The Court in the instant case ruled that an outgoing partner of a dissolved firm has the right to seek accounts, and a share of the profits earned from the firm's assets, even if the assets are taken over by another entity without the partner's consent. Crystal Transport Service, a partnership firm, was formed in the early 1970s with four equal partners. In 1978, three partners allegedly diverted funds to a private limited company (fourth defendant) without the consent of the fourth partner (plaintiff). When the plaintiff demanded accounts, the defendants refused, leading to the filing of Original Suit No. 286 of 1978. The plaintiff sought dissolution of the firm, settlement of accounts, distribution of shares, and the appointment of a receiver.
The defendants contended that the private limited company was established with the consent of all partners and that the firm’s assets and liabilities were transferred under an agreement dated June 25, 1978. Multiple receivers were appointed, but challenges persisted in settling the firm’s accounts, resulting in various appeals, revisions, and cross-objections. The core dispute revolved around the plaintiff’s entitlement to profits derived from the firm’s assets after the firm’s dissolution, particularly those earned by the private company (fourth defendant).
The Supreme Court upheld the Madras High Court’s ruling that the final decree was based on reports prepared without affording proper opportunity to the parties to challenge them, necessitating a remand.
In matters of partnership law, Section 37 of the Indian Partnership Act, 1932 provides critical protections for outgoing partners. The section stipulates that if business is carried on with the firm's assets without a final settlement, the outgoing partner is entitled to a proportionate share of profits at 6% per annum. During the account settlement process, as directed by the preliminary decree, the Commissioner was tasked with examining accounts under Sections 37 and 48 of the Act. Notably, the transfer of assets to the fourth defendant company without the plaintiff's consent falls within Section 37's scope.
The Court emphasized that an outgoing partner's entitlement to profits continues until the final settlement of accounts, irrespective of the dissolution date. Crucially, the quantum of business profits derived from the firm's assets by the fourth defendant company remains a matter of evidentiary proceedings. Section 37 fundamentally safeguards outgoing partners by ensuring their continued profit entitlement, with the caveat that continuing partners might have the option to purchase their share through a valid agreement. Complementing this, Section 48 prescribes a hierarchical framework for post-dissolution account settlement, guaranteeing equitable distribution among partners based on agreed ratios.
The Supreme Court dismissed the appeal, upheld the remand order, and directed the trial court to reassess the evidence for final decree preparation. The Bench emphasized that the rights of outgoing partners must be protected until an equitable settlement is reached. This ruling reinforces the principles of fairness and equity enshrined in the Indian Partnership Act, of 1932, ensuring that outgoing partners are not deprived of their rightful share in the firm’s assets and profits.