R.D. Alloys and Another vs Ram Narain Garg and Others

V.S. Aggarwal, J.—The present revision petition has been filed toy Shri Prem Sagar Garg himself and also as partner of M/s R.D. Alloys, Jagadhari. It is directed against the order passed by the learned Additional Senior Sub Judge, Jagadhari dated 8.8.1995. By virtue of the impugned order the learned Additional Senior Sub Judge had allowed the application filed by the respondents-plaintiffs for appointment of a receiver. The trial Court directed that parties should file a list of persons who can be considered for appointment as receiver of the business. The appeal filed by the petitioners had been dismissed by the learned Additional District Judge, Jagadhari on 1.5.1997. Hence, the present revision petition.

The relevant facts are that respondents-plaintiffs had filed a civil suit for dissolution of partnership and rendition of accounts. Petitioner No. 1 and plaintiffs 1 and 2 (respondents 1 and 2 in the revision petition) are real brothers. Respondents No. 3 is their mother. Ravinder Kumar Garg was also one of the plaintiffs. They were all carrying on the business under the name and style of M/s R.D. Alloys. Subsequently, Ravinder Kumar Garg had retired from the partnership on 1.4.1984 and respondent No. 3 had been inducted as a partnership in his place. The share of all the partners was 25 per cent.

Respondents'' case was that terms and conditions of the old partnership were to be remained unaltered. Petitioner No. 2 obtained their signatures on certain blank papers for getting the partnership deed typed. Petitioner No. 2 incorporated certain clauses particularly 9, 13 and 15 in his favour. In this process he manipulated a partnership deed which was alleged to be void ab initio and contrary to the principles of natural justice, as well as the spirit of partnership. Subsequently, petitioner No. 2 stopped the entrance of the respondents in the business premises. The respondents-plaintiffs were not allowed access to the account books. They were completely ousted from the partnership business. Petitioner No. 2 was stated to have forged and manipulated the accounts. An apprehension was expressed that petitioner No. 2 may remove the records, machinery and other assets of the partnership. Accordingly, it was prayed that during the pendency of the suit an receiver be appointed to take charge of the firm alongwith accounts and bank accounts etc. He should take over the control of the management of the firm.

The civil suit as well as the application filed under Order 40, Rule 1 CPC (for appointment of receiver) was contested. It was admitted that Ravinder Kumar Garg had retired from the partnership. It was denied that under the new partnership deed all terms and conditions of the old partnership were to remain unaltered. The assertion of the respondents that their signatures were obtained on blank papers were controverted. As per the petitioner he had brought into existence a small scale unit under the name and style of petitioner No. 1. It was a sole proprietorship concern. To settle respondents 1 and 2 and Ravinder Kumar Garg, they were taken as partners. They were sleeping partners. After Ravinder Kumar retired, the mother of the petitioner was inducted as a partner. It had been agreed that only petitioner No. 2 would conduct the business. It had also been agreed that respondents shall not be entitled to stop the working of the partnership even if some differences arrived at between them. Respondents were stated to be creating troubles in the day to day functioning. They had written to the Post Master, Jagadhari for stopping the mail to the firm. The respondents even made complaints to the Bank and other authorities to cause irreparable loss to the petitioner. It was alleged that machinery of the firm had been hypothecated with the financial institutions and there is no ground to appoint the receiver.

The learned trial Court held that paragraphs 9, 13 and 15 of the alleged partnership deed are arbitrary and against the principles of partnership business and accordingly it was further held that it is the respondents who are holding majority of the share in the partnership. They are being deprived of the fruits of the business. The business was not being run to the advantage of the partners and, therefore application under Order 10 Rule 1, CPC was allowed. The petitioners had filed an appeal. The learned Additional District Judge, Jagadhari agreed with the reasoning of the trial Court and dismissed the same.

On behalf of the petitioners it was urged that there was no ground to appoint the receiver which is a drastic step. He denied that there is any embezzlement or misappropriation of the articles. According to learned counsel that since the petitioners are in defacto possession of the business for the last so many years, they should not be dispossessed. On the contrary, learned counsel for the respondents highlighted that the respondents are holding majority of the share in the partnership. The petitioners are using the machines for the other factory and since, the respondents have a prima facie case and being partners they are being excluded, the receiver should be appointed''.

Under Order 40, Rule 1, Code of Civil Procedure, the Court has the power to appoint a receiver when it appears to the Court to be just and convenient. In that event, the Court can remove any person from possession or custody of the property and confers such power to the receiver as deemed appropriate. It is well known that the act of taking property out of the hands of one and putting it in pound under the orders of the Court, should only be done except to prevent manifest wrong or to prevent great danger to the property. The appointment of a receiver is one of the harshest remedy under the law. It has to be exercised in extreme cases. The law in this regard has undergone little change with the passage of time. The leading case on the subject still remains to be from the Madras High Court in the case of T. Krishnaswamy Chetty v. C. Thangavelu Chetty AIR 1955 Mad 430. The Court had prescribed the following five ''Panch Sadachar'' before appointment of the receiver. The same are :-

"(1) The appointment of a receiver pending a suit is a matter resting in the discretion of the Court. The discretion is not arbitrary or absolute: it is a sound and judicial discretion, taking into account all the circumstances of the case exercised for the purpose of permitting the ends of justice, and protecting the rights of all parties interested in the controversy and the subject-matter and based upon the fact that there is no other adequate remedy or means of accomplishing the desired objects of the judicial proceeding.

(2) The Court should not appoint a receiver except upon proof by the plaintiff that prima facie he has very excellent chance of succeeding in the suit.

(3) Not only must the plaintiff show a case of adverse and conflicting claims to property, but he must show some emergency or danger or loss demanding immediate action and of his own right he must be reasonably clear and free from doubt. The element of danger is an important consideration. A Court will not act on possible danger only the danger must be great and imminent demanding immediate relief. It has been truly said that a Court will never appoint a receiver merely on the ground that it will do not harm.

(4) An order appointing a receiver will not be made where it has the effect of depriving a defendant of a ''de facto'' possession since that might cause irreparable wrong. If the dispute is as to title only, the Court very reluctantly disturbs possession by receiver, but if the property is exposed to danger and loss and the person in possession has obtained it through fraud or force, the Court will interpose by receiver for a security of the property. It would be different where the property is shown to be ''in medio'', that is to say, in the enjoyment of no one, as the Court can hardly do wrong in taking possession: it will then be the common interest of all the parties that the Court should prevent a scramble as no one seems to be in actual lawful enjoyment of the property and no harm can be done to anyone by taking it and preserving it for the benefit of the legitimate who may prove successful. Therefore, even if there is no allegation of waste and mismanagement the fact that the property is more or less ''in medico'' is sufficient to vest a Court with jurisdiction to appoint a receiver.

(5) The Court, on the application of a receiver looks to the conduct of the party who makes the application and will usually refuse to interfere unless his conduct has been free from blame. He must come to Court with clean hands and should not have disentitled himself to the equitable relief by laches, delay, acquiescence etc."

In other words, the plaintiffs has not only to show a prima facie case but ordinarily the Court would be reluctant of depriving a defacto possession of the other person. But if there is waste and mismanagement of the property, the Court would certainly intervene and appoint the receiver. This decision from the Madras High Court was relied upon strongly in the case of Nihalchand L. Jai Narain and Others Vs. Ram Niwas Munna Lal and Others, . The Court in the first instance held that discretion exercised by the trial Court is only to be interfered unless it is contrary to law or arbitrary. It was further held that where a partner excludes the other from the management, a receiver can be appointed. In paragraph 10 this Court observed:-

"Where a partner excludes another from the management of the partnership affairs, there a case is made out for appointment of a receiver and this doctrine has been acted on even where the defendant contends that the plaintiff is not a partner or that he has no interest in the partnership assets, vide Peacock v. Peacock (1808)16 V J 49, Blakeney v. Dufaur (1851)15 Beav 40 and Wilson v. Greenwood (1818)1 S.W. 471. Reference may also be made to Lindlev on Partnership, Twelfth Edition pages 562-563 and Kerr on Receivers. Thirteenth Edition, page 70."

Further while discussing the facts it was held that receiver may be appointed where there is reasonable apprehension to the property or assets. The findings arrived at were:-

" A receiver may be appointed where there is a reasonable apprehension to the property, assets or income and are in danger of being injured, misused or dissipated. The property should be preserved from loss or wastage so that the final relief may be effective. The appointment of a receiver in such circumstance does not result in harassment to a party but protects the rights of the injured party by keeping the property intact. The counsel for the parties agree that the cinema has been running and screening pictures from December, 1967. The proceeds of the booking office are being realised exclusively by the defendants who deny that the plaintiff is entitled to any share of the income. In these circumstances, the funds in the form of the daily income of the cinema and other liquid assets need being preserved from misuse or malversation. The other property of the partnership has also to be safeguarded from injury or destruction and also from being alienated."

The Jammu & Kashmir High Court also considered the same controversy in the case of Prem Prakash Kapoor v. Gobind Ram Kapoor and Ors. AIR 1976 J & K 37 . Herein there was a partnership between the parties for manufacturing of woolen and silk-en clothes. They were relatives. The plaintiff was denied his right to manage the affairs. It was held that when such is the situation, a receiver could be appointed during the pendency of the suit. A Division Bench of Jammu & Kashmir High Court in the case of Tilak Chand Jain Vs. Darshan Lal Jain and Another, , while considering the same controversy held that a strong prima facie must be drawn and when the other partner is excluded, then the receiver can well be appointed. A learned Single Judge from Allahabad High Court in the case of Khaderan Ram and Others Vs. Sharda Prasad and Others, was concerned with a partnership dispute. The firm was running. There was no proof of misappropriation of funds or mismanagement. It was held that it is not appropriate to appoint the receiver. The findings arrived at were:-

"The sum and substance of a perusal of this entire law on the subject is that if the partnership has been dissolved or is sought to be dissolved by the filing of the suit receiver can be appointed as a matter of course provided his appointment is sought for the taking of the assets of the firm and ultimately for distribution thereof to the partners and the relationship between the partners is extremely strained. In the cases in which one of the partners has completely excluded the other from the management and the profits of the firm and funds are misappropriated, receiver can again be appointed, but for a running firm, the dissolution of which is not established, the Court will be slow in appointing a receiver because that will effect the position of the person who is running the business and is in de facto possession of the same."

The Delhi High Court in the case of Rajeshwar Nath Gupta Vs. Administrator General and Others, found that the defence raised was not wholly untenable. Possession should not be taken from the other person unless the Court is of the opinion that the property is going to be misutilized. Same view found favour with another decision of Delhi High Court in the case of Hari Mohan Sharma and Others Vs. CSR Poultry Research and Breeding Farm, . More recently this Court in the case of Ram Lal and Ors. v. Gian Chand and Ors. 1996 113 P.L.R. 695 held that where a person is in de facto possession running the business and profits were being earn, it would not be appropriate to appoint the receiver. Once again reliance was placed on the judgment delivered by the Madras High Court in the case of T. Krishnaswami Chetty (supra).

Reverting back to the facts of the case, therefore, one has to see if it would be appropriate to take possession from the petitioners which were in de facto possession and earlier running the business. It has also to be determined prima facie if there is any wastage, misappropriation of the property or not.

At the outset reference can well be made to certain clauses of the partner- ship deed to which the respondents have serious objection :-

"9. That Sh. Prem Sagar Garg, party to the first part shall be entitled to conduct and carry on the business for and on behalf of and in the name of the partnership and enter into such agreements and/or execute such documents as may be necessary for and be incidental to the conduct of the partnership business. He is fully entitled to borrow money, raise loans whether with or without security, from banks and other private parties and execute such documents as may be necessary in this behalf. All of his acts shall be binding on and be rectified by the firm and other partners.

That in case of dissolution of the partnership or retirement of any of the parties to 2nd to 4th parts, the business assets and all the property of the partnership, shall vest solely in Sh. Prem Sagar Garg, party to the first part only. Each of the said parties to 2nd to 4th parts shall be entitled to claim only the balance lying to his/her credit in capital account, after adjusting share of profit/loss till date of retirement/dissolution and nothing more on any account, whatsoever.

That in case of differences amongst the partners, the parties to 2nd to 4th part shall not be entitled to stop working of the partnership business and bank accounts. In such an event, the dispute, if any, shall be referred to and got decided by the Arbitration in accordance with the provisions of the Indian Arbitration Act, in force."

These clauses indeed looks unusual and does not appear to be fair. At this stage further opinion is not being expressed for the reason that this shall be gone into during the course of trial. For purposes of the present revision petition, the same can be ignored.

On behalf of the respondents it was alleged that they are holding 75 per cent share and further that petitioner are using the machinery in another factory that the petitioners are running.

It is true that 75 per cent share is of the respondents. They are closely related. But what immediately has to be considered is the other factors which have been mentioned above.

The Local Commissioner had been appointed when the civil suit was filed atleast 10 years ago. Inventory of the articles had been prepared. In other words, the trial Court is conscious of the available machinery and the articles and there is little scope thus of misappropriation. Another factor is that the application for appointment of the receiver had been filed in the year 1986. Seemingly no serious attempt has been made for pressing the same. The order was only passed in the year 1995 by the trial Court. When so many years have rolled by, it will not be appropriate to take the drastic step and appoint a receiver at this stage. The de facto possession remained with the petitioners and it will not be fair to disrupt the same.

It is true that this Court would be slow to interfere in the findings already arrived at by the Courts below. But for the reasons when so many years have gone by, it appears that chances of misutilization alleged are remote. It is therefore, a fit case where this Court should interfere in the discretion so exercised.

For these reasons, the revision petition is accepted and the impugned orders are set aside. The application for appointment of the receiver is dismissed. However, the trial court is directed to expedite the trial and complete the same preferably within one year from today.