Calcutta High Court: In a writ petition seeking interim protection against a show cause notice and a notice of expulsion in a partnership dispute, a single-judge bench comprising of Moushumi Bhattacharya,* J., held that the petitioner’s expulsion lacked justification under Section 33 or Clause 20 displaying majority partners’ bad faith and therefore, breaching principles of natural justice for self-serving motives. The Court granted interim protection staying the show cause notice and expulsion for 6 weeks or until further arbitration orders. The Court directed the petitioner to constitute an arbitral tribunal within 4 weeks.
“Seen in light of Section 33, the respondents have displayed bad faith in issuing the impugned notice against the petitioner.”
Brief Facts
In the instant matter, the petitioner seeks interim protection against a show cause notice dated 20-10-2023, and a notice of expulsion dated 15-11-2023. The petitioner is a partner in the partnership firm M/s Serajuddin & Co. The petitioner is supported by respondent 3 while the other 3 respondents oppose the petitioner. The impugned notices were issued by the opposing respondents.
Respondent’s Allegations
The first allegation involved the petitioner’s alleged unlawful execution of Loan cum Hypothecation Agreements on behalf of the Firm with Tata Motors Finance dated 19-03-2021, in violation of the Partnership Deed. Despite no challenge to these agreements for over 2½ years, the respondents raise concerns only in the show cause notice, alleging the petitioner’s illegal actions. The second allegation is related to undermining the morale of senior employees, auditors, and partners, without specific instances mentioned. The third allegation involved the petitioner’s purported malafide acts after the demise of a joint managing partner, lacking specific details. The fourth allegation is related to financial and operational irregularities, also lacking specific details.
Court’s Assessment
The Court initially refused interim protection on 30-11-2023, citing incomplete facts, prompting the parties to file affidavits to present a complete set of facts. However, after filing of affidavit, the Court decided to address individual allegations in the show cause notice, beginning with the claim that the petitioner unlawfully executed Loan cum Hypothecation Agreements on behalf of the firm.
The Court noted that the notice of expulsion, dated 15-11-2023, referred to the show-cause notice accusing the petitioner of avoiding it and repeated allegations from the show cause notice. The expulsion notice cited Clause 20 of the Reconstituted Partnership Deed, giving majority partners the power to expel. However, the notice lacked independent findings justifying expulsion, and the petitioner was not given an opportunity to defend.
The Court noted that Section 33 of the Partnership Act, 1932, restricts expulsion without good faith and adherence to partnership deed provisions. In the present case, the petitioner is in the minority, and Clause 20 requires factual satisfaction of unjust and unfaithful conduct. The Court observed that the opposing respondents must act with probity, acknowledging the duty to be just and faithful to each other. The Court noted that the petitioner’s refusal to conform to majority decisions does not excuse a lack of good faith on the part of the respondents. The Court stated that even if the allegations are true, good faith must be proven and lack of evidence or particulars raised questions in the present case.
“Expulsion is the final step which can be taken against an erring partner from which there is no return. The majority partners must hence show utmost good faith before taking that step.”
The Court noted that the petitioner received insufficient time to respond to the show cause notice, violating Clause 20, which mandates an effective defense. The Court observed that “giving a personal hearing is not equivalent to an opportunity for an effective defense”, as expulsion occurred two days after the hearing. The Court stated that the respondents breached principles of natural justice and displayed bad faith in issuing the expulsion notice. The Court held that the expulsion without utmost good faith is a breach of Section 33 of the Partnership Act, 1932 and the respondents failed to justify expulsion, displaying bad faith.
“The fact built-up leaves no option for the Court but to hold that the opposing respondents were in breach of the principles of natural justice for self-serving motives. The respondents have not been able to show any evidence to justify the expulsion either under section 33 of the Act or under Clause 20 of the Reconstituted Partnership Deed.”
Court’s Decision
After a comprehensive analysis of facts and affidavits, the Court grants interim protection. The impugned notices are stayed for 6 weeks or until further orders or completion of arbitration. The Court directed the petitioner to constitute an arbitral tribunal within 4 weeks as per the arbitration clause. The respondents’ request for stay is refused, considering the wrongful nature of the show-cause and expulsion.
[Meraj Yusha v. Hamida Khatoon, 2023 SCC OnLine Cal 5613, order dated 22-12-2023]
*Judgment by Justice Moushumi Bhattacharya
Advocates who appeared in this case :
Mr. Joy Saha, Sr. Adv., Mr. Abhijit Sarkar, Ms. Urmila Chakraborty, Mr. Saraswata Mohapatra, Counsel for the Petitioner
Mr. S.N. Mookerji, Sr. Adv., Mr. Dhruv Chadda, Mr. D.N. Sharma, Mr. Yash Singhi, Counsel for the Respondent 1
Mr. Ratnanko Banerji, Sr. Adv., Mr. Jishnu Chowdhury, Mr. Ratnesh Kr. Rai, Counsel for the Respondent 2
Mr. Jishnu Saha, Sr. Adv., Mr. Ishaan Saha, Mr. Rishabh Karnani, Mr. Pranav Sharma, Counsel for the Respondent 3
Mr. S.K. Kapur, Sr. Adv., Mr. Utpal Bose, Sr. Adv., Mr. K.R. Thaker, Mr. Ankan Rai, Counsel for the Respondent 4
