2021 (7) TMI 1392 - HC - Indian Laws

Partnership not liable for retired partner's debts; court directs release of withheld amounts

The court held that the partnership firm was not liable for debts incurred by an individual partner, emphasizing the lack of intention to bind the firm. ... Doctrine/principle of pristine Hindu law - privity of contract between the respondents and the petitioner or not - whether the basic principles of the laws relating to partnerships and contracts will not apply when one of the contracting parties is the State? - HELD THAT:- The undisclosed principal in the present case is the partnership firm represented by the petitioner. In the light of the agreement executed between the respondents and Smt. P. Syamala, the respondents cannot contend that she had executed the document with any intention to bind the firm or in her capacity as a partner of the firm. This is all the more evident from the reading of Ext.R4(a) which had preceded the agreement. Even though in Ext.R4(a) the legal heirs of Late Sathyapalan had expressed the willingness of the firm to carry out the work, the respondents chose to execute the agreement with Smt. P. Syamala in her individual capacity. As such, neither Smt. P. Syamala nor the respondents have intended the agreement to bind the firm. It follows therefore that no liability alleged to have been incurred as a result of Ext.P6 agreement can be fastened on the petitioner. Whether the partnership assets can be made liable for a debt allegedly owed by a partner? - HELD THAT:- There can be no doubt that if a partner owes any money, the creditor will be entitled to proceed against the profits that may be earned by the debtor, in his capacity as a partner of a firm or against the debtors' interest in the partnership firm. In the case on hand, Smt. P. Syamala had retired from the partnership as can be seen from Ext.P4 deed dated 31.03.2013, whereby the partnership was reconstituted. There is nothing in the pleadings of the parties to show that the retiring partner had any rights subsisting in the partnership, on the date of issuance of Ext.P3 letter by the Assistant Executing Engineer, proposing to withhold the amounts due to the firm, towards the risk and cost liability of Smt. P. Syamala. Ext.P3 proceeds on the basis that Smt. P. Syamala is a partner of the firm, which does not appear to be correct on the basis of Ext.P4 deed - Since the question whether Smt. P. Syamala has any 'cost and risk' liability to the respondents is admittedly pending consideration of the competent civil court, it is not necessary in these proceedings to go into the question as to the modes of recovery that can be resorted to by the respondents, if they are able to succeed in the civil court. The decision contained in Ext.P3 to withhold the payment due to the petitioner's firm is set aside. There will be a direction to the respondents to release the credit received in favour of the petitioner's firm for payment of CC8 and final bill amounting to Rs. 30,01,268/- immediately, at any rate within a period of one month from the date of receipt of a certified copy of this judgment - the writ petition is allowed. Issues Involved:1. Liability of the partnership firm for debts incurred by an individual partner.2. Validity of withholding amounts due to the partnership firm for debts allegedly owed by a retired partner.3. Interpretation of the nomination and its implications on the partnership firm.4. Applicability of Sections 19 and 22 of the Partnership Act in binding the firm.Issue-wise Detailed Analysis:1. Liability of the partnership firm for debts incurred by an individual partner:The court examined whether the partnership firm could be held liable for debts incurred by an individual partner, specifically the mother of the petitioner, who had undertaken a contract in her personal capacity. The court emphasized that the nomination in favor of Smt. P. Syamala was solely for receiving amounts due to her deceased husband and did not imply any liability on the partnership firm. The court referenced Sections 19 and 22 of the Partnership Act, which outline the conditions under which a partner's actions can bind the firm. It was highlighted that the respondents failed to establish that the liability incurred by Smt. P. Syamala was related to her actions as a partner intending to bind the firm.2. Validity of withholding amounts due to the partnership firm for debts allegedly owed by a retired partner:The court scrutinized the decision to withhold the payment due to the petitioner's firm based on the alleged liability of Smt. P. Syamala. It was noted that Smt. P. Syamala had retired from the partnership firm as evidenced by the Deed of Reconstitution. The court pointed out that the respondents' action was based on the incorrect assumption that Smt. P. Syamala was still a partner. The court concluded that the respondents could not withhold amounts due to the firm for debts allegedly owed by a retired partner, especially when her liability was still under consideration by a civil court.3. Interpretation of the nomination and its implications on the partnership firm:The court analyzed the nomination of Smt. P. Syamala for receiving amounts due to her deceased husband and determined that it did not imply any liability on the partnership firm. The nomination was solely for the purpose of receiving payments and did not bind the firm to any obligations. The court referenced Exhibit P6, the supplemental agreement executed between Smt. P. Syamala and the Superintending Engineer, which indicated that the work was entrusted to her in her personal capacity, not on behalf of the partnership firm.4. Applicability of Sections 19 and 22 of the Partnership Act in binding the firm:The court explained the provisions of Sections 19 and 22 of the Partnership Act, which stipulate that a partner's actions can bind the firm only if done in the firm's name or with the intention to bind the firm. The court cited the Supreme Court's decision in Devji v. Magan Lal R. Atharana, which reinforced that a partner's actions must explicitly indicate an intention to bind the firm. The court found that the actions of Smt. P. Syamala did not meet these criteria, and thus, the partnership firm could not be held liable for her individual debts.Conclusion:The writ petition was allowed, and the decision to withhold the payment due to the petitioner's firm was set aside. The respondents were directed to release the withheld amount immediately. The court clarified that it did not express any opinion regarding the ongoing civil suit concerning Smt. P. Syamala's liability. The parties were instructed to bear their respective costs.