Prohibition in USA, No Application of Section 69 of Partnership Act in Arbitration Cases: Delhi High Court

Delhi High Court Justice Bench Neena Bansal Krishna It decided that the bar in Article 69 of the Partnership Law does not fall within the scope of the expression “other transactions” used in Article 69(3) of the Partnership Law. Therefore, the prohibition imposed under Article 69 has no application in arbitration proceedings.

Quick Facts

The Petition under Section 34 of the Arbitration and Conciliation Act, 1996 has been filed on behalf of the Petitioner, who is a partner, seeking to challenge the Order dated 28.04.2017 and the amended Order dated 01.07.2017 in which the learned Arbitrator decided his claims. Petitioner in Arbitration cases relating to partnership Firms M/s Ashika Textiles and Classic Processors.

Plaintiff/petitioner Mr. Hari Om Sharma and Mr. Sauman Kumar Chatterjee and Mr. SK Malhotra, respondent Nos. 1 and 2 respectively, executed a Partnership Deed on 12.05, forming the Partnership Firm M/s Ashika Textiles in the Will. .1995, in Sahibabad, Ghaziabad, Uttar Pradesh, Headquartered in Delhi. Later, two more partner companies were opened.

The third Partnership Firm in Will i.e. Classic Processors was incorporated on 19.12.2000 at Sahibabad, Ghaziabad, Uttar Pradesh with Headquarters in Delhi. Business operations started within the Partnership Firm in June 2001. Ultimately, Two Companies closed their businesses on 31.07.2003. Then disagreements arose between the partners. The petitioner served Legal Notice dated 27.10.2004.

The plaintiff also submitted his Requests by serving the second Legal Notification dated 01.08.2005 upon other facts he learned until 01.08.2005. After receiving a Reply dated 16.08.2005 from the respondents, the petitioner filed the third Legal Notice dated 29.08.2005 seeking resolution of their Dispute through Arbitration.

Defendants only consented in the Ashika Textiles case and refused in the Classic Processors case due to the false claim that there was no Arbitration Clause in the Partnership Deed.

Petitioner subsequently sent a copy of the Classic Processors Partnership Deed containing the Arbitration Clause in 2006, but no further response was received from respondents.

Since the respondents in the connected case of M/s Ashika Textiles had already given their consent, the Arbitrator was appointed for this Company as well. At the request of the parties, both cases were decided by the Arbitrator with a stick.

The Learned Arbitrator thus held that the two unregistered Partnership Firms were not dissolved on 31.07.2003, but the affairs of both the Partnership Firms were closed on the said date and both the Firms were dissolved from the date of the Award.

Discussions

The petitioner submitted that the learned Arbitrator not only went beyond his Jurisdiction but also abused himself by not deciding the Claims in accordance with the Partnership Deed.

It was also alleged that the defendants handed over the business premises to the landlord on the same day without complying with any provision of the Partnership Deed or the Act. Since both Companies are Willing Partnerships, the defendants have not served any written Notice required for the termination of the Companies to the plaintiff.

It was also claimed that the Partnership Firm was unlawfully closed on 01.08.2003. The vacant possession of the business premises was transferred to the landlord on the last business day of the Partnership Business, that is, on 31.07.2003, and this caused damage to the appellant. The learned Arbitrator failed to appreciate the evidence on record and erroneously and arbitrarily held that the cause of action arose on 31.07.2003.

It was further submitted that the decision of the learned arbitrator allowing interest was contrary to the provisions of the Agreement and the relevant Act. The petitioner is actually entitled to claim compound interest on the Capital at the rate of 18% per annum and not 12%.

In contrast, respondents He submitted that the entire claim was barred under Section 69 of the Partnership Act and the Limitation Act. Article 69 is a mandatory provision and the bar inculcated therein cannot be ignored. In this respect, trust has been established. Krishna Motor Service vs HB Vittala Kamath,(1996) And Jagdish Chander Gupta vs. Kajaria Traders (India) Ltd. (1964).

It was also claimed that the plaintiff tried to take advantage of the lack of written documentation regarding the dissolution of the Partnership Company and the money received after the liquidation. Trust is placed in: Baijnath vs. Chottelal, (1958) Here, the court ruled that “the cessation of business, together with other circumstances, may legitimately lead to the conclusion that the partnership has ended.”

Analysis of the Court

The Court initially discussed the scope of intervention under Article 34 of the Arbitration Act and referred to the decision of the Supreme Court. MMTC Limited v Vedanta Ltd, (2019) Pursuant to Article 37 of the 1996 Act, it was decided that interference with the Arbitral Award cannot go beyond the limits set out in Article 34.

The court went further and analyzed the contention regarding the liquidation of companies. First, the court agreed that the arbitrator should rely on the Supreme Court decision. M/S VH Patel & Company & Ors vs Hirubhai Himabhai Patel & Ors, (2000) Here, it has been concluded that in case of violation of the agreement and any behavior that undermines mutual trust, such behavior will definitely lead to the termination of the partnership.

Based on the above, the court observed that as rightly observed by the learned Arbitrator, the date of closure cannot be considered as the date of dissolution of the partnership as the entire assets of the partnership are yet to be distributed.

The court concluded that the findings of the learned arbitrator that there was no liquidation and that the partnership companies would be dissolved from the date of the decision did not involve illegality or perversion and did not require any intervention.

The court also rejected the defendant’s claim that the case could not be sustained because the partnership companies were unregistered and referred to the decision of the Supreme Court dated 12.12.2015. Ananthesh Bhakta / Nayana S. Bhakta, (2017) kept here The bar of Article 69 is limited to Courts and Civil Litigation and cannot be invoked in cases where disputes between partners are submitted to arbitration. As long as the Partnership Deed contains the Clause providing for the arbitration of disputes between partners, failure to register the Partnership Firm does not constitute a basis for rejecting the application for arbitration.

The Court also rejected the plaintiff’s claim of limitation and observed that the Limitation should be calculated from the date on which the cause of action arose. Legal Notice was dated 29.08.2005. There are no deficiencies in the findings of the learned arbitrator regarding certain parts of the claims that were time-barred before 28.08.2002.

The Court concluded that the parties failed to state whether there was any perversion in determining the Claims based on due consideration of the facts and the law. The arbitrator’s findings cannot be substantially reconsidered.

Therefore, the present petition is rejected on the grounds that it lacks merit.

Case Title: HARI OM SHARMA – SAUMAN KUMAR CHATTERJEE & ANR

Case Reference: OMP (COMMUNICATION) 381/2017

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