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Petitioner: USMAN VS Respondent: Haji OMER Haji AYUB,Honorable Justice HAMOODUR RAHMANSharifuddin Peerzada,A. A. Fazeel
1966 P T D 396
1966 P T D 396
[Supreme Court Pakistan]
Present: A. R. Cornelius, C. J., S. A. Rahman, Fazle‑Akbar,
B. Z. Kaikaus and Hamoodur Rahman, JJ
Civil Appeal No. K‑6 of 1964
USMAN‑Appellant
versus
(1) Haji OMER Haji AYUB, AND
(2) Haji RAZZAK‑Respondents
AND
Civil Appeal No. K‑7 of 1964
MASTER HOSIERY MILLS LTD.‑Appellant
versus
(1) Haji OMER Haji AYUB
(2) Haji RAZZAK, AND
(3) USMAN‑Respondents
Civil Appeals Nos. K‑6 and K‑7 of 1964, decided on 22nd December 1965.
(On appeal from the judgment and order of the High Court of West Pakistan, Karachi Bench, Karachi, dated the 30th April 1962, in First Appeals Nos. 115 and 116 of 1961 and Miscellaneous Application No. 41 of 1961).
(a) Partnership Act (IX of 1932), S. 4 read with S. 69‑Act does not provide any special mode for creation of partnership‑Oral agreement‑Non‑registration under S. 69 does not affect validity of partnership or bar suit for dissolution, accounts, or for realisation of property of dissolved firm.
The Partnership Act does not prescribe any special mode for the creation of a partnership which can validly come into being even upon an oral agreement between the partners. Non -registration of the firm under section 69 of the Partnership Act does not affect the validity of the partnership or prevent any of the partners from suing for the dissolution of the firm or for accounts or the realization of the property of a dissolved firm. This section only bars a suit for enforcing a right arising out of a contract against either the firm or any past or present member of it or against any third party.
(b) Stamp Act (II of 1890), S. 35‑Partnership agreement written on unstamped paper‑Admissible in evidence on payment of penalty.
(c) Transfer of Property Act (IV of 1882), S. 53‑A‑Transferee of plot of land can avail of benefit of S. 53‑A where after obtaining possession he had constructed structures thereon "in part performance" of earlier agreement.
(d) Transfer of Property Act (IV of 1882), S. 52‑(Transfer pendent late)‑Suit for declaration that firm stood dissolved as from a certain date, and for accounts‑Transferee of assets of firm cannot acquire any right, title or interest during tendency of suit.
(e) Partnership Act (IX of 1932), S. 37‑Choice is of the out going partner either to claim share of profits attributable to use of his share of property of firm or to claim interest.
The choice in the absence of a contract to the contrary is in terms of section 37, Partnership Act, 1932, of the outgoing partner. It is for him either to claim a share in the profits made since he ceased to be a partner in so far as that may be attributable to the use of his share of the property of the firm or to claim interest at the rate of 6 % per annum.
The principle is that the deceased or the outgoing partner has rights over all the assets of the partnership and that this right is in the nature of an unascertained interest in every single item of asset thereof. He cannot be regarded merely as a person entitled to a particular sum of cash ascertained upon the striking of a balance. If the continuing partners choose to carry on the business they obviously utilise the assets of the partnership and are thus placed in a fiduciary position with regard to the share of the outgoing partner in those assets. This makes them liable to account for whatever profits are attributable to such user.
Such accounting is also considered to be reasonable, for, it may well be that in a given case all the profits that are earned by the remaining partners may be attributable purely and solely to the exercise of their own skill and intelligence or it may be that the profits have been earned by reason of the fact that the remaining partners themselves provided further assets and further capital by means of which the business became a profitable one. Under this system of accounting, if insisted upon by the outgoing partner under section 37 of the Partnership Act, it will be open for the remaining partners to claim to be recompensed for the skill and labour employed by them in the conduct of the business after dissolution and they will also be entitled to prove what portion, if any, of the profits was obtained not by reason of the use of the partnership assets but in some other manner.
The outgoing partner has to make his choice before the Commissioner appointed to take accounts.
Sharifuddin Peerzada, Senior Advocate Supreme Court (M. Akram, Advocate Supreme Court with him) instructed by S. M. Hanif Attorney for Appellant (in C. A. No. K‑6 of 1964).
A. A. Fazeel, Senior Advocate Supreme Court (A. H. Ahsan, Advocate Supreme Court with him) instructed by K. A. Ghani Attorney for Respondent No. 1 (in C. A. No. K‑6 of 1964).
Respondent No. 2: Ex parte (in C. A. No. K‑6 of 1964).
Sharifuddin Peerzada, Senior Advocate Supreme Court (M. Akram, Advocate Supreme Court with him) instructed by S. M. Hanif Attorney for Appellant (in C. A. No. K‑7 of 1964).
A. A. Fazeel, Senior Advocate Supreme Court (A. H. Ahsan, Advocate Supreme Court with him) instructed by K. A. Ghana Attorney for Respondent No. 1 (in C. A. No. K‑7 of 1964).
Respondents Nos. 2 & 3: Ex parte (in C. A. No. K‑7 of 1964).
Dates of bearing: (Karachi) 17th and 18th February 1965.
JUDGMENT
HAMOODUR RAHMAN, J.‑These two appeals, by special leave, arise out of a judgment of a Division Bench of the High Court of West Pakistan at Karachi, whereby two First Appeals and a miscellaneous appeal were disposed of on the 30th of April 1962.
The facts giving rise to these appeals are somewhat complicated and, therefore, need to be set out in some detail.
In or about the year 1951 one Haji Razzak (hereinafter referred to as Razzak), the respondent No. 2 in both these appeals, who was carrying on business under the name and style of Master Industrial Works, obtained a permit from the Government of Pakistan for erecting a Hosiery Factory at Karachi and for the purposes of the said factory acquired a plot of land, being plot No. A/43, from the Sind Industrial Trading Estates in the name of his firm. Later on this plot was exchanged for plot No. C/9. But as he himself did not have sufficient capital to start the factory, he approached Haji Omer (hereinafter referred to as Omer), the respondent No. 1 in both these appeals, and one Usman, who is the appellant in Civil Appeal No. K‑6 of 1964, and the respondent No. 3 in Civil Appeal No. K‑7 of 1964, for financial help. On the 16th of July 1952, a document was drawn up, which was described as an agreement, between the said three persons which declared that they had decided to form a partnership to carry on business under the name and style of Pyramid Industries.
Under this agreement Usman and Omer were to contribute Rs. 37,500 each and Razzak was to contribute Rs. 25,000 and each of the Partners was to be entitled to share in the profit and loss of the business in, the same ratio in which he contributed towards the capital. The managing partner of this firm was to be Omer and he was to place orders for machinery, arrange letters of credit, obtain land, start construction, engage technicians and other staff and do all such other things as the firm required from time to time. He was also empowered to sign cheques and other documents and to maintain proper accounts, which the other partners were to have a right to inspect.
The agreement further contemplated that this partnership would be later converted into a limited concern with a fully paid up capital of Rs. one lac and shall be called Pyramid Industries Limited. In this limited concern Usman and Omer were to have the right to nominate two directors each and Razzak one only. Pending the registration of the company, however, the business was to be carried on as a partnership business.
This agreement was on an unstamped paper but it was stipulated that a stamped agreement would be drawn up and executed later. The formal document was, however, never drawn up nor was the partnership firm registered. Nevertheless, on the 21st of August 1952, Razzak purported to execute another agreement on stamped paper in favour of the partnership firm of Pyramid Industries for the transfer of the plot No. A/43 obtained from tic; Stud Industrial Tradin., Estates Limited in the name of Master Industrial Works, the firm name of Razzak, as also of (lie goodwill and other assets of the said Master Industrial Works for the consideration of Rs. 5,100. The receipt of this amount was acknowledged in this document by Razzak, who described himself as the silo proprietor of Master Industrial Works, and it was declared that possession of the plot had already been handed over to the Pyramid Industries. Although this agreement purported to be signed by Razzak as the sole proprietor of Master Industrial Works and by Omer as the managing partner of Pyramid Industries, Razzak denied his signature to this document. Thereafter, the plot was exchanged with plot No. C/9, but the allotment was again in the name of Master Industrial Worries, although it is alleged that this exchange was brought about by the initiative of Oiner and it was he who took possession of the plot from the Sind Industrial Trading Estates.
On the 1st of December 1952, however, Usman and Razzak purported to execute another deed of partnership, this time on a properly stamped paper, whereby Razzak purported to take Usman as a partner in his business of Master Industrial Works. Under this agreement Usman was to have a 12 annas share therein and Razzak only a 4 annas share. Usman was to contribute the entire capital required for carrying on the business and the only contribution of Razzak was to be the plot No. C/9. The partnership was to be a partnership at will commencing from the date of its execution and no partner was to be allowed to withdraw any amount whatsoever from the firm for the first two years or even thereafter if the firm was running at a loss. After the expiry of two years only if any profit accrued, then the partners were to mutually agree to the amount to be withdrawn by each.
It may be pointed out here that Razzak and Usman are related inter se.
In the meantime, the machineries ordered for the mill arrived and the question arose as to how the amount necessary for clearing the machineries was to be contributed. The amount needed for this purpose was Rs. 50,000. Usman claims that he paid Rs. 32,000 by a self cheque (Exh. 23) drawn by him as the proprietor of Ashrafi Industries on the Netherlands Trading Society Bank. (The original cheque said to have been filed in the trial Court has since become untraceable). Razzak claims that he paid the balance of Rs. 18,000 in cash. On the other hand, Omer claims that he paid the entire amount of Rs. 50,000.
Serious disputes and difference, it appears arose between the partners at this stage and on the 10th of February 1953, Omer served a notice of dissolution of the partnership entered into on the 16th of July 1952‑‑Pyramid Industries‑alleging that the unexpected and unfair conduct and refusal to carry out their part by the other partners had left him no option but to dissolve the partnership. This was followed up by a suit filed on the 12th of February 1953 (Suit No. 144 of 1953) in the Chief Court of Sind at Karachi for a declaration that the firm of Pyramid Industries stood dissolved as from the 10th of February 1953, for accounts and for appointment of a receiver to take charge of the assets of the partnership firm. In this plaint he also alleged that he had paid Rs. 50,000 in November 1952, for retiring the shipping documents relating to the imported machinery and that he had contributed altogether up to that time Rs, 65,100. The dispute was alleged to have arisen over the refusal of Razzak and Usman to deliver the shipping documents, although Razzak had agreed in writing to do so by his letter of the 11th of December 1952, (Exh. P/9), wherein he also acknowledged that Omer had paid the entire sum of Rs. 50,000 to clear the documents relating to the machineries. By this letter Razzak agreed that the bank memo. and the documents will be given to Omer on receipt from the bank. The above amount was said to have been paid partly by a cheque for Rs. 32,000 drawn on the Netherlands Trading Society Bank, Karachi, and partly in cash to the extent of Rs. 18,000.
Along with the plaint an application was also filed for the appointment of a receiver of the assets of the partnership and the shipping documents relating to the machineries. On the same date by an ex parte order the Nazir of the Court was appointed interim receiver to get the machineries cleared and to take possession thereof as also of the plot in question.
On the 23rd of February 1953, Razzak applied for the vacation of the said order on the ground that the written document purported to be executed on the 16th of July 1952, was not a concluded agreement but only a document drawn up during negotiations which did not ultimately materialise and no partnership was created. He also denied that he had either sold or agreed to sell his firm of Master Industrial Works or the leasehold interest in respect of plot No. A/43. He also denied that he had executed the agreement of the 21st of August 1952, and characterised it as a fabricated and forged document. On the 24th of February 1953, on the undertaking given by the counsel appearing on behalf of Razzak to furnish security to the extent of Rs. 65,000 to clear the machinery within a month and to instal the same on the land, further proceedings were stayed and the Nazir, who was earlier appointed ad interim receiver, was directed to hand over possession to the defendants in that suit on the security being furnished. The security was furnished and the machineries were then cleared and set up at the site after completing the constructions thereon. By the end of 1953, it is said, the factory commenced production under the management of the firm of Master Industrial Works, of which Usman and Razzak had become partners under the partnership‑deed of the 1st of December 1952.
It appears that in the meantime Usman and Razzak and one Ghafoor, a brother of Usman, had formed themselves into a private limited company under the name and style of Master Hosiery Mills Limited and on the 20th of February 1954, Usman and Razzak as partners of the firm of Master Industrial Works purported to execute an agreement to sell the goodwill, stock in trade, plants, machineries and other assets of Master Industrial Works to this newly‑formed company for the consideration of Rs. one lac and fifty thousand (Exh. X/2). Then on the 28th of February 1954, Usman and Razzak executed a deed dissolving the firm of Master Industrial Works with effect from the end of February 1954. In this document it was recited that the partnership had done no business other than that of clearing the machineries and installing the same and that, as such, no profits had accrued to the partnership. From the 1st of March 1954, the factory began to be run under the management of this newly constituted company of Master Hosiery Mills Ltd.
The receivership matter, which was still pending in the High Court, was revived on an application of Razzak for withdrawal of the amount of Rs. 65,000 deposited in Court and for substitution of the security. It was heard on the 28th of January 1955, when Razzak was formally appointed the receiver and manager of the concern on the security already furnished by him, as it was felt that such an order would, in no way, prejudicially affect the interest of Omer, the plaintiff in the suit.
Omer went up in appeal against this order but this appeal remained pending and ultimately became in fructuous when the suit itself was‑ finally heard in 1958, for in the meantime a compromise was arrived at between Razzak and Omer and an application was made under Order XXIII, rule 3 of the Code of Civil Procedure, for a decree in terms of the compromise. This compromise was supported by both Omer and Razzak who personally appeared in Court and a decree was passed in terms thereof. Since the defendant No. 2 Usman was not a party to this compromise the suit continued thereafter against Usman alone.
Razzak also filed a number of affidavits in various proceedings taken thereafter in which he supported the plaintiff's case and also the compromise and denied that Usman was a partner or had anything to do with the partnership business.
On the 1st of March 1956, Omer applied to the Court for appointment of the Nazir as the receiver of the assets of the partnership including the plot No. C/9 or in the alternative for the appointment of himself and the Nazir as joint receivers, as Razzak had in the meantime been arrested and locked up in Jail. The Court, however, appointed the official assignee as the interim receiver. On the very next day Usman who was the second defendant in the suit, applied for the vacation of the said order as also filed an application challenging the validity of the alleged compromise between Razzak and Omer. The decree in terms of the compromise, which had not till then been drawn up, was on this application directed not to be prepared. The official assignee took possession on the 2nd of March 1956, and then Razzak made desperate efforts to have the possession restored.
Master Hosiery Mills Limited also applied on the 31st of March 1956, for the vacation of the order appointing the receiver, alleging that the factory belonged to it and to no one else. Whilst this application was pending the suit was transferred to the District Court at Karachi, as the original jurisdiction of the Chief Court had been taken away by section 28 of the District Courts Order. It was there numbered as Suit No. 1015 of 1956. The, application of Usman challenging the validity of the compromise was rejected by the Additional District Judge of Karachi on the 30th of November 1957. He also vacated the stay order and directed the decree to be prepared on the basis of the compromise of the 25th of February 1956.
The compromise between Razzak and Omer admitted that there was a partnership entered into between them on the 16th of July 1952, to carry on business in the name and style of Pyramid Industries and that this partnership stood dissolved as from the 10th of February 1953. It also admitted that the goodwill and assets of Master Industrial Works and the plot of land acquired by it in the Sind Industrial Trading Estates had been sold by Razzak to the said firm of Pyramid Industries. Furthermore, that Omer had made a total investment of Rs. 77,000 in the partnership and that account was to be taken between Omer and Razzak on the basis that their shares were 12 annas and 4 annas respectively.
In 1958, however, Razzak turned a complete somersault and filed a suit for setting aside the compromise on the ground that it had been fraudulently obtained. This was Suii No. 3 of 1958. Both these suits and the application of Master Hosiery Mills Limited for the vacation of the order appointing the official assignee as the receiver were all heard together in December 1958, by the Additional District Judge, Karachi, who dismissed the second suit filed by Razzak as also the application of Master Hosiery Mills Limited but decreed the suit of Omer which was filed on the 12th of February 1953. He held that a partnership was validly formed on the 16th of July 1952, to carry on business in the name of Pyramid Industries in accordance with the terms reduced into writing (Exh. P/1) and that it stood dissolved on the 10th of February 1953, on the terms and conditions contained in the compromise of the 25th of February 1956. Razzak was, therefore, liable to render accounts up to 25th of February 1956, and the security of Rs. 65,000 furnished by him was to be adjusted against the amount, if any, found to be due from him. Usman, the other partner, was held liable to render accounts from 2nd of March 1956, up to date and the security of Rs. one lac furnished by him was to remain in Court till the final decree. The plot No. C/9 was to be deemed to be the property of the partnership. The purported transfer of the factory and its assets to Master Hosiery Mills in 1954 was considered to be fictitious and without consideration. The Nazir of the Court was again appointed receiver and a Commissioner was appointed to take accounts. The trial Court also held that on the 11th of December 1952, Omer, the plaintiff, had paid the entire amount of Rs. 50,000 for the clearance of the machineries.
Against this decision three appeals were filed, one by Razzak, another by Usman and the third by Master Hosiery Mills Limited but the decree of the learned Additional District Judge was confirmed by the High Court with some modifications on the 30th of April 1962. The High Court also accepted that the compromise was genuine but held that it did not bind Usman. The plaintiff' Omer's contribution was reduced from Rs. 77,000, the amount mentioned in the compromise, to Rs. 65,000 and the machineries fitted by the company Master Hosiery Mills Limited after 10th February 1953, were directed to be excluded from the assets of the company.
It is against this decision of the High Court that Usman and Master Hosiery Mills Limited came up to this Court and obtained special leave to appeal.
The High Court confirmed the finding of the trial Court that a valid partnership had come into existence on the 16th of July 1952, upon the terms which were reduced in writing (Exh. P/1). The defendant Razzak's contention that this document exhibited no concluded agreement and was, in any event, never acted upon, was rejected by both the Courts below and, we think, upon cogent grounds. The Partnership Act does not prescribe any special mode for the creation of a partnership which can validly come into being even upon an oral agreement between the partners. Non‑registration of the firm under section 69 of the Partnership Act does not affect the validity of the partnership or prevent any .4 of the partners from suing for the dissolution of the firm or for accounts or the realization of the property of a dissolved firm. This section only bars a suit for enforcing a right arising out of a contract against either the firm or any past or present member of it or against any third party. I am also satisfied that there was abundant evidence for coming to the conclusion that this agreement of 16th July 1952, was duly acted upon.
The trial Court also came to the finding that none of the other two partners, apart from the respondent Omer, had contributed anything towards the partnership and, as such, since the terms of the partnership provided that the partners would share profits and losses in proportion to their respective contributions towards the capital of the firm, the appellant Usman would get no share at all. So far as Razzak and Omer were concerned, their shares would be determined in accordance with the compromise entered into on the 25th of February 1956. Again, since in this compromise Razzak only admitted Omer as a partner in the firm of Pyramid Industries, he was alone liable to account for all transactions of the firm to the 25th of February 1956, in accordance with the terms of the said compromise. The others partner Usman was, however, held to be liable to account only from the 2nd of March 1956, when the assets of the partnership were by an order of the Karachi Bench of the High Court of West Pakistan made over to him, after vacating the order appointing the official assignee as the receiver, on his furnishing security in the sum of Rs. one lac.
The objection as to the admissibility of the agreement of the g 16th of July 1952 (Exh. P/1) on account of its being written on an unstamped paper, lost its force after the penalty was paid.
The finding that the agreement of the 21st of August 1952, was a genuine document and had been duly signed by the appellant Razzak is also based on abundant evidence. It was for lawful consideration of Rs. 5,100 and it validly transferred all the goodwill and other movable assets of Razzak to the firm of Pyramid Industries. As regards the plot No. C/9, which was admittedly got in exchange for plot No. A/43, it has been found by both the Courts below that the respondent Omer had obtained possession thereof from the Sind Industrial Trading Estate and in part performance of the agreement on the 21 st of August 1952, had constructed some structures thereon. He could, therefore, avail of the benefit of section 53‑A of the Transfer of Property Act which debarred the transferor in such cases to enforce against the transferee any right in respect of the property. The title of Pyramid Industries to the lease‑hold interest of the said plot and the structures thereon was also thus validly upheld.
In this view of the matter the conclusion that the partnership purported to have been entered into on the 1 st of December 1952,…
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