Partnership Act, 1032, Section 32(2) - 4th defendant retired from partnership in 1983 - Intimation sent to Bank regarding reconstitution of partnership - Bank accepting the same - Held that 4th defendant has been discharged from plaint liability to the Bank

KERALA HIGH COURT (D.B.)

Before :- S. Sankarasubban and R. Bhaskaran, JJ.
A.S. No. 72 of 1991. D/d. 5.2.2002.

George - Appellant
Versus
State Bank of Travancore - Respondent

For the Appellant :- P.K. Joseph, Meena Sreedhar A. and M.A. Felicia, Advocates.
For the Respondent :- V.R. Kesava Kaimal, C. Usha Kaimal and Mr. M.M. Madhu, Advocates.

Kerala High Court, Ernakulam

JUDGMENT
S. Sankarasubban, J.- Fourth defendant in O.S. No. 89 of the Sub Court, Ernakulam is the appellant. Respondent is the plaintiff in the suit, viz. The State Bank of Travancore, Cochin Branch
. The suit was filed by the plaintiff for recovery of a sum of Rs. 90,182.05 alleged to be due from the defendants to the plaintiff with interest and costs. The first defendant in the suit is the Queens Engineering Works, which is a Partnership firm with defendants 2 to 5 as partners.
2. The Firm was granted an overdraft facility for Rs. 40,000/- on 10.6.1982 and a medium term loan of Rs. 50,000/- on 9.2.1983. The necessary security documents were furnished to the respondent/Bank. The defendants executed revival letters in respect of the overdraft facility and medium term loan account facility. Since the amount was not paid, the suit was filed.
3. In paragraph 13 of the plaint, the plaintiff stated that the defendants executed the revival letter for the overdraft facility on 24.5.1985 and on 10.1.1986 the medium term loan was revived. Hence, the suit is not barred by limitation. It is also stated that notices were sent to all the defendants.
4. The fourth defendant filed a written statement stating that the suit is barred by limitation and that he retired from the Partnership on 10.3.1983. Copy of the retirement deed was duly handed over by the fourth defendant to the plaintiff's then Branch Manager John, who had duly noted this fact in the relevant books. The entire liability of the first defendant was taken over and the business carried on by defendants 2, 3 and 5 on the basis of the terms and conditions of the retirement deed. The plaintiff also agreed to the same and further agreed not to connect the fourth defendant with any of the affairs of the first defendant. It is also stated that the above facts will be clear from the subsequent conduct of the plaintiff and also from the fact that in none of the documents executed subsequent to 10.3.1983, the fourth defendant was either asked by the plaintiff to be a party or made a party. The fourth defendant denied that he had executed any revival letter. He also denied that lawyer's notice was sent to him. Separate written statement was filed by defendants 2 and 3.
5. The Court below raised relevant issues. One of the issues is whether the fourth defendant stands discharged from the plaint liability by reason of his retirement from the partnership ? The Court below found this issue against the fourth defendant. The suit was decreed and the plaintiff was allowed to realise the entire debt from defendants 2 and 3 and by sale of the plaint schedule property. If the plaintiff is unable to realise the entire debt from defendants 2 and 3 and by sale of the property, the plaintiff can proceed against defendants 4 and 5. As already stated, this appeal is filed by the fourth defendant. According to him, he should be deemed to be discharged from the liability of the Firm by the conduct of the Bank as well as other partners.
6. We heard learned counsel for the appellant Sri P.K. Joseph and the learned counsel for the respondent Sri V.R.K. Kaimal.
7. Sri Joseph contended that it is true that normally a retiring partner is made liable for the debts which have been incurred by the Firm while he was a partner. But under Section 32 of the Partnership Act (hereinafter referred to as 'the Act'), there are certain instances where a partner may be discharged from the liability even with regard to the debts, which were incurred by the Firm at the time when he was a partner. Under Section 32(2) of the Act, discharge may be made by the agreement by the retiring partner to any third party and the partners of the reconstituted Firm and such agreement may be implied by a course of dealing between such third party and the constituted Firm, after he had knowledge of the retirement. Learned counsel points out the following circumstances to infer that his client has been impliedly discharged from the liability. First is the conduct of the Bank in asking defendants 2 and 3 to execute Exts. A.12 to A.15 revival letters. Second is Ext. A.19 agreement executed by defendants 2 and 3 dated 18.4.1986 in favour of the Bank and thirdly no notice was issued by the Bank to the fourth defendant before the suit was filed.
8. PW.1 was the Manager of the Bank when the suit was filed. During his cross-examination by the fourth defendant, he admitted that Ext. A.16 notice was not issued to the fourth defendant. He further admits that the communication intimating the retirement of the fourth defendant was available in the file before the notice was issued. To a question whether Ext. A.16 notice was not issued because he had retired from the Partnership, his answer is 'may be'. Another question was put to the witness regarding Exts. A.12 to A. 15, revival letters. Here also, he says that the fourth defendant was not asked to sign Exts. A.12 to A.15 because he had retired from the Partnership. It is also stated that the Bank has not given any communication to the fourth defendant that his retirement is not binding on the Bank. So far as the liability of defendants 2 and 3 is concerned, he admits the receipt of Ext. A.19. PW.3 was the Manager of the Bank from 2.4.1985 to 6.9.1986 when the revival letters were received. He admits that Ext. A.19 was produced in the Bank while he was the Manager. It is stated that the Bank knew about the retirement of the fourth defendant when Ext. A.19 document was produced. He has not given any explanation as to why the fourth defendant was not asked to sign the revival letters. Thus, from the evidence, it is clear that after the retirement of the fourth defendant, the Bank was intimated about it. But the Bank did not direct the fourth defendant to participate in signing the revival letters nor the Bank issued any notice to the fourth defendant to repay the money. It is on the basis of the oral evidence as well as on the basis of Ext. A.19 and non-signing of the revival letters that the learned counsel argued that the fourth defendant has been discharged from the liability.
9. As already stated, Section 32 of the Act is the Section dealing with the retirement of partner. Section 32(2) of the Act says that a retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such party and the reconstituted firm after he had knowledge of the retirement. Section 32(3) of the Act says that public notice has to be given for retirement. But there is a proviso to Section 32(3) of the Act, which says that a retired partner is not liable to any third party who deals with the Firm without knowing that he was a partner. Thus, a partner, who retires from a Firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement. Lindley on Partnership, Fifteenth Edition at page 409, says thus :
    "Effect on creditors of agreement between partners : To apply this to cases of partnership, let it be supposed that a firm of three members, A, B and C, is indebted to D : that A retires, and B and C either alone, or together with a new partner, E, take upon themselves the liabilities of the old firm. D's right to obtain payment from A, B and C is not affected by the above arrangement and A does not cease to be liable to him for the debt in question, although his liability as between himself and B and C may thence forward be that of a surety. But if, after A's retirement, D accepts as his sole debtors B and C, or B, C and E (if E enters the firm), then A's liability will have ceased, and D must look for payment of B and C, or to B, C and E, as the case may be. When, therefore, a partner has retired, and a creditor of the firm continues to deal with the continuing partners and such other persons, if any, as may have become associated with them in partnership, it is of great importance to ascertain whether the creditor has or has not accepted the new firm as his debtors, in lieu of the old firm. If he has, the retired partner's liability will cease, whilst, if he has not, it will still continue."
10. In Vinaitheethal Achi v. Chidambram Chettiar and Others, AIR 1972 Madras 238, it was observed as follows : "Where the new firm assumes liability to pay the debt due to the old firm and the creditor agrees to accept the new firm as his debtor to discharge the old partnership firm from its liability, the partners of the new firm would be liable to pay the creditor". In Syndicate Bank v. R.S.R. Engineering Works, ILR 1994 Karnataka 1095, it is observed as follows : "A reading of Section 32(2) makes it clear that a partner who retires from the firm does not thereby cease to be liable for the partnership debts and obligation incurred by the firm when he retires. Any time a partner can be discharged from the liability if there is such an agreement between the third party and the retiring partner and the partner of the reconstituted firm and such an agreement can be implied by a course of dealing between such third party and the reconstituted firm, if he had knowledge of the retirement...." In that decision, it is also observed thus :
    "This evidence coupled with the documents referred to above clearly proves that the plaintiff Bank was in the know of the retirement of defendant No. 3 from the firm under Ext. D.1 and the dissolution of the firm under Ext. D.4 and it is also the evidence of PW.2 that the plaintiff Bank was also supplied with copy of the Dissolution Deed, which contained stipulations regarding the arrangements made between the partners to the rights and liabilities of the third parties. Under Ext. P.5 defendant No. 4 has informed the plaintiff Bank that the firm is dissolved and he has taken over the firm solely with ownership rights. In spite of the copy of the dissolution being sent to the plaintiff Bank and the intimation sent by defendants 3 and 4 to the plaintiff Bank, the plaintiff Bank has not chosen to intimate any of the defendants about its intention of not accepting the arrangement made by the partners between themselves making respondent No. 4 liable for the dues of the plaintiff Bank. In our opinion the plaintiff Bank by its conduct has accepted the dissolution of the firm whereby respondent No. 4 took over the assets and liabilities of the firm and also undertook the discharge of the liabilities incurred by the firm to the third parties prior to its dissolution. The plaintiff Bank is a nationalised Bank. It cannot be expected to keep quiet if it had any objections to dissolution and was not agreeable to respondent No. 4 taking over the liabilities incurred by the firm prior to its dissolution."
The facts in our case are also similar to the facts in the Karnataka case. The fourth defendant retired from the Partnership on 10.3.1983. The revival letters were signed in 1985-86. At that time the retirement of the fourth defendant was intimated to the Bank, but the Bank did not require the fourth defendant to sign the revival letters. Ext. A.19 agreement between the partners was sent to the Bank. This shows that defendants 2 and 3 are partners and are liable to the debts of the Bank and Ext. A.16 notice was not issued to the fourth defendant. These clearly show that after the Bank was intimated about the retirement of the fourth defendant and about the undertaking by defendants 2 and 3 that they will continue to be liable. This means that the Bank has accepted the agreement and that the partners of the reconstituted Firm will be liable for the debts of the old Firm.
11. In the above view of the matter, we hold that the fourth defendant has been discharged from plaint liability to the Bank. Hence, the decree of the Court below making the fourth defendant liable is set aside and the appeal is allowed. We make it clear that the judgment and decree of the Court below with respect to the other respondents are kept in tact. No order as to costs.
Appeal allowed.
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