This blog has been written by Arshia Ann Joy, and Shani A.R, 4th year law students at NUALS, Kochi
Section 33 (1) of the Indian Partnership Act, 1932 (hereinafter “the Act”) states that a partner may be expelled in good faith from the partnership firm, only if such a power is conferred on the remaining partners by means of a mutual contract. If the two conditions, namely, that a contract must confirm such powers to the partners and that such a power must be exercised in good faith, are unsatisfied, the expulsion of the partner would be invalid.[i] However, in a scenario where one of the partners acts in a manner highly detrimental to the very existence of the firm, the legal recourse available to the remaining partners is very limited. The plight of the remaining partners is aggravated further when the partnership deed does not include a specific provision to expel a partner. The Bombay High Court in Kunda Madhukar Shetye, permitted the expulsion of a partner without an explicit clause, citing implied powers. This article contends that the rationale of the Bombay High Court in the said decision falls short of addressing the issue adequately.
After analysing the established position of law regarding section 33, this article attempts to delve into the need for interpreting Kunda Madhukar decision more broadly to permit an expulsion even when there are no explicit or implied powers in the partnership deed.
APPLICATION OF SECTION 33(1)
Section 33 applies only in situations wherein the power of expulsion has been reserved in the Articles of Partnership. In V. Anantha Raju. v. T.M. Narasimhan, the Supreme Court upheld the expulsion of a partner from a firm as the partnership deed specifically permitted it. The Apex Court further clarified that the provision permitting expulsion would continue to operate unless the amendment deed entered into at a later stage specifically negates or supersedes such a provision in the former deed. The Madras High Court and the Calcutta High Court in 2020 adhered to this established position of law while upholding an expulsion, courtesy to the specific clause in the partnership deed permitting the same.
When there is no power to that effect in the deed of partnership or any specific mention of the circumstances and the manner of exercise of such power, expulsion of a partner will be deemed invalid. The court clarified in Santiram that, “If the partnership agreement does not provide for expulsion, no partner can approach the court seeking relief for expelling a partner from the partnership business on the allegation that the concerned partner had committed the breach of the partnership agreement.”
Although express provisions are ordinarily preferred in conferring the power of expulsion, there is nothing in the Act which prevents an implied agreement.[ii] It is also to be noted that section 33 does not extend to the expulsion of a partner who committed a direct breach of the contract of partnership.
Applying the same rationale in Santiram, the court in Shivraj Reddy invalidated an expulsion as there was no specific provision authorising the same even in the Reconstituted Deed of Partnership. The absence of such a specific authorising provision coupled with the failure to notify the partner in question regarding the decision to expel him, would guarantee the invalidation of the expulsion by a court of law. Further, it has been clarified that in the absence of the partners having agreed to the exercising of powers to expel, the courts are not entitled “to write a contract between the parties” permitting the same. Granting permission to expel unscrupulous partners from the firm cannot be treated as the court indulging in the act of writing a contract between the parties. The provisions of the Act read along with its overall scheme permits the court to extend its jurisdiction in order to address the partners’ detrimental actions without resorting to the dissolution of the firm.
POST KUNDA MADHUKAR SHETYE DECISION
In Kunda Madhukar Shetye v. Shila Subrao Shetye, the Bombay High Court upheld an expulsion in spite of the absence of an authorising provision in the partnership deed. The court was mindful of the remaining partners’ opinion that the expelled partner was taking steps “to virtually destroy the firm and then say that the others have no power to expel her”. The court was of the opinion that an implied power to expel must be read into the clauses or else the existing clauses would be rendered meaningless.
The Delhi Court in 2021, while interpreting Kunda Shetye, stated that the above rationale should be read along with the facts of the above case wherein two clauses of the partnership deed cast a responsibility on the partner not to indulge in any act contrary to the interest of the firm or its partners. The court opined that it was owing to these clauses that the Bombay High Court decided to permit an expulsion even in the absence of a specific authorising clause in the partnership deed. The Calcutta High Court in the same year adopted the same reasoning as above while adhering to Kunda Shetye. It held that due to the presence of clauses casting a duty on the partners not to indulge in activities deleterious to the firm, expulsion was justified, even in the absence of a specific clause permitting it.
When there is a breach of the partnership agreement by a partner, the remedy available to the remaining partners is to apply for dissolution of the firm under section 44 of the Act. The business conducted by the firm culminates with such a dissolution unless there is an agreement to the contrary included in the partnership deed. If a partner engages in deleterious activities with an intention to shut down the business, the primary remedy available before the remaining partners is to approach the appropriate forum under section 44. However, the downside of this remedy is that such a suit would ultimately result in the dissolution of the firm and thereby its business, even if it is contrary to the interest of the remaining partners.
In light of the above scenario, the Delhi High Court has erred in holding that the rationale in Kunda Shetye cannot apply in the absence of a clause casting responsibility on the partner not to indulge in any act contrary to the interest of the firm or its partners. This is because a partner acts as an agent of all the other partners in a partnership firm and thereby is essentially expected not to indulge in activities contrary to the interest of her principal. Section 9 of the Act further casts a general duty on the partners to conduct the business of the firm in furtherance of ‘common advantage’ and not for satisfying one’s own personal interests. This principle holds true even if there is no clause in the deed which specifically states so.
Further, the Act vouches for the continued existence of a partnership firm in spite of a change in its constitution through admission, retirement, insolvency, death or expulsion of its partners. Since, the Act envisages the continued existence of the firm even in the event of an expulsion, it would go against the very purpose of this Act to dissolve the firm just because there is no specific clause requiring the partners not to indulge in any unprincipled acts while in office.
It can hence be concluded that the present position of law regarding expulsion of partners does not sufficiently address the issue that arises when one of the partners indulges in detrimental activities while the remaining partners prefer not to opt for dissolution of the firm. The courts should be mindful of the fact that as per section 9 of the Act, partners being agents of the firm are not permitted to engage in deleterious activities. This is irrespective of whether the partnership deed specifies the same or not as a ground for expulsion. Such a broad interpretation by the Apex Court would effectively remedy the plight of the remaining partners even if there is no clause in the partnership deed which permits an expulsion.
[i] 5 C.L GUPTA, Law of Partnership 1.35 (Lexis Nexis 2016).
[ii] Satyajeet Desai, The Law of Partnership in India 254 (7th ed. LexisNexis 2009).