Sriram & Sons vs State Bank Of Bikaner & Jaipur

This order will dispose of the above three appeals, as similar orders passed by the DRT is under challenge in these appeals.

DRT, Jaipur has upheld the order passed by the Recovery Officer whereby he had ordered sale of certain shares of respondent No. 4 in the property owned by a partnership firms. This appeal is directed against the said order dated 11.6.2012.

Short and crisp question raised in the present appeals is purely legal to the effect that share in the partnership concern could not be attached but only interest of the partner in the property of a partnership was liable to be attached or sold etc.

Facts giving rise to these appeals, in brief, are that Respondent No. 4. Mr. Subhash Chand Jain had availed some cash facilities from the respondent State Bank of Bikaner and Jaipur on behalf of M/s India Electric Limited. It is stated that this company had no concern whatsoever with M/s Navin Vikrai Kendra, M/s Delhi Vanaspati Syndicate and M/s Bharat Supply Company, partnership firms in which Mr. Subhash Chand Jain was a partner. Mr. Subhash Chand Jain had only 10%, 7% and 16% share in these partnership firms respectively. As per the bank, the repayment of the loan became irregular and so respondent bank initiated recovery proceedings against the aforesaid borrower by filing O.A NO.52/1994. This O.A. was allowed in favour of the bank on 20.8.2013. R.C. for Rs.28,64,164.37 was issued. The bank accordingly filed an execution petition before the Recovery Officer.

The appellants would allege that the loan was secured by the personal guarantees of the borrowers and the guarantee of Mr. S. C. Gupta. The judgement-debtor Mr. S.C. Gupta in connivance with the bank and Mr. Subhash Chand Jain had made a representation before the certificate holder bank for proceeding with the existing fixed asset of the primary borrowers Le. Late Ravi Jain and Mr. Subhash Chand Jain and gave details of various properties including that of partnership firm in which Mr. Subhash Chand Jain was a partner. Appellants would urge that Mr. S.C. Gupta had wrongly detailed the assets of the partnership firms as the asset of Mr. Subhash Chand Jain. The respondent bank without even verifying and investigating the facts initiated execution proceedings against the said assets. Certificate-holder bank did not claim anything from the guarantors. It also did not make any other effort to ascertain or recover the amount from the personal assets of the judgment-debtors. The bank instead simply chose to proceed with the execution proceedings against the assets of the partnership firms. It is also urged that one of the properties, namely, 8-525, Friends Colony, New Delhi, which belonged to the primary borrowers was discharged during the execution proceedings. Based on these facts, the Recovery Officer was pleased to attach the assets of the said partnership firms vide his order dated 15.4.2005 as fixed assets of Mr. Subhash Chand Jain. As per the appellants, Mr. Subhash Chand Jain was only one of the partners of the said firms. Not only that, the Recovery Officer on 21.5.2010 also ordered the auction of the property and fixed 7.7.2016 as the date of auction.

Aggrieved against the above order, one of the partners Mr. Naresh Chand Gupta filed objection which were dismissed in default on 12.11.2009. He filed a review application on 28.5.2010. The Recovery Officer then stayed the auction proceedings on 7.6.2010. The appellants along with other partners then filed objection against the attachment order and sale of the properties. It is urged that the properties are owned and possessed by the firms M/s Navin Vikrai Kendra, M/s Delhi Vanaspati Syndicate and Bharat Supply Company, which are registered with the Registrar of Firms at Delhi. The said properties were purchased by those firms.

It is alleged that the dispute arose amongst the partners and business started to suffer. These firms are said to be no more in any sound financial condition and even stopped business in the year 2000. It is averred that the firms were only accumulating liabilities under various heads and M/s Navin Vikrai Kendra and M/s Delhi Vanaspati Syndicate were dissolved by way of notice from one of the partners on 4.8.2004. Even a suit was filed for rendition of account and after settlement of accounts a dissolution deed was prepared. Respondent No. 4 allegedly did not get any share. The assets and the liabilities of the said firms statedly were transferred to the appellants Sriram & Sons, HUF and to Smt. Raj Bala and Mr. Sharad Gupta having share of 33%, 34% and 34% respectively.

The objections raised by the appellants were decided by the Recovery Officer on 2.6.2011. It is urged that while allowing the objections in part, the Recovery Officer erroneously and without considering the legal issues upheld the attachment of the shares of Mr. Subhash Chand Jain in the partnership firms. Aggrieved against this order, the appellants filed an appeal before the DRT which has now upheld the order passed by the Recovery officer. Claiming that the Recovery Officer as well as the DRT has seriously erred in attaching the share of a partner, which would not be legally sustainable, the present appeals have been filed.

Notice was issued and the reply has been filed. The respondent has tried to justify the order.

I have heard the counsel for the parties. The sole submission made by the learned counsel for the appellants is that the share of a partner in a partnership firm could not have legally been attached and what could be attached is the interest and not the share. In support of his submission, the counsel has referred to various judgments starting from Full Bench decisions of the Lahore High Court in the case of Ajudhia Pershad Ram Pershad vs. Sham Sundar & Ors. : AIR 1947 Lah13. While considering the question raised before it, the Full Bench of the Court had referred to a quotation from the work of Lindley where the following exposition of legal position is given:-

What is meant by the share of a partner is his proportion of the partnership assets after they have been all realized and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is and this only, which on the death of a partner Passes to his representatives, or to a legatee of his share; and which on his bankruptcy passes to his trustee.

The Court has then notice that this view noted above is based on judicial decision and is in accordance with law and rules contained in the Partnership Act, 1890 and corresponding rules in the Indian Partnership Act, 1932. As is noticed, section 14 defines the expression 'Property of the firm', which subject to the contract between the partners, is declared to include all property and rights and interests in property originally brought into the stock of the firm, or acquired: by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Section 15 declares that, subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purpose of business. The Court has viewed that this precludes the possibility of any of the partnership property being, or being deemed to be, separate property of any partner, so long as the partnership subsists. In other words, while partnership is inexistence, no partner can point to any part of the assets of the partnership firm as belonging to him alone. Noticing section 32 of the Act which provides for retirement of a partner from the partnership, the Court has observed that the Act makes no provision for the separation of the share of the retiring partner and the intention may be that this shall be determined by agreement between the partners. Every partner has a right to have the entire property of the partnership applied in payment of the debts and liabilities of the firm, in order to discharge himself from the liabilities attaching to him as partner. It follows that no partnership property can be separated and appropriated to the parties which is not the purpose of the partnership as such, without the consent of the existing partners. As is noticed by the Court, the situation is different only in case of a minor partner dealt with in section 30(i) of the Partnership Act. The partner who is not a minor and has the agreement of the other partners to severance of his share, can only secure separate possession of his share by seeking dissolution, and in such a case the rules laid down in sections 46, 48 and 49 would become applicable. As per these sections, the debts and liabilities should be met first out of the firm's property and thereafter the assets should be applied in rateable payment to each partner of what is due to him first on account of advances as distinguished from capital, and secondly on account of capital, the residue, if any, being divided rateably among all the partners. The Court accordingly has held that the share of each partner is, in the word of Lindlay, his proportion of the partnership assets after they have been all realized and converted into money and all the partnership debts and liability have been paid and discharged.

The Full Bench in the case of Ajudhia Pershad Ram Pershad's case (supra) has also considered' the question regarding transfer of such interest by a partner to an outsider as provided in section 29 of the Partnership Act. It is observed that the rights of the transferee are on a distinctly lower plane than those of his transferor. Such a transferee is not entitled to interfere in the conduct of the business or to require-accounts or to inspect the books of the firm and he must be content to receive a share of profits calculated on the basis of accounts agreed to by the existing partners, which he is bound to accept. It is only if the firm is dissolved that he is entitled as against the remaining partners to receive the share of the partnership property to which his transferor was entitled as well as to ask for an account, and that only from the date of dissolution. Section 29 deals only with voluntary transfers and does not in terms apply to a transfer under Order XXI rule 49 CPC. The Court has gone on 'to observe that the that the omission be reasonably supplied by application thereto of the principles contained in section 29. In this regard, the Full Bench referred to the reasoning of the Court of Appeal in the case of Brown, Janson & Co. vs. Hutchinson & Co., (1895) 2 Q.B. 126, where section 31 of the English Partnership Act corresponding to section 29 of the Indian statute was construed in relation to section 23 of the English Act which corresponds to Order XXI rule 49 CPC. A creditor had obtained a charging order attaching to the interest of his judgment-debtor in a partnership in which the said judgment-debtor was a partner and had obtained a further order directing the partnership to deliver to such creditor an account of the share of the debtor in the partnership. Rigby L.J. on construction of section 31 of the English Act has observed as under:

This case depends upon S. 23, sub-s. (2) partnership Act, 1890. The latter part of that sub-section provides that the Court or a Judge may direct all accounts and inquiries, and give all other order and directions which might have been directed or given if the charge had been made in favour of the judgment-creditor by the partner, or which the circumstance of the case may require. Reading the subsection with S. 31, sub-s.(1), which provides that an assignment by a partner of his share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to require any accounts of the partnership transactions, I think it plain that the intention of the Legislature was that, under ordinary circumstances; in dealing with a case under sub-s. (2) of S. 23, the analogy of an assignment by a partner of his share should be adhered to.

Concurring with above view of Lord Justice Rigby, the Full Bench has held that the Indian legislature may be held to have imported the provisions of sections 23 and 31 of the English Partnership Act into the Indian law to have intended that the provisions of section 29 should apply also by analogy in case of voluntary transfer under Order XXI rule 49 CPC.

Counsel has then made reference to another Full Bench decision of the Hon'ble Andhra Pradesh High Court in the case of Addanki Narayanappa & Ors. vs. Bhaskara Krishnappa & Ors., : AIR 1959 A.P. 380. The Court in this case has considered the position in law of the rights of a partner in a partnership. It is observed that so far as the English law is concerned, it may be taken to be settled that a partner has no interest in "Partnership Reality" as distinguished from the money arising from its sale. Rule adopted by the English Courts is that the real estate intended by the partners to constitute a part of the partnership property or treated by them as belonging to the partnership is regarded in equity as converted into personality for all purposes, and also for the settlement of the claims of the partners inter se. As per the Full Bench, the law in India is not different. Sections 14 and 15 of the Indian Partnership Act speak about what would constitute the property of the firm and declare that such property shall be held and utilized for the purpose of partnership thereby indicating that so long as the partnership continues no part of the assets of partnership could be regarded as belonging to any individual partner. It is further held that no part of the partnership asset could be utilized for the purpose other than that of the partnership. A partner, therefore, seeking to get his share could not get his share in specie in the movable and immovable properties but only after the assets have been converted into money, debts and liabilities discharged and it only in the residue that he could get his proportionate share. The Court has further observed that the statute enjoins this process being gone through before a partner gets a share in the assets of the partnership and it is governed by sections 46, 48 and 49 of the Partnership Act. As per the Court, it would therefore follow that partner cannot predicate of a definite share in immovable property which he could transfer or give up. Interest of a partner in partnership assets can not be regarded as a right or interest in immovable property. This position of law is approved by the Hon'ble Supreme Court when this case went before the said court. This is reported as Addanki Narayanappa & Anrs. Vs Bhaskar Krishnappa & Ors. : AIR 1966 SC 1300. The Supreme Court after making reference to sections 14, 15, 29, 30 and Sections 31 to 38 has held that from perusal of these provisions, it would be abundantly clear that whatever may be the character of the property which is brought by the partner when the partnership is formed or which may be acquired in the course of business of the partnership, it becomes the property of the firm and what a partner is entitled to his share in profits, if any, accruing etc. 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 exclusive property of person who brought it in. It would be trading asset of partnership in which all partners would have interest in proportion to their share in joint venture of business of partnership.

Reliance is also placed on another Full Bench decision of the Allahabad High Court in the case of Manohar Das & Ors. vs. The Board of Revenue, U.P., : AIR 1971 All 523. The Full Bench in this case has relied upon the Full Bench decision of Lahore High Court Ajudhia Pershad Ram Pershad's case (supra) and accordingly has held that the share of partner, upon winding up on dissolution of firm, is only in the residue which is left after the liabilities in the various clauses of section 48 have been paid out. Payment of capital and advances to a partners is not out of the residue. The amount paid as capital investment to a partner shall have to be deducted in order to find the value of the residue; because the value of the partner's share is only his proportion of the residue.

The counsel has also referred to the judgement of S.V. Chandra Pandia & Ors. vs. S.V. Sivalinga Nadar & Ors, : (1993) 1 SCC 589. After making reference to various sections of the Partnership Act, the Hon'ble Court has observed that these provisions make it clear that regardless of the character of the property brought in by the partners on the constitution of the partnership firm or that which is acquired in the course of business of the partnership, such property shall become the property of the firm/and an individual partner shall only be entitled to his share of profits, if any, accruing to the partnership from the realization of this property and upon dissolution of the partnership to a share in the money representing the values of the property. It is well-settled that the firm is not a legal entity and has no legal existence, it is merely compendious name and hence the partnership property would vest in all the partners of the firm. The Court has observed that accordingly each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone. By virtue of the implied authority conferred as agent of the firm his action would bind the firm if it is done to carry on, in the usual way, the business of the kind carried on by the firm but the act or instrument by which the firm is sought to be bound must be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm. The Court has finally held that his right is merely to obtain such profits, if any, as may fall to his share upon the dissolution of the firm which remain after satisfying the liabilities set out in the various sub-clauses (i) to (iv) Clause (b) of Section 48 of the Act.

On this basis, the counsel would contend that no partner would have a definite share in the partnership firm and all properties would be owned by the partnership, as such an individual partner is only entitled to the interest or the profits which are to be calculated on dissolution or otherwise after settling all the liabilities. Accordingly, the counsel would contend that the Recovery Officer as well as the DRT was not legally justified in attaching the share of a partner, as such a share remains indefinite and only the profit or interest of the partners in the firm is that may be available to the partner for any purpose of attachment etc.

The counsel for the respondent, on the other hand, would urge that the aforesaid three firms are close-knit family members or friends and these partners are in collusion with each other to delay and defeat the recovery of the dues of the respondent bank. The counsel would say that the order passed by the Recovery Officer as well as the Tribunal below is perfectly legal. As per the respondent, it is neither share of the partner in the firm nor share in the property held/owned by the partnership firm but is property of respondent No. 4. The judgement-debtor being a partner in the partnership property has been ordered to be attached and sold In the R.C. The counsel has made reference to the judgements in the case of M/s Raja Theatre.vs. M/s Selvam Financiers & Ors., reported in, Laxmidhar Behera vs. Bansidhar Khatei, reported in, Jagat Chunar Roy & Ors. vs. Iswar Chunder Roy, reported in, Commissioner of Income-tax vs. Diza Electricals and A.L.A. Firm vs. Commissioner of Income-tax, Madras1. Though the copies of the said judgment have not been placed before me, but as per, the counsel, it has been viewed in these judgments that the interest of a partner in a partnership firm is movable property and in that event Order XXI rule 49 CPC is attracted. This provision talks of attachment of partnership property. As per order XXI rule 49(1), the property belonging to the partnership shall not be attached or sold in execution of decree other than the decree passed against the firm or against the partner as such. Order XXI, rule 49(2) prescribes that the court on application of a decree holder against a partner, may make an order charging the interest of such partner in the partnership property and profits with payment of the amount due under the decree, and may, by the same or a subsequent order, appoint a receiver of the share of such partner in the profits and of any other money which may be coming to him in respect of the partnership, and direct accounts and inquiries and make an order for the sale of such interest or other orders as might have been directed or made if a charge had been made in favour of the decree holder by such partner. As per the counsel, in M/s Raja Theatre's case (supra), the Madras High Court has held that right, title and interest in the partnership to the extent of 30% and such right title and interest of the first respondent was liable to be attached.

In my view, what these judgments provide is not the attachment of the share. It is only the right, title and' interest of the partner to the extent of his share which has been held liable to attachment. In the impugned order, the Recovery Officer had directed 10%, 7% and 16% shares in the properties, i.e, Shop No. 3, Karbala Market, New Delhi, 1817, Khari Baoli, Delhi' and Shop No. 11, CSC Market, Shanti Niketan, New Delhi to be attached which was assumed to be the share of judgement-debtor. This order has been upheld by the Tribunal below. The judgment relied upon by the counsel for the appellants would clearly show that no partners has any definite share in a property owned by the partnership' firm, and individual partners shall only be entitled to his share from the realization of the property and upon dissolution of the partnership to a share in the money representing the values of the property. Even the Hon'ble Madras High Court has only attached the interest which would ultimately be realized from the share of the partner and not the share as such. The Full Bench of the Lahore High Court has clearly considered all these questions and this judgement appears to be holding the field till date. The share of each partner, as noticed by the Court, is his proportion of the partnership assets after they have been all realized and converted into money and all the partnership debts and liabilities have been paid and discharged. As per the Court, the transfer under Order XXI rule 49 CPC where a creditor had obtained a charging order attaching the interest or the judgement debtor in the partnership is what he can claim to deliver to such creditor on account of his share in the partnership. The legal position that would emerge is that it is only the interest of the partner in the partnership firm which would be liable to be attached and not the share as such, because such a share remains indefinite where the entire property being that of the partnership firm. In view of the above position, the order passed by the DRT upholding the attachment of the share of respondent No. 4 in the partnership firms may need to be corrected to the attachment of the interest determined in the manner as would emerge from the law laid down by the judgments noticed above. It would be appropriate to remand this case back to the Tribunal to reconsider this position and to pass an appropriate order in accordance with jaw, as rights of the bank to seek recovery of its dues cannot be forfeited on such pleas which otherwise appears to be a minor irritant and is bound to be corrected in accordance with the legal position.

The appeals are accordingly disposed by remanding the cases to the Tribunal below for passing a fresh order in accordance with law.