sat 1/10 arb.appeal 42-2013.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION ARBITRATION APPEAL NO. 42 OF 2013 Mrs.[ENTITY] & Anr. Appellants vs. Mr.[ENTITY] & Ors. Respondents Mr.[ENTITY], Senior Advocate with Mr.[ENTITY] with Mr.[ENTITY] with Ms.[ENTITY] with Ms.[ENTITY] i/b. M/s.Federal & Rashmikant for Appellants/Applicants. Mr.[ENTITY], Senior Advocate with Ms.[ENTITY] i/b. Mr.[ENTITY] for Respondent No.1. Mr.[ENTITY], Senior Advocate with Mr.[ENTITY] i/b. M/s.Mulla & Mulla & CBC for Respondent Nos.2 and 3. CORAM : S.C. GUPTE, J. RESERVED ON: 23 APRIL 2014 PRONOUNCED: 07 MAY 2014 ORDER :
The appeal is from an order passed by the learned District Judge, Satara, on an application under [SECTION] of the [ACT] (the Act). By the impugned order, the learned trial Judge rejected the Appellants' application for appointment of Court Receiver of the business and assets of the partnership firm of the Appellants and Respondents.
2 The Appellants and Respondents were partners in a partnership firm. The firm carried on business of running of a boarding and lodging house known as IL Palazzo Hotel. The partnership was initially formed by three brothers
- [ENTITY], [ENTITY] and [ENTITY] - in the year 1958. Appellant No.1 is the widow of [ENTITY], whilst Appellant No. 2 is the widow of [ENTITY]. Respondent Nos.1 to 3 are sons of [ENTITY]. By a Deed of Partnership dated 6 March 1992, the partnership firm "lL Palazzo Hotel" was reconstituted. The Appellants had 33.1/3% share sat 2/10 arb.appeal 42-2013.doc each in the net profits and / or losses of the firm, whilst Respondent Nos.1, 2 and 3, respectively, had 11%, 11% and 11.1/3% shares. It is the case of the Appellants that from September 2012, Respondent No.1 has been attempting to utilise the partnership assets for his personal benefit at the cost of the partnership business. By notice dated 15 March 2013, the Appellants dissolved the partnership firm "IL Palazzo Hotel" with immediate effect. The Appellants also invoked the arbitration agreement forming part of the Deed of Partnership and suggested appointment of a sole arbitrator. Respondent Nos.1 and 2 disputed the dissolution notice claiming inter alia that the firm was not a partnership at will.
Immediately on the date following the dissolution notice, i.e. on 16 March 2013, Respondent No.1 withdrew a sum of Rs.11 lacs from the partnership account in IDBI Bank and Bank of Maharashtra. As a result, disputes and differences arose between the parties and an arbitration application under [SECTION] of the Act was filed by the Appellants. On 6 April 2013, an ad-interim injunction order was passed by the learned District Judge, Satara, against the Respondents restraining them from withdrawing any amount from the partnership account except under joint signatures of the Appellants. Ad-interim injunction was also granted in respect of creation of third party rights in the partnership business and assets. The ad-interim application for appointment of Court Receiver was, however, rejected by the learned District Judge. That rejection is challenged in the present appeal.
3 In the meanwhile, the Appellants also preferred an application under [SECTION] of the Act for appointment of an Arbitral Tribunal. On this application, the Court was pleased to appoint an Arbitral Tribunal consisting of five arbitrators.
Aggrieved by the constitution of the Arbitral Tribunal of five arbitrators, the Appellants have preferred an SLP, which is pending disposal before the Supreme Court.
4 Learned Counsel for the Appellants submits that the partnership was at will; it is submitted that the Appellants, who have 2/3 rd share in the profits and losses of the partnership, have lost confidence in Respondent No.1; that the firm has accordingly been dissolved by the Appellants by a notice of dissolution. It sat 3/10 arb.appeal 42-2013.doc is submitted that Respondent No.1 is not entitled to carry on the business of the partnership firm any longer and that it is imperative that a Court Receiver is appointed to take charge of the partnership assets pending winding up of the business of the partnership firm and settlement of accounts between the partners. It is further submitted that the appointment of the Court Receiver is all the more necessary considering the fact that Respondent No.1 has been carrying on the business of partnership in cash since receipt of the dissolution notice.
5 It is submitted, on the other hand, by learned Counsel for Respondent No.1 that the appeal is not maintainable. It is submitted that the impugned order is passed by the trial court in the exercise of its powers under [SECTION] of the [ACT] and not under [SECTION] of the Act and that such an order is not appealable under [SECTION] of the Act. On merits, it is denied by Respondent No.1 that the partnership is at will. It is submitted by learned Counsel that Respondent No.1 is entitled to carry on the business of the firm.
6 Learned Counsel for Respondent Nos.2 and 3 submits that the Appellants have not shown willingness to go before the Abitral Tribunal consituted in the matter. He relies on the judgment of the Supreme Court in the case of [PRECEDENT] and submits that omission on the part of the Appellant to approach the arbitral tribunal justifies denial of interim relief under [SECTION] to the Appellants. Learned Counsel further submits that in the absence of any allegation of siphoning off funds or mismanagement against Respondent No.1, the conduct of business by Respondent No.1 ought not to be interfered with by appointment of a Court Receiver.
7 As for the preliminary objection to maintainability, Mr. [ENTITY], learned Senior Counsel appearing for Respondent No.1, contends that an order granting or refusing grant of ad-interim relief, pending disposal of an arbitration application under [SECTION], is an order passed by the Court in exercise of its [PRECEDENT] sat 4/10 arb.appeal 42-2013.doc powers under [SECTION] of the [ACT]. He relies on the judgment the Supreme Court in [PRECEDENT] and submits that whilst entertaining an application under [SECTION], the Court has the same powers for making orders as it has for the purpose and in relation to any proceedings before it, which include the powers under [SECTION]. The submission is that an ad-interim order, which is passed in exercise of powers under [SECTION], which would otherwise have been appealable under [SECTION], is not appealable because of the words contained in the parenthesis in the opening line of [SECTION], namely, an appeal shall lie from the following orders "(and from no others)". The learned Counsel also relies upon the decision of this Court in [PRECEDENT] in support of his case that under [SECTION] of the Act, an appeal lies only against a final order passed in a proceeding instituted under [SECTION] of the Act. He submitted that an appealable order under [SECTION] is of necessity an order which outlives the proceedings under [SECTION].
8 It is difficult to see how any order passed by the Court in an application to it under [SECTION] of the Act is not an order passed under [SECTION] by reason of the Court having exercised powers under [SECTION]. As explained in the case of Arvind Constructions Co. (P) Ltd. (supra), whilst powers are conferred on the District Court under [SECTION] of the Act for ordering an interim measure of protection, no special procedure is prescribed by the Act in that behalf. Whilst entertaining an application under [SECTION] of the Act, the Court has the same power for making orders as it has for the purpose of and in relation to any proceeding before it. This is on the principle that when a power is conferred under a special statute and on an ordinary court of land without laying down any special condition for exercise of that power, the general rules of procedure of that court would apply. Thus, every order by the District Court under [SECTION], whether ad-interim or interim, is passed by using powers of the Court which are ordinarily exercised whilst deciding an interlocutory application before it. These include powers under [SECTION] or well recognised principles for exercise 2 (2007) 6 SCC 798 3 2012(6) Bom.C.R. 149 sat 5/10 arb.appeal 42-2013.doc of such powers. The order passed by the court in an application made to it under [SECTION] of the act by exercising such powers is very much an order passed under [SECTION], and is appealable under [SECTION] of the Act. Grant or refusal of an interim measure of protection by way of an ad-interim order under [SECTION] of the Act is, thus, an appealable order under [SECTION]. There is nothing in law which requires the life of such an order to extend beyond the pendency of the proceeding under [SECTION]. The judgment of our court in Conros Steels Pvt. Ltd. (supra) has not decided the point as to whether or not an ad-interim order passed under [SECTION] is appealable under [SECTION]. A casual reference to 'final order' under [SECTION] being appealable cannot be termed as laying down any such law.
9 The objection to grant of ad-interim relief of receiver on the ground of omission to prosecute arbitration proceedings on the part of the Appellants, has no merit either. The Appellants have themselves applied for appointment of an arbitral tribunal. They are aggrieved by the constitution of the tribunal as ordered by the Court and are prosecuting their remedy in respect of such constitution before the Supreme Court. It cannot be said that the Appellants have omitted to prosecute the arbitration proceedings. The judgment of Firm Ashok Traders (supra) has no application to the facts of the present case.
10 Coming now to the merits of the ad-interim application, prima facie the Appellants have a case for dissolution of the partnership. The partnership has a clause to the effect that the partnership is at will. Receipt of the notice of dissolution by the Respondents is not disputed. It is well settled that after dissolution of a partnership firm, the partners cannot exercise their rights with respect of the partnership firm except for the purposes of winding up of the business of the partnership firm. In order to protect and preserve the assets and the business of the partnership firm pending winding up of the affairs of the firm and settlement of accounts between partners, it is ordinarily necessary that a Receiver is appointed of such business and assets. Secondly, it is an admitted position that for a substantial period of time post notice of dissolution and restraint order of the trial court against unilateral operation of the bank account of the firm, sat 6/10 arb.appeal 42-2013.doc Respondent No.1 has conducted the business of the partnership firm in cash without depositing the receipts and income of the partnership business into the bank account of the firm. The Respondent has expressly pleaded in his pleadings as follows:
"43. With reference to the contents of paragraph 7.2 of the Affidavit I say that it was the consistent practice earlier that any surplus was required to be deposited in the suit partnership bank account but for the dissolution notice which was given by the Applicants even this surplus amount for the period from April 2013 onwards would also have been deposited in the Bank account. In that eventuality even that amount would have got frozen and there would not be any money left with me for the purpose of running the said Hotel and even making the statutory payments also which would have worsened the situation. In such circumstances, it was necessary for me to maintain the cash in my hand, for the purpose of running the hotel and making the mandatory expenditure." [para 43 @ pg. 300 of [ENTITY] dated 16th November, 2013] "110. With respect to the contents of Paragraph-23 of the affidavit I say that the amount has not been deposited in the business only because if the amount would have been deposited nothing would have been left with me for the purpose of running the hotel. In light of the order, passed by the Honourable Court and in the light of the notice of the alleged dissolution, there was no malafide intention but it was a situation which had been created by the Applicants themselves. With reference to the contents of Para-23, I therefore say that the allegation made therein are denied by me. I say that, so far as the maintenance of accounts are concerned I have already dealt with the same in detail in earlier part of this affidavit and I may be permitted to refer the same." [para 110 @ pg.322-323 of [ENTITY] dated 16th November, 2013] In the premises, the prayers for appointment of an ad-interim court receiver are clearly justified. There is no reason whatsoever why the ordinary relief of appointment of a receiver should be denied in this case. If at all, there are positive reasons why such relief ought to be granted in the present case.
11 The basis of the impugned order seems to be two-fold. The learned District Judge has held that documents on record prima facie show that the sat 7/10 arb.appeal 42-2013.doc immovable properties are not the assets of the partnership firm, though admittedly the partnership firm has been conducting the business of running of the hotel in these immovable properties. Secondly, it is held that it is not the case of the Appellants that Respondent No.1 is keeping false or bogus record of partnership firm. The learned trial Judge, in the premises, has considered the ad- interim order issued for restraining unilateral operations of the bank account and creation of third party rights as well as directions to keep accounts of the partnership firm until further orders, to be sufficient interim measures of protection.
12 It may be noted that quite apart from the question of ownership of the immovable property, the partnership business is admittedly carried on in the immovable property and that the building constructed within the immovable property is owned by the partnership. Prima facie the partnership is a partnership at will and the Appellants, who admittedly have a 2/3 rd share in the partnership have lost confidence in Respondent No.1 who was in conduct of the business. The Appellants have duly served a dissolution notice on the Respondents. Prima facie after such dissolution notice, Respondent No.1 has no right to carry on business of the partnership either on account of the partners or his own account. It is just and convenient that a Court Receiver is appointed of the assets and properties of the partnership firm with a view to protect them pending beneficial winding up of the firm. The interest of the Appellants, who are majority partners having 2/3rd interest in the firm, cannot be said to be adequately protected simply by directing Respondent No.1 to keep accounts. The interim injunction in respect of unilateral operations of the bank account of the partnership firm, as indicated above, has already been rendered meaningless since the Appellant has been carrying on business in cash. In the premises, it is absolutely imperative that the Appellants' interests are protected by appointment of a Court Receiver. It is not necessary for the Appellants to show that Respondent No. 1 has been keeping false or bogus accounts so as to claim such appointment. The learned trial judge is clearly in error in not granting an ad-interim receiver.
13 The submission that it is not in the interest of justice to appoint a sat 8/10 arb.appeal 42-2013.doc
Receiver which has the effect of closing down of the business, entailing a loss of its goodwill, has no merit, since in any event pending the winding up of the affairs of the firm and settlement of accounts between the parties, the business can be conveniently carried on by either of the parties as an agent of the Court Receiver.
14 Both the parties were asked to submit their respective offers to take over the agency to continue the business of lodging and boarding house of IL Palazzo. The Appellants have offered to pay an annual royalty of Rs.92 lacs, if the Appellants are appointed as agents of the Court Receiver. This Court called upon Respondent No.1 to match this offer. The Court even showed an inclination to appoint Respondent No.1 as an agent of the Court Receiver even if its offer falls short of the offer of the Appellants by a little margin, since the Respondent has been conducting the business of the partnership firm since the last few years.
Learned Counsel for Respondent No.1, however, expressed his client's inability to come anywhere near the offer of the Appellants. Respondent Nos. 2 and 3 had no offer to make.
15 Learned Counsel for Respondent No. 1 only submitted that his client has the suit business as the only source of livelihood (Respondent No. 1 is claimed to have been paid a salary of Rs. 75000/- per month for running the hotel), and even lives in two rooms within the building where the partnership business is carried on. Learned Counsel submitted that both the source of livelihood and residence of his client need to be protected. There appears to be substance in this submission. It is more or less admitted by all parties that Respondent No.1 was actually using two rooms and also getting a salary for running of the lodging and boarding business.
16 Learned Counsel for Respondent Nos.2 and 3 submits that Respondent Nos.2 and 3 were also using one room whenever they visited the premises of Hotel IL Palazzo. Nothing is pointed out to the Court that the partners have agreed to any such use on a permanent or even exclusive basis. There is no question of protection of any such use pending disposal of [SECTION] application of the Appellants.
sat 9/10 arb.appeal 42-2013.doc 17 For all these reasons and having regard to the respective stands of
the parties and their individual requirements, interests of justice would be served adequately if the impugned order is set aside and the following ad-interim order is passed during the pendency of the application under [SECTION]. Accordingly, it is ordered that:
(i) Court Receiver, High Court, Bombay, is appointed as a Receiver of the assets and business of the partnership firm of Hotel IL Palazzo constituted under the partnership deed dated 6 March 1992. The Court Receiver shall only take symbolic possession of the assets and business. Respondent No.1 is directed to hand over such possession to the Court Receiver within a period of two weeks from today. The Appellants are appointed as agents of the Court Receiver on payment of an annual royalty of Rs.70 lacs payable in quarterly instalments. A sum of Rs.17.5 lacs representing the instalment of royalty for a quarter shall be kept as security deposit with the Court Receiver for due compliance with the Agency Agreement. The Court Receiver shall accordingly enter into an agreement with the Appellants with security and royalty so provided for and on usual terms and conditions of the Agency Agreement;
(ii) Respondent No.1 shall be entitled to retain two rooms presently in his personal use for the residence of himself and his family in the building where the business of the partnership firm is carried on as agent of the Court Receiver without payment of any royalty;
(iii) Respondent No.1 shall be entitled to receive a sum of Rs.64,500/- per month from out of the royalty sat 10/10 arb.appeal 42-2013.doc
paid by the Appellants as an ad-hoc share of Respondent No. 1 in the royalty paid by the agents of the Court Receiver;
(iv) The Arbitration Appeal is accordingly disposed of;
(v) Liberty to the parties to apply. 18 Learned Counsel for Respondent No.1 and Respondent Nos.2 and
3 seek stay of this order. There is already two weeks' time granted for delivery of possession of the suit premises. Prayer for stay is refused.
([ENTITY], J.)