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Ramkumar v. Ramkishan Tayal Fouji
Factual and Procedural Background
The plaintiff and defendants entered into a partnership on 15-12-1976. It is asserted in the record that defendant No. 1 received certain partnership payments and misappropriated those amounts by using them for his own purposes instead of distributing them according to the partnership terms. On 1-6-1979 the plaintiff filed an application under Section 20 of the Arbitration Act seeking (a) filing of the partnership agreement (which contained an arbitration agreement) in Court and (b) that an accounting be taken through arbitration and amounts due to the plaintiff be awarded to him. The plaintiff also sought an interim injunction restraining defendant No. 1 from realising other payments due to the partnership.
Defendant No. 1 replied, objecting that the partnership was not registered and therefore the application was not maintainable; defendant No. 1 also stated that the partnership had stood dissolved. In response the plaintiff filed I.A. No. 4 on 27-6-1979 seeking amendment of the main application to allege dissolution and assert a right to settlement of accounts consequent to dissolution. That amendment application remained pending, but the trial Court framed preliminary issues on maintainability and dismissed the main application on the basis that Section 69(1) of the Partnership Act barred the application. The plaintiff appealed.
Legal Issues Presented
- Whether an application under Section 20 of the Arbitration Act is maintainable where a partnership is unregistered, in view of the bar created by Section 69(1) of the Partnership Act and the statutory exceptions contained in Sub-section (3)(a) of Section 69 (i.e., enforcement of a right to sue for accounts of a dissolved firm).
- Whether the trial Court erred in adjudicating the maintainability of the main application without first permitting the plaintiff to amend the main application by incorporating I.A. No. 4/79 (alleging dissolution and a right to settlement of accounts).
Arguments of the Parties
Appellant's Arguments
- The plaintiff/appellant submitted that the application under Section 20 of the Arbitration Act was saved by Clause (a) of Sub-section (3) of Section 69 of the Partnership Act because the plaintiff sought enforcement of his right to sue for accounts of a dissolved firm.
- The trial Court should not have dismissed the main application without permitting the amendment (I.A. No. 4), since the amendment was sought at a preliminary stage, amplified existing pleadings, arose from a defence plea, and left the basic structure of the main application unchanged.
Respondents' Arguments
- The respondents relied strongly on Jagdish Chandra v. Kajaria Traders (AIR 1964 SC 1882) and Iqbal Singh v. Ram Narain (AIR 1977 All 352), contending that an application under Section 20 of the Arbitration Act is hit by Section 69(1) of the Partnership Act and therefore not maintainable in the absence of registration.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chhotelal v. Gopaldas, AIR 1940 Nag 78 | Explains the legislative scheme underlying Section 69 of the Partnership Act and the rationale for Sub-section (3)(a): registration is intended to protect third parties but exceptions were carved out so unregistered firms could enforce rights such as suits for dissolution or accounts of dissolved firms. | The Court cited this case to elucidate the policy behind Section 69(3)(a) and to support the view that enforcement of rights to sue for accounts of a dissolved firm was intended to be preserved despite non-registration. |
| Jagdish Chandra v. Kajaria Traders, AIR 1964 SC 1882 | Held that an application under Section 8(2) of the Arbitration Act (appointment of arbitrator) in the partners' dispute was covered by Sub-sections (1) and (2) of Section 69 (disability arising from non-registration) and not by the exceptions in Sub-section (3). | The Court distinguished Jagdish Chandra: it held that Jagdish Chandra dealt with Section 8 applications and did not apply to Section 20 applications where the Court itself makes a reference; consequently Jagdish Chandra was not applicable to the present Section 20 application seeking accounts of a dissolved firm. |
| Iqbal Singh v. Ram Narain, AIR 1977 All 352 | Division Bench applied Jagdish Chandra to an application under Section 20 of the Arbitration Act, treating Section 20 as covered by the disability in Section 69. | The Court held that Iqbal Singh had overlooked the distinction between applications under Section 8/9 and those under Section 20; it therefore rejected the applicability of Iqbal Singh to the present facts. |
| Union of India v. Gorak Mohan, AIR 1964 All 477 | Clarifies the distinct provinces of Sections 3 and 20 of the Arbitration Act (and, by analogy, of Sections 8/9 versus Section 20): Section 8/9 confer power to appoint arbitrators, after which the Court becomes functus officio; Section 20 contemplates filing of arbitration agreements and references by the Court. | The Court relied on this distinction to support its conclusion that applications under Section 8/9 (appointment) are materially different from Section 20 (filing and reference) and that an application under Section 20, when seeking relief such as accounts of a dissolved firm, may amount to enforcement of a right saved by Section 69(3)(a). |
| Jagat Mittar Saigal v. Kailash Chander Saigal, AIR 1983 Delhi 134 | Decision of the Delhi High Court cited in support of the view that the Section 69(3)(a) exception can save certain arbitration-related applications. | The Court found itself fortified by this decision in reaching the conclusion that the present Section 20 application (as amended) is saved by Clause (a) of Sub-section (3) of Section 69 and hence maintainable despite non-registration. |
Court's Reasoning and Analysis
The Court's reasoning proceeds in identifiable steps, based strictly on the material in the record:
- Error in procedure: The trial Court erred by adjudicating the maintainability of the main application while I.A. No. 4 (the amendment application filed 27-6-1979) remained pending. The amendment sought to allege dissolution and the plaintiff's entitlement to settlement of accounts; the amendment was an amplification of existing pleadings and should have been permitted at the preliminary stage.
- Statutory framework and policy: The Court explained the policy behind Section 69 of the Partnership Act — while registration is designed to protect third parties and non-registration generally disables enforcement, the Legislature explicitly preserved certain enforcement rights (for example, rights to sue for dissolution or accounts of a dissolved firm) by Sub-section (3)(a). The Court cited Chhotelal v. Gopaldas to present that legislative rationale.
- Distinction between Section 8/9 and Section 20 of the Arbitration Act: The Court emphasized the legal and functional difference between proceedings under Sections 8/9 (appointment of arbitrators where the Court's role ends after appointment) and proceedings under Section 20 (filing of arbitration agreements and Court's power to refer the dispute). Relying on Union of India v. Gorak Mohan, the Court observed that an application under Section 8/9 merely seeks appointment and does not amount to enforcement of a right to sue within the meaning of Section 69(3), whereas an application under Section 20 may lead to a Court reference and ultimately enforcement through the Court's award.
- Application of authorities: The Court considered Jagdish Chandra (which dealt with Section 8 applications) and the Division Bench decision in Iqbal Singh (which applied Jagdish Chandra to Section 20 applications). The Court concluded that Jagdish Chandra was not applicable to Section 20 applications in the present factual context and that Iqbal Singh had overlooked the crucial distinction between Sections 8/9 and Section 20.
- Conclusion on maintainability: Because the plaintiff, as amended, sought relief that is within the exception carved out by Clause (a) of Sub-section (3) of Section 69 (i.e., enforcement of a right to sue for accounts of a dissolved firm), the non-registration disability prescribed by Section 69(1) did not render the Section 20 application non-maintainable. Consequently, the trial Court's dismissal on maintainability grounds was set aside.
Holding and Implications
Holding: The appeal is allowed, and the impugned order of the trial Court dismissing the Section 20 application on maintainability grounds is set aside.
Direct consequences for the parties (as ordered by the Court):
- The trial Court is directed to proceed with the hearing of the application in accordance with law.
- The amendment sought by the plaintiff by I.A. No. 4/79 is allowed and the plaintiff/appellant is directed to incorporate that amendment in the main application under Section 20, subject to payment of Rs. 50/- by way of costs to defendant No. 1.
- There shall be no order as to costs of this appeal.
- Parties are directed to appear before the trial Court on 26-11-1990.
Implications beyond the parties: The opinion reasons about the correct application of Section 69(3)(a) to Section 20 proceedings and distinguishes prior authorities that dealt with Section 8; however, the judgment itself does not purport to lay down a novel general rule beyond resolving the present dispute. The opinion does not explicitly declare that it is creating a new precedent outside the context of these proceedings.
1. The plaintiff has come up in appeal aggrieved by an order of the trial Court holding an application under Section 20 of the Arbitration Act, 1940 to be not maintanable on account of bar created by Section 69(1) of Partnership Act, 1932.
2. The plaintiff and defendants entered into a partnership on 15-12-1976. It appears; that the defendant No. 1 received certain payments relating to partnership and misappropriated the amount to his own use without distributing the same in accordance with the terms of partnership. On 1-6-1979, an application under Section 20 of the Arbitration Act was filed seeking filing of the partnership agreement, incorporating the arbitration agreement, in the Court and, thereafter, taking account through arbitration of the amount due and payable to the plaintiff and awarding the same to the plaintiff.
3. The plaintiff also moved an application seeking an interim injunction restraining the defendant No. 1 from realising any other payments due to the partnership.
4. The defendant No. 1 filed a reply to the applications and took an objection therein that the partnership being not registered, the application was not maintainable. Therein, it was was also stated that the partnership had stood dissolved.
5. Soon on the filing of the reply and having noticed the objection raised by the defendant No. 1, the plaintiff filed an application (I.A. No. 4) on 27-6-1979 seeking an amendment in the main application that the partnership having been dissolved as per the stand taken by the defendant No. 1, himself, the plaintiff was entitled to settlement of accounts consequent to the dissolution of partnership and to realisation of the amount due to him.
6. Admittedly, this application for amendment remained pending and the trial Court having framed preliminary issues as to the maintainability of the main application, heard the parties on it and directed the application to be dismissed as stated hereinabove.
7. The learned counsel for the appellant has submitted that the application under Section 20 of the Arbitration Act was saved by Clause (a) of Sub-section (3) of Section 69 of the Partnership Act inasmuch as the plaintiff was seeking enforcement of his right to sue for accounts of a dissolved firm and the trial Court should not have dismissed his application without permitting the amendment prayed for.
8. The trial Court definitely erred in overlooking I.A. No. 4 and adjudicating upon the maintainability of the main application. The amendment was prayed for at a preliminary stage of the proceedings and possibility there could have been no objection to permit the amendment because the plea was sought to be raised on the basis of a plea taken in the defence and further the basic structure of the main application remained the same. Really speaking, the amendment was an amplification of the pleadings already raised. The application deserved to be allowed and is hereby allowed.
9. The English Law of Partnership makes registration of firms compulsory and imposes a penalty for nonregistration. That drastic approach has not been followed in the Indian statute. Still, a firm not registered has been attached with disability to enforce its claims either against third parties or against fellow partners. One exception to this disability recognised by the Indian Law is that any unregistered partner in any firm registered or unregistered may sue for dissolution of the firm. This exception is made on the principle that registration is designed primarily to protect third parties and the absence of registration need not prevent the disappearance of an unregistered or imperfectly registered firm. (See report of Special Committee). In Chhotelal v. Gopaldas, AIR 1940 Nag 78, the scheme underlying Section 69 was summed up in the following words :--
"It is impossible to legislate entirely against unregistered partnership, but the intention of the Legislature was to discourage nonregistration as far as possible; to prohibit the enforcement of any right to sue for the dissolution of a firm, even though unregistered, or for accounts in the case of an unregistered firm which had been dissolved, would not have been practicable, since the moneys in possession of such a firm would not then be amenable to any realisation after the firm had in fact been dissolved, or the affairs of the firm were in such a state as to render dissolution in fact inevitable. It is for this reason that Sub-section (3)(a) has been enacted."
10. If the Legislature has chosen to specifically save the enforcement of any right to sue for the dissolution of a firm or for account of a dissolved firm or any right or power to realise the property of a dissolved firm from the rigour of the disability attaching with non-registration, it is difficult to conceive that the Legislature would have intended the disability to operate if one mode of enforcement of right was pursued but not when any other mode was pursued. Ordinarily, the parties approach the Court for enforcement of their rights and whenever they have a right to sue. However, when two persons agree to have their differences settled through arbitration, what they really mean is that the actual decision of the dispute will rest with a third person called an arbitrator. Still, the Court may have to intervene to regulate the arbitration proceedings or to give the award of the arbitrator sanction of law. The taw of Arbitration results in withdrawal of the dispute from the ordinary courts enabling the parties to substitute a domestic Tribunal. Nevertheless, the award has to be made a rule of the Court followed by a decree to be enforceable. When the proceedings are intiated under Section 20 of the Arbitration Act, they begin with the intervention of the Court and they end with the intervention of the Court when the arbitration award is made a rule of the Court. When the end result sought to be achieved is the dissolution of a firm or account of a dissolved firm or realisation of the property of a dissolved firm, even if the proceedings have been initiated under Section 20 of the Arbitration Act on account of an arbitration agreement being available between the parties, the party is in substance enforcing his right to sue for achieving the end result.
11. The learned counsel for the respondents has placed strong reliance on Jagdish Chandra v. Kajaria Traders, AIR 1964 SC 1882 and a Division Bench decision in Iqbal Singh v. Ram Narain, AIR 1977 All 352, in support of his submission that an application under Section 20 of the Arbitration Act is also hit by Section 69(1) of the Partnership Act.
12. In Jagdish Chandra's case (AIR 1964 SC 1882) (supra), 'K' and 'J' were partners. The partnership agreement contained an arbitration clause. Each partner was to supply a certain quantity of manganese ore to enable export. 'J' failed to carry out his part of the partnership agreement. 'K' wrote to 'J' for appointment of arbitrator to which 'J' did not agree. 'K' filed an application under Section 8(2) of the Arbitration Act seeking appointment of arbitrator. Their Lordships held that the arbitration clause was a part of the agreement and the proceeding before the contract. Their Lordship held the proceeding to be a nature covered by Sub-sections (1) and (2) of Section 69 of the Partnership Act and not those mentioned as exceptions in Sub-section (3) and Sub-section (4). Undisputedly, it was not a case where 'K' had sought for dissolution of the firm or accounts of a dissolved firm etc. within the meaning of Sub-section (3) of Section 69.
13. In Iqbal Singh's case (AIR 1977 All 352) (supra), the Division Bench of Allahabad High Court applied Jagdish Chandra's case (AIR 1964 SC 1882) to an application under Section 20 of the Arbitration Act.
14. Application under Section 8 and those under Section 20 of the Arbitration Act are different and have a contrasting distinction.
As held by the Division Bench of Allahabad High Court in Union of India v. Gorak Mohan, AIR 1964 All 477.
"The province of Section 3 and Section 20 is quite distinct. The former confers power upon the Court to appoint an arbitrator on an application under Section 8 where the parties do not concur in the appointment of an arbitrator and the latter entitles party to apply for filing of the arbitration agreement in Court and empowers the Court to make an order of reference to the arbitrator appointed by the parties and in the absence of such appointment to the arbitrator appointed by it. In the former case, after the Court has appointed an arbitrator, it is the parties who refer the dispute to him. In the latter case, it is the Court which refers the dispute. Where on an application under Section 8 the lower Court not only appointed an arbitrator but also referred the dispute to him, the order referring the dispute is without jurisdiction."
Thus under Sections 8 and 9 of the Arbitration Act, the Court becomes defunctus officio having appointed an arbitrator. It cannot make a reference. Section 20 contemplates making a reference. In the context of Section 69 of the Partnership Act, an application under section 8 or 9 merely seeking appointment of arbitrator can never be an application for the enforcement of any right to sue contemplated by Sub-section (3) but an application under Section 20 of the Arbitration Act in the context of the relief prayed for may amount to enforcement of any right to sue. This distinction with due respect to the Hon'ble Judges deciding Iqbal Singh's case (AIR 1977 All 353) (supra) has been lost sight of. In the opinion of this Court, Jagdish Chandra's case (AIR 1964 SC 1882) (supra) also does not have applicability to an application under Section 20 of the Arbitration Act.
15. In the present case, the plaintiff/ appellant has come to the Court for the relief of accounts of a dissolved firm, specially when the impugned application is read as amended. The application is saved by Clause (a) of Sub-section (3) of Section 69 of the Partnership Act and the non-registration of the firm does not have any effect on the maintainability of the application.
16. I am fortified in the view which I have taken by the decision of Delhi High Court in Jagat Mittar Saigal v. Kailash Chander Saigal, AIR 1983 Delhi 134.
17. As a result, the appeal is allowed. The impugned order of the Court below is set aside. It is directed that the trial Court shall proceed with the hearing of the application in accordance with law. There shall be no order as to costs of this appeal.
18. The plaintiff/appellant shall incorporate the amendment prayed for vide I.A. No. 4/79 in the main application under Section 20 of the Arbitration Act, subject to payment of Rs. 50/- by way of costs to the defendant No. 1.
19. Parties through their respective counsel are, directed to appear before the trial Court on 26-11-1990.
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