Syed KHURSHID SOHAIL Versus AZIZ HAMI

ORDER

1. The plaintiff has filed this suit for dissolution or partnership and rendition of account. Alongwith the plaint the plaintiff has also filed two applications one (C.M.A. No. 127/88) under Order XXXV1II, Rules 1 and 5 for attachment before judgment of building and structure, machinery, capital equipment and the existing old books of accounts. The other application (C.M.A. No. 365/88) has been filed under Order XL, Rule 1, C.P.C. for appointment of receiver for defendants No. 4 and 5. Both these applications shall be disposed of by this order.

2. The plaintiff and defendants No. 1 to 3 entered into a partnership under the name and style of Aria International Service (Melamine Factory) for manufacturing and marketing Malamine products, exports and imports and any other business with the consent of the partners. The partnership deed was entered into on 1‑1‑1979 and was duly registered with the Registrar of Firms. The plaintiff was doing business in Dubai at that time and had obtained permission for establishment of an industrial unit in Pakistan for manufacturing products under non‑repatriable foreign investment from Dubai for US. $ 180,000. According to the plaintiff the machinery of the said value was sent to Pakistan by

3. ~._ dim through his own resources of foreign exchange. The plaintiff by his own personal effort secured a plot of 10,000 square yards in the name of his company M/s. Tasnim Industry. As a part of his capital investment, he provided 7,800 square yards of land for construction of the firm's Melamine factory. The lease was obtained in the name of defendant No. 4 and sub‑lease was executed by the K.D.A. The plaintiff claims to have made investments of (1) Rs. 7,80,000 being the value of the land, (2) the firm's machinery worth Rs. 1,880,000, (3) building valued at Rs. 2,300,000 and (4) cash Rs. 9,0O,OOC. The plaintiff also obtained from his influence and goodwill credit facility from BCCI Karachi to the extent of Rs. 80,00,000 against the security of land, machinery and buildings and tangible sets and due to goodwill established by him the defendant No. 4 was able to open several L.Cs. in the sum of Rs. 1,00,00,000. The production and sale started in the year 1979. The plaintiff being pre‑occupied abroad entrusted to defendants Nos. 1 and 2 the entire affairs of the firm. It has been alleged that defendants Nos. 1 and 2 having the control of the partnership have been guilty of misconduct in conducting the affairs of the partnership and have merely paid Rs. 50,000 to the plaintiff m cash out of his share of profit of Rs. 20,00,00,000 for 9 years. Besides this out of the plaintiffs share of profit the defendants have paid Rs. 2,00,000 to the Income‑tax Department towards plaintiff's income tax dues. The defendants Nos. 1 and 2 have refused the plaintiff access to the books of account to which the plaintiff is entitled. The defendants Nos. 1 and 2 have shifted the office of the firm to the factory premises against the terms of the partnership deed. The defendants Nos. 1 and 2, have illegally and fraudulently formed a private limited company in the name of the firm without the consent of the plaintiff and to the disadvantage of the plaintiff they are making secret profits and syphoning the assets of the firm to defendant No. 5 to the exclusion of the plaintiff. To make the fraud complete the defendants' applied to K.DA. for transfer of plot No. A‑1 Sector 16, Korangi Industrial Area in the name of defendant No. 5. The representative of the plaintiff in Pakistan informed the K.D.A. of this fraudulent act and the‑defendants' fraud could not be materialized. The defendant No. 3 is a sleeping partner and the defendants Nos. 1 and 2 who have the entire control of the affairs of the firm have failed to settle accounts.

4. The defendants Nos. 1 and 2 filed their written statement and also counter‑affidavit. The defendants Nos. 1 and 5 in the counter‑affidavit denied that the defendant No. 1 is not a national of Pakistan and stated that he has no intention to run away from Pakistan. He claims to have made substantial investment exceeding Rs. 33 lacs in defendant No. 4. In the written statement which has been treated as part of counter‑affidavit it has been disclosed that immovable property described in the application has been transferred with the approval of K.D.A. m the name of defendant No. 5 who have acquired all assets of defendant No. 4. It was stated that the defendant No. 1 was carrying on business in Dubai under the name and style of Aria International Trading Company since 1969 and had imported machinery for manufacturing melamine products from a firm at Tehran owned by defendants Nos. 1, 2 and 3 and was stored at Sharjah. The defendants Nos. 1 and 2 wanted to set up and establish a factory in Pakistan and were looking for a Pakistani entrepreneur. The plaintiff approached the defendants Nos. 1, 2 and 3 and proposed that under a non repatriable scheme bf Government of Pakistan he could obtain permission for setting up a mclamine factory. The defendant No. 1 and plaintiff came to Karachi and partnership dated 1st January, 1979 was executed. On receipt of sanction from the Government of Pakistan the plaintiff requested for shipment of machinery in his name to Karachi. The defendant No. 1 demanded payment of US $ 102,500 being the value of the machinery before handing over possession of the machinery for shipment by plaintiff. ': he plaintiff made part payment of Dhirams 1,00,000 on 1st May, 1979 through a cheque which was dishonoured. The plaintiff was asked to arrange funds and on his assurance and in the spirit of goodwill the machinery and air‑conditioners were released to the plaintiff for shipment to Karachi. In 1980 the plaintiff left for England. Prior to his departure the plaintiff had entered into an agreement of sale dated 16th May, 1979 for plot of land measuring 7800 square yards in Korangi Industrial Area for Rs. 7,80,000. On execution of the said agreement Rs. 1,00,000 were paid by defendant No. 4. It has been denied that plaintiff has made any investment as alleged. The machinery was supplied by defendants Nos. 1, 2 and 3 and the construction was made by defendant No. 4. The defendant No. 4 had mortgaged its assets to BCCI for obtaining credit facility which never exceeded Rs. 5.5 million. The plaintiff never attended the affairs of the business and on 26th September, 1981 he coerced defendant No. 3 to counter sign two cheques for Rs. 56,000 and Rs. 157,000 in his favour, and thereafter he left for England. He has been declared absconder for non‑payment of Income‑tax arrears of Rs. 40,00,000. It was denied that the entire capital was provided by the plaintiff. The defendants Nos. 1 and 2 have provided their capital through remittance detail of which has been mentioned in the written statement. It was pleaded that the plaintiff was evading payment of income‑tax dues in respect of his other business which jeopardised the assets of defendant No. 4 and the plaintiff was removed as a partner with effect from 31st December, 1982. The partnership firm namely defendant No. 4 was converted into a private limited company on 2nd January, 1986 which acquired the partnership concern and thereafter defendant No. 4 ceased to exist. All the allegations of fraud, mismanagement and denial of plaintiff's share have been denied. The defendants Nos. 1 and 3 had contributed all their shares of the capital and have not committed any acts of fraud or misconduct as alleged by the plaintiff.

5. During the hearing of application under Order XL, Rule 1, C.P.C. on 1st February, 1988 the learned counsel for the defendants contended that the plaintiff has been removed or expelled from the firm. On query whether such action was permissible in law Mr. Japanwalla requested for time. However by consent Official Assignee was appointed receiver with limited power. The matter came up for hearing on 15th February, 1988 when Mr. Abid Japanwalla Advocate produced documents which had not been filed with the counter‑affidavit or written statement. As such production was objected, he requested for time for filing proper application and affidavit which was allowed. He therefore filed an application under section 151, C.P.C. seeking permission to file 18 documents which include correspondence aim' balance: sheets. The plaintiff filed counter -affidavit to this application and :filed two documents in rebuttal to which a rejoinder was also filed. Having examined these documents I am of the view that they may be `necessary' for determining the applications filed by the plaintiff. Therefore, I have permitted them to be referred and relied upon by the parties during the arguments.

6. The learned counsel for the plaintiff has contended that the; suit is barred by time as provided by Art. 106. According to the defendants the plaintiff was retired from 1st January, 1983 and this was communicated to him by letter dated 31st March, 1983. The plaintiff has denied its receipt. Article 100 applies to a suit for accounts of a dissolved firm. In the present case it is not the case of the defendants that the partnership had been dissolved. After excluding the plaintiff it continued and on 2nd January, 1986 the firm was converted into a limited company. Therefore, on defendants' own admission the firm was dissolved on 2nd January, 1986. According to the plaintiff the suit is governed by Article 120. Considering from the view point discussed above and without going into the merits of this controversy at this stage, prima facie the suit does not seem to be barred by time. Even otherwise on the basis of affidavits it is not possible to give any finding at this interlocutory stage.

7. From the above facts it is clear that the plaintiff and defendants Nos. 1,2 and 3 had entered into a partnership deed and constituted a firm under the name and style of Aria International Services (Melamine Factory) which is defendant No. 4. The defendants have taken the stand that the plaintiff had incurred income‑tax liabilities which had jeopardised the assets of defendant No. 4. The plaintiff was therefore, removed as a partner with effect from 31st December, 1982. It was further pleaded in the written statement that defendant No. 3 alongwith plaintiff was retired on the same date 'as both were unable to attend and contribute in the running of the partnership firm. The firm was thereafter reconstituted. The certificate from the Registrar of Firms produced by the defendants reveals that retirement was notified on 12th June, 1983.

8. Mr. Abid Japanwalla first took the stand that the plaintiff has been removed and/or expelled. Under section 33 of the Partnership Act a partner can be expelled by a majority of the partners provided there is a contract between the partners to this effect and further that such power has been exercised bona fide and in good faith. Therefore unless there is an agreement between the partners g empowering the majority of partners to expel any partner, no partner can be expelled from the partnership firm. In this regard reference has been made to Lindley on The Law of Partnership, 10th Edition, page 444 where the following observation has been made: " no majority of partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. The Court cannot control the exercise of a power to expel if it is exercised bona fide .But all clauses conferring such a power are construed strictly, by reason of the abuse which may be made of them, and of the hardship of expulsion; and the Court will never allow a partner to be expelled if he can show that his co‑partners, though justified by the wordings of expulsion clause, have, in fact, taken advantage of it for base and unworthy purposes of their own, and contrary to that truth and honour which every partner has a right to demand on the part of his co‑partner."

9. Reference can be made to Din Muhammad v. Kanshi Ram and others AIR 1930 Lah. 378. In the present case the partnership deed does not contain any clause empowering the partners to expel any partner. Therefore, prima facie plaintiffs expulsion as alleged by the defendants does not seem to be proper.

10. The learned counsel then took the plea that the plaintiff has been retired from the firm and relied on the certificate of the Registrar of Firms. According to the defendants as the plaintiff had gone abroad and was not taking any interest in the firm's business and was jeopardising the interest of the firm by personal income‑tax liabilities the partners decided to retire him with effect from 31st December, 1982. No deed of retirement has been produced nor any public notice of retirement was issued. Section 32 of the Partnership Act provides for the retirement of a partner. According to it a partner is competent to retire with the consent of partners in accordance with an express provision if any, relating to the retirement in the partnership agreement or with the consent of all other partners at any time and on any terms. If a partner cannot retire in the aforestated manner then. if the partnership is at will, he can retire by giving notice in writing to all other partners of his intention to retire. The learned counsel for the defendants had admitted that the partnership was at will. There is nothing on record to prima facie establish that the plaintiff had sought for retirement and with the consent of other partners he has been retired by the partners nor there is anything to show that the plaintiff has been retired by the partners in accordance, with an express agreement, nor can the defendants show that the plaintiff had given a written notice for retirement from the partnership. Therefore, the retirement of the plaintiff as pleaded by the defendants is in fact an act of the defendants Nos. 1, 2 and 3 without the knowledge and consent of the plaintiff. From the documents filed by the defendants it seems that during the months of October and November 1982 the plaintiff and defendants had entered into correspondence in which the plaintiff was demanding certain documents and bank statements. In the letter dated 30‑12‑1982 addressed to the plaintiff the defendant No. 4 had rebutted the allegations made by him and it was suggested that it would be better if the disputes are properly and with confidence settled. In the letter dated 31‑3‑1983 while referring to their letter dated 30‑12‑1982 and the plaintiff's arrears of Income Tax and threats of the Income Tax Department the defendant No. 4 stated as follows:‑

11. "In these events and circumstances we are placed in a very critical situation and under tremendous pressure with an impending threat now to our very survival. We and our firm are, therefore, constrained to treat you as your having retired as a partner from our partnership business with effect from 1 st January, 1983 in the best interest of the Firm in this crisis and situation of grave emergency endangering the existence of our running business:"

12. The plaintiff denies receipt of this letter. However, the defendants Nos. 1 and 4 had taken the decision to retire the plaintiff. This fact was notified to the Registrar on 12‑6‑1983. In the re‑joinder the plaintiff has filed a copy of defendants' letter dated 3:d March, 1983 by which the defendants had forwarded the balance sheet as on 31‑12‑1982 and further stated that:‑‑

13. "You will be pleased to know that we have successfully crossed the breaking point and entered into the era of profit, after charging interest on loan and depreciation. We shall be pleased to furnish any further information as you may require in this regard."

14. The learned counsel for the plaintiff has contended that if the plaintiff had been retired there was no point in making such a statement. Be that as it may, the fact remains that the retirement of the plaintiff in the manner as stated in the letter dated 31‑3‑1983 prima facie does not seem to be in conformity with the law and partnership deed. Considering the partnership deed between the parties and provision of law, the defendants could have got rid of the plaintiff` only by dissolving the firm and re‑constituting it as a new firm. The defendants have not D stated that the defendant No. 4 has been dissolved. According to them the plaintiff and Murtaza Muhammad Khan have retired and the remaining partners continued the firm.

15. The learned counsel for the defendants then contended that the removal was made under the implied authority of the partners. Section 19 of the Partnership Act provides that an act of a partner which is done in the name of the firm for carrying on the business of firm in the usual way shall be binding on the firm. Such authority to bind the firm is called the implied authority of a partner. In the absence of custom of trade or usage the implied authority does not extend to the acts enumerated in subsection (2) of section 19. The exercise of implied authority is restricted to carrying on business of the firm in its normal and usual course. The implied authority does not empower partners to expel or remove any partner. As express provisions for retirement and expulsion have been provided under the Act resort cannot be made to the implied powers under section 19 of the Partnership Act which is restricted only for the conduct of the business of the firm in the usual course.

16. The defendants Nos. 1 and 2 have converted the firm into a private limited company which has been joined as defendant No. 5. This is an admitted position that all the assets and business of the firm have been routed to defendant No. 5 which is carrying on the same business. In these circumstances the learned counsel for the defendants contended that as a limited company has been incorporated, the plaintiff cannot claim any account from them. According to Mr. Fazle Ghani Khan the learned counsel for the plaintiff, the exclusion of the plaintiff from the partnership is a strong ground for appointment of receiver. In this regard the learned counsel has referred to Cosnt v. Harris 24 RR 108. Where any partner transfer the assets of a firm and invests it in any business, he is liable to account for such profit which he earns. The defendants are using the partnership property under the name and style of a limited company to the exclusion of the plaintiff and without rendering any account. In these circumstances it is a fit case for appointment of receiver.

17. From the above discussion prima facie the plaintiff could not be expelled or removed as alleged by the defendants. The defendants Nos. 1, 2 and 3 were carrying on the business of the firm and were in fiduciary relationship with the plaintiff. It is the duty of a partner who drives any profit from any transaction of the firm or from the use of the partnership property, the firm name or firm's connections to account for such profit. The defendants admit to have converted the firm into a limited company which has taken over the firm's name, business, assets and properties. They are also carrying on business "and earning profits to the exclusion of the plaintiff. In these circumstances the defendants are prima facie liable to render accounts. Here I will reproduce a passage from Lindley on the Law of Partnership 13th Edition page 337:

18. "Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership, to do his best for the common body, and to share with his co‑partners any benefit which he may have been able to obtain from other people and in which the firm is m honour and conscience entitled to participate ..In accordance with this principle it was established by numerous decisions before the Partnership Act, 1890 was passed, that one partner was not at liberty to acquire gain at the expense of his co-partners without their full knowledge and consent, either by directly making a profit out of them or by appropriating to himself benefits which he ought to have acquired, if at all, for the common advantage of the firm. The result of these decisions is summarised in the following sections of the Partnership Act, 1890: 29‑(,1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by hind of the partnership property, name or business connection."

19. Section 29 is similar to section 16 of the Partnership Act, 1932. In cases where partnership is dissolved, in Lindley at pages 615 and 616 the following principle has been stated:‑

20. "Upon the dissolution of a partnership, and in the absence of any agreement to the contrary, it has been seen (4) That, for the purposes of winding up, the partnership is deemed to continue; the good faith and honourable conduct due from every partner to his co‑partners during the continuance of the partnership being equally due so long as its affairs remain unsettled; and that which was partnership property before, continuing to be so for the purpose of dissolution, as the rights of the partners require."

21. The plaintiff has filed this suit for dissolution of partnership and rendition of accounts. The partnership was at will therefore if no notice of dissolution was served on filing of suit it stands dissolved. Even if this is not accepted, according to defendants it was dissolved on 31‑12‑1982. In a suit for dissolution of firm and G accounts as well as in cases where suit for accounts of a dissolved firm is filed receiver is appointed as a matter of course as it has been considered to be just and convenient. Reference can be made to Ali Muhammad Bhai v. Sadaruddin P L D 1959 Kar. 452, Sh. Munir Ahmad v. Muhammad Ismail and 2 others 1971 SCMR 666; Asghar Ali v. Abdul Husain and 3 others P L D 1977 Kar. 280, Muhammad Jamil v. Iqbal Ahmad P L D 1977 Kar. 351, Omar v. Razak P L D 1956 Sind 85 and Sheonarain v. Shri Kirpa Shanker AIR 1972 Pat.

75. It is an equitable remedy which is to be granted on equitable considerations. Before a receiver is appointed the Court should satisfy that the plaintiff has made out a prima facie case and has fair chances of success. It is a discretionary relief which H is sparingly used to safeguard the interest of the parties as well as the property. Reference can be made to Wali Muhammad v. Muhammad Iqbal Khan Mokall and others P L D 1975 Lah. 492.

22. Considering the contentions of the parties and principles of law as discussed above it would be proper, equitable, just end convenient to appoint a receiver. The defendants have already transferred all the assets, business, property and goodwill of the firm to defendant No. 5 and it is necessary to protect the interest of all the parties.

23. The question arises who should be appointed as a Receiver. The defendants Nos. 1 and 3 are running the business. The plaintiff has remained abroad preoccupied with his business and for long has not shown any anxiety to participate or manage the business and affairs of the firm. In the background of these facts I appoint the Official Assignee as a Receiver of defendant No. 4 and also of all the business, assets and properties which arc run and held in the name of the defendant No. 5. The defendants Nos. 1 and 3 shall manage the business under the control and supervision of the Receiver who shall have all the powers as provided under Order XL, R. 1, C.P.C. The Receiver shall appoint an independent and reputable Chartered Accountant as auditor for maintaining proper and correct accounts of defendant No. 5. In view of this order C.MA. 367/88 has become infructuous and is dismissed. The plaintiff should deposit Rs. 10,000 towards OA's. tentative fee.

24. AA./K‑90/K

25. Order accordingly.