Consumer protection: Sleeping partners are liable for payment

The partners argued since the firm's assets were enough to repay, they should not be held liable

Chanakya Finance Corporation, a registered partnership firm having eight partners, had accepted deposits from several investors. The firm duped hundreds of depositors by failing to repay the deposits along with the promised interest.

A group of investors (complainants) filed individual cases before the District Forum to try to recover their lost monies. After following the prescribed procedure, the Forum held the firm as well as all its partners jointly and severally liable to repay the invested amounts along with 12 per cent interest from the respective dates of maturity. Neither the firm nor any of the partners challenged this decision in appeal, so the order attained finality.

Jehangir B Gai

Since the order was not complied with, the complainants filed execution proceeding under Section 27 of the Consumer Protection Act for criminal prosecution for deliberate failure to comply with the order. Even then, the order was not complied with. Finally, the Forum sentenced each of the eight partners to imprisonment for three years and also pay a penalty of Rs 10,000 per complaint.

Six of the eight partners challenged the order of conviction by filing an appeal before the Karnataka State Commission. Their contention was that they were merely sleeping partners since the inception of the firm. They claimed that the firm's accounts were not even disclosed to them, and that the managing partners had not even paid them their share of the profits. They contended that since they were not active partners and were never in control of the day-to-day management of the firm, they could not be held liable. They stated that the firm was being managed by two partners, Nanjundaraje Urs and Rajeev Lochana, so only these persons could be held liable.

The State Commission did not find any merit in the contentions of the six persons who claimed to be sleeping partners, and dismissed their appeal. So they approached the National Commission in revision, reiterating their contentions, and arguing that they should not be saddled with a huge financial burden.

The National Commission observed that the partners of a firm are jointly and severally liable. So they cannot get away by raising a plea that they were not the active partners. Besides, since the order passed in the complaint has attained finality, and it was only the conviction which was under challenged, the Commission noted that such a plea could not even be considered in the execution proceedings.

The partners’ argument that since the Forum had already attached the firm’s assets which was to repay deposits along with interest, it was wrong to convict them, was also rejected by the National Commission. The Commission observed that nearly three years had elapsed since the order was passed in favour of the consumers, yet they had not got the fruits of the decree passed in their favour.

The National Commission also castigated the firm for not only duping hundreds of depositors, but also avoiding compliance of the orders passed by the consumer forum. So, by its order of May 5, 2017, delivered by Justice Ajit Bharihoke for the Bench along with Anup Thakur, the Commission dismissed the revision petitions, and upheld the convictions.

The author is a consumer activist