Nagarchand Goenka vs Surendra Nath Sarkar

Ray, J.—This is the defendant''s appeal against an order appointing a Receiver of a partnership business constituted under circumstances hereafter described. This order was passed on the application of the plaintiff in a proceeding u/s 20, Arbitration Act (10 [X] of 1940). The facts giving rise to the cause of action for the plaintiff-respondent''s suit are shortly these: The plaintiff, Surendra Nath Sarkar, is the sole and absolute proprietor of several business concerns known as the Galgalia Rice Mills at Islampur, P.S. Islampur and the Jute Presses at Galgalia, Thakurganj and Islampur, District Purnea. The defendant Nagarchand Goenka is a big business man being the proprietor of several other concerns. For better management of the plaintiff''s business, the parties entered into a partnership on and from 9th February 1943, for a. period of three years. The terms of the partnership were later incorporated into a deed which was fully executed and registered by both parties on 4th June 1943, and the firm name and style of the partnership was adopted as Galgalia Rice and Oil Mills and N.G. Rice Mills. According to the terms of the partnership, the present appellant was left in the sole and absolute charge of the business being entirely responsible for the efficient and smooth management thereof, and thus became the managing partner. By the terms of the'' said partnership the respondent was not ordinarily to interfere in the management of the partnership firm.

Some very important terms of the partnership relevant for the purposes of this case are set out herein below: (a) That each of the partners was to contribute Rs. 1,51,000 towards the working capital of the business within a prescribed time; (b) That the managing partner Goenka would get a budget estimate duly prepared and have the same approved by the plaintiff; (c) That Goenka would furnish Sarkar every month with abstracts of accounts; (d) That Goenka should every year prepare a profit and loss statement of the business and submit the same to Sarkar for scrutiny; (e) That the accounts of the firm should be duly adjusted and audited within the time mentioned in the deed; (f) That none of the partners should utilise any asset or goodwill of the firm in connexion with any other business of similar nature either on their own account or on behalf of any other person, firm or company; and that according to para. 20 of the partnership deed, it is provided that if any of the partners committed any breach, non-observance or nonperformance of any of the terms of the partnership, the other partner should give him notice requiring him to make amends within a month of the receipt thereof, and in case the breaches, etc., are not remedied, the partner aggrieved might, notwithstanding anything contained in the deed, forthwith determine the partnership by notice in writing and on such determination the firm should be deemed to stand dissolved.

In pursuance to the arrangement between the parties, the plaintiff paid Rs. 1,51,000 as agreed upon towards, the fund for capital outlay of the business. The defendant appellant entered into management without any interference by the plaintiff-respondent. Sometime after the plaintiff came to discover that the defendant did not comply with the partnership covenants. This led to acute differences between the parties in consequence whereof the plaintiff by a notice dated 13th November 1944, called upon the defendant to make amends for his defaults in observance of the terms of the partnership within the prescribed time.

It is then alleged that notwithstanding his notice, the appellant failed to make necessary amends, and hence the respondent exercised his right of determining the partnership by a written notice, and that the partnership, therefore, stands dissolved. The plaintiff thereupon started the proceeding. Thinking that he could not institute a suit for dissolution of partnership and winding up of the business under the provisions of the Indian Partnership Act inasmuch as according to Article 26 of the deed of partnership it was agreed as between them that any dispute or difference. which may arise between them with regard to the construction, meaning and effect of these presents or any part thereof or respecting the accounts profits or losses of the business or the rights and liabilities of the partners under these presents or the dissolution or winding up of the business or any other matter relating to the firm or its affairs, shall be referred to arbitration in accordance with the provisions of the Arbitration Act or any other law for the time being in force. Along with the petition for reference to arbitration which has since been registered as a plaint, the respondent filed an application for appointment of a Receiver to take charge of the business pending disposal of the case and the learned Subordinate Judge appointed a Receiver by his ex parte order dated 13th January 1945. The appellant on receipt of a-notice later appeared and put in his objection against such appointment, and the learned Subordinate Judge after hearing both parties has passed the order under appeal on 9th March 1945. The defendant has, therefore, preferred this appeal.

The following contentions were urged before us, viz., (1) that in a proceeding under the Arbitration Act the Court has no jurisdiction to appoint a Receiver until actual reference to arbitration is made, or, in other words, until the arbitration actually commences; (2) that there could be no dissolution of the partnership except by a regular suit under the Partnership Act and (3) that the facts and circumstances of the case do not make out sufficient cause for holding that it is just and convenient to appoint a Receiver.

I shall take up the last ground first. Mr. Baldeo Sahay appearing for the appellant urges that there is no finding recorded by the Subordinate Judge of any dishonest conduct on the part of his client in relation to his management of the business, nor is there any finding that continuance of the management in his hands will tend to deteriorate, destroy or otherwise cause any irreparable injury to the business, and that in any view of the case, there being a clause in the deed of partnership by which the aggrieved partner, namely, the respondent can be compensated by damages, there is no good ground for dispossessing the appellant from the management of the business. The appellant being a very substantial man of great business dexterity, the business is safe in his hands and also the interest of the respondent. He further contended very strongly that the appointment of a practicing pleader as Receiver of business concerns like those of the present is simply unwise and detrimental to the interest of his client who, having invested Rs. 1,51,000 as a part of his capital outlay for the management of this business, expects good outturn.

True it is that the parties have not gone into evidence before the Subordinate Judge, nor has he given any definite finding with regard to the allegations and counter-allegations of the parties in relation to the charges levelled against the appellant''s management. And the Subordinate Judge, relying upon the admissions of the parties and certain documents the genuineness of which has not been challenged either before him or before us, has come to his own conclusion that prima facie there are sufficient grounds to prove that it would be dangerous to allow the appellant to continue in charge of the business. He, therefore, holds that it is nothing but just and convenient to appoint a Receiver under the circumstances of this case. I entirely agree with his conclusions. Non-observance of certain very important terms in the deed of partnership such as (1) failure to prepare a budget and to secure approval thereof by the respondent, (2) default in submitting monthly abstracts of accounts, (3) failure to prepare annual statement of profit-and loss, (4) omission to get the accounts audited by the auditor named in the partnership deed is admitted by the appellant, but he gives some reasons which are advanced by way of explaining the breaches of covenants, namely, that on account of war conditions and the mills being under the absolute control of the Government and their being engaged to perform Government contracts in purchasing paddy and supplying milled rice, the conditions could not be observed. The explanation is not at all convincing. I am inclined to think that, on the contrary, if the entire business carried on by the firm is controlled by the Government agencies, there should be no place for black marketting and there should be no uncertainty about the details of the'' business and it would be rather easier to fulfill the terms and conditions of the partnership deed. In a big business concern like this non-observance of the above conditions raises grave suspicion as to the honesty of the partner in charge. It would not be profitable for the appellant, so far as his chance of success before the arbitrator is concerned that the Court should come to any definite finding at this stage as to the charges laid at his door by the respondent. Nor is it advisable to convert a summary proceeding like the present one into a regular trial.

Besides mere breaches and non-observance of the terms of the partnership, there are certain charges of dishonesty too against the appellant. I will mention only one such as will be quite sufficient for the purpose of coming to a decision in this appeal. It is said that the manager of the Goenka Company, a business concern belonging to the appellant, in his own individual capacity having nothing to do with the present partnership concern, took on giving a receipt 50,000 bags of rice from the firm Galgalia Rice Mills. The receipt is in favour of the manager of the Galgalia Rice Mills, but no price is paid to them. The respondent having come to know of this started corresponding with the Goenka Company for payment of the price, and the reply was that the receipt had been granted under a misconception, and no rice had in fact been taken from the Galgalia Rice Mills. Mr. Baldeo Sahay urges that it is impossible that 50,000 bags of rice could be taken from Galgalia railway station without there being permits for wagons and without there being other accounts, of the railway company showing the transport and that the rice concerned was in fact purchased by the Goenka Company from various other places and the accounts of the mills do not show that in fact the rice was so taken. Mr. Sahay fails to notice that the entire business being under the absolute control of his client and the accounts being of his own making and the place, time and manner of transport being quite unknown to the respondent, it was not possible for him particularly, at this stage, and in a summary proceeding like this, to prove more than producing the receipt of the manager of the Goenka Company the genuineness of which is not challenged either in the Court below or here before us. It is needless to come to any definite finding as to whether the rice had in fact been taken without payment of price from the Galgalia Rice Mills. This is a matter which will be dealt with by the arbitrator in course of winding up of the partnership business. But it remains quite certain that the transaction is shrouded in mystery and the incident lends a great support to the apprehension of the respondent that the business will deteriorate irreparably to his utter loss if the management of the defendant continues.

The apprehension that the business may suffer to some extent in the hands of practising lawyer on account of his absence of business skill may not be quite unfounded, but the redeeming feature in this case is that it is freely admitted at the bar that the mills are employed solely in turning out contracts of the Government, and the business, therefore, being of a certain and stereotyped character does not require much skill. It is also to be borne in mind that in view of the very strange feelings between the parties, it would be unsafe, so far as the interest of the respondent is concerned, to put the mills in charge of the appellant who is only a working partner and has no interest in the mills, machines, machineries, buildings, structures etc., which it is alleged are worth about 5 lakhs. In my view, there fore, so far as the facts and circumstances of this case go, it is nothing but just and convenient to appoint a Receiver.

I shall now deal with the point of law raised by Mr. Baldeo Sahay which if correct will go to the very root of the matter. He challenges the Court''s jurisdiction to appoint a Receiver at this stage of the proceeding. He contends that it is according to Section 41(b), Arbitration Act (10 [X] of 1940) that the Court shall have, for the purpose of, and in relation to arbitration proceedings, the same power of making orders in respect of any of the matters set out in Schedule 2 as it has for the purpose of, and in relation to, any proceedings before the Court. The appointment of a Receiver being enumerated in Clause (4) of Schedule 2, he argues that the power to appoint a Receiver accrues only after the proceeding becomes an arbitration proceeding within the meaning of this section. According to him a proceeding becomes an arbitration proceeding not with the commencement of filing an application u/s 20 of the Act but only after notice of such an application is given to all parties concerned, and where no sufficient cause is shown, the Court orders an agreement to be filed and makes an order of reference to the arbitrators appointed by the parties or otherwise. For this contention of his he relies upon Sub-sections (3), (4) and (5) of Section 20 and lays stress upon the word "Thereafter" with which Sub-section (S) begins. Sub-section 5 reads:

Thereafter the arbitration shall proceed in accordance with, and shall be governed by, the other provisions of this Act so far as they can be made applicable.

"Thereafter" has certainly reference to the previous Sub-clauses which in substance say that as soon as an application in writing is filed u/s 20 of the Act, it shall be numbered and registered as a suit between one or more parties; on such an application being made, the Court shall direct notice thereof to be given to the parties concerned to show cause Within the time specified and when no cause is shown a reference is made to the arbitrators. This is a contention with which I am unable to agree. This amounts to putting a very narrow construction on the words "arbitration proceedings" in Section 41(b). The proceeding is initiated according to Section 20 by the filing of an application in writing when the conditions requisite in Sub-section (1) of Section 20 arises. That Sub-section leaves no room for doubt that the object of the proceeding is to enforce an agreement for arbitration with respect to the subject-matter of the agreement or any part of it in case of differences or disputes between the parties.

Therefore, it is a proceeding for arbitration from the very start. The word "arbitration" occurring after the word "thereafter" in Sub-section (5) means the arbitration by the arbitrator or arbitrators appointed in accordance with the provisions of the preceding Sub-section (4). Furthermore, there is a great danger in putting such a narrow construction upon the words "arbitration proceedings." Because if the contention of Mr. Baldeo Sahay is accepted, the Court will be completely powerless to pass any order for the preservation or safety of the properties in dispute involved in the subject-matter of the agreement for arbitration, and the opposite party may take his own time in showing cause why the agreement should not be filed and reference should not be made to the arbitrators by which time the entire property may be completely wasted. In that case there will be no point in empowering the Court either to appoint an arbitrator or to pass an order of injunction by way of saving the property concerned long after the proceeding began. I am, therefore, of opinion that this contention of the appellant''s learned advocate has no force.

The other contention of law is that the plaintiff in order to attract the provisions enabling him to get a Receiver appointed during the pendency of the suit should have filed a suit for dissolution of partnership under the Partnership Act. He, not having done so, cannot get the Court exercise the power of appointing a Receiver. The fate of this contention depends upon that of the other one that I have just now dealt with. Besides, it is noticeable that the parties having agreed to refer their dispute about, amongst other matters, dissolution of the partnership, any suit except through the machinery provided in the Arbitration Act is barred u/s 34, Arbitration Act. The present proceeding is one for dissolution of the partnership through the arbitration proceedings controlled by the Court. The distinction between this suit and a suit under the Partnership Act for dissolution is a mere matter of form and not of substance. This contention, therefore, also fails.

It has further to be noticed that the contracted partnership being for three years only, it is to terminate automatically by 9th February next, and therefore the balance of convenience is in favour of maintaining the present state of things. Any change for a short period may prove injurious to the business or in the long run complicate matters relating to termination of partnership.

In the result, I would dismiss this appeal with costs and uphold the order of the learned Subordinate Judge.

Fazl Ali, C.J.

I agree.