Delhi HC Upholds Arbitration Award in Unregistered Partnership Dispute, Affirms S.69 Partnership Act Not Bar to Arbitration - 2025-04-26

Delhi High Court Upholds Arbitral Award in Partnership Dispute, Clarifies Scope of Section 69 of Partnership Act

New Delhi: The Delhi High Court, in a judgment delivered on October 28, 2024, by Justice Neena Bansal Krishna , dismissed challenges filed by former partners of two dissolved firms against an arbitral award concerning the settlement of their accounts. The court reaffirmed the limited scope of judicial intervention under Section 34 of the Arbitration and Conciliation Act, 1996, and clarified that the bar under Section 69 of the Partnership Act, 1932, regarding unregistered firms, does not apply to arbitration proceedings.

The case involved disputes between partners of two unregistered firms, M/s Ashika Textiles and Classic Processors, which ceased business operations on July 31, 2003. Disputes arose subsequently between the partners, leading the claimant, Hari Om Sharma , to invoke arbitration in 2005. Justice Satpal (Retired) was appointed as the sole arbitrator for both firms.

Background of the Dispute

Hari Om Sharma , Sauman Kumar Chatterjee , and S.K. Malhotra were partners in M/s Ashika Textiles (formed 1995) and Classic Processors (formed 2000). While the business of both firms stopped on July 31, 2003, disputes arose regarding the settlement of accounts and distribution of assets. The claimant alleged misappropriation of assets, fabricated accounts, and the respondents starting similar businesses using the firms' goodwill without proper dissolution. The respondents contended that the firms were dissolved by mutual consent on July 31, 2003, accounts were settled, and proceeds distributed. They also argued that the claims were barred by limitation and, importantly, that the arbitration proceedings were not maintainable as the firms were unregistered, citing Section 69 of the Partnership Act.

The arbitration commenced in 2007, and the learned arbitrator delivered a final award on April 28, 2017 (corrected on July 1, 2017), deciding numerous claims raised by the claimant regarding both firms, and holding that the firms stood dissolved from the date of the award, not the date of business closure. Both the claimant and the respondents filed petitions under Section 34 of the Arbitration Act, challenging aspects of the award.

Key Legal Contentions and Court's Analysis

The High Court addressed several key issues raised by the parties:

1. Date of Dissolution: The respondents argued the firms dissolved on July 31, 2003, upon cessation of business. The claimant argued there was no formal dissolution. The court, aligning with the arbitrator, noted that while business closed on July 31, 2003, the Partnership Deeds (being Partnership at Will) required written notice for dissolution under Section 43 of the Partnership Act, which was admittedly not given. Furthermore, the distribution of assets was still pending. Citing the arbitrator's reliance on M/S V.H. Patel & Company & Ors vs Hirubhai Himabhai Patel & Ors , the court upheld the finding that the firms dissolved from the date of the arbitral award (April 28, 2017), considering the conduct of the partners had destroyed mutual confidence, making it impractical to continue.

   The court held: "As has been rightly held by the learned Arbitral Arbitrator, the date of closure cannot be deemed to be a date of dissolution of partnership since all the assets of the partnership were yet to be distributed... the findings of the learned Arbitrator about there being no dissolution and to hold that the partnership firms shall be dissolved w.e.f. the date of Award, does not suffer from any illegality or perversity and does not warrant any interference."

2. Bar under Section 69 of Partnership Act: The respondents strongly contended that claims from an unregistered partnership were barred by Section 69 of the Partnership Act, thus making the arbitration non-maintainable. The court considered this objection and referred to Supreme Court precedents.

   Citing M/s Umesh Goel vs Himachal Pradesh Cooperative Group Housing Society Ltd and Ananthesh Bhakta v. Nayana S. Bhakta , the court affirmed that the bar under Section 69 is limited to proceedings in civil courts and does not extend to arbitration proceedings.

   The judgment stated: "Therefore, the contention of the respondents that the arbitral proceedings were non-est being barred under Section 69 of the Partnership Act, is not tenable and is without any merit."

3. Limitation of Claims: The arbitrator had held that claims pertaining to periods more than three years prior to August 29, 2005 (the date of invoking arbitration) were time-barred. The claimant challenged this. The court reviewed the timeline and agreed with the arbitrator's finding, noting that the claims were for specific dues while the firms were functioning, and limitation would run from the date the cause of action arose for each claim.

   The court concluded: "There is no infirmity in the findings of the learned Arbitrator about certain portions of the claims which were prior to 28.08.2002 being barred by limitation. No interference on the findings of the learned Arbitrator on the aspect of limitation is warranted."

4. Merits of Claims and Interest: Both parties challenged the specific amounts awarded or rejected by the arbitrator for various claims related to asset valuation, share of profits, interest, etc. The respondents also challenged the rate of interest awarded. The court reiterated the principle established in National Highway Authority of India v. M. Hakeem that a court under Section 34 cannot re-appreciate evidence or interfere with the arbitrator's findings unless they are based on no evidence or are perverse.

   Regarding interest, the court found the arbitrator had provided cogent reasons for awarding simple interest at 9% p.a. generally and 12% p.a. on the capital account, referencing the partnership deed and past practices reflected in audited accounts.

   The court held: "The challenge by the Claimant to these amounts was essentially on merits which lie beyond the scope of objections under Section 34 of the Arbitration and Conciliation Act... In view of the aforesaid, the challenge by the claimant to the various amounts allowed to him by the learned Arbitrator is not tenable." It further added, "There is no ground to interfere in the interest granted for the reason that Ld. Arbitrator has granted interest in his discretion, for cogent reasons which cannot be termed as Arbitrary or capricious."

Conclusion

The High Court found no perversity, patent illegality, or breach of the fundamental policy of Indian law in the arbitral awards. It concluded that the arbitrator had duly appreciated the facts and law within the scope of the reference. Accordingly, both the claimant's objections and the respondents' cross-objections were dismissed.

The judgment reinforces the principle that judicial review of arbitral awards under Section 34 is limited, emphasizing that courts are not appellate authorities re-evaluating the merits. It also provides clarity on the applicability of Section 69 of the Partnership Act, confirming that arbitration is a valid avenue for dispute resolution even for unregistered partnership firms.