Supreme Court Dismisses Suit for Dissolution of Partnership by Legal Heirs: Rajendra Bajoria vs. Hemant Kumar Jalan (21 September 2021)

Introduction

Date of the Judgment: 21 September 2021

Citation: [Arising out of SLP(C) Nos. 2779-2782 of 2019]

Judges: B.R. Gavai, J. and L. Nageswara Rao, J.

Can the legal heirs of deceased partners of a firm demand the firm’s dissolution and a share of its assets? The Supreme Court of India recently tackled this question, clarifying the rights of legal heirs versus the rights of partners under the Indian Partnership Act, 1932. This case arose from a dispute over the assets of a partnership firm established in 1943, where the legal heirs of some of the original partners sought to dissolve the firm and claim their share of its assets.

The Supreme Court bench comprised Justice B.R. Gavai and Justice L. Nageswara Rao. The judgment was authored by Justice B.R. Gavai.

Case Background

A partnership firm named ‘Soorajmull Nagarmull’ was formed on 6th December 1943. The original partners included Baijnath Jalan, Mohanlal Jalan, Babulal Jalan, Sewbhagwan Jalan, Keshabdeo Jalan, Nandkishore Jalan, Deokinandan Jalan, Chiranjilal Bajoria, and Kishorilal Jalan. All the original partners have since passed away. The plaintiffs in the case are the legal heirs of Chiranjilal Bajoria, Deokinandan Jalan, and Mohanlal Jalan. The defendants are the legal heirs of the other original partners.

The plaintiffs filed a civil suit (C.S. No. 79 of 2017) in the Calcutta High Court, seeking a declaration that they, along with the defendants, are entitled to the assets and properties of the firm. They also sought a decree for the dissolution of the firm, for the winding up of its affairs, and for a distribution of the assets among the heirs of the original partners.

Timeline:

Course of Proceedings

The defendants filed applications (G.A. Nos. 1688 and 1571 of 2017) seeking dismissal of the suit or rejection of the plaint, arguing that the plaint did not disclose a cause of action and that the suit was time-barred. The Single Judge of the Calcutta High Court dismissed these applications on 22nd September 2017, finding that the issue of limitation was a mixed question of fact and law.

The defendants then appealed to the Division Bench of the High Court (APO Nos. 491 and 520 of 2017). On 14th September 2018, the Division Bench allowed the appeals, holding that the reliefs claimed in the plaint could not be granted, and rejected the plaint. The plaintiffs then appealed to the Supreme Court.

Legal Framework

The judgment primarily revolves around the interpretation of the Indian Partnership Act, 1932, specifically Sections 40, 42, 43, and 44, along with the clauses of the Partnership Deed dated 6th December 1943. These sections deal with the dissolution of a partnership firm.

Section 40 of the Indian Partnership Act, 1932 states, “A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.”

Section 42 of the Indian Partnership Act, 1932 states, “Subject to contract between the partners a firm is dissolved—(c) by the death of a partner.”

Section 43 of the Indian Partnership Act, 1932 states, “Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.”

Section 44 of the Indian Partnership Act, 1932 states, “At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:—(a) that a partner has become of unsound mind…(g) on any other ground which renders it just and equitable that the firm should be dissolved.”

Clause 4 of the Partnership Deed states, “That upon the death of any partner the partnership shall not be automatically dissolved but the surviving partners may admit the legal representative of the deceased unto the partnership by mutual consent.”

Clause 7 of the Partnership Deed states, “…none of the parties hereto shall at any time be entitled to apply to any Court of law for the dissolution of the partnership or for appointment of a Receiver over the partnership or any portion of its assets.”

Arguments

Appellants’ (Plaintiffs’) Arguments:

• The plaintiffs argued that the Single Judge correctly concluded that the plaint disclosed a cause of action and should not have been rejected under Order VII Rule 11 of the Civil Procedure Code (CPC).
• They contended that the Division Bench conducted a mini-trial, which is impermissible when considering an application under Order VII Rule 11 of CPC.
• They relied on the judgment of the Supreme Court in Dahiben v. Arvindbhai Kalyanji Bhanusali (2020) 7 SCC 366, stating that the power to terminate a civil action is a drastic one and cannot be routinely exercised.
• The plaintiffs asserted that the averments in the plaint should be read in their entirety, not piecemeal, to determine if a cause of action exists.

Respondents’ (Defendants’) Arguments:

• The defendants argued that the reliefs sought in the plaint could not be granted based on Sections 40, 42, 43, 44 and 48 of the Indian Partnership Act, 1932, and the clauses in the Partnership Deed.
• They contended that Section 40 of the Indian Partnership Act, 1932, requires consent of all partners for dissolution, or a contract between partners.
• They pointed out that while Section 42 of the Indian Partnership Act, 1932, allows dissolution on the death of a partner, this is subject to a contract between the partners, and clause 4 of the Partnership Deed specifically states that the partnership shall not be automatically dissolved upon a partner’s death.
• The defendants argued that Section 44 of the Indian Partnership Act, 1932, allows a suit for dissolution only at the instance of a partner, and since the plaintiffs are not partners, the suit is not tenable.
• They relied on T. Arivandandam v. T.V. Satyapal (1977) 4 SCC 467 and Pearlite Liners (P) Ltd. v. Manorama Sirsi (2004) 3 SCC 172, stating that if the reliefs sought cannot be granted, the plaint should be rejected.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues. However, the core issues that the court addressed were:

1. Whether the plaint discloses a cause of action that can be adjudicated by the court.
2. Whether the reliefs sought by the plaintiffs, who are legal heirs and not partners, can be granted under the Indian Partnership Act, 1932, and the terms of the Partnership Deed.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• T. Arivandandam v. T.V. Satyapal (1977) 4 SCC 467 – Supreme Court of India: This case was cited to emphasize that a plaint should be rejected if it is manifestly vexatious and meritless, not disclosing a clear right to sue. The Court reiterated the need for a meaningful reading of the plaint.
• Pearlite Liners (P) Ltd. v. Manorama Sirsi (2004) 3 SCC 172 – Supreme Court of India: This case was used to support the argument that if the reliefs sought in a plaint cannot be granted under the law, the suit should be dismissed at the threshold.
• Dahiben v. Arvindbhai Kalyanji Bhanusali (2020) 7 SCC 366 – Supreme Court of India: While the plaintiffs relied on this case, the Supreme Court used it to support the position that the power to terminate a civil action is drastic, but necessary when a plaint does not disclose a cause of action.

Legal Provisions:

• Section 40 of the Indian Partnership Act, 1932: Deals with dissolution by agreement, stating that a firm may be dissolved with the consent of all partners or as per their contract.
• Section 42 of the Indian Partnership Act, 1932: Specifies that a firm may be dissolved on the death of a partner, subject to any contract between the partners.
• Section 43 of the Indian Partnership Act, 1932: States that a partnership at will can be dissolved by any partner giving notice to other partners.
• Section 44 of the Indian Partnership Act, 1932: Allows a court to dissolve a firm at the suit of a partner on certain grounds.

Authorities Considered by the Court

Judgment

The Supreme Court upheld the decision of the Division Bench of the Calcutta High Court, dismissing the appeals filed by the plaintiffs. The Supreme Court agreed that the reliefs sought by the plaintiffs could not be granted under the Indian Partnership Act, 1932, and the terms of the Partnership Deed.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ T. Arivandandam v. T.V. Satyapal (1977) 4 SCC 467*: The Supreme Court followed this case, emphasizing that a plaint should be rejected if it is manifestly vexatious and does not disclose a clear right to sue. This reinforced the principle that courts should prevent abuse of the legal process.

✓ Pearlite Liners (P) Ltd. v. Manorama Sirsi (2004) 3 SCC 172*: The Supreme Court followed this case, holding that if the reliefs sought in a plaint cannot be granted under the law, the suit should be dismissed at the threshold. This supported the decision to reject the plaint in the present case.

✓ Dahiben v. Arvindbhai Kalyanji Bhanusali (2020) 7 SCC 366*: While the plaintiffs relied on this case, the Supreme Court used it to support the position that the power to terminate a civil action is drastic, but necessary when a plaint does not disclose a cause of action. This case was used to justify the rejection of the plaint.

✓ Section 40 of the Indian Partnership Act, 1932: The court considered this section to highlight that the plaintiffs did not have the right to dissolve the firm, as they were not partners and did not have the consent of all partners.

✓ Section 42 of the Indian Partnership Act, 1932: The court considered this section regarding dissolution on death of a partner, but noted that it is subject to the contract between the partners, and the partnership deed specifically stated that the partnership would not be automatically dissolved on death of a partner.

✓ Section 43 of the Indian Partnership Act, 1932: The court considered this section regarding dissolution of partnership at will, noting that the plaintiffs were not partners and thus could not seek dissolution.

✓ Section 44 of the Indian Partnership Act, 1932: The court used this section to highlight that only a partner can seek dissolution, which the plaintiffs were not.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legal limitations imposed by the Indian Partnership Act, 1932, and the specific clauses of the Partnership Deed. The court emphasized that the plaintiffs, as legal heirs, lacked the standing to seek dissolution of the firm or claim its assets. The court also focused on the principle that a plaint should be rejected if the reliefs sought cannot be granted under the law, to avoid wasting judicial time.

Fact:Law

The ratio of fact to law in the judgment is as follows:

The court’s reasoning was heavily based on the legal framework and interpretation of the Indian Partnership Act, 1932, and the Partnership Deed, with a lesser emphasis on the factual aspects of the case.

Logical Reasoning

Issue 1: Whether the plaint discloses a cause of action?

Issue 2: Whether the reliefs sought can be granted to the plaintiffs?

The Supreme Court reasoned that the plaintiffs, being legal heirs of the deceased partners, did not have the legal standing to seek dissolution of the partnership firm or claim its assets. The court relied on Section 44 of the Indian Partnership Act, 1932, which allows only partners to seek dissolution, and the specific clauses in the Partnership Deed, which stated that the partnership would not be automatically dissolved upon the death of a partner. The court also considered the principle that a plaint should be rejected if the reliefs sought cannot be granted under the law, as established in cases like T. Arivandandam v. T.V. Satyapal and Pearlite Liners (P) Ltd. v. Manorama Sirsi.

The court rejected the plaintiffs’ argument that the Division Bench had conducted a mini-trial, stating that the High Court was correct in assessing whether the reliefs could be granted based on the pleadings. The court emphasized that the power to terminate a civil action is a drastic one but necessary when a plaint does not disclose a cause of action.

The court’s decision was based on a strict interpretation of the law and the contract between the partners, and it did not find any grounds to allow the legal heirs to seek dissolution or claim the assets of the firm.

“The partners do not have any right, title or interest in respect of the assets and properties of a firm so long as the firm is carrying on business.”

“Thus, it is clear that it is only a partner of a firm who can seek dissolution of the firm. The dissolution of a firm cannot be ordered by the court at the instance of a non-partner.”

“The reliefs claimed in a plaint flow from and are the culmination of the cause of action pleaded in the plaint. The cause of action pleaded and the prayers made in a plaint are inextricably intertwined.”

Key Takeaways

• Legal heirs of deceased partners do not automatically inherit the right to seek dissolution of a partnership firm or claim its assets.
• Only partners of a firm can seek dissolution under Section 44 of the Indian Partnership Act, 1932.
• Partnership agreements are crucial in determining the terms of dissolution, and specific clauses can override general provisions of the Indian Partnership Act, 1932.
• Courts can reject a plaint at the threshold if the reliefs sought cannot be granted under the law, to avoid unnecessary litigation.
• The judgment reinforces the principle that courts should prevent the abuse of the legal process by rejecting vexatious and meritless claims.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There was no discussion on any specific amendments in the judgment.

Development of Law

The ratio decidendi of this case is that legal heirs of deceased partners cannot seek dissolution of a partnership firm or claim its assets unless they are admitted as partners, and that only partners can seek dissolution under Section 44 of the Indian Partnership Act, 1932. The judgment reinforces the existing legal position that partnership agreements and the Indian Partnership Act, 1932, govern the rights and liabilities of partners and the dissolution of firms. There was no change in the previous legal position, but the judgment clarified the limitations on legal heirs in such matters.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision to reject the plaint. The court held that the legal heirs of deceased partners cannot seek dissolution of a partnership firm or claim its assets, as they are not partners and do not have the right to do so under the Indian Partnership Act, 1932, and the terms of the Partnership Deed. This judgment clarifies the legal position regarding the rights of legal heirs in partnership matters and reinforces the importance of partnership agreements.