Disputes between the partners of a chartered accountants firm are not governed by the Chartered Accountants Act but by the Indian Partnership Act – High Court of Kerala
The Hon’ble High Court of Kerala in Joshy John Vs. the Institute of Chartered Accountants of India (WP [C] No. 5833 of 2020 dated: 26.04.2021) has held that disputes between the partners of a chartered accountants firm are not governed by the Chartered Accountants Act, 1949 (CA Act for short) but by the Indian Partnership Act. The petitioner, herein is a Chartered Accountant (CA for short) registered with the Institute of Chartered Accountants of India (ICAI for short) and applied for sole proprietorship on its website but ICAI has refused to do so. Aggrieved thereby, the petitioner approached the Hon’ble High Court of Kerala through a writ petition under article 226 of the Constitution of India.
Facts of the case
- The petitioner along with the 2nd and the 3rd respondents in the writ petition were partners of a CA firm namely “R. Menon & Associates” in Ernakulam, started in 2015. The duration of the said partnership was at “will” and ICAI has issued registration certificate in 2018. At the same time a partner, 2nd respondent herein was practicing as a practicing as Sole Practitioner also. According to the petitioner, he was the only working partner and the other two partners were not active and one was residing in Kozhikode and the other was in Dubai. Meanwhile, husband of the 3rd respondent as landlord, issued notice to the petitioner to vacate the partnership office premises. Thereon, the Firm surrendered the premises to the said landlord, as both the other partners gave consent to vacate the premises. The petitioner, who had invested in the premises, stood to lose his investments due to vacating the premises.
- In fact, he was no longer interested in continuing with the partnership and hence sent notice to the other two partners, dissolving the partnership with effect from 20.11.2019. The 3rd respondent, however, sent a reply stating that the partnership cannot be so dissolved unilaterally. In the said reply, the 3rd respondent stated that if the petitioner wanted to exit, he should have resigned, leaving the other partners to reconstitute and continue with the same partnership.
- Though the petitioner submitted an application to the ICAI (1st respondent herein) to record dissolution of the partnership, it has not been recorded as the web portal of the ICAI insisted on OTP confirmation by other partners. The petitioner desired to continue as CA at a different address, as a partnership in the name and style “Joshi John & Associates”. On his application to register the new Firm, the 1st respondent ICAI noted in the web portal that since the petitioner is in charge of another partnership at different address, he has to change his Head Office address.
- Thereafter, the petitioner proposed to register “Joshi John & Co.” as a sole proprietorship. Though the petitioner tried to upload Form-18 in respect of the proprietorship, the Form-18 by default is showing the petitioner as partner of the dissolved “R. Menon & Associates”. The petitioner sent a series of letters pointing out his difficulties in uploading the Form-18. The 1st respondent is taking a stand that in order to dissolve the Firm ‘R. Menon & Associates’, the consent of other two partners is required. The stand of the 1st respondent seems to be that when an activity of dissolution of a Partnership Firm is pending, another activity of registration of a Proprietary Firm cannot be initiated.
- As the issue involved is one affecting the fundamental right of the petitioner to pursue a profession, the Court passed an interim order on 20.10.2020 directing the 1st respondent to upload the Form-18 pertaining to the petitioner’s proprietary concern. The petitioner would submit that though the Form-18 was uploaded pursuant to the interim order of the Court, since the name of the dissolved Firm still exists in the records of the 1st respondent ICAI, the petitioner is denied the right to apply for Multi Purpose Empanelment to obtain audit assignments of Banks and Public Sector Undertakings.
- When the writ petition was heard on 26.02.2021, the counsel for respondents, 2 and 3 submitted that their objection is to the unilateral dissolution of the Firm by the petitioner and if the petitioner makes an application for retirement from Partnership, the respondents 2 and 3 will give their endorsement, without prejudice to the right of the parties for resorting to adjudication process for resolution of partnership claims. Respondents 2 and 3 undertook not to object to the retirement of the petitioner from “R. Menon & Associates”. However, on 30.03.2021, when the writ petition was heard, respondents 2 and 3 submitted that retirement of the petitioner can be permitted only after settlement of partnership accounts.
- Meanwhile, the 1st respondent, ICAI filed a statement resisting the writ petition. According to the ICAI, as per Regulation 190(1) of the Chartered Accountants Regulations, 1988, a CA shall, before commencing practice in a Trade name or Firm name, apply to the Council to use a Trade or Firm name. As per Regulation 190(7), every time there is a change in the particulars of office or Firm, the Member or the Firm, as the case may be, shall communicate it to the Council. The Council of the ICAI in its 165th meeting held on 24.11.1993 decided that in the case of retirement of partner(s), if other partner(s) do not confirm the retirement within the specified period, such retirement would not be noted in the records of the partnership. However, the fact that there is a dispute among the partners of a Firm would be intimated to the C & AG/RBI while furnishing the particulars of the Firm for empanelment of Bank/C&AG audit.
- The ICAI further submitted that in view of the decision of the Council at its 300th meeting held on 24th to 26th November, 2010, where a Firm is ‘at will’, retirement or reconstitution cannot be permitted if partners object to it on being put to notice. The ICAI further stated that in view of Section 27(1) of the CA Act, 1949, where a CA in practice or a Firm, has more than one office in India, each one of such offices shall be in the separate charge of a member of the Institute. In the light of Section 27(1) of the Act and of the Regulation 187(1), the petitioner cannot register his sole proprietorship in the self-service portal at a different address unless he is relieved as in charge of the Head Office of the Firm, contended the 1st respondent ICAI.
- Respondents 2 and 3 filed counter affidavit and strongly opposed the writ petition. The respondents stated that after surrender of the leased premises to the husband of the 3rd respondent, the petitioner sent notice of dissolution. Respondents 2 and 3 informed the petitioner that he may retire and they will reconstitute the Firm and will continue with the Partnership. They also suggested that before dissolution, the Firm needs to be valued on the basis of existing gross billing, or multiple of Net Profits or even on the basis of sharing of the clientele. The respondents 2 and 3 contended that the petitioner, instead of dissolving the partnership in a fair manner, has appropriated all the works, business and clientele without settling the accounts and apportioning the business in a reasonable manner.
- Whether ICAI, the 1st respondent herein is competent to decide matters with regard to the disputes between the partners of a firm constituted by chartered accountants?
- Whether ICAI can force a Chartered Accountant to continue in a partnership of CAs even after dissolution of the Partnership Firm or retirement of the Chartered Accountant, by retaining such unwilling partner in the Partnership Firm, in the register of partnerships maintained by the institute?
- Whether the petitioner is eligible for retirement from the firm of CAs at will without settling financial disputes?
- Whether the remaining partners (2nd & 3rd respondents in the writ petition) could re-constitute the existing firm after the petitioner’s retirement?
- Whether the remaining partners are able to get their claims in respect of the partnership?
Held by High Court
- Though in pursuance of the interim directions of the Court, the 1st respondent ICAI has permitted the petitioner to register a new sole proprietary Firm ‘Joshi John & Co.’, the problem faced by the petitioner is that he continues to be described as Managing Partner of ‘R. Menon & Co.’ at one address and sole proprietor of ‘Joshi John & Co.’ in a different address. It offends Section 27 of the Chartered Accountants Act, 1949 (CA Act for short). Furthermore, it causes hurdles in the way of the petitioner to apply for multipurpose empanelment to obtain audit assignments of Banks and Public Sector Undertakings.
- It is clear from the Scheme and provisions of the CA Act that the Act is not intended to register the partnerships of Chartered Accountants or regulate inter se relations or disputes between partners. The Regulation 190 is intended only to regulate the Trade name or Firm name of Chartered Accountants. The Regulation 190(1) mandates approval of Firm name and the Regulation 190(7) mandates communication to the Council, of changes in the particulars of a Firm. The registration and regulation of a partnership Firm of Chartered Accountants, like any other partnerships therefore are to be governed by the Indian Partnership Act, 1932.
- It is not disputed that ‘M/s. R. Menon & Associates’ is a partnership at will. Section 43 of the Indian Partnership Act, 1932 provides that when a partnership is ‘at will’, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The Firm is dissolved as from the date mentioned in the notice and if no date is so mentioned, as from the date of communication of the notice. As per the dissolution notice sent by the petitioner, the date of dissolution mentioned therein is 20.12.2019. Therefore, as per Section 43 of the Indian Partnership Act, the Firm ‘M/s. R. Menon & Associates’ should ordinarily be treated as dissolved from that date.
- However, in this writ petition, the respondents 2 and 3 initially took a stand that they have objection in dissolution of the partnership, but if the petitioner makes an application for retirement, the respondents 2 and 3 will give their endorsement, without prejudice to the right of the parties for resorting to adjudication process for resolution of partnership claims. Accordingly, the petitioner submitted application for retirement. But the respondents 2 and 3 have gone back from their undertaking and have submitted before the Court that they cannot approve retirement of the petitioner without settling claims of the continuing partners. Section 32(1)(c) of the Indian Partnership Act, 1932 provides that a partner may retire, where the partnership is at will, by giving notice in writing to all other partners of his intention to retire. The petitioner has given notice of his retirement to respondents 2 and 3 and in view of Section 32(1)(c), the petitioner stands retired from the partnership namely ‘R. Menon & Associates’.
- The legal position under the Indian Partnership Act being so, the 1st respondent ICAI cannot take a stand that they will not recognise such retirement for the purpose of Regulation 190 of the Chartered Accountant Regulations. As stated earlier, the Regulation 190 is intended for the limited purpose of approving the trade name or Firm name of a Chartered Accountant or a Firm and for maintaining Register of Offices and Firms, for that purpose.
- It has to be noticed that the CA Act does not empower the Council to adjudicate inter se dispute between members of the Institute or disputes between partner-members of a Firm, unless those disputes fall within the ambit of Chapter V of the Act, 1949. Though the decision of the Council to evolve a mechanism of Alternate Dispute Resolution (ADR) to resolve inter se disputes between their members/Firms is laudable, availability of such ADR mechanism cannot be a reason not to record the current status of a CA in a Firm, in the registers maintained under Regulation 190.
- Non-recording of such retirement in the registers, will have serious adverse consequences on a CA. It can be seen from the facts of this case, in spite of retirement from ‘M/s. R. Menon & Associates’, the petitioner is shown as the CA having charge of the said Firm. The petitioner has now started a proprietary firm ‘Joshi John & Co.’, of which also he is in charge. As per Section 27 of the Act, 1949 where a CA has more than one office in India, each one of such offices shall be in the separate charge of a member. Due to the partnership dispute, the petitioner is forced to violate Section 27 of the Act, 1949.
- The forcible continuance of the petitioner, as a partner of a Firm which is loaded with partnership disputes, has civil consequences also on the petitioner. As per the general decisions taken by the Council, the Council will not only record in their registers that the partnership is under dispute, but will communicate the said fact to the C & A.G and Reserve Bank of India, while furnishing the particulars of a Firm for empanelment of Bank/C&AG audits. Such recording and communication will indeed affect the chances of the petitioner to get audit assignments.
- The decision of the 1st respondent institute not to recognise and record the retirement of the petitioner from ‘M/s. R. Menon & Associates’ will therefore cause unnecessary and unwarranted hindrance to the professional advancement of the petitioner. It will offend the fundamental right of the petitioner to practice a profession freely, guaranteed to him under Article 19(1)(g) of the Constitution of India. The petitioner is therefore entitled to reliefs, in this writ petition. The writ petition is therefore allowed.
- The 1st respondent ICAI is directed to recognise the retirement of the petitioner from the Firm ‘M/s. R. Menon & Associates’. The 1st respondent shall remove the name of the petitioner from the list of partners of ‘M/s. R. Menon & Associates’ maintained under Regulation 190 of the Chartered Accountants Regulations, 1988. The ICAI may permit the respondents 2 and 3 to re-constitute the Firm, if they so desire and are eligible. These directions are without prejudice to the right of the petitioner and respondents 2 and 3 to get their claims in respect of the partnership, adjudicated through appropriate legal proceedings.
Author/Blogger: Aji V. Dev, Advocate, High Court of Kerala at Aji V. Dev & Associates, Ernakulam, Kochi, available at [email protected]/[email protected]/9447788404