JUDGMENT M. Katju, J.
1.This appeal has been filed against the impugned order of the District Judge, Kanpur Nagar dated 22.12.2003 by which the appellant's application under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Arbitration Act) has been dismissed.
2. Heard Sri S.P. Gupta, learned senior advocate and Sri Sunil Gupta learned senior advocate for the appellants and Sri Ravi Kant, senior advocate and Sri H.N. Singh for the respondents.
3. The facts of the case are that a partnership firm M/s. Modern Metal Industries, appellant No. 1, was constituted under the Partnership Act, whose partners included (1) the appellant No. 2, Shri Bhagwan Gupta, (2) Smt. Shanti Parolia, and (3) Smt. Sunil Kumari Parolia. The business of the firm consisted of manufacture and sale of various aluminium and steel products, and the factory is located in the premises at 83/258A, Juhi Khurd, Kanpur. True copy of the partnership deed is at page 46 of the paper book in this case being Annexure-1 to the affidavit in support of the stay application. Clause 18 of the partnership deed states :
"That all disputes and questions in connection with the partnership or interpretation of this deed arising between the partners or between any one of them and the legal representative of the other or between their respective legal representatives and whether during the continuation of or after the termination of this partnership shall be referred to sole arbitrator Sri Dataram Parolia, 44, Burtolla Street, Calcutta according to the provisions of the Arbitration Act in force and his decision shall be binding on all concerned."
4. The partnership was initially constituted in 1965 and it was reconstituted thrice but the present three partners were partners of the firm throughout. The last reconstitution of the firm was in the year 1982 with only the present three partners. Thus, it is evident that the firm has been functioning for almost 40 years.
5. It is not disputed that from the very inception the appellant No. 2 has been residing at Kanpur whereas the respondent Nos. 1 and 2 are housewives and have been residing with their families at Calcutta. The wife of appellant No. 2 is the sister of the husbands of respondent Nos. 1 and 2. It is alleged by the appellant No. 2 that since the place of business and factory of the firm was at Kanpur it is obvious that the understanding between the partners was that the respondent Nos. 1 and 2 will be sleeping partners while appellant No. 2 was to be exclusive managing partner of the firm's business located at Kanpur. It is alleged that this fact is not even disputed by the respondent Nos. 1 and 2 as in their legal notice dated 1.10.2003 it has been mentioned that they are permanent residents of Calcutta while appellant No. 2 has been managing the affairs of the firm/factory at Kanpur. It has also been admitted by the respondent Nos. 1 and 2 in their application dated 17.11.2003 before the High Court in previous F.A.F.O. No. 1059 of 2003 between the parties that they had agreed that one partner alone, namely, appellant No. 2, Shri Bhagwan Gupta, shall operate the S.B.I. Bank account of the firm at Kanpur. Paragraph 3 of the said application reads as follows :
"That it is relevant to state here that under the terms of the partner, all partners had equal right and it was only the consent given by remaining partners that one partner was allowed to operate the bank account."
6. It may be mentioned that in the counter-affidavit in reply to the affidavit in support of the stay application in the present appeal it has been stated (vide paragraph 10) :
"The account was being operated jointly initially by the appellant No. 2 and one other partner Indra Dev Gupta upto ..................... and after retirement of Sri Indra Dev Gupta with the consent of the partners by Shree Bhagwan Gupta.,............"
7. Thus, from the facts it appears that the bank account of the firm in the S.B.I. account at Kanpur was being operated solely by appellant No. 2 with the tacit agreement of respondent Nos. 1 and 2.
8. Learned counsel for the respondents Sri Ravi Kant has submitted that Clause 11 of the partnership deed has stated that all the partners shall be entitled to operate the account or accounts of the firm jointly or severally as may be mutually decided between them from time to time.
9. In our opinion Clause 11 of the partnership deed itself contemplates that the partners may agree that any one of them can alone operate the firm's bank account. At any event it is evident from the application dated 17.11.2003 in F.A.F.O. No. 1059 of 2003 and paragraph 10 of the counter-affidavit in this case that Clause 11 of the partnership deed was impliedly varied by the consent of the partners at least for the last 18 years and this was quite valid as an agreement can be varied by a course of dealing. Section 11 of the Partnership Act, 1932 states :
"Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing."
10. In the present case it appears to us that variation has been done by implication as well as by the course of dealing between the parties, and the partners had by their conduct agreed that appellant No. 2 alone will operate the bank account. This variation has not been re-varied and is existing till today.
11. In this connection it has been alleged in paragraph 12 of the affidavit in support of the stay application in this appeal that at all points of time all cheques have been deposited and drawn in the aforesaid S.B.I. bank account of Kanpur only by the appellant No. 2 and never by respondent Nos. 1 and 2. This averment in the affidavit has not been denied in the counter-affidavit filed in this appeal. Thus, it stands unrebutted that at least ever since the last reconstitution of the firm, i.e., since 1982 the firm's bank account has been operated solely by appellant No. 2; and this was being done by the implicit or explicit consent of respondent Nos. 1 and 2.
12. It may also be mentioned that on 25.7.1987 the respondent Nos. 1 and 2 executed a General Power of Attorney in favour of appellant No. 2 to act and sign on behalf of the firm in all transactions including those with offices of the Ministry of Defence, Directorate General Supplies and Disposal, etc. of the Government of India. In fact it is obvious that since respondent Nos. 1 and 2 are housewives living at Calcutta they could obviously not run the business of the firm which was located at Kanpur. In our opinion the respondent Nos. 1 and 2 were like absentee landlord who were only interested in getting profits without making any contribution to the running of the business. It is obvious from the facts that the business was being run solely by appellant No. 2 who was residing at Kanpur and was for all practical purposes the managing partner of the firm, whereas the respondent Nos. 1 and 2 were only sleeping partners and were only interested in getting their share in the profits of the firm without making any contribution to its operations. True copy of the General Power of Attorney is annexed as Annexure-2 to the affidavit filed in support of the stay application.
13. From the facts of the case, it appears that the respondent Nos. 1 and 2 started resorting to arm twisting tactics. Initially they wanted to sell their shares to appellant No. 2 at an exorbitant price. Under Clause 14 of the partnership deed it was provided that no partner shall without the consent of the other partners in writing transfer his/her share in the firm. Since the respondent Nos. 1 and 2 demanded an exaggerated and exorbitant price which the appellant No. 2 was unable to pay they started resorting to obstructionist methods so that the firm may not function properly. In this connection respondents No. 1 and 2 with their husbands personally visited the factory at Kanpur in June, 2003 and checked the accounts and stocks of the firm to their satisfaction but they asked the appellant No. 2 to keep the account since April, 2003 in abeyance pending negotiations for purchase of their shares by appellant No. 2.
14. Subsequently on 22/ 23.9.2003 the respondent No. 2 along with one Chandra Kishore Thakur, clerk in the firm, on the excuse of Durga Pooja without any information or permission of appellant No. 2 and behind his back attempted to hold a public meeting within the factory premises and for that purpose purported to seek permission for this purpose. True copy of the application of Chandra Kishore. Thakur dated 22.9.2004 to the Additional City Magistrate, Kanpur Nagar seeking permission to hold a public meeting on the occasion of Durga Pooja in the factory premises and true copy of the application of respondent No. 1 to the same effect is Annexure-3 to the affidavit in support of the stay application.
15. It is alleged in paragraph 16 of the affidavit in support of the stay application in this appeal that this was done behind the back of the appellant No. 2 and had never been done in the 40 years of the firm's existence. The whole intention of the respondents appeared to be to oust the appellant No. 2 and grab the premises with the help of anti-social elements.
16. It may be mentioned that the premises of the firm are in the sole tenancy of appellant No. 2 as alleged in paragraphs 5 and 7 of the affidavit which is uncontroverted in the counter-affidavit.
17. On 1.10.2003 the respondent Nos. 1 and 2 sent a letter through their advocate to appellant No. 2 accepting that all accounts had been regularly received till March, 2003 but alleging non-furnishing of the statement of accounts thereafter. This letter was received by the appellant No. 2 on 6.10.2003.
18. On 3.10.2003 the respondent No. 1 by her own letter and respondent No. 2 through her Attorney (her husband) without any intimation to the appellant No. 2 and without his consent wrote a letter to the Branch Manager of S.B.I., Latouche Road Branch, Kanpur that there were disputes between the partners of the firm and requested to stop with immediate effect all withdrawals of any fund from the said account standing in the name of the firm until further written advice of the three partners. It was also requested that the Branch Manger should stop payment or honouring of cheques, etc. issued by or on behalf of Modern Metal Industries. True copy of these letters is Annexure-4 to the affidavit in support of the stay application.
19. It may be noted that in this letter dated 3.10.2003 it is specifically mentioned that some disputes and differences have arisen among the three partners. On the basis of this letter the Bank issued a letter dated 3.10.2003 stopping payments from the account of the firm. Copy of that letter is also part of Annexure-4 to the affidavit filed in support of the stay application. This letter states that in view of the letter of respondent Nos. 1 and 2 the bank has stopped payments due to the disputes between the partners.
20. It is alleged in paragraph 18 of the affidavit in support of the stay application that neither the respondent No. 1 nor the respondent No. 2 ever informed or consulted the appellant No. 2 before sending the letter dated 3.10.2003 to the bank for stopping the payment of the bank account. Thus, the appellant No. 2 was not given a chance to express its own opinion in the matter. The respondent Nos. 1 and 2 unilaterally and without any notice to appellant No. 2 took this action behind the back of the appellant No. 2 and this gave rise to the dispute and filing of the application under Section 9 of the Arbitration Act.
21. It is alleged in paragraph 19 of the affidavit that the aforementioned unilateral action of the respondent Nos. 1 and 2 to send the said letter to the bank and asking the bank to stop payment of the firm's bank account was an act of extreme highhandedness and in breach of trust and mala fide. It betrays irresponsible and reckless behaviour on the part of respondent Nos. 1 and 2 and was in breach of the terms of the conditions of the partnership deed and the Partnership Act. This act was extremely prejudicial and virtually fatal to the business of the firm because without operation of the bank account no business can run.
22. As already stated, on 6.10.2003 the appellant No. 2 received a letter dated 1.10.2003 from the respondents through an advocate making allegation that appellant No. 2 had not furnished the statement of accounts and stocks since April, 2003 and suggesting that manufacturing activities in the factory should be kept in abeyance so that they may be able to take the accounts. For this they also demanded that their husbands be allowed to stay at the factory premises, Maruti Zen Car No. 5699 be provided to them and one Chandra Kishore Thakur whom they described as Chief Administrative Officer of the firm (who was really a clerk in the firm) be associated as supervisor of the stock taking work. True copy of this letter dated 6.10.2003 is Annexure-5.
23. On 7.10.2003 the appellant No. 2 through his advocate sent a notice-cum-reply to respondent Nos. 1 and 2 in respect of the bank's letter dated 3.10.2003. By this notice-cum-reply the appellant No. 2 totally denied the allegations made by the respondents in their letter dated 1.10.2003 and stated that furnishing of accounts since April, 2003 has remained suspended only at their instance. The appellant No. 2 also enclosed up-to-date statement of accounts from 1.4.2003 to 30.9.2003. Appellant No. 2 also expressed his objection to the highhanded, unauthorised and illegal manner in which the respondent Nos. 1 and 2 had caused operation of the bank account of the firm to be stopped by the bank and also requested them to immediately get the State Bank account operational again since payments were required to be made for various purposes in connection with the business of the firm e.g., purchase of raw materials, payment of wages to labour, payment of electricity, telephone and other dues, payment of trade tax, central excise, etc., general expenses for running the establishment, etc. The appellant No. 2 also wrote to the respondents that supplies to Government of India contracts were to be made to the Ministry of Defence within time-bound frames and in fact supplies of the value of about Rs. 40 lacs are to be made within November, 2003. By stopping the normal operation of the bank account there was imminent danger of not only cancellation of the orders but also incurring risk purchase losses, penalty, damages and other consequences of the breach of the contract. Apart from that, the reputation and goodwill of the firm would also be severely endangered. It was also stated that the factory premises cannot be made available for any person to stay for residential purposes. Zen Car No. 5699 did not belong to the firm but was the individual asset of the son of appellant No. 2 and the premises on which the factory is running has been in the sole tenancy of appellant No. 2. True copy of the notice-cum-reply dated 7.10.2003 is Annexure-6. Despite this notice-cum-reply the respondent Nos. 1 and 2 neither cared to write to the bank to resume normal operation of the bank account nor did they reply to the appellant No. 2. Respondent Nos. 1 and 2 were completely indifferent to the welfare of the business and exhibited total disregard for the losses that may be caused to the firm.
24. Learned counsel for the appellant, Sri S. P. Gupta, submitted that the agreement and business among the partners as per the partnership deed was continuing intact and therefore all the partners both contractually and legally stood mutually bound to each other and committed to the welfare of the partnership firm vide Section 9 of the Partnership Act which states :
"Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative."
25. Learned counsel for the appellants submitted that the respondent Nos. 1 and 2 committed breath of the partnership deed, by their high-handed action of getting the payments from the firm's bank account stopped. The said act of the respondent Nos. 1 and 2 amounts to stabbing the appellant No. 2 in the back inasmuch as the appellant No. 2 is the managing partner and is accountable to all the purchasers, labour, workmen and Government departments for due delivery of products, payment of dues, of taxes, electricity bill, telephone bill, etc. Respondent Nos. 1 and 2 had adopted arm-twisting tactics and built pressure on appellant No. 2 in order to extract from him a highly exaggerated, exorbitant and unfair price for sale of their shares in the firm.
26. On 11.10.2003 the appellant No. 2 received a further letter dated 4.10.2003 by the advocate of the respondent Nos. 1 and 2 purporting to question certain amounts paid by the appellant No. 2 during September, 2003 from the Bank account. True copy of this letter dated 4.10.2003 is Annexure-9. On 17.10.2003 the appellant No. 2 sent a reply to the aforesaid letter dated 4.10.2003 stating that the amounts paid in September, 2003 (being Rs. 6 lacs, Rs. 5 lacs and Rs. 1.20 lacs respectively) had already been accounted for in the statement of accounts sent with his notice-cum-reply dated 7.10.2003. Appellant No. 2 again requested the respondent Nos. 1 and 2 to permit resumption of the operation of the bank account. No reply was received in response to this letter. True copy of the letter dated 17.10.2003 is Annexure-10 to the affidavit filed in support of the stay application. The details of these payments have been given in paragraph 27 of the affidavit and a perusal of the same shows that they appeared to be genuine payments for business purposes. In our opinion the respondent Nos. 1 and 2 have only tried to make a mountain out of a mole hill by questioning these payments for extraneous reasons.
27. On 29.10.2003 again the appellant No. 2 wrote to the respondent Nos. 1 and 2 stating therein the difficulties and hardships being faced by the firm in running the business and requesting them to allow resumption of the operation of the bank account. True copy of the letter dated 29.10.2003 is Annexure-12. No reply was received in response to this letter also,
28. It is stated in paragraph 30 of the affidavit that at the end of the month of October, 2003 the appellant No. 2 was faced with a serious crisis since huge liabilities of the firm towards monthly trade tax and central excise dues were to be discharged by the firm but no operational bank account of the firm was available from which this payment could be made. As a result appellant No. 2 had to borrow these moneys and he made the payment of the Government dues and taxes from his personal account. However, these dues were again required to be paid for November, 2003 and thereafter.
29. Under the labour laws the wages have to be paid by 7th and 22nd of every month. During the month of October, 2003 the payment of wages was arranged and made by appellant No. 2 from his personal resources but once again during November, 2003 wages fell due on 7th November and needed to be paid by the firm. True copy of the wage sheet is Annexure-13.
30. Similarly, electricity dues have to be paid every month as stated in paragraph 32 of the affidavit. The appellant No. 2 paid electricity bill for consumption of September, 2003 from his personal resources and account only to prevent disconnection of electricity and total paralysis of the business. However, for consumption of electricity in October, 2003 a bill dated 4.11.2003 was received from the Kanpur Electricity Supply Company Limited and fresh bills thereafter have also been received vide Annexure-14. Similarly, telephone bills have to be paid, copy of which is Annexure-15. For manufacturing process for products to be supplied, to the Defence Forces, various raw materials have to be purchased and for this immediate funds are required otherwise if the supply was not made within time the contract can be cancelled and penalty, damages, etc. can be imposed on the firm. The firm also had to furnish bank guarantees which can be cancelled. The details have been given in paragraph 34 of the affidavit. A list of outstanding payments as on 10.1.2004 is as follows :
31. In view of the arm twisting tactics of the respondents the appellant No. 2 was compelled to file an application under Section 9 of the Act being Arbitration Case No. 26 of 2003 before the District Judge, Kanpur Nagar for interim relief pending arbitration. The appellant No. 2 also filed application under Section 151, C.P.C. for ex parte interim relief. True copy of the said application under Section 9 and the application under Section 151, C.P.C. is Annexure-17 to the affidavit. The relief prayed for is mentioned in paragraph 38 of the affidavit in support of the stay application.
32. On 7.11.2003 the District Judge, Kanpur Nagar issued notice to the respondents but did not grant any ex parte relief. The District Judge, directed the respondents to file their objections to the Section 9 application and fixed 13.1.2004 for hearing vide Annexure-18 to the affidavit. Against that order, which tantamounted to refusal to grant ex parte interim relief, the appellant filed F.A.F.O. No. 1059 of 2003 under Section 37 of the Arbitration Act before this Court with an application under Section 151, C.P.C. for interim relief. This appeal was disposed of by this Court by order dated 13.11.2003 vide Annexure-20 to the affidavit. On 13.11.2003 the High Court granted some relief but relegated the parties to the District Judge for final disposal of the application under Section 9 of the Arbitration Act and pre-poned the date of hearing before the District Judge from 13.1.2004 to 20.12.2003.
33. It may be mentioned that the arbitrator mentioned in the arbitration clause, Sri Data Ram Parolia, had died and hence the appellant No. 2 on 9.11.2003 sent a notice to the respondent Nos. 1 and 2 and to the advocates for appointment of another arbitrator vide Annexure-19 to the affidavit. Respondent Nos. 1 and 2 did not reply to this letter also.
34. On 17.11.2003 Sri B. N. Parolia, husband of respondent No. 2, withdrew the long standing security from the bank as a result of which the bank cash credit (overdraft) facility of the firm was terminated. True copy of the letter of Sri B. N. Parolia dated 17.11.2003 and the bank's letter dated 18.11.2003 are Annexure-21 to the affidavit. On 22.11.2003 the appellant No. 2 received a telegram from respondent No. 2 purporting to withdraw the General Power of Attorney dated 25.7.1987 in his favour.
35. On 22.11.2003 the respondent No. 1 also filed a preliminary objection in the Arbitration Case No. 26 of 2003 before the District Judge, Kanpur Nagar alleging that after the death of Data Ram Parolia there was no arbitration clause and hence the application under Section 9 was not maintainable vide Annexure-22 to the affidavit.
36. In our opinion there is no merit in this preliminary objection. Section 8(1)(b) of the Arbitration Act, 1940 states-:
"If any appointed arbitrator or umpire neglects or refuses to act, or is incapable of acting, or dies, and the arbitration agreement does not show that it was intended that the vacancy should not be supplied, and the parties or the arbitrators, as the case may be, do not supply the vacancy................ any party may serve the other parties................. with a written notice to concur in the appointment or appointments, or in supplying the vacancy."
37. Under Section 8(2) if the appointment is not made within 15 days of service of the notice under Section 8(1) the Court can appoint an arbitrator.
38. In the present case the partnership deed has been executed when the old Arbitration Act (Arbitration Act, 1940) existed and the partnership agreement does not show that it was insisted upon by the parties that the vacancy on the death of the arbitrator should not be supplied.
39. Learned counsel for the appellant has relied on the decisions in Kishanlal Chug v. K.C. Thapar, ILR (1971) 1 Cal 597; Prabhat General Agencies v. UOI, AIR 1971 SC 2298; Sindhy Resettlement v. Ambavi Raghu, AIR 1983 Guj 233 and State of U.P. v. Sardul Singh, AIR 1985 All 67, etc. In these decisions it has been clearly stated that the death of the named arbitrator will not nullify the arbitration agreement. We are in respectful agreement with these decisions as it was the clear intention of the parties that disputes and differences between the partners should not be decided in a Court of law but should be decided in a private forum. The decision in Prabhat General Agencies case (supra), is a Supreme Court decision and hence is binding on us, Hence we are of the opinion that the preliminary objection of respondents in the arbitration case No. 26 of 2003 lacks merit, and it is rejected. We are of the opinion that in this eventuality the Court can appoint an arbitrator.
40. We may mention that the view of the learned District Judge is only on the aforesaid preliminary objection filed by the respondent Nos. 1 and 2. The respondents did not file any reply to the application under Section 9 on merits. On the due date viz., 20.12.2002 the respondents did not even appear nor did their counsel appear although they were fully aware of the date.
41. The appellant No. 2 was heard through his counsel by the District Judge on 20.12.2003 and on 22.12.2003 the impugned order was passed.
42. From the facts it is evident that the whole game of the respondent Nos. 1 and 2 was to create a problem for the firm. Their whole object obviously was to extract an exaggerated price for their shares in the firm by putting pressure and resorting to obstructionist and arm twisting tactics which to our mind almost amounted to black-mail. Respondents 1 and 2 were residing in Calcutta and were not contributing anything to the operations of the firm. As already stated above, they appear only to be like absentee landlords desirous of extracting as much money as possible from the firm, without contributing anything to it. They hardly appeared to be interested in the welfare of the firm since they were living in Calcutta with their husbands and families. They did not reply to any notice sent by appellant No. 2 nor did they reply to any application nor appeared on the due date before the District Judge.
43. We have carefully perused the impugned order dated 22.12.2003. In paragraph 12 of the impugned order the learned District Judge has stated :
"In the present case the partnership firm has three partners, two of them have decided that unless the dispute between them (that is the two) with other third is resolved the payments from the bank should be stopped. The majority of the partners of the firm have taken a decision. Can by orders of the Court in the form of an interim order, compel them to abide by the decision of minority partner? Would it not be breach of the trust? The mutual invisible adhesive bond of the trust, faith and confidence which created the partnership and the firm has evaporated, the majesty and might of law in the form of order of the Court cannot bring back, restore faith, confidence and trust and cannot compel minority partner to do a thing with which the majority is opposed or not willing to do. Partnership affairs need mutual faith, trust and confidence. If a majority group of partners in the firm does not agree to do a thing and firm has not been dissolved, Court cannot compel the partnership to follow dictates of minority. Financial affairs play major role in carrying out the affairs of partnership firm. The Court, while the partnership is in existence, cannot compel it to incur liability or interfere in transaction which have financial implications. Such affairs can only be resolved or conducted by mutually settled modes, any difference arising or connected with the business can only be decided by the majority of partners, and every partner has a right to express his opinion before the matter is decided, no change can be made without the consent of the majority. The Court cannot interfere in such matters."
44. In our opinion the view taken by the Court below is not tenable in law or on the facts.
45. In our opinion the act of the respondent Nos. 1 and 2 to cause stoppage of payment of cheques from the sole bank account of a running firm is ex facie illegal, invalid and not binding for the following reasons :
"(a) Such action was taken without informing or consulting and without taking the consent of the remaining partner (appellant No. 2) and actually behind his back. It is hence ex facie in the teeth of the legal and statutory duty of every partner under Section 9 to be 'just and faithful' to the other partner and under Section 12(c) of the Partnership Act to allow the other partner to 'exercise his right to express his opinion before the matter is decided'.
(b) Such action was taken in a wholly reckless and irresponsible manner resulting in ruination of the running business of the firm and its susceptibility to huge losses, penalties, damages, etc. It was ex facie in the teeth of the legal and statutory duty of every partner under Section 9 of the Partnership Act to act only to the 'greatest common advantage' of the firm and all its partners and not to their detriment.
(c) Such action is contrary to the consensually conferred rights of appellant No. 2 to act as the Managing Partner and operate singly by himself the bank account of the firm, which right remained unaltered and protected under Section 11 of the Partnership Act.
(d) Above all, such action was destructive of the relations and contracts entered into by appellant No. 2, Managing Partner, as an agent of the firm with third parties which are binding on all the other partners and ought to be honoured, performed and completed by the firm. It was hence also contrary to the letter and spirit of Section 18 of the Partnership Act."
46. Under Section 12 of the Partnership Act even the majority decision is legally effective only if it has been made :
(i) bona fide and in good faith;
(ii) after consulting the remaining partner;
(iii) in respect of 'ordinary matters'.
47. In the present case inasmuch as the decision to suspend the sole bank account of the firm has been taken unilaterally without any information to appellant No. 2, the same has been made neither bona fide nor in good faith nor after consultation with the remaining partner (appellant No. 2) nor in any 'ordinary matter'.
48. In paragraph 18 of his affidavit before this Court, appellant No. 2 has categorically stated that the respondents took the action of sending the letter dated 3.10.2003 for stopping payments to the bank without any notice or information to appellant No. 2. In their reply to the same in paragraph 17 of their counter-affidavit the respondents have, while not denying the contents of the said paragraph 18, only sought to refer to their advocate's notice dated 1.10.2003. The said advocate's notice does not even remotely mention anything as regards the action of stopping payments from the bank account and, in any case, it was received by appellant No. 2 only on 6.10.2003. The fact regarding receipt of notice on 6.10.2003 stated by appellant No. 2 in para 20 of his affidavit has remained unrebutted by the respondents in paragraph 18 of their counter-affidavit. Hence, it is evident that before their letter dated 3.10.2003 was sent to the Bank, the respondents never gave any notice or information of the same to appellant No. 2 to enable him to exercise his right of expressing his opinion on the subject and be consulted under Section 12 of the Partnership Act.
49. In our opinion the view taken by the Court below that "the mutual invisible adhesive bond of the trust, faith and confidence which created the partnership and the firm has evaporated" is wholly misconceived. Had the respondents truly and genuinely lost faith or confidence in appellant No. 2, they would have dissolved the firm and wound up its business but they have neither done that nor even taken any step before any court for the redressal of their so-called grievances. The Court below has unduly got carried away even in the absence of any case on merits being put before it by the respondents.
50. In our opinion the Court below has failed to exercise its discretion reasonably and legally by not granting interim relief against the respondents. It has failed to appreciate that while, on the one hand, the agreement and business among the partners as per the partnership deed is continuing intact and, therefore, all partners, both contractually and legally, stand Still mutually bound to one another and committed to the welfare of the partnership concern, on the other hand, respondent Nos. 1 and 2 are continuing to commit breach of the partnership deed and agreement by their wholly reckless, irresponsible, high-handed and non-co-operative acts, including the act of getting the payment from the bank account stopped.
51. In our opinion the said act of the respondent Nos. 1 and 2 amounts to stabbing the appellant No. 2 in the back inasmuch as he is the managing partner and is accountable to all the purchasers as well as labour and workmen and the different Government departments for the due delivery of products and payments of salaries, dues, taxes, etc. Knowing this fully well respondent Nos. 1 and 2 have only adopted arm twisting tactics upon appellant No. 2 in order to extract from him a highly exaggerated and exorbitant price for their shares in the firm. In our opinion the Court has power coupled with duty to restrain them from doing so.
52. In our opinion the Court below has failed to appreciate that the sole bank account of the firm is the very lifeline of the firm and unless the moneys deposited therein are allowed to be withdrawn, at least, for business expenditure purposes, it would be impossible to run and manage the business of the firm and to keep its contractual commitments with the customers within the stipulated periods of time.
53. On the uncontroverted facts of the case, a very grave and sudden situation has arisen when the business of the firm itself is facing imminent danger of being paralysed and, hence we are of the opinion that an interim injunction under Section 9 of the Act should be granted for protection of the firm from severe crises and imminent danger of its business coming to a grinding halt resulting in huge and irreparable loss.
54. It remains undenied that immediate payments have to be made on behalf of the firm on a regular monthly basis for labour wages, electricity bills, telephone bills, trade tax, central excise and other Government and public dues, purchase of raw materials, etc. for timely production and supply of goods to the purchasers and in particular to the Government of India (Ministry of Defence) within the stipulated and fixed deadlines under the contract and obtaining bank guarantees, under Government contracts without which the contracts themselves shall stand cancelled and for these payments, the appellant No. 2 genuinely requires immediate resumption of normal operation of the bank account without the stoppage of payment of cheques as has been directed by the respondents.
55. In Const v. Harris, (1824-34) All ER 311 (KB), the Lord Chancellor (Lord Eldon) observed :
"In ordinary partnerships nothing is more clear than that, although partners enter into a written agreement stating the terms upon which the joint concern is to be carried on, yet, if there be a long course of dealing, or a course of dealing, not long, but still so long as to demonstrate that they have all agreed to change the terms of the original written agreement, they may be held to have changed those terms by conduct. For instance, if in a common partnership, the parties agree, that no one of them shall draw or accept a bill of exchange in his own name without the concurrence of all the others, yet if they afterwards slide into a habit of permitting one of them to draw or accept bills, without the concurrence of the others, this Court will hold that they have varied the terms of the original agreement in that respect. So, in this case, if it can be shown that in the administration of this property the proprietors in general, after 1812, pursued a different course from that provided for by the deed of March, 1812, they must be taken to have altered the agreement and to have substituted the terms to which in their conduct they have adhered instead of the terms contained in the original agreement."
56. The above decision of the House of Lords squarely applies to the facts of the present case, and we respectfully agree with the view taken therein.
57. From the above observation of the House of Lords it is evident that under the law of partnership the partners can vary the agreement by their conduct and course of dealing (which is also stated in Section 11 of the Partnership Act).
58. In the present case, as already mentioned above although the partnership agreement stated that the bank account can be operated jointly and severally by all the partners, subsequently by conduct the partners had agreed that the appellant No. 2 alone will operate the firm's bank account. To our mind the reason for this was obvious. The respondent Nos. 1 and 2 were living with their families in Calcutta while the business of the firm was at Kanpur. The day-to-day running of the business requires making payments from the bank account for various business purposes, and obviously if every cheque of the firm has to be signed by all the three partners the functioning of the firm would become impossible because the cheques would have to be sent for signing to Calcutta and then returned, and all this would have caused long delay. Hence, it is obvious from the facts that, when the relations between the parties were good they impliedly agreed that the appellant No. 2 who was residing at Kanpur and looking after the business of the firm should alone have authority to operate the bank account.
59. In Const v. Harris, (1824-1834) All ER 311 (KB), it was further observed :
"I call that the act of all which is the act of the majority, provided all are consulted, and the majority are acting bona fide................."
In the above decision the Lord Chancellor also observed :
"For a majority of partners to say : "We do not care what one partner may say. We being the majority, will do what we please," is, I apprehend, what this Court will not allow. So, again, with respect to making Mr. Robertson the treasurer, Mr. Const had a right to be consulted. His opinion might be overruled, and honestly overruled, but he ought to have had the question put to him and discussed. In all partnerships whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other. They are to act upon the joint opinion of all, and the discretion and judgment of anyone cannot be excluded."
60. Thus, in the above decision the House of Lords observed that even the majority of the partners cannot take a decision on behalf of the firm except by inviting the views of the minority and consulting the minority. All this has not been done in this case, and instead respondent Nos. 1 and 2 only wanted to ride rough shod over appellant No. 2 for mala fide and extraneous reasons.
61. The decision in Const v. Harris (supra), has been followed in Abbott v. Treasury Solicitor, 1969 (1) WLR 1575.
62. The aforesaid decision in Const v. Harris, (1824-1834) All ER 311 (KB), has been cited with approval by Pollock and Mulla on the Indian Partnership Act (Sixth Edition). In the aforesaid book Pollock and Mulla said :
"A majority cannot bind a minority without notice to them and without giving them the opportunity to express their opinion. If this were not so, it would practically put the entire management in the hands of a high-handed majority, and would set the rule at naught that every partner has a right to take part in the conduct of business."
63. This view has been followed in Highley v. Walker, 1990 (26) TLR 685.
64. Pollock and Mulla have further stated that the majority decision must be made in good faith with a view to the common advantage of the whole body. In the present case the majority (respondent Nos. 1 and 2) does not appear to have made a decision in good faith for common advantage of the firm, rather it was highly detrimental to the interest of the firm. Hence, in our opinion it was not binding on the firm or appellant No. 2.
65. In Lindley on Partnership 15th Edition the same view has been reiterated and it has been observed (vide para 15-08) :
"If a majority of partners is to outvote a minority, the former must ensure that they act with complete good faith, and in particular, that the views of the latter are fully canvassed, since it is a fundamental right of every partner to be heard and to have his views duly considered before , any decision is taken."
66. The same view has also been expressed in Halsbury's Laws of England (Vol. 35) page 64 footnote 4.
67. Halsbury has referred to the decision in Great Western Rly Co. v. Rushout, 1852 (5) De G and Sm. 290 at 310 in which it was observed :
"If there is any agreement by the majority, before hearing the minority, to override in any event the views of the minority, such conduct is not consistent with good faith."
68. Thus, the law is well settled that before the majority can take a decision binding on the minority, certain conditions have to be fulfilled which are as follows :
(1) The minority must be consulted;
(2) The majority must act in good faith;
(3) The majority must act for the welfare of the firm and not for a purpose which is detrimental to the welfare of the firm.
69. Unless these conditions are fulfilled, the majority in the firm cannot ride rough shed over the majority simply because it claims to be in the majority. In the present case respondent Nos. 1 and 2, though no doubt a majority in the firm, have to our mind not fulfilled any of these three conditions :
(1) They have not consulted the appellant No. 2 before writing to the bank for stopping payment from the firm's bank account and for doing their other obstructionist acts. They have not even replied to the repeated letters of appellant. No. 2. In our opinion consultation with the minority must be effective consultation, and not mere consultation for the sake of observing formalities. The majority partners must discuss with the minority its proposed decision, and explain how this will be in the interest of the firm, and then it must seek the views of the minority on this. It is quite possible that the minority may be able to persuade the majority that its proposed decision will be detrimental to the firm's interest, and this may persuade the majority to change its view. In the present case far from effective consultation there was no consultation with the minority at all, as the facts disclose.
(2) They have not acted in good faith, rather they have acted in bad faith, because their whole intention appears to be to extract an exaggerated price for their shares from appellant No. 2, totally oblivious to the damage they are doing to the firm.
(3) They have not acted for the welfare of the firm but rather their acts have caused great damage to the firm. They have not bothered about how the wages of the labour is to be paid, how electricity and telephone bills are to be paid, how taxes are to be paid, etc. They have not cared about how the contracts of the firm could be complied with and what damage there will be to the goodwill of the firm if such contracts are not fulfilled. They have not bothered to see that by their own reckless and irresponsible conduct the defence contracts obtained from the Government of India and others can be cancelled and the firm will not be able to furnish bank guarantees for keeping the contracts alive, and the consequence of cancellation of such orders would be penalties, damages, etc. apart from the permanent damage to the goodwill of the firm. Their whole approach was mala fide, irresponsible and greedy."
70. It may be mentioned that Section 12(c) of the Partnership Act states :
"Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners."
71. A careful perusal of Section 12(c) shows that a majority can take a decision only provided the minority partners have been given a right to express their opinion and there is effective consultation with the minority. Further, it is implicit in Section 12(c) that the decision of the majority should be in good faith and should be for welfare of the firm. The decision of the majority should be for the benefit and welfare of the firm and not for destroying it.
72. It may be mentioned that an application under Section 11 of the Arbitration Act has been filed by the appellant No. 2 on 18.11.2003 which is still pending in this Court.
73. In Sundaram Finance Ltd. v. NEPC India Ltd., (1999) 2 SCC 479, the Supreme Court observed that an interim order can be sought from the Court under Section 9 of the Arbitration and Conciliation Act, 1996 even before commencement of arbitration proceedings. It was held that issuance of notice to the opposite party invoking the arbitration clause is not a condition precedent to filing the application under Section 9. All that is required is that before passing the interim order the Court must be satisfied about existence of an arbitration agreement and the applicant's intention to take the matter to arbitration. In our opinion both these conditions are satisfied in the present case. The appellant No. 2 filed the application under Section 11 on 18.11.2003, whereas the impugned order was passed on 22.12.2003. Hence the appellant No. 2 had applied for arbitration before the impugned order was passed.
74. We are of the opinion that the prima facie case and balance of convenience are in favour of the appellant No. 2. Irreparable loss will be caused to the firm and appellant No. 2 (for the reasons stated above). If temporary injunction pending arbitration is not granted.
75. However, we make it clear that since we are only deciding the Section 9 application the observations we have made above will not influence the arbitrator in the final disposal of the arbitration proceeding except for the law points we have laid down.
76. Shri Ravi Kant, learned senior advocate for the respondent Nos. 1 and 2 submitted that there was no arbitrable dispute between the parties. We do not agree. If there was no arbitrable dispute why did the respondent Nos. 1 and 2 get the operation of the firm's bank account stopped, which practically resulted in suspending the business? Why did the respondents by their further conduct obstruct the business? This argument of learned counsel for the respondents has only to be stated to be rejected. Not only did the respondents get the firm's bank account stopped, they further tried to get Durga Puja started on the factory premises, their aim apparently being to grab the property with the help of anti-social elements. Their demand for accounts appears to be with an arm twisting and blackmailing design. In fact appellant No. 2 had explained the withdrawals from the account to the respondents.
77. Shri Ravi Kant has relied on the decision of the Supreme Court in P.K. Ramaiah and Co. v. Chairman, National Thermal Power Corporation, 1994 Supp (3) SCC 126.
In that case there was a voluntary and unconditional written acceptance of payment in full and final settlement of the contract. It was held that subsequent claim for further amounts in respect of the same work is not an arbitrable dispute.
78. The above decision is wholly distinguishable on facts, and we do not see what relevance it has to the present controversy.
79. In our opinion there was certainly an arbitrable dispute in this case. It may be noted that the arbitration clause in the partnership deed (quoted earlier in this judgment) uses very wide words, and hence in our opinion the dispute can certainly be referred to arbitration. The words used in the arbitration clause are : "all disputes and questions in connection with the partnership or interpretation of this deed arising between the partners". A mere perusal of this clause and a look at the facts can leave no doubt that there was an arbitrable dispute.
80. For the reasons given above this appeal is allowed. The impugned order dated 22.12.2003 is set aside. The appellant No. 2 is permitted to operate the firm's bank account in the S.B.I. at Kanpur solely and respondent Nos. 1 and 2 are restrained from interfering with the management of the business of the firm by appellant No. 2 including operation of the bank accounts of the firm.