One Partner's Signature Is Sufficient For Firm's Insolvency Plea If Majority Of Partners Approve: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has recently clarified that where a majority of partners has decided to initiate insolvency proceedings, the petition need not be signed by all of them, as one partner may act on behalf of the firm under the Partnership Act.

The tribunal, however, dismissed the appeal before it after holding that the insolvency application was barred by limitation.

A bench of Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka made the clarification while upholding the Mumbai bench of the National Company Law Tribunal's (NCLT) order rejecting an insolvency application filed by Shree Dhanvantari Pharmaceuticals against Konkan Ayur Pharma Pvt. Ltd.

“Now, of the two partners who constitute the majority one has signed the petition, but as rightly contended by the appellant, under Sec.18 of the Partnership Act, every partner is an agent of the other partner and under Sec.22 of the Act, if an act of a partner should bind the firm, then such act should have been done in the name of the firm. Therefore, the authority of Nandkishore Jaynarayan Jethale to institute the petition under Sec.7 cannot be questioned, since he has done the act in the firm's name. The next aspect is whether both the partners who constitute the majority should sign the petition. Here, Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, read with Form 1, is silent. When the procedural law is silent on it, then one necessarily has to fall back on the substantive law, the Partnership Act, and it enables one partner to act for all.”, the tribunal clarified.

Shree Dhanvantari Pharmaceuticals, a partnership firm engaged in the manufacture and trading of Ayurvedic medicines, claimed that it had advanced loans of about ₹2.26 crore to Konkan Ayur Pharma. Alleging default in repayment, it initiated insolvency proceedings before the NCLT after issuing a demand notice in May 2022.

During the proceedings, one surviving partner of the firm and the son of a deceased partner sought to intervene. They questioned the authority of the partners who had instituted the insolvency application.

The NCLT, however, dismissed the application, citing other irregularities such as uncertainty regarding the date of default, among others.

Before the appellate tribunal, the partnership firm argued that after the death of one of its four partners, two of the three surviving partners had validly authorized the filing of the insolvency application.

It also argued that the NCLT had travelled beyond the scope of a Section 7 proceeding by examining internal disputes among the partners.

The corporate debtor and the objecting partner, meanwhile, maintained that the insolvency application lacked proper authorisation and that no financial debt had been established.

The tribunal rejected the objections to authorization. It held that the son of the deceased partner had no locus standi to oppose the proceedings, as he is not a partner. 

As the decision to initiate the insolvency proceedings had been taken by the majority, the dissenting partner too was bound by it. Any challenge to that decision, it observed, would have to be pursued before a civil court.

On the merits, the tribunal found that the corporate debtor's balance sheets reflected the appellant as a sundry creditor, supporting the existence of a debt. It nevertheless held that the insolvency application was barred by limitation.

Since there were no transactions after 31 March 2019, the application ought to have been filed by March 31, 2022. The tribunal also found no material supporting the appellant's assertion that the default occurred on 30 May 2022.

The tribunal accordingly upheld the NCLT's order and dismissed the appeal.