Laxminarayan Sawalram v. Dwarkaprasad Rudmal And Another

1. This appeal is directed against the order dated 20-12-1960 of the learned Single Judge, Sen, J., of this Court in Misc. Appeal No. 124 of 1958 whereby the order of the executing Court setting aside the sale of the rice mill by public auction in favour of the appellant was upheld.

2. Briefly stated the facts giving rise to the sale of the rice mill are these. Appellant-decree-holder and the respondent-judgment-debtor No. 1 Dwarkaprasad had entered into a partnership on 27-12-1950. However, the appellant filed a suit on 18-4-1953 for dissolution of partnership and settlement of accounts. The claim was contested by Dwarkaprasad and evidence in the suit was to be recorded on 5-7-1955. But on that date both the parties to the suit amicably settled their disputes and in terms of their compromise a decree was passed on that date. It was one of the terms of the compromise that the partnership property be sold through a commissioner, and that out of the half share of respondent-defendant Dwarkaprasad in the sale proceeds of the partnership property appellant-plaintiff Laxminarayan be paid a sum of Rs. 20,000/- in full satisfaction and settlement of the accounts of the partnership inter se. Thereafter on 14-7-1955 Dwarkaprasad filed a petition for being adjudged insolvent and he was accordingly so adjudged on 13-8-1958. In the mean time, the rice mill in question belonging to the partnership was sold by public auction on 28-12-1957. An objection was, therefore, raised that as the adjudication of Dwarkaprasad as an insolvent relates back to 14-7-1955 the sale of his share in the property which had vested in the receiver was illegal and liable to be set aside. The objection found favour with the executing Court and accordingly it set aside the sale. In appeal to this Court the learned Single Judge accepting the objections confirmed that order. Hence this appeal.

3. The only question, therefore, that falls for determination is whether the sale of the rice mill held on 28-12-1957 was illegal or not. In our view the answer to the question is that it is not illegal but perfectly valid.

4. The executing Court as also the learned Single Judge were in eror in holding that since after the date of the decree i. e., 5-7-1955 the partnership no longer subsisted, what was sold on 28-12-1957 was not a partnership property, and as the adjudication of Dwarkaprasad on 13-8-1958 relates back to 14-7-1955 there could be no valid sale of any property of the insolvent vesting in the receiver. No doubt it is true that as soon as Dwarkaprasad was adjudged insolvent, and as there remained surviving only one partner the partnership firm stood dissolved. For the matter of that it stood in law dissolved by virtue of the decree on 5-7-1955 even before insolvency petition was filed on 14-7-1955. Even so, the provisions of Section 47 of the Indian Partnership Act specifically provide that even after the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. In view of this provision, therefore, it is evident that during the process of winding up of the firm and settlement of accounts finally, all the assets and liabilities of the firm continue to remain as those of partnership. It cannot, therefore, be urged that after the dissolution of the partnership whether by virtue of the decree of the Court or by virtue of the adjudication of Dwarkaprasad as insolvent, the rice mill ceased to be partnership property or assets. In this view then the provisions of Sections 48 and 49 of the Indian Partnership Act come into play, and the partnership assets have first to be utilised for purpose of settlement of accounts between the partners and of the debts of the firm in the manner provided therein. It would mean, therefore, that the rice mill which was admittedly partnership asset has to be appropriated first towards the debts due from the firm and next the debts due inter se between the partners, and only if any surplus is left after such liquidation that it would be available for payment of the separate debts, if any, of the individual partner due to others. Till then no creditor as such of any individual partner is entitled to claim any interest in the partnership property as such excepting in the nett amount of share both in the profits and assets of that debtor in the partnership.

5. Even under the Provincial Insolvency Act what vests in the receiver is the share of the insolvent partner which is nothing but the nett amount that becomes payable to such a partner after ac-counts of the partnership are made and settled. Till then the receiver is not entitled to claim to be a partner in place of the insolvent in the partnership along with the remaining partner. On the adjudication of a partner as insolvent, his share in the partnership along with his separate property vests in the insolvency Court, or in the Receiver or in the Official Assignee, as the case may be. The Receiver is not entitled to take exclusive possession of the assets of the firm. He merely replaces insolvent partner in respect of the business- of the firm and becomes a tenant in common with the continuing partners from the date of the order of adjudication. The solvent partners have the right to realise partnership property. The Receiver can claim nothing as the insolvent's share unless all the joint creditors have been paid. But the right to wind up is the right of solvent partners and the Receiver or Official Assignee is neither entitled to join nor interfere in the work of the winding up of the affairs of the firm, and if he does he may be restrained from doing so. He is not entitled to claim possession of the account books though he has right to a fair opportunity to inspect them. He is entitled to, if necessary, file a suit for settlement of accounts and have the nett value of the share of the insolvent determined and settled with him.

6. In the aforesaid state of legal position, therefore, what vested in the Receiver in the instant case was nothing but the nett amount payable to Dwarkaprasad after the accounts of the partnership had been made and settled, and it was only half the sale proceeds of the rice mill less Rs. 20,000/-. That was exactly what was deposited in Court for payment to such person or persons as were entitled to it. We are, therefore, unable to accept the decision of the learned Single Judge and set it aside.

7. Then, there is another legal position which, in our opinion, is more decisive of the question involved in this appeal and it is Section 34 of the Indian Partnership Act which reads as under :

"34. (1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.

(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made."

It will thus be seen that the insolvent ceases to be a partner only on the date on which the order of adjudication is made and till then he continues to be a partner for all purposes. The determination of his interest as a partner in view of this provision would not relate back to the date of the insolvency petition for purposes of Indian Partnership Act which, in our opinion, would prevail over the Provincial Insolvency Act. In this view the sale held on 28-12-1957 is not affected at all in any manner by the adjudication of Dwarkaprasad as an insolvent on 13-8-1958. That being the petition we are unable to see how the sale could be held to be illegal and liable to be set aside.

8. The reult, therefore, is that the appeal succeeds and we set aside the order of the learned Single Judge as also of the executing Court and hold that the sale of the rice mill was valid and binding. Since there is no bar now left for confirmation of the sale we hereby confirm the sale. In the circumstances, however, we make no order for costs in this Court or in the Courts below.

9. Before we part with the case we would like to make certain observations in view of certain submissions made before us in the course of arguments by the learned counsel for the respondent-receiver. It was urged that the compromise in the suit whereby Dwarkaprasad agreed to pay Rs. 20,000/- to his other partner, the plaintiff, was a fraudulent compromise and was entered into with a view to defeat his own creditors. Unfortunately we are not called upon to decide that question in this appeal. In fact that this question was beyond the jurisdiction even of the executing Court. That question may well be agitated in the proper Court of the insolvency if so advised. We need not say anything on this question.