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Supreme Court sets aside Gujarat HC order on partnership suit

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The Supreme Court observed that the bar of Section 69(2) of the Indian Partnership Act, 1932 is not attracted in relation to the sale transaction.

Moreover, the subject suit cannot be said to be the one for enforcement of right arising from a contract; rather the subject suit is clearly the one where the plaintiff seeks common law remedies with the allegations of fraud and misrepresentation as also of the statutory rights of injunction and declaration in terms of the provisions of the Specific Relief Act, 1963 as also the Transfer of Property Act, 1882.

The Division Bench of Justices Dinesh Maheshwari and Vikram Nath passed this order while hearing a Petition filed by Shiv Developers Through Its Partner Sunilbhai Somabhai Ajmeri

The appeal, by the plaintiff of a suit for declaration and injunction, is directed against the order dated February 15, 2018, as passed by the High Court of Gujarat, whereby the High Court has allowed the revision application filed by the contesting defendants and has reversed the order dated April 7, 2017, as passed by the Court of 9th Additional Senior Civil Judge, Vadodara.

By the said order dated April 07, 2017, the Trial Court had rejected the application moved by the contesting defendants under Order VII Rule 11(d), Order XXX Rules 1 and 2 and Section 151 of the Code of Civil Procedure, 19083 read with Section 69 of the Indian Partnership Act, 1932 for rejection of plaint on the ground that the suit filed by and on behalf of an unregistered partnership firm was barred by law.

The Trial Court essentially held that, on its subject-matter relating to the validity of the sale deed in question, the bar of Section 69(2) was not operating against this suit. However, the High Court has taken a contrary view of the matter and has held that the plaintiff, being an unregistered firm, would be barred from enforcing a right arising out of the contract in terms of Section 69(2) of the Act of 1932.

The Court noted that the factual matrix and the background aspects of the matter, so far relevant for the question calling for determination in this matter, i.e., as to whether the subject suit, filed by an unregistered partnership firm, is covered by the bar created by Section 69(2) of the Act of 1932?

The facts of the case are that the appellant herein is an unregistered partnership firm, Shiv Developers. It is stated that this firm is engaged in the business of construction of buildings and is composed of two equal partners, namely, Sunilbhai Somabhai Ajmeri and Jignesh Kanubhai Desai. The said Sunilbhai Somabhai Ajmeri is also referred to as ‘the administrator’ of this firm and has filed the suit on behalf of the firm.

The plaintiff-appellant has averred that on November 26, 2013, the appellant and Dineshbhai Bhailal Bhai Patel and Arjunsinh Narayansinh Rajput (respondent Nos. 2 and 3) purchased a property (open land) 5 bearing Tika No 5/3, City Survey No 104, 105, 132, 106/A in City Survey Vibhag- B, situated on Kalal Pitha Road, Hujaratpaga, Sub-District Vadodara, admeasuring 232.81 square metres, through a registered sale deed. According to the appellant, its share in the suit property was 60% and the respective shares of respondent Nos 2 and 3 were 20% each.

It has further been averred that on April 22, 2014, a new partnership by the firm name “Aksharay Developers” was formed with four partners, Sunilbhai Somabhai Ajmeri and Dineshbhai Bhailal Bhai Patel, Arjunsinh Narayansinh Rajput, Ranjitsinh Narayansinh Rajput (respondent Nos 2, 3 and 4).

According to the plaint averments, the said partnership was formed exclusively for the purpose of the project related with the suit property and the tenure of the partnership was confined to the completion of the said project.

A Memorandum of Understanding (MOU) was signed by the partners on the date of incorporation of the firm, i.e, 22.04.2014; and it was agreed in the MOU that from the income which may accrue from the project, a fixed sum of Rs 1,00,00,000 (Rs 1 Crore) would be paid to Sunilbhai Somabhai Ajmeri along with 5-10% on the profit accruing upon the completion of project.

According to the appellant, the said MOU clearly acknowledged the fact that all the parties to the MOU were the partners of the firm “Aksharay Developers” and the MOU was being entered by virtue of the same.

The grievance of the appellant has been stated in the manner that in new turn of events, on February 23, 2015, the respondent Nos 2 and 3 constituted another firm under the same name and style as “Aksharay Developers” but without including Sunilbhai Somabhai Ajmeri and respondent No 4 as partners.

This firm, as constituted on February 23, 2015, is the “Aksharay Developers” (respondent No 1) herein and it is alleged that the same has been constituted and got registered by the respondent Nos 2 and 3 clandestinely and fraudulently.

It is further alleged that on the very next day of constituting the respondent No 1 firm, i.e, on 24.02.2015, the respondent Nos 2 and 3 got executed a sale deed, whereby 60% share of the appellant in the suit property was purchased by this firm Aksharay Developers from Sunilbhai Somabhai Ajmeri, acting on behalf of the appellant firm Shiv Developers.

It has yet further been alleged that the cheques issued in favour the appellants towards sale consideration were dishonoured.

As per the appellant, Sunilbhai Somabhai Ajmeri was oblivious to the fact that on 23.02.2015, the respondent Nos 2 and 3 got registered a partnership firm under the name “Aksharay Developers” without any mention of himself and the respondent No 4; and that Sunilbhai Somabhai Ajmeri was throughout under the bona fide belief that the suit property of appellant firm was being sold to that firm wherein he was also a partner as per the partnership deed and MOU dated 22.04.2014.

Counsel for the appellant submitted that the High Court has failed to appreciate that Section 69(2) of the Act of 1932 does not bar all suits by an unregistered partnership firm against third parties. In the factual matrix of the case, suit is not hit by Section 69(2) because the contract is not in the regular business dealings of the firm; and the words “enforcing a right arising under the contract” used in Section 69(2) of the Act of 1932 signify the rights arising out of contracts in respect of the firm’s business transactions only.

Counsel has supplemented his arguments with reference to the concurrent findings of the Trial Court and the High Court on the fact that the contract under consideration, on which the suit is premised, was not in connection with the business of the unregistered firm. Therefore, as per the law laid down by the Court, suit of the appellant is not barred under the provisions of Section 69(2) of the Act of 1932.

Counsel has further argued that the High Court has committed an error in bringing all suits by an unregistered firm against the third party within the ambit of Section 69(2) of the Act of 1932.

Per contra, Counsel appearing for the contesting respondents has strenuously argued that the sale document dated 23.02.2015 was executed by the administrator-partner of the unregistered firm and not in his individual capacity. Consequently, the sale document was related to the business of the firm.

Having given anxious consideration to the rival submissions and having examined the record with reference to the law applicable, the Apex Court of the view that the order dated 15.02.2018, as passed by the High Court, cannot be sustained and the bar of Section 69(2) of the Act of 1932 is not attracted to the suit filed by the appellant.

The Apex Court held that,

Taking up the facts of the case, one of the significant features herein is that the transaction in question, i.e, sale of its share by the plaintiff firm to the contesting defendants has not been the one arising out of the business of the plaintiff firm. This factual aspect is apparent from the basic plaint  averments and is fortified by the concurrent findings of the Trial Court as also of the High Court.

Though the High Court endorsed the finding that the transaction in question was not arising out of the business of the plaintiff firm but, it appears that the implication of this crucial finding has not acquired the requisite attention of the High Court.

“As noticed, the crucial and key factor in the case remains that the sale transaction in question is not arising out of the business of the appellant firm. Equally significant fact is that the subject suit is for enforcing a right of avoidance of a document on the ground of fraud and misrepresentation as also the statutory rights of seeking declaration and injunction.

Significantly, the composition of defendant firm “Aksharay Developers” (defendant No 1) has itself been questioned by the plaintiff appellant while alleging that on 22.04.2014, this firm was constituted with four partners but later on, the defendant Nos 2 and 3, constituted another firm in the same name with themselves as partners while leaving aside the other two.

We are not commenting on the merits of the case of either of the parties but this much is apparent from a look at the frame and contents of the plaint as also the prayers therein that the present one cannot be said to be such a suit by the unregistered firm which would attract the bar of Section 69(2) of the Act of 1932,” Court further held that.

The Apex Court observed that the relevant principles, when applied to the facts of the case, leave nothing to doubt that the transaction in question was not the one entered into by the plaintiff firm during the course of its business (i.e, of building construction); and it had been an independent transaction of sale, of the firm’s share in the suit property, to the contesting defendants. The bar of Section 69(2) is not attracted in relation to the said sale transaction.

Moreover, the subject suit cannot be said to be the one for enforcement of right arising from a contract; rather the subject suit is clearly the one where the plaintiff seeks common law remedies with the allegations of fraud and misrepresentation as also of the statutory rights of injunction and declaration in terms of the provisions of the Specific Relief Act, 1963 as also the Transfer of Property Act, 1882 (while alleging want of the sale consideration). Therefore, the bar of Section 69(2) of the Act of 1932 does not apply to the case.

“Accordingly, this appeal is allowed; the order dated 15.02.2018, as passed by the High Court of Gujarat in Civil Revision Application No 241 of 2017 is set aside; and the order dated 07.04.2017 as passed by the 9th Additional Senior Civil Judge, Vadodara in Special Civil Suit No 333 of 2015 is restored,” the Court ordered.

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