Does the winding up of the partnership firm amounts to liquidation of the partnership firm

Cause Title : R.Subbulakshmi (deceased) vs R.Venkitapathy (deceased), O.P.Nos.40 of 2019, Madras High Court

Date of Judgment/Order : 10.08.2023

Corum : Justice Krishnan Ramasamy

Citied: 

1. Vimal Kishor Shah and others vs. Jayesh Dinesh Shah and others reported in (2016) 8 SCC 788;
2. A.Ayyasamy vs. A.Paramasivam and others reported in (2016) 10 SCC 386;
3. Booz Allen and Hamilton Inc., vs. SBI Home Finance Limited and others reported in (2011) 5 SCC 532;
4. T.A.Kadeeja vs. R.K.Manjusha in CRP.No.439 of 2016 (B);
5. Express Newspapers Pvt. Ltd., and others vs. Union of India and others reported in (1986) 1 SCC 133;
6. Indian Express Newspapers (Bombay) Private Limited and others vs. Union of India and others reported in (1985) 1 SCC 641;
7. Basheshar Nath vs. Commissioner of Income Tax, Delhi and another reported in AIR 1959 Supreme Court 149;
8. Justice K.S.Puttaswamy (Retd.) and another vs. Union of India and others reported in (2017) 10 SCC 1;
9. Bawana Infra Development Pvt. Ltd., vs. Delhi State Industrial & Infrastructure Development Corporation Limited (“DSIIDC”) reported in 2023 SCC OnLine Del 1569;
10. J.G.Engineers Private Limited vs. Union of India and another reported in (2011) 5 Supreme Court Cases 758;
11. M.O.H.Uduman and others vs. M.O.H.Aslum reported in (1991) 1 SCC 412;
12. Booz-Allen & Hamilton Inc vs. SBI Home Finance Limited and others reported in (2011) 5 SCC 532;
13. Ashok Kumar Malhotra and others vs. Kasturi Lal Malhotra reported in MANU/PH/0136/2012;
14. J.B.Dadachanji and others vs. Ravinder Narain and others reported in MANU/DE/0867/2002;
15. V.H.Patel & Company and others vs. Hirubhai Himabhai Patel and others reported in (2000) 4 SCC 268
16. Valliammai Achi and others vs. KN PL.V.Ramanathan Chettiar and others reported in AIR 1969 Madras 257
17. Khandervali Sahib and others Vs. Gudu Sahib and others reported in (2003) 3 SCC 229;
18. S.V.Chandra Pandian vs. S.V.Sivalinga Nadar reported in (1993) 1 SCC 589;
19. Pannalal Paul vs. Padmabati Paul reported in AIR 1960 Cal P 693

Background

The issue is related to a newspaper started in 1951. The ownership was with a partnership firm and various people were inducted as partners over time. The said newspaper grew and several editions from various cities were added. When original editor passed away and disputes after between the partners of the firm after his demise and with regard to the same, several suits were filed between the partners before various Courts. Subsequently, as per the direction of the Madras High Court, batch conciliations were held between the partners and a memo of compromise was filed by the parties, in which they had agreed to refer all the disputes, which arises out of partnership deed dated 23.03.1997, to the Arbitral Tribunal constituted by three Arbitrators. All the 5 claimants had filed their claims and counter claims before the Arbitral Tribunal and completed their pleadings. Based on the said pleadings, the Tribunal had framed 45 issues on 18.07.2007. At this juncture, the fifth claimant had filed a petition, stating that he had issued a notice of dissolution under Section 43 of the Partnership Act, 1932  to which the fourth claimant objected. However, vide common order dated 23.07.2012, the Tribunal had decided that the Tribunal has jurisdiction to deal with the issue of dissolution, since the said notice falls within the scope of the aforesaid memo dated 18.01.2007, which was signed by all the claimants and based on which the disputes were referred to Arbitration. The Tribunal passed several interim orders including the third which was regarding the winding up of the partnership firm.

This appeal was filed by the second, third and fourth claimants challenging the interim award.

Judgment

For the purpose of deciding this case, the Court framed the 11 issues, which were all based on the submissions made by the respective learned Senior counsel for the respective parties. Among the issues addressed was the question, "Whether the winding up of the partnership firm amounts to liquidation of the partnership firm? If so, whether the Arbitral Tribunal can deal with the issue of winding up and act as Liquidator to liquidate the assets and liabilities of the partnership firm?"

ANSWER TO THE ISSUE:

After dissolution of the partnership firm, the next step is winding up of the affairs of the partnership firm. A reading of the provisions of Section 45 of the Partnership Act makes it clear that after dissolution, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before dissolution, until public notice is given of the dissolution. Section 46 of the Partnership Act, which deals with dissolution of the partnership firm, states that every partner or his representatives is entitled, as against all the other partners or their representatives, to have the property of the firm applied first in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. For the purpose making such payment of the debts and liabilities, the liquidator is supposed to called for claim from third parties. if any claim is called for in the course of winding, all the claimants will file their claim, thereafter, the same will be adjudicated by the liquidator.

Section 48 of the Partnership Act itself mandates the method of distribution of assets of the dissolved firm, wherein the payment of the debt to the third parties will get priority after the settlement of losses. For settling all the debts, the person, who is liquidating the assets, has to call for the claims, where the third party's interest is involved and certainly the Arbitrators cannot decide the same. 

In the course of liquidation, at any cost, the Liquidator of the partnership firm cannot dispense with calling for the claims from the third parties for settling the same. This has to be carried out mandatorily even if the balance sheet of the firm shows no third party claims. If any third party claims are received, certainly, the said third parties cannot address their grievances before the Arbitrator, since they are neither the parties to the arbitration agreement nor the partners of the firm. When the interest of third parties, who are not parties to the agreement, is involved, certainly the Arbitrator cannot decide the dispute, since it is not permissible for the Arbitrator to deal beyond the scope of the partnership deed.

Therefore since the third party interest is involved at large, the Arbitrators cannot act as Liquidator to liquidate the Assets of the firm.