rs. 65,000, and Brijlal said he would pay after the sale was completed. The sale was completed on or about June 22 or 23, 1929, and on June 24 Brijlal offered to pay Rs. 50,000 to defendant No. 2 on account, but defendant No. 2 told him to credit the sum to the account of another firm, viz., the firm of Narandas Kedarnath, in the books of the 1st defendants, and to debit it to Chimanram Motilal in the books of the suit partnership, to which Brijlal presumably agreed. It may be mentioned here that defendants Nos. 2 and 3 along with several other persons are also partners in the firm of Narandas Kedarnath, but the other partners of the firm of Chimanram Motilal, among them being the plaintiffs, are not partners in the firm of Narandas Kedarnath. In pursuance of the agreement between defendant No. 2 and Brijlal entries were made in the journal of the suit partnership which was lying with the 1st defendants at their pedhi near the Share Bazar, debiting Rs. 50,000 to the firm of Chimanram Motilal, and crediting the sum to the 1 defendants. In the journal of the 1 defendants" firm havala or transfer entries were made, debiting Rs. 50,000 to the suit partnership, and crediting the sum to Narandas Kedarnath. The havala entries were admittedly made after Aso Sud 14, S. 1985 Maru (October 17, 1929), but as of June 24, 1929. The plaintiffs contend that under these circumstances there was really no payment of the sum of Rs. 50,000 to the firm of Chimanram Motilal. They say that defendant No. 2 had no authority to receive the sum from the 1 defendants and the 1 defendants were awan of this limitation on the authority of defendant No. 2. They further say that the entries in the books were made in collusion between the 1 defendant and defendant No. 2 who was at the same time a partner of the firm o Chimanram Motilal, the creditors of the 1 defendants, and a partner o Narandas Kedarnath, the debtors of the 1 defendants, and that the payment is not binding on the firm of Chimanram Motilal, nor upon the plaintiffs as the partners of that firm.

(3.) This being the nature of the transaction, several important questions of law and fact arise for consideration. The very first question, in the forefront of the inquiry, is whether defendant No. 2 as the partner of a dissolved firm, viz., the firm of Chimanram Motilal, could transfer the credit of Rs. 50,000 due to the firm by the 1 defendants to the firm of Narandas Kedarnath, thereby making the latter firm the debtors instead of the 1 defendant firm; and, if so, whether the transfer was properly and regularly made, or was tainted by fraud or collusion, It is provided under Section 263 of the Indian Contract Act, 1872, which applies to this case, that the rights and obligations of a partner after dissolution of the partnership continue in all things necessary for winding up the business of the partnership. Pollock and Mulla in their Commentaries on the Indian Contract Act, 6 Edn., point out that this section was no doubt meant to express the English law on the subject, and that it should be read with sufficient emphasis on the word necessary , The continuing authority of the partners for purposes of winding up is described in the first para, in Section 47 of the Indian Partnership Act of 1932 as follows :- After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. There is a proviso to the section with which we are not concerned. This section is based on Section 38 of the English Partnership Act, The only distinction between Section 263 of the Indian Contract Act and Section 47 of the Indian Partnership Act is that instead of the words " the rights and obligations of the partners " we have a fuller expression, viz., " the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners". Both sections no doubt refer to the mutual rights and obligations of the partners after dissolution, and from the wording of Section 47 it seems that even the authority of a partner to bind the firm is one of the mutual rights and obligations of the partners in the winding up of the firm. It is therefore clear that though the dissolution of a firm causes a dissolution of the partnership between the partners, the partnership still subsists, but merely for the purpose of winding up its business and adjusting the rights of the partners inter se, and for this purpose the authority of the partners to bind the firm, and all their other mutual rights and obligations, continue notwithstanding the dissolution. The power of each partner, however, extends only so far as it is necessary to wind up the affairs of the firm and to complete transactions already begun. It has been held that if a debt is owing to a firm, payment by the debtor to any one of the partners extinguishes the claim of all the partners and discharges the debtor, even though a particular partner or a third person is appointed to collect the debts owing to the firm, and whether the debtor is aware of such appointment or not. Any partner of a dissolved firm can therefore recover payment of a debt due to the firm. He can effectually release the debtor and also give a valid receipt for the debt. But neither the release nor the receipt will be binding on his co-partners if the receipt is given, or the releasing partner acts, in fraud of his co-partners and in collusion with the debtor : see Fanar V. Hutchinson (1839) 9 Ad. & E. 641, Henderson and Smith V/s. Wild (1811) 2 Camp. 561, and Palaniappa Chettiar V/s. Veerappa Chettiar (1917) I.L.R. 41 Mad. 446. A partner can also accept a bill of exchange for a debt : King V/s. Smith (1829) 4 C. & P. 108. He has, however, no authority to acknowledge a debt, or by his act or admission to involve his co- partners in any new legal liability. Counsel for the 1 defendants thereupon contended that if a partner in a winding up can recover a debt due to the firm, he can also deal with it after recovery in any manner he pleases. That proposition, however, is subject to this qualification that the dealing in order to be binding on the co-partners must be necessary in the winding up. It is pointed out in Lindley on Partnership, 9 Edn., at p. 195, that although a partner has power to receive payment of a debt and to give a discharge for it on payment, it does not follow that he has power to compromise or settle the debt in any way he likes without payment. Nor can he discharge z separate debt of his own by agreeing that it shall be set off against a debt due to the firm. It is of course open to the co-partners either to ratify the act of the partner which is primarily not binding on them, or to acquiesce in it. But otherwise the act must be an act necessary in the winding up of the partnership.