Not Mandatory For Each Partner In A Firm To Contribute Towards Share Capital: Karnataka High Court

A single judge bench of Justice Umesh M Adiga made the observation while setting aside an order of appellate court which reversed trial court order dismissing a suit filed by one D Vijaygopal Mallya S/o Diwakar, seeking a declaration that M/s Vinyl Prints and Designs exclusively belongs to him and it is a proprietary concern. Mallya claimed that the defendant (appellant herein) has no right, title or interest in the business run by him and the defendant be restrained by permanent injunction from interfering and obstructing in running the business of the plaintiff in his own rights.

One of the reasons cited by the appellate court was that the defendant (Venkatarya S Nayak) had not contributed towards share of capital, therefore, he was a co-worker or subordinate of the plaintiff and not a partner.

Disagreeing, the High Court said, "The said finding is against the provisions of law. It is not necessary that each parties shall contribute towards share capital to become partners. It is an agreement between parties."

Referring to section 4 of the Indian Partnership Act, the bench said,

"There is no necessity that there must be an investment by each party to constitute a firm. In the evidence of PW1 i.e in his cross examination, he specifically says that except for purchasing computers and cutting machines, there was no requirement of any fund to purchase raw materials etc. He has also stated that except deposit of Rs.30,000, remaining raw materials were obtained on credit basis and the amount has been paid from time to time. According to the admission of PW1, evidence of DW1, pleading of defendant and contents of Ex.P1, plaintiff has been getting 70% of the profit."

It added, "According to the defendant the said profit was including refund of capital invested by the plaintiff and 18% interest per annum and interest on capital amount. PW.1 admits that he has received interest on the said capital. He has also admitted that by instalment he used to get a refund of capital invested by him. Therefore, finding of the learned trial judge that defendant has not invested the money. Therefore, it can be presumed that he was a co-worker is erroneous."

Then, terming the finding of the court that an unregistered partnership agreement cannot be looked at as evidence, as 'misconceived', the bench said,

"Section 17 of the Registration Act or partnership Act does not compel that the partnership deed shall be registered. When the registration of the partnership deed is not compulsory in accordance with Indian Registration Act or partnership Act, question of non-admissibility of Ex.P1 (agreement) does not arise."

It added, "It appears that the learned First Appellate Judge instead of considering that partnership needs to be registered to claim certain rights under the partnership act, wrongly construed that partnership deed should be registered under the Registration Act. Ex.P1 (agreement) is admissible in evidence. The learned trial judge erred and it was completely ignoring it and considering it under Section 47 of the Registration Act for collateral purpose. That needs to be interfered with in the second appeal."

Following, which the court held,

"It is pertinent to note that once partnership firms come into existence by agreement between the parties, it is not necessary to go back and see whether prior to starting of the firm whether either parties were running said business as an proprietary concern."

Further, going through the records the bench noted that the appellate court has said that that defendant has not produced the relevant documents or he has not taken such contentions in the notice or written statement. Therefore, it is to be presumed that earlier to the business of partnership, plaintiff was running a proprietary concern.

Dismissed this reasoning the court said, "Plaintiff has approached the Court and he should plead and prove his contention. Plaintiff has not placed any materials to show that prior to the partnership firm he had been running his business. Plaintiff cannot get relief on the basis of weakness in the case of the defendant. The said finding is erroneous."

Finally rejecting the contention of the appellant that the suit was barred as per section 69 of the Indian Partnership Act, the bench said "In the present case, the defendant has not taken such contention and there was no issue framed by the trial court in this regard. Therefore, we cannot find fault with either trial Court or First Appellate Court to hold that they erred in not considering the Section 69 of the Indian partnership Act, 1932."

Accordingly it allowed the appeal and set aside the first appellate court order and confirmed the trial court order.

Case Title: Venkataraya S Nayak v. D Vijaygopal Mallya

Case No: REGULAR SECOND APPEAL NO. 1035 OF 2007

Citation: 2022 LiveLaw (kar) 514

Date of Order: 25-11-2022

Appearance: S V Shastri & Ravi Hedge & Ravindranath K, advocate for appellant; Advocate Vijay Kumar B. Horatti, for Ravi G Sabhahit, for respondent.