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PETITIONER: M/S.KRISHNA MOTOR SERVICE BY ITS PARTNERS

       Vs.

RESPONDENT: H.B. VITTALA KAMATH

DATE OF JUDGMENT:       19/04/1996

BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. G.B. PATTANAIK (J)

CITATION:  JT 1996 (5)   162        1996 SCALE  (4)412

ACT:

HEADNOTE:

JUDGMENT:                          O R D E R      Leave granted.      We have heard learned counsel on both sides.      These appeals  by special leave arise from the order of a Division  Bench of the Karnataka High Court made in M.F.A. No.324/86 on  3.1.1994 and  in Civil  Petition  No.96/94  on 25.3.1994. It  is not  necessary to  narrate in  extenso the constitution, existence  and continuance  of the partnership firm prior  to July  1, 1973.  Suffice it  to state that the respondent, who  was working  in the  partnership firm  as a Supervisor on  salary basis,  was taken as a partner on July 1, 1973,  resulting a new partnership and it was agreed that he would  be entitled  to 10% of the profit and loss without contribution  of   any  capital  in  the  partnership.  When disputes  had   arisen  between   the  appellants   and  the respondent, the  appellants- four  partners-  had  a  notice issued  on   10.5.1984  dissolving   the  partnership.   The respondent by  his reply  dated  17.5.1984  had  agreed  for dissolution. Subsequently,  he filed  an  application  under Section 20  of the  Arbitration Act,  1940 (for  short,  the ’Act’) on  8.6.1984, in  the court  of the  Civil  Judge  at Shimoga for  reference to  the arbitrator  in terms  of  the agreement. The  trial Court  rejected three  out of 4 claims made by  him and referred claim No.1 to the arbitration. The High Court  on further  consideration, in  appeal, added two more items  to the reference. Thus, these appeals by special leave.      Shri Javali, learned senior counsel for the appellants, contended that since admittedly the partnership firm was not registered as  required under  Section 69 of the Partnership Act, 1932,  the respondent was not entitled to the reference under Section  20 of  the Act  to an  arbitration.  He  also contended that  even assuming  that the court has such power of making  reference, it would be only within the parameters of the  provisions in  sub-section (3)  of Section 69 of the Partnership  Act   and  no  other  claim  is  referable  for

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arbitration. He  placed string  reliance on  Jagdish Chander Gupta vs.  Kajaria Traders (India) Ltd. (1964) 8 SCR 50], in particular  the   last  paragraph  thereof,  overruling  the judgment of  the Patna High Court in Mahender vs. Guru Dayal [AIR 1951 Patna 196]. The respondent resisted the contention and relied  on Prem Lata vs. Ishar Dass Chaman Lal [(1995) 2 SCC 145]      The question,  therefore, is: whether the respondent is entitled to  a  reference  under  Section  20  of  the  Act? Admittedly, the  partnership  firm  was  not  registered  as required under  Section 69(1)  of the  Partnership Act.  The partnership deed  does contain  a clause  for  reference  to arbitrate the  disputes that would arise under the contract. The question,  therefore, is: whether the exceptions to sub- section (3)  of Section  69 would  apply to the facts of the case Sub-section (3) of Section 69 envisages as under:      "69.(3)  The   provisions  of  sub-      sections (1)  and (2)  shall  apply      also to a claim of set-off or other      proceeding  to   enforce  a   right      arising from  a contract, but shall      not effect-      (a) the enforcement of any right to      sue for  the dissolution  of a firm      or  for  accounts  or  a  dissolved      firm, or  any  right  or  power  to      realise the property of a dissolved      firm; or      (b)  the   powers  of  an  official      assignee, receiver  or Court  under      the   Presidency-towns   Insolvency      Act,  1909  (3  of  1909),  or  the      Provincial Insolvency   1920  (5 of      1920), to  realise the  property of      an insolvent partner,"                      (Emphasis supplied)      The contention  of Shri  Javali is that since the words "other  proceedings  to  enforce  a  right  arising  from  a contract" clearly envisage that When a party to the contract seeks to  enforce the  right arising  from the contract, the main  part   of  sub-section   (3)  stands   attracted,  the exceptions provided  in the  exclusionary  clauses  have  no application. Therefore, the ratio in Jagdish Chandra Gupta’s case, though  related to  reference under  Section  8  would apply to the facts of the case and that the reference is not maintainable. We  find no force in the contention. The words "but shall  not affect"  require to  be  given  meaning  and effect thereof  in the  operation of  the main  part of sub- section (3).  But as  seen the  exceptions engrafted in sub- section (3)  intend to  exclude the  embargo created by sub- section  (3)  and  intended  to  effectuate  the  exceptions enumerated therein.  It is  seen that  the proviso  give  an exception stating  that the  main part  of  sub-section  (3) shall not  affect (a)  the enforcement  of any  right arisen from dissolved firm, of a firm or for account of a dissolved firm, or  any right  or power  to realise  the property of a dissolved firm,  it confied  interest to the partners, i.e., parties  to   the  contract.   Undoubtedly,  Section  69  is mandatory in character and its effect is to render a suit by plaintiff in  respect of  a right  vested in him or acquired under a  contract which  he entered  into as  a partner of a firm, whether  existing or dissolved void. In other words, a partner of an erstwhile unregistered partnership firm cannot bring a  suit to  enforce a  right arising out of a contract falling within  the ambit  of the main part of Section 69(3)

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of the  Act. In  Jagdish Chandra’s  case at  60  this  Court interpreting main  part of sub-section (3) had held that "In our judgment,  the words  ’other proceeding’  in sub-s.  (3) must receive  their full  meaning untrammeled by the words’a claim of  set-off’. The  latter words neither intend nor can be construed  to cut down the generality of the words ’other proceedings’. The  sub-section provides  for the application of the  provisions of  sub-ss. (1) and (2) to claims of set- off and  also to  other proceedings  of any  kind which  can properly be  said to be for enforcement of any right arising from contract except those expressly mentioned as exceptions in sub-s.(3) and subs.(4)."      If the  right to dissolve the firm itself is in dispute and is  subject matter  of the  suit for  dissolution of the partnership firm,  if a party to the contract of partnership seeks a  reference for  arbitration to resolve that dispute, it  would   be  a  right  from  a  contract  arisen  in  the proceedings for  enforcement of  the right  to dissolve  the firm. In  that event,  necessarily, the  main part  of  sub- section (3)  stands attracted and no such reference is valid in law.  But in a case where the parties have already agreed for dissolution  of the  partnership by  mutual consent, the partnership stood  dissolved. There is no dispute as regards the right  arising from  the contract of a firm. The dispute is only  with regard  to working  out the  rights flown from dissolution for settlement of accounts of the dissolved firm or any  right or  power  to  realise  the  property  of  the dissolved firm  etc. That  right  would  form  part  of  the exception engrafted  in sub-section  (3) of  Section 69. The object intended  by the  legislature appears  to be  that in spite of  the defect of non-registration and the prohibition created in  the main part of non-enforceability of the right arising from  a contract,  the parties  having worked  under that contract, to the limited extent of the enforcement of a right to  realise the  assets, settlement of the accounts of the dissolved  firm or  any right  or power  to realise  the property of  the dissolved  firm  are  exceptions  engrafted therein and  gives right to the parties to enforce the same, independent  of   the  right   arising  from  the  contract. Therefore, the  parties are  relieved from  the  prohibition created by operation of Section 69.      In Jagdish  Chandra Gupta’s   case  (supra), the  facts were that  right to  dissolution of the partnership firm was itself in  dispute and  the suit was filed for that purpose. Therefore, when  the application  under Section  8(1) of the Act  was   filed,  this   Court  had  held  that  since  the partnership firm  was not  registered as enjoined under sub- section (1)  of Section 69, the main part of sub-section (3) excluded the  application for  enforcement of  the right  to reference in  other proceedings  including enforcement under Section 8 of the Act. In Prem Lata’s case (supra), the facts were that by a deed of partnership was executed but the firm was not  registered under Section 65 of the partnership Act, On  the   demise  of   one  of   the  partners,   the  legal representatives  called   upon  other   partners  to  render accounts of  the dissolved  firm. It  is settled law that on the  demise   of  one  of  the  members  of  the  firm,  the partnership  stands  dissolved.  Therefore,  the  claim  had arisen under the exception engrafted under Section 69(3). In the backdrop  of those  facts and  considering the effect of the provisions in the light of the ration in Jagdish Chandra Gupta’s case, another Bench of this Court to which one of us (K.Ramaswamy, J.)  was a  member had held in Smt Prem Lata’s case that Section 20 stands attracted to make an application for reference.  Later, ratio clearly applies to the facts in

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this case.      The question  then is: what are the items that would be referable  to   the  arbitration?   The  respondent   sought reference of the items mentioned below;      "1) taking out the true and correct      account of  the profit  and loss of      erstwhile firm  with  the  help  of      competent person  and carve out the      share of  the petitioner as per the      agreement of partnership deed dated      6.10.1973;      2) if  the respondents  are willing      to continue  the firm  in the  name      and style  of  the  erstwhile  firm      namely Sri  Krishna Motor  Service,      without taking  the  petitioner  as      partner, the  quantum  of  goodwill      and  compensation  payable  to  the      petitioner, as out going partner;      3) to  decide  in  respect  of  the      vehicle bearing  No.MYS5676 and  to      deliver   the    vehicle   to   the      petitioner,     with     reasonable      compensation for  the  use  of  the      said vehicle; and      4) to  find out the changes made in      the accounts  and the  transactions      carried out  in  the  name  of  the      erstwhile    firm     after     the      dissolution of  the firm  by notice      dated 10.5.1984  to  determine  the      profit and  loss of  the petitioner      or  such  other  reliefs  that  the      Court   may   deed   fit   in   the      circumstances of the case."      It would be seen that item (1) clearly falls within the exception provided  in Section  69(3). In  respect of  items (2), though  it is  widely worded,  the respondent  would be entitled to the question of entitlement towards the goodwill only upto  the date  of dissolution  of  the  firm  but  not thereafter. With  regard to  items (3)  and (4),  they arise from the  contract and  these items would not come under any exceptions engrafted  under Section 69(3) of the Partnership Act. Under these circumstances, the High Court was not right in making the reference in item No.(4).      The  appeals  are  accordingly  allowed  to  the  above extent, but, in the circumstances, without costs.