Partnership; M/s. Paily & Company, Engineers & Contractors Vs. State [Kerala High Court, 19-07-2016]

Partnership Act, 1932 – Sections 13 & 15 – mutual rights and liabilities – Partnership firm challenging the recovery effected from a bill payable to the firm – Managing Partner of the firm, in his individual capacity, had taken a contract work – When recovery is sought against one of the partners from the amounts due to the firm; even of individual debts created by a partner prior to the constitution of the firm itself; the same can be permitted, with the rider that the other partner/partners could demand the same to be adjusted from the surplus profit due to the debtor/partner or from the assets itself, in the event of dissolution. Subject to contract, the partners are entitled to share equally in the profits earned. The right of a partner, when the partnership firm subsists, is only to share in the profits, in accordance with his share in the partnership and on dissolution a similar share in the assets of the firm.

# Partnership


IN THE HIGH COURT OF KERALA AT ERNAKULAM

K. Vinod Chandran, J.

W.P.(C) No.22564 of 2015-U

Dated this the 19th day of July, 2016

PETITIONER(S)

M/S. PAILY & COMPANY, ENGINEERS AND CONTRACTORS, GANDHI NAGAR, PINANGODE ROAD, KALPETTA P.O, WAYANAD DISTRICT, KERALA STATE, REPRESENTED BY ITS MANAGING PARTNER, N.P.PAILY.

BY ADVS.SRI.K.S.BABU SMT.N.SUDHA SRI.BABU SHANKAR SRI.K.V.WINSTON SRI.K.S.GOPI

RESPONDENT(S)

1. STATE OF KERALA, REPRESENTED BY CHIEF SECRETARY TO GOVERNMENT, SECRETARIAT, PINCODE -695 001, THIRUVANANTHAPURAM.

2. EXECUTIVE ENGINEER, KARAPUZHA IRRIGATION PROJECT DIVISION, KALPETTA, PINCODE – 673 121, WAYANAD DISTRICT.

3. SECRETARY TO IRRIGATION DEPARTMENT, GOVERNMENT OF KERALA, SECRETARIAT – 695 001, THIRUVANANTHAPURAM.

4. BRANCH MANAGER, NEW INDIA ASSURANCE COMPANY LIMITED, KALPETTA BRANCH, MGT BUILDING, PINCODE – 673 122, KALPETTA NORTH, WAYANAD DISTRICT.

R1 TO R3 BY SR. GOVERNMENT PLEADER SRI.P.M.SANEER. R4 BY ADV. SRI.M.JACOB MURICKAN. R4 BY ADV.SRI.A.A.ZIYAD RAHMAN.

JUDGMENT

The petitioner is a partnership firm challenging the recovery effected as per Exhibit P2 from a bill payable to the firm. Admittedly, the Managing Partner of the petitioner firm, in his individual capacity, had taken a contract work in the year 1994 which involved blasting operations to be carried out. The operations were carried out successfully, allegedly under the supervision of the officers of the Government and the entire amounts due were paid to the contractor.

2. Subsequently, certain residents of the locality filed suits to recompensate the damages, caused to their residences by reason of the blasting operations. The suits stood decreed against the Government, the Contractor and the Insurance Company, the latter of whom insured the Contractor. Execution petitions were filed first against the Government and then the Contractor was impleaded. The Government then recovered an amount of Rs.4,41,623/- from the amounts due to the petitioner firm.

3. The writ petition impugn Exhibit P2 order which attempts such recovery. The learned Counsel for the petitioner contends that the dues against an individual, the accrual of which and the cause of action too occurred, long prior to the constitution of the firm cannot be proceeded with against the assets of the firm or its income. It is also contended that going by Section 15 of the Partnership Act, 1932 the assets of the firm has to be used for the businesses of the firm and not otherwise. In such circumstance, the recovery made with respect to the contract earlier carried out by one of the partners, in his individual capacity, is bad and illegal is the contention.

4. Section 15 comes under Chapter III “Relations Of Partners to One Another”’ and mandates that subject to contract,the property of the firm shall be held and used by the partners for the purposes of the business. This decides the relationship between those persons who are in the status of partners, inter-se. It is trite that a partnership firm has no separate existence from that of its partners and does not have the status even of a legal entity. Section 15 at best would regulate the relationship between the partners and does not affect a third party who claims against one of the partners. The reliance placed by the learned Counsel on the decision in

# Narayanappa v. Bhaskara Krishnappa [AIR 1966 SC 1300];

is specious.

5. Narayanappa (supra) was a decision on whether a deed of dissolution of partnership, the assets of which included immovable properties, would compulsorily require a registration, for reason only of the inclusion of immovable properties. Therein, there was a partnership dispute and a suit was filed by two of the partners, making the other partners defendants and claiming declaration with respect to certain suit properties and for division of the same into four equal shares. In the alternative, a dissolution of the partnership was also sought. Certain partners, who were defendants, alleged a dissolution of the partnership based on an agreement between the parties. The agreement was not registered and it was argued that Section 17(1)(c) of the Registration Act, 1908 provides for compulsory registration and, hence, the unregistered document was inadmissible in evidence.

6. The Hon’ble Supreme Court categorically held that “a firm has no legal existence under the Act and the partnership property will, therefore, be deemed to be held by the partners for the business of the partnership”. Again this only speaks of rights and liabilities of the partners with respect to each other and not with respect to a recovery made as against one of the partners, by a third party. The concept of partnership was succinctly stated to be the following:

“It seems to us that looking to the scheme of the Indian Act no other view can reasonably be taken. The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated his right during the subsistence of the partnership is to get his share of profits from time to time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case what the assignee would get would be only that which is permitted by S.29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners”.

7. If the reasoning of the learned Counsel is accepted that would be an effective device to frustrate recovery. Any debtor could contribute his assets to a partnership firm and claim no separate right over the assets, after the formation of the firm and also assert that any money coming into the firm; is liable to be applied only for the business of the firm. When recovery is sought against one of the partners from the amounts due to the firm; even of individual debts created by a partner prior to the constitution of the firm itself; the same can be permitted, with the rider that the other partner/partners could demand the same to be adjusted from the surplus profit due to the debtor/partner or from the assets itself, in the event of dissolution. Section 13 of the Act speaks of mutual rights and liabilities and specifies that, subject to contract, the partners are entitled to share equally in the profits earned. The right of a partner, when the partnership firm subsists, is only to share in the profits, in accordance with his share in the partnership and on dissolution a similar share in the assets of the firm.

8. The position would be otherwise if that partner/debtor has properties he holds by himself distinct from the assets of the partnership firm. In the present case the liability was created by and from a contract taken by the Managing Partner of the firm in his individual capacity. The said Managing Partner has filed the above writ petition for and on behalf of the firm. It is pertinent that there is no averment regarding any personal assets of the individual, apart from the assets of the firm or an averment as to any individual income accruing to the said person.

9. The Government has specifically relied on the “Madras Detailed Standard Specifications” on which the “Public Works Department Manual” is designed. The agreement, produced at Exhibit R2(a), specifically by clause 16, provides that “instruction regarding blasting operation laid down in the SS 19 of MDSS should be strictly followed”. The relevant extracts are produced along with the counter affidavit, which are marked along with Exhibit R2(a). The relevant provision under paragraphs 46 and 47 of the MDSS is extracted hereunder:

“46. Blasting.- Blasting executed by contractors in connection with Government works shall be carried out in the manner described under “Blasting operations – Instructions to contractors” of the M.D.SS.

47. Protections of adjoining and existing premises.- The contractor is to protect the whole of the adjoining and, where necessary, the existing premises and all works and all fittings to all buildings on and adjoining the site against structural and decorative damage caused by the execution of these works and make good in all respects all such damage done or occurring to the same, and leave such reinstatement in perfect order. He is also to make good any damage done in the execution of the work to existing public or private footways or roadways”.

It is on the above terms which are read into the contract executed, that the liability has been mulcted on the contractor.

10. This Court had specifically asked for the total amount due under the contract, or the respective shares of the partners,which the petitioner’s Counsel was not able to state. This was only to ascertain whether the amounts withheld, out of the total amount due, exceeded the share component of the Managing Partner. Be that as it may, even if it so exceeds, there would be no change in situation since what would be then required is adjustment of the rights and liabilities between the partners, which they will be entitled to take up between themselves. That would also depend upon the respective shares of the partners.

11. The further contention raised by the learned Counsel for the petitioner is that if at all the Managing Partner of the petitioner is mulcted with the liability in his individual capacity, the same would have to be indemnified by the insurer, the 4th respondent. This is a valid contention which could be taken by the petitioner against the insurer before the appropriate authorities.

This Court having found that there is absolutely no illegality in Exhibit P2, the writ petition is devoid of merit and the same is dismissed. Any proceeding against the insurer by the insured would be reserved to be proceeded with, in accordance with law, and the contentions of the respective parties would be left open. Parties are left to suffer their respective costs.

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