Pathirane v. Pathirane
Present: Gunasekara, J., and Sinnetamby, J.
R. W. PATt£TRAjSTE, Appellant, and A. PATHIRAjSJE, RespondentS. C. 351185—D. C. Kurunegala, 5810[M
■Partnership—Dissolution—Action for accounts—Correct procedure—Effect of non-production of accounts—Distribution of assets—Division of profits—PartnershipAct, ss. 29, 42—Civil Procedure Code, ss. 202, 430, 431, 508, oil, 51Z, 515.
Plaintiff and defendant carried on a business as partners. The defendantwas the managing partner. The plaintiff, instituted the present action averringthe dissolution of the partnership and asking that the accounts of the partnershipbe taken. He also asked for distribution of the assets and for division ofprofits.
■ Hebi, (i) that, when a partner states that accounts have not been renderedand asks for the taking of accounts, the Court should first make an orderdirecting accounts to be rendered from the date from which it finds that theyhave not been rendered. In such cases the procedure prescribed by sections202, 430, 431, 508, 511, 513 and 515 should be followed.
SINNETAMBY, J.—Pathirane v. Pathirane
that if a partner has books or accounts in his possession and Fails tosubmit any accounts to the Court, the Court is- entitled to draw inference8-adverse to the accounting party.
that the defendant was liable to share with the plaintiff the profits hemade by fraudulently obtaining a renewal in his own name of certain agreements-which the partnership had with a third party.
that, in the present case, as assets had not been distributed at the timeof the action, the plaintiff was entitled to recover profits up to the date of the-decree and, thereafter, legal interest on the aggregate sum found due to him.
Appeal from a judgment of the District Court, Kurunegala.
H. W. Jayewardene, Q.C., with N. R. M. Daluioatte, for the defendant-appellant.
B. Wilcramanayake, Q.C., with T. W. Rajaratnam, for the plaintiff-respondent.
Cur. adv. vult.
July 25, 1961. Sinnetamby, J.—
The plaintiff and defendant were partners and carried on a businessunder a partnership agreement marked PI bearing No. 285 dated 30thDecember, 1942. The nature of their business involved the sale of petroland other products of Caltex (CEYLON) Ltd. in premises belongingto the Caltex Company. They were permitted to use the equipmentprovided by the company on payment of a nominal hire and were subjectto the conditions set out in the agreements entered into between thepartnership and Caltex (CEYLON) Ltd. embodied in the documents^Dl, D3 and D14. The partners were, for the purpose of this businessregarded as the business agents of the Caltex company, though in pointof fact, they were not agents in the lega sense. Differences appear tohave arisen between the partners and the plaintiff had instituted anaction against the defendant in the District Court of Kurunegala on18th August, 1948, claiming profits for the three years ended 31st March,1948. He obtained a decree in November, 1954, in a sum of Rs. 10,550-on account of his share of the profits. In the meant me, on 10thSeptember, 1948, the defendant gave the plaintiff, in terms of thepartnership agreement PI, three months notice terminating the partnership*as from 10th December, 1948.
SINNETAMBY. J.—Paihirane v. Pathirane ■
The present action was instituted prior to the decree in that case on:25th August, 1949, averring the dissolution of the partnership andasking that the accounts of the partnership be taken. The plaintiff■also asked for distribution of the assets and for division of profits.
The defendant, according to the partnership agreement, was themanaging partner and it is not denied that he kept books ; indeed, inthe earlier action he produced his books to a firm of chartered accountantswho reported on them to the court. Even in the present action hecalled as a witness a gentleman employed in a firm of accountants andsubmitted a statement prepared by him. The plaintiff averred thatthe defendant had failed to render a true and correct account of thepartnership from 1st April, 1945. Article 7 of the partnership agreementPI requires that on the 31st of March each year a balance sheet shouldbe prepared showing the assets and liabilities and each partner’s share-of the capital and profits. Article 9 provides that these accounts shouldbe audited by a recognised auditor. Article 11 further provides thatneither partner shall draw a sum exceeding Rs. 150 per month exceptwith the consent of the other partner. The need for an annual balancesheet and a profit and loss account was thus imperative. Each partnercontributed a sum of Rs. 2,000 to the business as capital. They alsoappear to have borrowed money from the bank to finance the business■and this had been subsequently liquidated. Although the defendantsaid he had liquidated this loan out of his personal funds he has notestablished it by satisfactory evidence and the learned Judge has, inmy view, rightly rejected his contention.
The plaintiff also averred that prior to the notice of termination of“the partnership the defendant fraudulently obtained from the Caltexcompany an agreement for the sale of their products in the same premisesin his own name after inducing them to cancel the agreement with thepartnership. This, under the agreements, they could have doneat short notice. The plaintiff claimed the profits made by thedefendant in conducting the business in his own name from thedate of the cancellation of the agreement with the Caltex companyup to the date on which assets are distributed. The defendant, in his■answer denied that he failed to render accounts from 1st April, 1945,and stated that only a sum of Rs. 280 was due as plaintiff’s share ofthe profits. On the trial date, several issues were framed but there wasno issue suggested or adopted in regard to whether the defendant hadin terms of the partnership agreement submitted accounts to the plaintiffafter March, 1945. The consequence was that the learned trial Judgepermitted evidence to be led on various matters which need not havebeen gone into if the correct procedure had beeD followed.
SUfNETAMBY, J.—Pathireme v. PcUhircme
Sitting in appeal, I have noticed that in several partnership cases in"which the plaintiff has asked for the dissolution of partnership and foran order directing accounts to be taken, some trial courts have notfollowed the correct procedure and do not appear to have a properappreciation of the steps that should be taken in the course of such-proceedings. Where the plaintiff states that accounts have not beenrendered and asks for the taking of accounts, the court should firstconsider what defence the defendant has put up in regard to that claim.If his defence is that accounts have been rendered, then the first questionthe court must decide on is whether in fact accounts had been renderedand if so up to what date. It should then make an order directing-accounts to be rendered from the date from which it finds they havenot been rendered. Section 508 of the Civil Procedure Code expresslyprovides that in actions of accounts, the court may adjudicate piecemeal upon the matters in issue and in such adjudications makeinterlocutory orders of a final character. Having decided this issue thecourt should then call upon the defendant if he is the accounting partyto file a statement of accounts for such period as it consideis necessary.In rendering his accounts the accounting party must comply with theprovisions of Section 511 : it should be verified on oath or affirmation.Thereafter, a date should be fixed for the opposite party to falsify andsurcharge. When that has been done, the trial should be confined onlyto those items in the accounts in respect of which there are disputes.Section 513 provides for the procedure to be followed when the accountingparty makes default. The hearing of the main issues in the case shouldbe adjourned until after the accounts are taken in terms of Section 515.There are, of course, several other defences also open to the accountingparty when the plaintiff asks the court for an order calling on the defendantto file accounts. If such defences are taken they should first beadjudicated upon before an order is made. In the case of partnershipsSection 202 expressly provides that accounts shall be taken before adecree for dissolution is made. Ordinarily, in partnership cases, an ^action for accounting is never instituted except when it is associated ,with a prayer for an order of dissolution unless in point of fact there hasalready been a dissolution. If after accounts are filed the court thinksit requires the services of an accountant, it may issue a commission interms of Section 430 and 431 of the Civil Procedure Code to an accountantto examine and report on the account. This should only be done if thecourt considers such a reference necessary and should not be done solelyon the initiative of either or both parties—Seneviratne v. Kariaivasan1.
If courts of first instance would only follow these provisions of the CivilProcedure Code in taking partnership accounts much time would besaved and the issue narrowed to a smaller compass.
1 (1949) 51 A*. L. R. 206 ; 42 O. L. W. 20.
SINNETAMBY, J.—Pathiranc v. PcUhirane
In the present case, the defendant was not called upon to submit anaccount and, indeed, he did not submit one which was supported bybooks, but several issues were framed and the main ones with whichthe appeal was concerned and in respect of which argument was addressedto us were issues 1, 2, 3 (1), 3 (2), 4, 5 and 6. After trial the learnedJudge entered judgment foi the plaintiff for profits at the rate of Rs. 2,000per year from 31st March, 1948, up to the date of payment of his “ capitaland costs There was no express direction in the judgment or in thedecree spe ifying what amount had to be paid on account of capital,but, in answer to issue 2, the learned Judge fixed the amount due tothe plaintiff on account of his share of the assets and goodwill at Rs. 2,300.Against the judgment of the learned District^Judge, the defendantpreferred the present appeal.
The defendant, as stated earlier, failed to submit any accounts tothe court ; he only called an accountant who submitted a statementunsupported by any books. The court was accordingly entitled todraw inferences adverse to the accounting party. Lindley in his bookon Partnership refers to the effect of non-production of books in thefollowing terms :—
“ If a partner has books or accounts in his possession, and he willnot produce them, an account may, nevertheless, be arrived at bypresuming everything against him. Thus in a case where an accountwas directed at the suit of the representatives of a deceased partneragainst the surviving partner, and the latter would not produce thebooks, necessary to enable the Master to take the accounts, the Masterestimated the nett profits at £10 per cent, on the capital employed,and the Court, on exception to his report, confirmed it, adding that ifhe had set the nett profits down at £20 per cent, his report wouldhave been equally confirmed.”
In the present case, therefore, the failure of the defendant to producethe account books entitles the court to draw every adverse inferenceagainst him but the court had material upon which it could have proceeded.In the earlier action to which I have referred, a firm of chartered accountantsaudited the books and prepared and submitted a statement of the profitsdisclosed up to the end of March, 1948. They were fixed at Rs. 10,550after deduction of drawings. The learned Judge assessed the profitsfor the subsequent period on that basis, and it was not argued in appealthat his method of assessment was wrong. I think it was perfectly opento him to proceed on that basis. Indeed, the learned Judge has beenvery considerate to the defendant for on that basis he should have allowedprofits to be fixed at about Rs. 3,000 per annum but having regard
SINNETAMBY, J.—Pathirane v. Pathirane
-to the fact that it was the defendant who managed the business thelearned Judge has allowed Rs. 1,000 per year to be deducted on thataccount and assessed the profits at Rs. 2,000 per year, despite thefact that the remuneration allowed for his services in the partnershipagreement was only Rs. 50 per month. The plaintiff did not in appealcontest the correctness of this award. It is not clear how the learnedJudge arrived at the value of the capital contributed and the assets andgoodwill at Rs. 2,300 but this figure too was not seriously contested.What the defendant did contest, however, was that the plaintiff wasnot entitled to claim any profits after the Caltex company had terminatedits agreement with the partnership. This was done by letter D9 addressedby the Caltex company to the partners dated 23rd September, 1948,terminating the petrol agreement by giving a month’s notice. .In regardto kerosene, a new agreement with the defendant was entered into asfrom 1st October, 1948.
The notice of termination by the Caltex company was, as would appearfrom D8, made in consequence of a letter written by the defendant tothe Caltex company dated 21st September, 1948, which has been producedmarked D13. Obviously, in D13, there are misrepresentations uponwhich the company appears to have acted. For instance, in it thedefendant saj's that the plaintiff had withdrawn his capital of Rs. 2,000.This was in September, 1948, and is totally inconsistent with the decreeentered in the earlier case No. D. C. 5029 in which judgment was onlyfor the profits and the assets fixed at Rs. 3,232' 84 were directed to becarried forward to the next account. The defendant’s accountantproduced statements of account D15 and DIG which the Judge hasquite rightly rejected. In regard to profits not included in the partnershipaccounts made by a partner by utilising partnership assets before thetermination of the partnership, Section 29 of the Partnership Act wouldapply. In my view it clearly applies to the profits made by the defendantafter he secretly wrote letter D13 to the Caltex company and therebyinduced them to cancel the original agreement with the partners andto enter into a new agreement with him personally. This was donewithout the knowledge of and without notice to the plaintiff, and at atime when the partnership had not been terminated. Lindley refers toseveral cases where a partner who, on the termination of the partnership,obtains renewal of a lease in his own name, was ordered to account tothe partnership for the profits he thereby made. In my opinion, thedefendant was liable to share with the plaintiff the profits he made byobtaining a renewal in his own name of the several agreements thepartnership had made with the Caltex company.
The learned Judge in his judgment has ordered that the defendantshould pay the plaintiff profits as decreed till the date on which thepayment is made of the capital and costs. The only question that now
SINTNETAMBY, J.—Pathirane v. Pathirane
remains for decision is whether this order is right. The learned counselwho appeared for the respondent conceded that he was not entitledto ask for profits until the date of payment of capital and costs. Thisquestion is not easy to determine and would depend in each case uponthe facts and circumstances established therein. The accounts of apartnership must be kept open even after the date of dissolution for thepurpose of debiting and crediting the parties with monies payable bythem and monies they are entitled to receive both in respect of newtransactions as well as old transactions. The same will be the casewith partnerships which continue to do business in the partnershipname after dissolution. The main question to be taken into account iswhether the business is being conducted with property belonging tothe partnership and not to the individual partner who continues totrade in the partnership business without the consent of his co-partner.The general rule in such a case, as stated by Undley, is for thecontinuing partner to be condemned to pay either a share in the profitstill final distribution of the assets or, in the alternative, interest onthe capital at the usual rate, whichever is higher.
In the present case, the partnership agreement expressly providesthat fresh capital brought in should carry interest at 6 per cent, but theprofits were definitely larger. The plaintiff should, therefore, be entitledto recover profits so long as the business of the partnership continues.This is provided for by Section 42 of the Partnership Act, which, however,restricts the right of interest to 5 per cent, on the outgoing partner’sshare of the partnership assets. In this case, as assets had not beendistributed at the time of the action, it seems to me that the plaintiffis entitled to recover profits on the basis of the Judge’s order up to thedate of the decree for by its decree the court has in effect distributed theassets and, therefore, it cannot be aid that the defendant was stillcarrying on the business utilising partnership assets. The plaintiff’srights in short have been merged in the decree and, as learned counselfor the plaintiff-respondent conceded, the order as to profits must cometo an end on the date of the decree. Thereafter, the plaintiff wouldonly be entitled to legal interest on the aggregate sum found due tohim.
I would accordingly vary tbe decree by directing that the defendantdo pay to the plaintiff profits at the rate of Rs. 2,000 per year from31st March, 1948, up to the date of the decree and his share of the assetsand goodwill amounting to Rs. 2,300/- and that thereafter, he shouldpay legal interest on the aggregate amount till payment in full withcosts of action. Subject to this variation, I would dismiss the appealwith costs.
Gitnasekaba, J.—I agree.
Appeal mainly dismissed.
R. W. PATHIRANE, Appellant, and A. PATHIRANE, Respondent