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Case Number
Attorney(S)
  • Baldeva Sahay, for the appellant.
  • B.C De, for the respondent.
Judges
  • Fazl Ali, C.J
  • Ray, J.
Acts
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Baldeva Sahay, for the appellant.
  • B.C De, for the respondent.
Judges
  • Fazl Ali, C.J
  • Ray, J.
Acts
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Smart Summary

Factual and Procedural Background

The plaintiff, Surendra Nath Sarkar, was the sole proprietor of multiple business concerns (Galgalia Rice and Oil Mills, N.C. Rice Mills and certain jute presses). The defendant, Nagarchand Goenka, a businessman with other concerns, became the managing partner under a registered partnership deed dated 4 June 1943. The partnership was to run from 9 February 1943 for three years. Key duties of the managing partner included preparing and obtaining approval of a budget, furnishing monthly abstracts of accounts, preparing annual profit and loss statements, and ensuring audited accounts within stipulated times. The deed contained a clause (paragraph 20) permitting a partner aggrieved by breach to give notice to remedy defaults and, if not remedied, determine (dissolve) the partnership by written notice.

The plaintiff paid Rs. 1,51,000 as his contribution to capital. After discovering alleged non-compliance by the defendant with partnership covenants, the plaintiff issued a notice dated 13 November 1944 calling for amends. The plaintiff alleges the defendant did not remedy defaults and therefore purported to determine (dissolve) the partnership. Because the partnership deed provided that disputes be referred to arbitration under the Arbitration Act, the plaintiff filed an application under section 20 of the Arbitration Act (registered as a plaint) and, together with that petition, applied for appointment of a receiver to take charge of the business pending disposal. The Subordinate Judge made an ex parte appointment of a receiver on 13 January 1945. After the defendant appeared and objected, the Subordinate Judge, after hearing both parties, made an order on 9 March 1945 appointing a receiver. The defendant appealed against that order; this opinion is the appellate disposition of that appeal.

Legal Issues Presented

  1. Whether, in proceedings under the Arbitration Act (section 20), the Court has jurisdiction to appoint a receiver before actual reference to arbitration has been made (i.e., whether such power arises only after arbitration commences).
  2. Whether dissolution of the partnership and appointment of a receiver could be obtained only by a regular suit under the Partnership Act rather than in the arbitration proceeding established under the partnership deed and the Arbitration Act.
  3. Whether the facts and circumstances shown made out sufficient cause so that it was just and convenient to appoint a receiver to take charge of the partnership business pending the arbitration-controlled resolution.

Arguments of the Parties

Appellant's Arguments

  • The Court, in a proceeding under the Arbitration Act, lacks jurisdiction to appoint a receiver until an actual reference to arbitration is made (arguing that the power to make preservation orders arises only after the proceeding becomes an arbitration proceeding in the sense of sub-section (5) of section 20).
  • There could be no dissolution of the partnership except by a regular suit under the Partnership Act; because the plaintiff did not file such a suit, he could not obtain the appointment of a receiver.
  • The facts and circumstances did not show sufficient cause to justify dispossessing the appellant of management; there was no finding of dishonest conduct, and the appellant (a substantial businessman) was capable of safely managing the business. The appointment of a practising pleader as receiver was unwise and detrimental to the appellant's interest, particularly given his capital contribution of Rs. 1,51,000.

The opinion does not set out a detailed point-by-point statement of the respondent's separate legal arguments in the same manner; the respondent's position is reflected in the application for reference to arbitration and the application for a receiver alleging breaches and certain dishonest transactions by the appellant.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court addressed the factual sufficiency (third issue) first. The Subordinate Judge had not conducted a full trial, but, relying on admissions and unchallenged documents, concluded prima facie that it would be dangerous to allow the appellant to remain in charge. The appellate judge agreed.

The Court noted admitted breaches of core partnership covenants: failure to prepare an approved budget, failure to submit monthly abstracts, failure to prepare annual profit & loss statements, and failure to get accounts audited as provided in the deed. The appellant offered explanations (wartime conditions and government control of the mills engaged in government contracts) for non-observance; the Court found these explanations unconvincing and observed that government control and contracted operations would likely make compliance easier rather than harder.

Beyond breaches, the Court observed an allegation of dishonesty: a receipt issued by the manager of the Goenka Company (an appellant concern separate from the partnership) for 50,000 bags of rice taken from the partnership mills without payment. The genuineness of that receipt was not challenged in the courts below or in the appeal. While the Court declined to determine conclusively whether rice was in fact taken without payment (leaving that to the arbitrator during winding up), it found the transaction suspicious and reinforcing the apprehension that continued management by the defendant could cause irreparable harm to the plaintiff's interest.

The Court accepted that a practising pleader might lack business skill, but noted that the mills' operations were largely government contracts of a stereotyped nature and therefore did not require exceptional commercial skill. Given strained relations between the parties and the appellant's limited proprietary interest in the mills (alleged assets worth about Rs. 5 lakhs belonging to the partnership, not to the appellant personally), the balance favored appointing a receiver.

Turning to the legal contention about jurisdiction under the Arbitration Act (first issue), the appellant relied on section 41(b) read with section 20, arguing that powers enumerated in the Second Schedule (including appointment of a receiver, appearing in clause 4) are available only after the proceeding becomes an "arbitration" in the sense that the Court has given notice, waited for cause, and then made an order of reference under sub-sections (3)–(5) of section 20. He placed emphasis on the word "Thereafter" in sub-section (5).

The Court rejected this narrow construction. It reasoned that a proceeding initiated under section 20 by filing the application in writing is a proceeding for arbitration from the outset because its object is to enforce an agreement for arbitration as provided in sub-section (1) of section 20. The Court explained that the word "arbitration" in sub-section (5) refers to the arbitration conducted by the arbitrator(s) appointed in accordance with sub-section (4). If the appellant's narrow view were accepted, the Court would be powerless to make preservation or protective orders (such as appointing a receiver) during the critical period before reference, allowing an opposing party to dissipate disputed property.

On the second legal contention (that the plaintiff should have filed a Partnership Act suit for dissolution to obtain a receiver), the Court observed that the parties had agreed in their deed to refer disputes (including dissolution) to arbitration and that, under section 34 of the Arbitration Act, a suit except through the arbitration machinery is barred. Therefore, the present proceeding for dissolution via arbitration was proper; any distinction between this and a Partnership Act suit was one of form rather than substance. The Court also observed the temporal context: the partnership was for a fixed three-year term and was close to its automatic termination on 9 February next, making the balance of convenience favor maintaining the status quo pending arbitration.

Holding and Implications

Holding: The appeal was dismissed and the order of the learned Subordinate Judge appointing a receiver was upheld. The Court concluded that it was just and convenient to appoint a receiver given the prima facie breaches, the suspicious transaction involving a receipt for rice, and the risk of irreparable loss to the respondent.

DISPOSITION: Appeal dismissed; order appointing receiver upheld.

Direct consequences: The appointment of a receiver to take charge of the partnership business remains in force pending disposal of the arbitration-controlled proceedings; the defendant remains divested of management for the interim. Costs of the appeal were awarded against the appellant.

Broader implications: The opinion explains and applies statutory provisions of the Arbitration Act concerning the Court's power to make preservation orders during proceedings initiated under section 20, but the provided opinion does not expressly state that it establishes a broader binding precedent beyond the facts of this case. Accordingly, the direct effect is on the parties before the Court, and no explicit statement in the opinion indicates the setting of a new precedent.

Show full summary ...

    Nagarchand v. Surendranath

    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 under section 20 of the Arbitration Act (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 and Oil Mills at Galgalia, P.S Thakurganj, N.C 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 businessman being the proprietor of several other concerns. For better management of the plaintiff's business, the parties entered into a partnership on and from the 9th February, 1943, for a period of three years. The terms of the partnership were later incorporated into a deed which was duly executed and registered by both parties on the 4th of June, 1943, and the firm name and style of the partnership was adopted as Galgalia Rice and Oil Mills and N.C 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 has 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 connection 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 paragraph 20 of the partnership deed, it is provided that if any of the partners committed any breach, non-observance or non-performance 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 the 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 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 he 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 the 13th of 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 the 9th of 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. Baldeva 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 practising 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 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. But 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 he no place for black marketing and there should be no uncertainty about the details of the business and it would be rather easier to fulfil 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 fact been taken from the Galgalia Rice Mills. Mr. Baldeva 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 a 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 not interest in the mills, machines, machineries, buildings, structures, etc., which it is alleged are worth about 5 lakhs. In my view, therefore, 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. Baldeva 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) of the Arbitration Act (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 the Second Schedule 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 the Second Schedule, 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 under section 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 and 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 (5) 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 subclauses which in substance say that as soon as an application in writing is filed under section 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 arise. 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. Baldeva 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, he 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 under section 34 of the 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 the 9th of 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.

    Appeal dismissed.
    H.R.K

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    Comments

    Nagarchand v. Surendranath
    (Aug 7, 1945)