Partnership Act, 1932, Sections 32(3), 72 - Partnership firm - Retiring partner - Public notice

as required u/s 72 of the Act not given - Held, a retiring partner is liable for any subsequent
act on behalf of the firm which would bind the firm until the public notice as prescribed by
Section 72 is given.
Harihar Davey vs Kamlesh Steel Enterprises A ... on 1 June, 2005
Equivalent citations: I (2006) BC 193, 2005 (3) CTC 497
Author: S A Kumar
Bench: S A Kumar

JUDGMENT S. Ashok Kumar, J.

1. The plaintiff has filed the suit claiming a sum of Rs. 17,70,000/= from the
defendants with interest at the rate of 12% per annum from the date of plaint and till
date of realisation and for costs.

2. The gist of the plaintiff's case is as follows:-

The plaintiff is the uncle of defendants 2 and 4 who are carrying on business in the
name and style of M/s. Kamlesh Steel Enterprises. To tie over the financial
difficulties, they approached the plaintiff in the year 1995 and from time to time, the
plaintiff has been paying amounts to the defendants on the understanding that the
amounts should be repaid at a nominal interest of 12% per annum. By statement of
accounts, the defendants acknowledged receipt of payment of Rs. 20 lakhs as on
31.3.1996. Subsequently, the defendants paid a sum of Rs. 5 lakhs on 15.11.1998 and
thus as on 1.12.1998 a sum of Rs. 15 lakhs was due towards principal account. The
defendants were regularly paying interest upto September, 1999 and also sued to
send TDS forms. However, from October 1999, they have not deposited the TDS
amount for the period April 199 to September 1999 even though it was paid. The
cheque for Rs. 5 lakhs dated 4.12.2000 was dishonoured on presentation.
Considering the close relationship, the plaintiff did not take legal action. Thereafter,
the defendants refused to pay even interest, besides the principal amount of Rs. 15
lakhs. Then the plaintiff initiated criminal proceedings under Section 138 of the
Negotiable Instruments Act for dishonour of cheques. The plaintiff also issued a
lawyer's notice on 28.3.2001 calling upon them to pay the principal amount with
12% interest, for which the defendants 3 and 4 sent reply notice containing false and
unsustainable allegations and denying the liability. Hence the plaintiff has filed the
suit for recovery of the suit claim.

3. The defendants 3 and 4 have filed a common written statement, gist of which is as
follows:-

The plaintiff is the paternal uncle of the defendants 2 and 4. The third defendant is
the mother-in-law of the second and 4th defendant. Though the defendants 2 to 4
were Partners of the first defendant firm, the business was virtually conducted by the
husband of the second defendant. The defendants 3 and 4 were not aware of any of
the transactions took place with the plaintiff. On account of differences between the
Partners, the firm was dissolved and the defendants 3 and 4 retired from the firm on
1.4.1998 and hence they have nothing to do with the affairs of the first defendant
firm. There were no financial difficulties. These defendants never approached the
plaintiff for financial help. These defendants had not confirmed the statement of
accounts as on 31.3.1996 or thereafter they owe any amount to the plaintiff till they
retired from partnership firm. These defendants had not paid any amount, much
less, Rs. 5 lakhs on 15.11.1998 to the plaintiff.

4. By the Dissolution Deed dated 1.4.1998, the liabilities of the first defendant firm
were taken over by the second defendant. Thus these defendants have no liability of
whatsoever to the plaintiff. The defendants 3 and 4 neither paid, nor had occasion or
necessity to pay interest to the plaintiff as they had not borrowed any money from
him. These defendants have not issued any cheques at any point of time. From the
date of dissolution, these defendants had severed all their connections with the first
defendant firm and the plaintiff is fully aware of the same. Since the defendants 3
and 4 retired from the partnership business on 1.4.1998, they are in no way
connected with the alleged offence under Section 141 of the Negotiable Instruments
Act. The said criminal case is false, malicious and vexatious. Even when the loan was
given on 4.12.2000, these defendants 3 and 4 had retired from the partnership firm.
The relief sought for as against these defendants is not maintainable and thus the
suit is liable to be dismissed.

5. On the above pleadings, the following issues were framed:-

(i) Whether the loan was given by the plaintiff to defendants 1 and 2 with the consent
of defendants 3 and 4?

(ii) Whether the partnership firm was dissolved on 1.4.1998 as contended by

defendants 3 and 4 and the liabilities were taken over by the second defendant?

(iii) Whether the defendants are discharged from liability on their retiring from the
first defendant firm?

(iv) Whether the suit is maintainable against an unregistered partnership firm?

(v) Are the defendants jointly and severally liable to pay the suit claim of Rs.
17,70,000/=?

(vi) Whether the defendants are liable to pay interest as claimed in the plaint?

(vii) To what reliefs are the parties entitled?

6. On behalf of the plaintiffs, the plaintiff examined himself as P.W.1 and Exs.P.1 to
P.11 were marked. On behalf of the defendants, forth defendant has been examined
as D.W.1. Defendants 1 and 2 did not contest the suit and they were set ex parte.

7. Issues(i) to (vii):-

The suit is for recovery of Rs. 17,70,000/= from the defendants with interest at 12%
per annum on Rs. 15 lakhs from the date of plaint till date of realisation. The first
defendant is a partnership firm. The defendants 3 and 4 who are the partners alone
filed written statement and contested the suit. According to defendants 3 and 4,
though they were Partners of first defendant partnership firm, they retired from the
firm on and from 1.4.1998 and the second defendant's husband alone is liable for the
transaction with the plaintiff. The plaintiff is none other than the uncle of the
defendants 2 and 4. Though there is no promissory note supported for the
transactions, the statement of accounts signed by the second defendant which is
marked as Ex.P.1 would reveal that a total sum of Rs. 20 lakhs has been paid by the
plaintiff to the defendants, out of which, Rs. 5 lakhs has been repaid towards
principal. The plaintiff has produced TDS certificates Ex.P.3 and P.4 which relates to
the period upto 31.3.1999. Though the defendants 3 and 4 claim to have retired from
the partnership on and from 1.4.1998, major portion of the amounts were borrowed
by the first defendant firm before their retirement. Though they claim to have retired
on 1.4.1998, they have not produced any document to establish their contention that
they have retired from the partnership firm.

8. Further the contention of the defendants 3 and 4 is that it is only the husband of
the second defendant was conducting the business of the partnership firm and he is
only responsible for the transactions. This contention is not sustainable since it has
been elicited in the cross examination that profit and loss shall be shared among the
Partners in equal proportion irrespective of the fact that the defendants 3 and 4 are
not aware of the transaction of the firm with the plaintiff, being the partners of the
firm. Sections 19, 22 and 25 of the Indian Partnership Act is very clear that acts of
one partner bind the other partners. In case of retirement of a partner, the partner
has to give a notice under Section 72 of the Partnership Act. Section 72 of the
Partnership Act reads as follows:-

"A partnership continues, as to third persons who deal with the members thereof as
partners, until due notice of dissolution is given even though as between the
partners, the firm has been dissolved prior to such notice, especially as to persons
who dealt with the firm or extended credit prior to the dissolution as between
partners. Accordingly, each member of a former firm is bound, and continues liable
for the acts of any partner within the ordinary scope of the business of the firm, until
due notice of such dissolution has been given. But, in case of dissolution by
operation of law, notice thereof need not be given, nor is notice necessary where a
valid partnership has never existed. Wherever a notice is required by law to be given,
it ought to be given in such manner as the law deems sufficient. In India notice is
regulated by the Act."

9. As per Section 72 of the Partnership Act, a public notice should be given by

publication in the official gazette and in at least one vernacular newspaper
circulating in the district where the firm to which it relates has its place of principal
place of business. Admittedly in this case, no publication was made in the official
gazette. Therefore the retirement from the partnership by the partner cannot be held
legal. In the decision reported in C. Assaiamma v. State Bank of India (AIR 1990
Kerala 157) a Division Bench has held as follows:

"23. In this connection, reference has also to be made to section 23(3) of the
Partnership Act, It lays down that:

"Notwithstanding the retirement of a partner from a firm, he and the partners

continue to be liable as partners to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until public
notice is given of the retirement. Section 45(1) provides that not withstanding the
dissolution of a firm, the partners continue to be liable as such to third parties for
any act done by any of them which would have been an act of the firm if done before
the dissolution until public notice is given of the dissolution. This mode of giving
notice has been laid down in section 72 of the Partnership Act which says that a
public notice has to be given by intimation to the Registrar of Firms under section
63and by publication in the Official Gazette and in at least one vernacular newspaper
circulating in the district where the firm to which it relates has its place of principal
place of business. It is not contended that notice was given to the Registrar of Firms
of the dissolution of retirement or a publication was effected in the Official Gazette
What is relied on the prove the public notice is the publication in the 'Sathyanadam',
which is a Sunday Edition of Malayalam Daily, 'Keela Times' as evidenced by
Ext.B12. That alone would not satisfy the requirement of public notice is clear
from Section 72 of the Partnership Act. Further D.W.1 admitted that he is not a
reader of "Kerela Times" of 'Sathyanadam'. It is difficult to attribute knowledge of
dissolution to the bank from publication Sathyanadam. In any event, as there is no
publication in the Official Gazette, or proof of notice to the Registrar, there is no
public notice as contemplated in Section 45(1w) and 72 of the Partnership Act. In the
circumstances the retirement of the 2nd defendant, even if it be true, cannot affect
the rights of the plaintiff bank who is a third party in view of Section 32(3) of the
Partnership Act."

10. In the decision reported in Lakshmi Vilas Bank Ltd. v. Sun Finance and Ors.
(1995 (2) Law Weekly 574) a Division Bench of this court held as follows:

"22. The 2nd defendant has examined himself as D.W.1. He has stated in chief
examination that the Chairman of the plaintiff bank knew that defendants 2,4 and 5
have retired from the 1st defendant firm recently. He does not say or explain to the
Court as to how the Chairman of the plaintiff bank knew about their retirement. He
has admitted in cross-examination that no notice was given in writing to the plaintiff
about the alleged retirement. In the letter of undertaking Ex.A5 dated 15.4.1970, the
partners of the 1st defendant have undertaken to give notice to the plaintiff of any
change occurring in the firm in writing and that until receipt of such notice by the
bank and the receipt of acknowledgment by them from the bank for the same, the
plaintiff shall be entitled to regard all of them as partners of the 1st defendant firm.
Since admittedly, no notice was given in writing about the alleged retirement of
defendants 2,4 and 5 from the 1st defendant firm to the plaintiff, they are, in our
view, also liable for the suit claim. Section 45 of the Indian Partnership Act says that
a partnership continues as to third persons who deal with the members thereof as
partners until public notice of dissolution is given, even though, as between the
partners the firm has been dissolved prior to such n notice. In other words, a
partnership is presumed to continue as to third persons until public notice of
dissolution has been given, unless the person dealing with the firm after its
dissolution, had actual knowledge of such dissolution. Accordingly, each partner of a
former firm is bound by, and continues liable for, the acts of any former partner, if
they would have been acts of the firm if dissolution had not taken place. the
dissolution of a firm completely breaks the partnership relation between its
members and consequently the agency constituted by that relation in regard to
dealings with third persons. Thereafter, a partner ceases to have any authority to
bind his previous co-partners by any act. The words 'any act done by any of them
which would have been an act of the firm if done before dissolution" indicate that
notwithstanding the dissolution of the 1st defendant firm, the old partners of the
firm continue to be liable as partners although by virtue of the dissolution they have
ceased to be partners and are no longer partners for any act done by any of the old
partners, provided that fact is of a character that would have been an act of the firm.

11. Section 72 of the Indian Partnership Act deals with the mode of giving public
notice. It is useful to extract the following passage in J.P. Singhal's Indian
Partnership Act, Fifth Edition, appearing at page 1215:

"A partnership continues, as to third persons who deal with the members thereof as
partners, until due notice of dissolution is given even though as between the
partners, the firm has been dissolved prior to such notice, especially as to persons
who dealt with the firm or extended credit prior to the dissolution as between
partners. Accordingly, each member of a former firm is bound, and continues liable
for the acts of any partner within the ordinary scope of the business of the firm, until
due notice of such dissolution has been given. But, in case of dissolution by
operation of law, notice thereof need not be given, nor is notice necessary where a
valid partnership has never existed. Wherever a notice is required by law to be given,
it ought to be given in such manne as the law deems sufficient. In India notice is
regulated by the Act."
12. Under Section 32(3) of the Indian Partnership Act, a retired partner continues to
be liable until public notice is given of his retirement and what the public notice
under the Act is specified by Section 72. Therefore, on a reading of both the sections,
it is clear that a retiring partner will be liable for any subsequent act on behalf of the
firm which would bind the firm until the public notice as prescribed by section 72 is
given.

13. Rule 4 of the Tamil Nadu Partnership (Registration of Firms) Rules, 1951 deals
with the form of intimation and notices under Sections 61, 62 and 63 of the Indian
Partnership Act, which shall respectively be in Forms III, IV, V and VI annexed to
these Rules with such variations as circumstances may require. Form No. V if the
form prescribed for giving of notice of change in the constitution or forwarded to the
Registrar of Firms for filing under Section 63(1) of the Indian Partnership Act. Three
decisions cited by Mr. S.P. Subramaniam, learned counsel for the appellant, may be
usefully looked into in this regard. the first is reported in Jwaladutt R. Pillani v.
Bansilal Motilal (ILR 53 Bombay 414=A.I.R.1929 P.C.132= 29 L.W.884). This
decision deals with the corresponding section under the Indian Contract Act, which
was in force before the enactment of the Indian Partnership Act. The Full Bench
observed as follows:

"Where on the dissolution of partnership, public notice of dissolution is given, but no

notice is given to the old customers, the retiring partner is still liable to the old
customer if he continues to give credit to the partnership."

14. Though no document was produced by the defendants 3 and 4 to show their
retirement from the partnership firm on 1.4.1998 and the partnership firm itself was
dissolved on 1.4.1998, such contention is false because Ex.P.11 agreement is dated
4.9.1999. If as contended by defendants 3 and 4, the partnership firm itself was
dissolved on 1.4.1998, then the partnership firm could not have entered into Ex.P.11,
agreement dated 4.9.1999.

15. Since defendants 3 and 4 have not discharged their burden at the time of
retirement from the partnership firm, their liability cannot be denied and therefore
the suit is liable to be decreed as prayed for.

16. In the result, the suit is decreed as prayed with costs.