By my preliminary judgment, dated the 2nd May, 1928, I declared that the plaintiff was entitled to have an account taken of the affairs of the partnership, as on the date of the death of his father, namely, the 13th August, 1908. After making that declaration, without forthwith referring the case to the Official Referee, I granted an adjournment at the request of the 6th defendant's counsel, who wanted time to consider his position, in regard to his filing an appeal from my judgment. I understand that no appeal has been filed and I am now asked to deal with certain questions of accountability arising between the parties. The plaintiff's right would arise, only if it be found that some amount is due to him; but all parties have desired me to first deal with these questions, even before the accounts are taken. That means, of course, that the parties believe that the accounts, if gone into, will disclose that a substantial sum is due to the plaintiff. It is on this hypothesis, that I am now dealing with the questions raised.
For ready reference, I reproduce a part of the pedigree set forth in my preliminary judgment.
I have held that the partnership consisted of Muralidas, Grovardhandas, Krishnadas and Gokuldas. Murali died in 1907, Krishnadas, the plaintiff's father in 1908 and Govardhan in 1909. Gokuldas, the 1st defendant, became the surviving partner, who, without winding up the affairs of the dissolved firm, continued the business employing its assets. This has given rise to the questions that have now been argued before me.
There can be no doubt as regards the true legal position of Gokuldas as the surviving partner of the firm. The plaintiff was, at his father's death, an infant about nine months old and when Govardhan died, had not completed his second year. On him devolved the interest of Krishnadas in the partnership. It was the duty of Gokul to have wound up the dissolved partnership and for that purpose, if necessary, he was entitled to carry on and continue the business. He was under a duty to realize the assets, fulfil the existing obligations, pay off the debts and ascertain the extent of the surplus property remaining, that became divisible between the partners. The plaintiff and Gokul would be the joint owners of that residue and in what shares they owned it would depend upon the state of the account between the partners inter se. This is the course clearly indicated by the law and if this course had been followed, rights of third parties would not have come into existence conflicting with the plaintiff's rights and the surplus to the extent of his share would have been at his disposal. But, instead of following this course, Gokul (this is not disputed) continued and carried on the business—not with a view to wind it up and bring it to a speedy close—but conducted the trade as an ordinary trader would, incurring new obligations and entering into fresh transactions. An extensive business was carried on in this way for several years, till Gokuldas failed in trade and was adjudged an insolvent in 1924. The assets of the partnership, at the death of Krishnadas, consisted inter alia of many items of valuable immovable property worth some lakhs and Gokuldas, it is alleged, mortgaged several of them for debts borrowed in the course of the trade, which he subsequently carried on for his own benefit. For the plaintiff, it is contended that he is entitled to proceed against what was at the dissolution, the property of the firm and recover out of it, his share, when that is determined. The contention put forward is, that, under the law, the partnership property has first to be applied in discharge of the firm's debts and when that is done and the surplus is ascertained, each of the partners has a right, which cannot be defeated, to receive his share out of the surplus assets. The plaintiff's position may be thus stated: as the surviving partner Gokul had certain powers, those powers were in a sense plenary, that is to say, he could validly sell or mortgage the properties of the dissolved firm, provided (the proviso is important) the acts done were in the course of, or for the winding up of, the partnership. The plaintiff concedes that this rule is qualified to this extent, namely, that if third parties dealt with Gokul in the reasonable belief that a given sale or mortgage was necessary for the proper winding up, the title such third parties acquired would not be defeated, although in point of fact, there was absence of necessity, or the money raised was misapplied. The plaintiff contends that, if, after paying off partnership debts and after making due provision in favour of transactions of the kind mentioned above, there remains a surplus, he is entitled, as the representative of the deceased partner, to proceed against that surplus, for recovering in specie what may be found to be his share. To this, the answer of the Official Assignee is, that what is due to the plaintiff is a debt pure and simple due from Gokul and that the former can recover that debt out of the estate of Gokul just in the same manner as any other creditor can. In other words, he contends that the plaintiff has no special rights over and above any ordinary creditor of Gokul and that he (the plaintiff) ranking as such creditor is at liberty, if he chooses, to prove his debt in insolvency and receive a dividend out of the bankrupt's estate. This is the contention put forward on behalf of unsecured creditors by the Official Assignee. Then, as regards secured creditors, they maintain that in law, the right of the surviving partner to deal with partnership property is, that of an unqualified owner and whatever right the plaintiff may have against Gokul that right cannot defeat the interest created in the property by the latter in their favour. These are the points on which I am now asked to give my decision. This part of the case has been fully argued by Mr. S. Duraiswami Aiyar for the plaintiff and by Sir C. P. Ramaswami Aiyar, as well as the Advocate-General for the defence. The contentions seem, in my opinion, to involve points which are fairly simple.
At this point, I must mention that several cases were posted along with this in the Cause List, some of them being suits filed by certain secured creditors of Gokuldas. An application was made to me that they should be impleaded as parties to this action. On that application, I made on the 28th February, 1929, the following:
Order.—“These various persons desire to be added as parties to C. S. No. 622 of 1923, which 1 shall call the main suit.
Maharaja of Pittapuram, Plaintiff in C. S. No. 229 of 1924.
Dewan Bahadur Govinddoss Chaturbujadoss, Plaintiff, in C. S. No. 434 of 1923.
Best & Company Ltd. Plaintiff in O. S. No. 85 of 1924.
Potti Narayanaswamy Chetty by legal representatives and Potti Ethirajulu Chetty, Plaintiffs 1 to 7 in C. S. No. 50 of 1927.
Messrs. Chathurbujadoss Khusaldas & Sons, 1st defendant in C. S. No. 691 of 1928.
Application to this effect is made by their respective counsel, Sir C. P. Ramaswami Aiyar, Mr. Subbaraya Aiyar and Mr. S. Jagadeesa Aiyar. Certain important issues are common to the main suit and the several suits to which they are already parties. The applicants urge that they are interested in the account that has to be taken, as a consequence of the preliminary judgment passed in the main suit. Mr. Duraiswami Aiyar does not concede this position, but in any event, it is eminently desirable that that account should be taken in the presence of the parties whom it affects. The plaintiff in the main suit, by his counsel, Mr. S. Duraiswami Aiyar and the other parties to that suit agree to the application being granted. I therefore make this order by consent. I direct these various persons to be made parties to C. S. No. 622 of 1923 on the terms, namely, that they shall be bound by all that has so far transpired in that suit and that, while they shall be at liberty to file separate statements of objections before the Official Referee, they shall be represented (their interests being identical) by one practitioner or one set of practitioners at that enquiry and that they shall be so represented by the legal adviser or advisers of the firm of Khusaldas & Sons., liberty being reserved to the parties to apply by reason of any change of circumstances, that the practitioner or practitioners, who shall appear before the Official Referee, shall be of a party, other than Khusaldas & Sons. The question of costs is reserved.
I shall now proceed to deal with the questions raised. I have set forth fully the nature of the right which the plaintiff claims. It is impossible to accurately describe it in a single statement; but, in text-books and judgments, the expression “partner's lien” is used to describe this right. It must be borne in mind that this is merely a convenient mode of referring to the right and that the word “lien” in this phrase is not used in its ordinary technical sense. To ignore this must necessarily lead to confusion of thought. Those that use the expression are careful to point out that an outgoing partner enjoys no such right as a lien, in the strict sense of the term. Lindley (to take an example) is conscious of the fact that the phrase is liable to mislead; for, he refers to it as ‘’ the right, lien quasi lien, or whatever else it may be called”: Lindley on Partnership, 9th Edition page 438.
Similarly, Pollock and Mulla speaking of this right, refer to it as belonging “to the class of equitable not possessory liens,” and further add “commonly called ‘partner's lien’”. (See commentaries under Sect. 262, Indian Contract Act.)
I refer to this fact at the outset because much of the criticism levelled against the plaintiff's case has proceeded and wrongly on the footing that what he claims is to enforce a lien, that is a specific charge upon partnership property.
The law on this subject is thus set forth by Lindley:
“In other words, each partner may be said to have an equitable lien on the partnership property, for the purpose of having it applied in discharge of the debts of the firm and to have a similar lien on the surplus assets, for the purpose of having them applied in payment of what may be due to the partners respectively, after deducting what may be due from them, as partners to the firm.”
“The lien of each partner exists not only as against the other partners, but also against all persons claiming through them or any of them; and it is therefore available against their executors, execution creditors, and trustees in bankruptcy.”
“To hold however that this lien could be enforced against persons purchasing partnership property would be in effect to prevent any sale of that property without the consent of the whole firm, and would practically stop all partnership trade. Whilst, therefore, a person who purchases a share of a partner takes that share subject to the liens of the other partners, person who bona fide purchases from one partner specific property belonging to the firm acquires a good title to such property, whatever liens the other partners might have had on them prior to their sale.”
These passages show, how the right loosely described as “partner's lien” is conditioned by the undoubted power which a surviving partner possesses to give a valid title to a purchaser in good faith, of any specific property belonging to the firm. The contentions urged against the plaintiff are, first, that the amount due to him is in the nature of a simple debt and, secondly, that one who purchases from a surviving partner acquires a good title, whether the transaction is bona fide or not. In my opinion, both these contentions are clearly untenable. On this point, as I shall show presently, there is no difference between the English and the Indian Law. Sect. 39 of the Partnership Act, 1890, enacts, that on the dissolution of a partnership, every partner is entitled first to have the partnership property applied in payment of the partnership debts and next to have the surplus assets then remaining applied in payment of what may be due to the partners on an account being taken. This section in effect prescribes the mode of dealing with the assets of a dissolved firm. The debts due to its creditors must be first paid out; when that is done, the section declares, the outgoing and the surviving partners own the surplus as their property. Each of them, then is a part-owner of that surplus, the extent of his interest depending on the state of the account between the partners inter se. It is from this joint ownership that the retiring partner's right springs. But this right is subject to the rule, that a purchaser from the continuing partner in the ordinary course of business deals with him as absolute owner and not as mere partner and is therefore fully protected. This principle is clearly illustrated in Bourne v. Bourne(1), affirmed in Bourne v. Bourne(2). In this case, there were two partners Grove and Bourne. Grove died on the 9th May, 1901. Bourne carried on the business and deposited on the 7th February, 1902, title deeds of a property with the Firm's Bankers, Messrs. Berwick & Co. Bourne himself died on the 3rd of September, 1902. The question arose whether the executors of Grove were bound by this transaction with the Bankers. In each of the judgments, the matter is thus dealt with: Was the act done by the continuing partner in the ordinary course of winding up? In any event, did the third party reasonably believe that the act was necessary for that winding up? In that event, the stranger dealing with the continuing partner acquires an indefeasible title to the property in question. It was contended that the Bankers could not rely upon the mortgage, because they ought to have known that the debt due by the old firm having been paid, the surviving partner had no right to pledge the estate. Vaughan Williams, L. J., answers thus:
“All I can say with reference to that is that as far as the Bankers are concerned this apparently was an ordinary winding up; there were payments in and payments out and both the payments in and the payments out must be taken to have been made on account of this realisation and winding up.”
The judgment of Romer, L. J., contains a very clear statement of the law. What is generally described as “partner's lien” is thus explained:
“That lien is not one which affects each particular piece of property belonging to the partnership, so as to affect that property in the hands of any person dealing with the surviving partner in good faith.”
The next sentence throws further light on this point:
“It is really what one may call a general lien upon the surplus assets, and does not affect each particular property, so as to interfere with the right of the surviving partner to deal with the separate properties belonging to the partnership, for the purpose of realization and to give a good title to persons dealing in good faith with him in respect of those properties.”
This principle so clearly formulated by the learned Lord Justice applies to the facts of the case. The point to decide is stated in the following sentence:
“Then the only question remaining is this: was the debt of the bank which the surviving partner gave the charge to secure, one that really to the knowledge of the bank not a partnership debt?”
Then follow a number of reasons given to show that the bank was acting in good faith:
“The account with them was a partnership account. It was continued under the partnership name, and apparently for the purpose of the partnership and it appears to me impossible to say that it is not or may not be reasonable for a surviving partner to continue the partnership account, for the purpose of winding up the estate. To my mind, the case is very much, as if the only change in the account had been to put the account of the partnership in administration. When you find an account of that kind continued—and here it is only continued for something like nine months before the charge is given, the bankers, it appears to me, are entitled, in the absence of evidence showing the contrary, to assume and to be credited with the belief that the surviving partner is continuing it, for the purpose of realization and that sums paid into that account and sums drawn out of that account in the name of the partnership are paid in and drawn out for the purpose of the partnership. That being so, in this case, when the account is finally taken and there is a balance due to the bankers, that, to my mind, is a balance which the bankers are entitled to believe and to assert was so far as they were concerned, a partnership debt, in respect of which they were entitled to have the security given, which this surviving partner gave.”
This judgment contains a very lucid exposition of the principles governing the subject. The decisive factor in each case is, did the third party act in good faith? In other words, did he reasonably believe that the act was in furtherance of the winding up? The learned trial Judge, Farwell, J., applies the same test:
“So far as I can see, there is nothing whatever to put the bank upon any enquiry, or to fix them with notice” that the act was not done, in the course of the winding up. Romer, L. J., I may point out, relies, as an important element, upon the fact, that only a short period, like nine months, had elapsed before the charge was given; To this feature of the case, attention is called, in the following passage, occurring in the Law of Vendor and Purchaser by Williams:
“Having regard to this pronouncement, it appears that where the survivor of two partners sells the real estate sufficiently soon after the other partner's death to make it apparent that he is selling to wind up the partnership affairs, he can make a good title to the equitable interest in the land and give a good discharge for the purchase money, without the concurrence of the deceased partner's legal representatives.”—3rd Ed. Vol. I pages 446 and 447.
Another case, which is frequently referred to, is In re Langmead's Trusts. In this case, the executor of a retired partner sought to have an asset of the dissolved firm, assigned by the surviving partner to a third party applied to payment of partnership debts. The judgment is apt to mislead, if the somewhat complicated facts of the case are not carefully followed.
John Clark Langmead and William Langmead were partners. John retired and a deed executed by the partners came into existence on the 5th February, 1825. It recited:
(1) that the partnership was to stand dissolved:
(2) that William should pay to John £2,000 and John in consideration thereof was to convey to William his interest in the partnership, so that William was to become the sole owner;
(3) to carry into effect these provisions, a deed was to be executed, which should contain a covenant on the part of William that he would pay all the debts of the concern and indemnify John in regard to them.
William paid £2, 000 to John but did not however pay all the debts due from the firm.
John died in 1830 and in 1831 William Langmead assigned a certain policy of assurance, part of the assets of the firm, in favour of Walter Boyd. Subsequent to this, several creditors of the firm proved their debts and were paid out of the estate of John. These were debts which, in accordance with the instrument of the 6th February, 1825, William was bound to pay. The other facts of the case may be ignored.
The question (so far as it is relevant to the present case) was: as between the legatee of John Langmead and the representatives of Walter Boyd, who had the title to the policy in question? Sir John Romilly, M. R., decides in favour of Boyd's representatives. True, John was entitled to have the firm's property applied in payment of the firm's debts, so long as any debt existed; but more than six years had elapsed after the dissolution of the firm and Walter Boyd might therefore have reasonably supposed that all the debts of the concern had been either paid or barred by lapse of time. William Boyd took an assignment for value in these circumstances. He therefore got a good title.
The point to observe in this case is, that the only lien or right which John could have claimed was to have the partnership assets applied in payment of the partnership debts. He had no other lien; for, as the facts stated show, he had already received from William an amount representing the value of his share in the assets of the firm. The only outstanding right being to have the debts paid up, the master of the Rolls observes that in the circumstances of the case, the purchaser had valid grounds for supposing that the partnership debts had, during the long period of six years, been either paid off, or had been barred and that there were therefore at the time no debts due and payable.
There is an observation at bottom of page 511 (E.R) which reads thus:
“If that had been the case, a purchaser from William Langmead, even with express notice of that trust, would not have been bound to see to the application of the purchase money.”
This is said to favour the contention put forward for the defence. Clearly not. What does this observation mean? The trust being one to apply the proceeds in payment of debts, a purchaser with express notice of this trust is not bound to see to the application of the purchase-money. This does not mean that if the purchaser knew that the purpose of the trust had already been fulfilled, that is, that the debts had already been fully paid off, he would still be protected.
This went on appeal and the appellate judgment reported in Langmead's Trusts, In re throws no light on the question, as the decision turned on the language of the instrument.
It is in Bourne v. Bourne that the principles are stated with great force and clearness and the law as stated in that case has been adopted in standard works on the subject. The observations in Langmead's Trusts In re being somewhat cryptic are not useful to the same extent, as those in the first mentioned case.
The rule is thus stated in Halsbury's Laws of England:
“This right is available, and may be enforced not only against the partnership assets and the other partners, but also against all persons, claiming through them, in respect of their interests as partners, for example, assignees, personal representatives, trustees in bankruptcy, or judgment-creditors, except purchasers or pledgees of specific assets of the partnership who might reasonably suppose that all the partnership debts had been paid or barred by lapse of time, or who otherwise deal with the surviving or continuing partner in good faith.”
The surviving partner has thus a right to dispose of the properties of the dissolvod firm, for purposes connected with the winding up of that firm; but if the alienation was not for such a purpose, the purchaser acquires nevertheless an indefeasible title, provided there are circumstances justifying a reasonable belief that the act was done in furtherance of the winding up; otherwise, he is not protected. Therefore, under the English Law, if the case of a secured creditor does not fall within this rule, his right must give way to the superior claim of the deceased partner's representative. A fortiori, the share of the deceased partner is not liable to answer for the sums due to unsecured creditors of the new firm.
This follows from authorities I have already cited. The same principle is recognized in three other cases, which may be cited. In West v. Skip, the retiring partner's rights against the continuing partner are thus described:
“The partners themselves are clearly joint tenants in the stock and all effects……So, if one partner had died, the debts and effects survived: but yet the survivor is considered in this Court barely as a trustee for the representatives of the deceased, upon which tooting the account would be taken, and nothing considered as the share of the survivor till afterwards, which is from the continuance of the property in the stock to the representative of the deceased partner, who has a specific lien thereon, although the survivor afterwards dies or becomes bankrupt.”
In the case supposed, the partnership became dissolved by the death of a partner. What happens if it became dissolved by consent?
“The property in the stock of the partner so going out is not divested thereby, but he remains equally entitled as joint tenant with the other; and in a bill for an account, the stock would be subjected for his satisfaction.”
Having dealt with these two cases, the Lord Chancellor proceeds to deal with the rights of the separate creditors of the survivor, as against the representatives of the deceased partner:
“Then, as between one partner and the separate creditors of the other, the law and those two cases before mentioned say, that they cannot effect the stock any farther, than that partner could whose creditors they are.”
This case states the principle very clearly. The right of the retiring partner arises from the fact that the partners are joint tenants of the property, each being a part-owner. This right prevails not only against the survivor but also against his creditors. In Skip v. Haruood, this right was held to prevail even as against execution creditors of the surviving partner.
The third case is Stocken v. Dawson. The following observations are very pertinent to the case on hand:
“I make no imputation against Oliver; for, I believe he thought he was employing his own property and not the property of another person. It was a Very unfortunate mistake, and nothing but a mistake; nevertheless we know how frequently it happens, that persons, whose duty it is to withdraw the property of others, endeavour to keep it engaged in trade for their own profit; and it would reduce the jurisdiction of this Court to a very lowebb, if we were told that no person could ever demand an account of the profits, arising from an improper use of his money, without making himself and his property liable to the debts incurred by those, who were making an improper use of his capital.”
This case was affirmed on appeal in 17 L.J Ch. 282.
The point is very fully dealt with in the judgment of the Lord Chancellor. The property improperly and without authority used in the trade by the surviving partner, it is pointed out, never can be liable for the debts of that trade, except where the principle of “order and disposition” applies (see page 286).
I have now dealt with the position under the English Law both of secured and unsecured creditors. Are there rights different under the Indian Contract Act? Sect. 262 of the Contract Act corresponds to Sect. 39 of the Partnership Act. The former section is but an instance of the application of the principle underlying the English section. If we take the relevant portions of the two sections, there is even a verbal resemblance. Sect. 262 says:
“The partnership property must be applied in the first instance in payment of the debts of the firm and if there is any surplus, then the share of each partner must be applied in payment of his separate debts or paid to him.”
The idea underlying this is, the surplus, to the extent of each partner's share, is his property. That share must be either paid to him, or (that being his property) must be applied in payment of his separate debts. How is this language in substance different from Sect. 39? It says, to quote only the portion material:
“Every partner is entitled to have the property of the partnership applied in payment of the debts of the firm and to have the surplus assets, after such payment, applied in payment of what may be due to the partners.”
Next, Sect. 263 of the Contract Act reproduces in effect Sect. 38 of the Partnership Act. I am unable to follow the argument that this section indicates that the Indian Law is different. It says that after a dissolution, the rights of the surviving partner continue “in all things necessary for winding up the business of the partnership.”
Sect. 38 enacts that his authority continues:
“So far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.”
As Pollock and Mulla point out, the Indian section expresses the English Law “if it be read with sufficient emphasis on the word ‘necessary’.”
Sect. 241 is next referred to, as showing that the Indian Law departs from the English Law. This argument is again unsound. Sect. 241 provides that the property left by a retiring partner or the representative of a deceased partner to be used in the business is to be considered as a loan within the meaning of Sect. 240. This section (Sect. 241) is one of a group of sections, dealing with what is essential to the constitution of a partnership. (Sects. 240 and 241). As Pollock and Mulla point out, these add nothing in principle to the law settled by the decision in Cox v. Hickman: (see commentaries under Sect. 240). Sect. 241 and the allied sections have their counterpart in Sect. 2, Sub-sect. (3) of the Partnership Act, which in their turn, superseded the provisions of the English Act, called Bovill's Act. Further, how does Sect. 241 apply to the present case at all? It refers to a case where the property is left by the outgoing partner to be used in the business: that is to say, where he authorizes his share to be employed in the trade by the surviving partner. The use of the plaintiff's share of the property in the trade, subsequently carried on by Gokuldoss was unauthorized and this section cannot possibly apply.
The next section, which has a bearing on the present points is Sect. 253. It is that section which declares that partners are joint owners of partnership property and (as a necessary corollary) that each partner is a part owner: [Sub-sect. (1)]. This again is a mere re-enactment of the English rule: (see Sect. 20 of the Partnership Act). It is impossible, therefore, to deduce from these sections that a departure from the English Law is intended.
I may at this point usefully cite a decision of the House of Lords—Hugh Stevenson v. Akticngesellschaft. An English company and a German company carried on a partnership business in England, until the outbreak of war between Great Britain and the German Empire, which operated as a dissolution of the partnership. After the outbreak of the war, the English company continued to carry on the business and to use the partnership plant for that purpose. It was held that the German company were entitled to a share of the profits made after the dissolution by the carrying on of the business by the English company with the aid of the German company's share of the capital. This case emphasizes two points: first, that the rights of partners in the assets of the firm are rights of property and do not depend merely on contract; secondly, the continuing partner is treated in respect of the outgoing partner's share in the property, as standing in a fiduciary relationship. The argument advanced for the English company is this: Sect. 42 of the Partnership Act, which provides that the outgoing partner is entitled, at his option, either to interest or to profits, attributable to the use of his share, is inapplicable as in the case of an alien enemy, the provisions of the Act have no application, the contractual relationship between the parties having become completely and finally severed: (see the argument of Leslie Scott, K.C). Lord Finlay, in his judgment, points out that the question to be determined does not depend upon any contract, but on the rights of property, which both partners have in the assets of the firm. Viscount Haldane observes that the analogy of a contract in respect of money due does not hold good, as the question is one of property. He adds:
“It depends on the principles which Courts of Equity apply to persons who are in possession of property under circumstances in which they are treated as standing in a fiduciary relationship.”
Lord Dunedin stresses the same two points:
“The result in law is that they carry on the business as trustees for the partners, until the winding up is effected. No doubt the enemy partner cannot receive the money during the war. But his property as such is not confiscated……He will only get the fruits to which his property is entitled.”
Lord Atkinson deals also with these two aspects at length:
“When a partnership has been dissolved by death or bankruptcy or otherwise, it has been decided that the relation existing between the surviving partner and his former partner………is a fiduciary relation.”
The observations of Kindersley, V.C, in Darby v. Darby are cited by the learned Lord:
“What is the clear principle of this Court as to the law of partnership? It is that, on the dissolution of the partnership, all the property belonging to the partnership shall be sold, and the proceeds of the sale, after discharging all the partnership debts and liabilities, shall be divided among the partners according to their respective shares in the capital. That is the general rule; it requires no special stipulation; it is inherent in the very contract of partnership.”
The principle so clearly formulated in this case does not conflict with the rule contained in Sect. 43 of the Partnership Act, that the amount due to an outgoing partner is merely a debt and as such is subject to the ordinary law of limitation.
I have now discussed the law bearing on the point. I shall now proceed to consider the various claims put forward. To deal first with the unsecured creditors of the new trade, their claim requires no further notice, as the plaintiff's share is, in no manner, liable for the debts due to them. Then, as regards secured creditors, I shall apply the principles I have stated to the facts of each case.
There are five cases before me relating to the claims of secured creditors. In regard to one of them (C. S. No. 434 of 1923) the parties are unable to agree whether the claim of the plaintiff in that case arose or not from a transaction connected with the winding up. I must, therefore, postpone the decision of this case, till the report of the Official Referee is received. In regard to the four remaining cases, it is agreed that the claim preferred in each of them is unconnected with the winding up and that the facts giving rise to each of the claims are entirely independent of the business of the dissolved firm. I am asked, for this reason, by all concerned, to deal with these four cases, without waiting for the Official Referee's report.
It is unnecessary to refer in any detail to the title deeds of the various properties filed as exhibits. The facts that emerge from the evidence, documentary and oral are: (1) That the sale-deeds in respect of every item of property (without a single exception) stood in the name of either the firm or the partners. Each claimant dealing with Gokuldoss had thus either actual or constructive notice that the property belonged to the dissolved firm; and (2) that each of these creditors dealt with Gokuldoss not on the footing that he was the surviving partner engaged in winding up the concern, but under the mistaken belief that he was the manager of a joint Hindu family. In other words, each of them, in dealing with Gokuldoss believed him to be the managing member of a co-parcenary consisting of several members including the minor plaintiff.
We start thus with the position, that the transactions, were not, in point of fact, connected with the winding up. It is not even suggested that apart from the real facts, the claimants were under any misapprehension as regards the true state of things.
I shall first take the case of Messrs. Best & Company (C. S. No. 85 of 1924). The mortgage in their favour comprises several items; but in this enquiry we are concerned only with a fractional share in one of them. The partnership became dissolved in 1908 and it is admitted that the transaction which gave rise to the debt did not take place earlier than 1919. In the course of the new trade carried on by Gokuldoss, he bought yarn from Messrs. Best & Company and an amount was found due to them. Promissory notes were executed and properties were mortgaged in respect of this debt. This happened in 1922 and 1923. It is not even suggested that the claimants believed or had reason to believe that these transactions were entered into by Gokuldoss in connection with, or in furtherance of, the winding up. On these facts, any question of good faith is entirely excluded. Applying the principles which I have stated, these creditors are not protected and I must therefore, hold that the share of the minor plaintiff in C.S No. 622 of 1923 in the particular item of property, to which I have referred, is not affected by the mortgage.
Mr. Duraiswami Aiyar, the plaintiff's learned counsel, calls another argument to his aid, which, in my opinion, is also well founded. He says in effect: a party dealing with Gokuldoss cannot rely upon the latter's apparent authority of surviving partner, if that party did not profess to deal with him as such partner. Messrs. Best & Co. dealt with Gokuldoss on the footing that he was the managing member of a Hindu co-parcenary. As they did not deal with him as surviving partner, the question, whether they believed in good faith that his act was in furtherance of the winding up or not, does not arise: Farquharson Brothers & Co. v. King & Co.. In this case, a man named Capon sold his master's goods fraudulently and under an assumed false name. The fact was that his master authorised him to sell to certain known customers and any stranger misled by this apparent authority, would in law, on the ground of estoppel, be protected. The question arose, whether the respondents who believed Capon (who sold under a false name) to be the real owner acquired a good title. In a striking judgment, Lord Halsbury held that they were not:
“If they had represented their clerk Capon to be invested with disposing power, and (note the importance of the next sentence) if anybody, supposing Capon to be invested with that power, had acted upon it to his own prejudice, then undoubtedly estoppel would have arisen.”
But such circumstances did not exist and the respondents, it was held, acquired no title. I need quote only one further sentence from the judgment in that case:
“I do not myself see upon what ground a person can be precluded from denying as against another an authority which has never been given in fact, and which the other has never supposed to exist.” (Page 341.)
The same principle was applied in Underwood Ltd. v. Bank of Liverpool. Scrutton, L. J., observes:
“So in my view you cannot rely on the apparent authority of an agent who did not profess in dealing with you to act as agent.” (Page 792).
And Bankes, L. J., says:
“They considered that they were still dealing with Underwood, the old customer, the principal and not with a new Underwood, an agent.” (Page 788).
This principle is of general application, not confined to what may be strictly called estoppel, or to principal and agent. In Solomon v. Attenborough, one of two executors, without the knowledge of the other, pawned articles of plate belonging to the estate and misapplied the money. The defendants, the pawn brokers, dealt with him not as executor, but as absolute owner of the plate, It was held that as the pledger did not purport to act as executor, the defendants had no title to the plate and were bound to deliver it up. The following passage from the judgment of Buckley, L. J., brings out the point:
“They (the defendant's counsel) were further asked for authority for this proposition: that if a person contracts, not purporting to deal as executor the purchaser who did not know he was executor can, for the purpose of supporting the contract, rely on the fact that he was executor. For that proposition, they have cited no authority and so far as I know there is none.”
Bank of Bombay v. Suleman Somji(3) also illustrates the same point. Their Lordships cite a passage from In re Queale's Estate(4), which very tersely expresses the principle and which I shall therefore reproduce:
“Fits Gibbon, L. J., says:
“The Bank dealt with him (the mortgagor) as, and in his capacity of, an individual owner, not an executor, but a person pledging his own property for his own debt, giving as security his own interest for his own purposes. Under such circumstances the Bank can, in my opinion, have no better title than that which its debtor really had in the capacity in which he was dealt with, namely, as beneficial owner, i.e, as residuary legatee.” (Page 150).
This principle was applied again by the Judicial Committee in Raja Balwant Singh v. Clancy(5). The ratio decidendi of Bijraji Nopani v. Pura Sundary(6) and Gharib-ul-lah v. Khalak Singh(7) also supports the contention of the plaintiff. On this ground also, the claim of Messrs. Best & Co., in so far as it relates to the plaintiff's share in the item in question fails.
I understand that there is some dispute as regards the extent of the item (to which the plaintiff in C. S, No. 622 of 1923 is entitled) which is affected by my judgment. The parties expected that they would be able to agree in regard to the item. They have not been able to do so. But I need not postpone my judgment on this account. For this enquiry, I direct the case to be posted on the 15th of April.
I shall next deal with the case of the Maharajah of Pittapuram, the plaintiff in C.S No. 229 of 1924. The mortgage in his favour, as in the case of Messrs. Best & Company, comprises several items of which we are concerned only with one, the Cathedral Gardens; because, the partnership owned that and not the others on the date of the dissolution. The claimant advanced to Gokuldoss about Rs. 3,85,000. He took a promissory note, dated the 22nd December, 1922 and there was an equitable mortgage created on the following day. It is admitted that, in point of fact, neither this debt nor the debts (due to the Imperial Bank) to discharge which, this loan was raised were incurred for any purpose connected with the winding up. This claimant again dealt with Gokuldoss not as the surviving partner, but as the managing member of a joint Hindu family. This fact is undisputed and, therefore, I do not propose to review the evidence on the point. I may observe that in regard to this property, although the actual conveyance was taken in 1909, it is admitted that it was acquired by the old firm and with its monies, previous to the dissolution. As regards the question of good faith or reasonable belief, the remarks I have made in regard to the claim of Messrs, Best & Company apply equally to this case. For the reasons already given, 1 hold that the plaintiff's share in the Cathedral Gardens is not affected by the mortgage created by Gokuldoss. This disposes of the claim of the plaintiff in C. S. No. 229 of 1924, so far as this enquiry is concerned.
Then comes the claim of the plaintiffs, Narayanaswami Chetty and others, in C. S. No. 50 of 1927. All the properties comprised in their mortgage had been acquired previous to the dissolution. Their claim calls for no special remark, as what I have already said, in dealing with the claimants in the two previous cases, applies equally to them. I therefore hold that the plaintiffs' share in these properties is not affected by the mortgage referred to.
Lastly, remains the claim in C. S. No. 691 of 1928. The facts connected with this case are the following: Messrs. Kusaldoss & Sons sold goods to Gokuldoss and obtained for the price thereof hundis from him, dated the 16th of September, 1922 and the 25th of October, 1922. The goods had been sold a short time previous to the dates of the hundis. It is admitted that these transactions were not in any way connected with the winding up of the old firm. In this case again, it is not even averred, that the creditors either in fact believed or had reason for believing, that Gokuldoss bought the goods and gave the hundis, for any purpose connected with the winding up. Then Messrs. Kusaldoss and Sons, filed against Gokuldoss and others a suit in this Court, C. S. No. 433 of 1923 to recover the amount due on the hundis and obtained a decree. When execution was threatened, Gokuldoss offered to give security. An order was made permitting him to do so, and security was accordingly furnished in respect of certain properties and we are now concerned with only three of them, those set forth in the plaint in C. S. No. 691 of 1928. The evidence of Kishendoss of Messrs. Kusaldoss & Sons makes it perfectly clear that they regarded Gokuldoss not as the surviving partner, but as the manager of a co-parcenary. Indeed, each one of these claimants makes a point of the fact that Gokuldoss was throughout believed to be the managing member of a joint family, including, among others, the plaintiff. The remarks I have already made apply with equal force to these claimants also. I, therefore, hold that the plaintiffs' interest in these properties is not affected by the charge in question.
In the view I have taken, it is unnecessary to consider the argument that, in so far as one of the three items is concerned, no valid charge was created.
I may, in conclusion, observe that the right claimed by the plaintiff and which has been discussed by me is, in respect of the immovable properties mentioned in Sch. A to the plaint in G. S. No. 622 of 1923. These had been acquired previous to the dissolution and were, therefore, the property of the old firm. There are certain other properties mentioned in Sch. B which the plaintiff admits were acquired subsequent to the dissolution. No evidence has been adduced before me, as to how they were acquired. The case was opened with the statement by Mr. Duraiswami Aiyar, that his client did not propose to claim any right of priority over secured creditors in any of those items and that he, therefore, would not advance any argument regarding them. But towards the close of the case, the learned counsel intimated that he did not wish to formally abandon his claim, as he would like to have liberty to argue, as a question of law, before any appellate tribunal, that his client would have some right as against secured creditors in those items. I merely make a note, at his request, of what is stated to me.
The case is referred to the Official Referee, for the taking of an account on the basis of the two judgments I have delivered (the preliminary judgment and the present judgment).
The question of costs, including the costs of the Official Assignee, is deferred, pending the receipt of the report from the Official Referee.
There is a further issue, which has been reserved-one that is common to the main suit, O. S. No. 623 of 1923, and several suits filed by certain creditors. Though some evidence was incidentally directed to this point at the main trial, I understand that the parties were under the impression that this issue was not then being tried. It is alleged that in 1919 there was a partition which had the effect of separating Dwarakadoss and his minor son, Ramdas, from Gokuldoss. This plea led to the following issue being raised in C. S. No. 622 of 1923.
“Did the 3rd defendant and his father become divided in status in 1919 from the other members of the family and is the 3rd defendant liable thereafter for any of the obligations of the Murali Doss Ram Doss and Company or Madras Import Company or for any of the other reliefs claimed against the 2nd defendant?”
[The learned Judge discussed the evidence and continued:]
If my finding that there was no definite and decisive intention to divide is wrong, then the conclusion is inevitable, that the brothers immediately on partition, the very next moment, became either reunited or entered into a fresh partnership. In either case, the minor's liability cannot be disputed.
Before concluding, I would like to mention that I was led to suspect at the last stages of the hearing that the fact that the minor's guardian ad litem happens to be a Bench Clerk of this Court, gave rise to some dissatisfaction. I understand that he was appointed guardian by the order of the Deputy Registrar made more than six years ago when he was practising at the Bar. No objection has since been taken to his continuing to hold the office. To place the matter beyond doubt, I asked Sir C P. Ramaswami Aiyar if there was any desire that he should be removed from his office or whether his conduct was open to question. I am glad to say, he assured me, that, there was no ground for complaint. I may note that, when I delivered judgment on the principal issue in the case. I provided by consent, for the guardian's fee, although as it now transpires, his part of the case had not been gone into then.
By consent, the plaintiff and the Official Assignee shall get their costs of this suit and in proceedings therein subsequent to my judgment, dated 2nd May, 1928, up to date. Certified for two counsel on both sides. The question whether these costs shall come from ‘A’ Schedule or ‘B’ Schedule properties is reserved. The Receiver will for the present pay Rs. 3,000 to the plaintiff and Rs. 3,000 to the Official Assignee towards these costs. If on taxation it is found that either party has received more than he is entitled to, he shall bring the excess into Court.
N.R.R