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Delhi High Court stays removal of Mohit Saraf from L&L partnership

The Delhi High Court today stayed the termination of L&L Partners Senior Partner Mohit Saraf from the firm’s partnership pending the conclusion of arbitration proceedings with Founder and Managing Partner Rajiv Luthra (Mohit Saraf v. Rajiv Luthra).

The verdict was pronounced by a Single Judge Bench of Justice V Kameswar Rao after it was reserved on December 9, 2020.

The judgment reads,

“In view of my above discussion, prima facie the termination of the petitioner from partnership by the respondent in terms of email dated October 13, 2020 being in violation of the Deed and the Partnership Act, keeping in view the mandate of Section 12 of the Partnership Act, where a partner has the right to take part in the conduct of the business and also keeping away the petitioner from the partnership business shall be to his prejudice, if he finally succeeds in the prospective arbitration proceedings, I direct that there shall be a stay of the operation of the email dated October 13, 2020 issued by the respondent terminating the petitioner from the partnership till the conclusion of the prospective arbitration proceedings.”

On the issue of the status of Saraf and Luthra as partners of the firm, the Court held,

“I agree with the submission of learned Counsels for the petitioner that partners in the firm stand on equal footing. One partner acts as an agent of the other(s). Together they constitute a firm. The partnership per se is not a distinct legal entity.”

On the question of Saraf’s termination from the partnership, the Court delved into clauses of the partnership deed, concluding,

“When the later part of Clause 7A contemplates approval of respondent/RKL and petitioner/MS in the decision-making process, then earlier part of Clause 7A cannot be construed to mean the power of the respondent/RKL to terminate petitioner/MS. I also note, as per Clause 10B, power vests with both the petitioner and the respondent to take decision with regard amalgamation, merger, collaboration and buy-out of the firm by third parties. This clause appears to be at variance with the initial limb of Clause 7A.

Be that as it may, when a vital decision regarding buy-out of firm requires the concurrence of both the petitioner and the respondent, it cannot be construed that “termination” under Clause 7A would mean the grant of power on respondent to terminate the petitioner from partnership which has come into existence on the execution of the Deed by both the petitioner and the respondent.”

Justice Rao thus took the prima facie view that the only purpose for the word “termination” in clause 7A of the deed was for termination of equity partners who would be inducted by Rajiv Luthra from his equity share and does not contemplate termination of Saraf from the firm.

The Court also agreed with Saraf’s contention that his termination from the partnership of the firm was not in good faith, for the following reasons:

(i) The termination was effected by invoking provisions which do not contemplate termination of the petitioner as a partner;

(ii) The termination was effected immediately after the issuance of email dated October 12, 2020 by the petitioner acknowledging the decision of respondent to withdraw / retire from the firm;

(iii) No challenge is made by the respondent to the email dated October 12, 2020;

(iv) In the absence of a challenge to email dated October 12, 2020, the respondent prima facie could not have issued the email dated October 13, 2020; and

(v) The respondent resorted to the termination of the petitioner from partnership and not dissolution/termination of Deed as contemplated under the notice/communication dated January 06, 2020.

The Court further noted,

“The plea of the Counsels for the respondent that even if there is no explicit power, there is an implied power to terminate the partnership of the petitioner is also not appealing. Firstly, the statute i.e., the Partnership Act do not contemplate termination of a partner. Such a provision can neither expressly nor impliedly be read in the statute nor in the Deed. What is contemplated under the Partnership Act is expulsion of a partner under Section 33, but in good faith of powers stipulated in the partnership deed. No such power of expulsion is also stipulated.”

On the induction of 23 new equity partners by Saraf and 2 by Luthra, the Court noted,

“I have serious doubt on the stand of the parties, because the induction of partners could have only taken place with the approval of the other partner. It is the case of the parties here; no approval was taken by the opposite party for the induction of respective partners by them. In the absence of any approval, no induction of partner could have been made.

So, it follows on acceptance of withdrawal/retirement of the respondent by the petitioner in terms of email dated October 12, 2020 or termination of partnership of the petitioner vide email dated October 13, 2020 by the respondent, the partnership stood dissolved.”

Prima facie, it was held that the termination of Saraf from the partnership being illegal and in violation of the deed, and in the absence of Luthra’s power to take such an action, Saraf must be reinstated.

Saraf had moved the High Court in October last year after he was removed from the L&L partnership by Luthra.

In his petition under Section 9 of the Arbitration & Conciliation Act, Saraf pressed for the restoration of “last uncontested status” at L&L Partners while his dispute with Luthra is referred to arbitration.

Whereas the High Court had initially suggested that the parties refer their dispute to mediation, the matter found its way back in Court after talks failed to make any headway.

Asserting that there was no master-servant relationship between them, Saraf argued before the High Court that his ouster from the law firm was illegal and unless the L&L partnership was dissolved, he would continue to be a partner.

Defending his letter accepting Luthra’s retirement, Saraf said that Luthra’s intention to leave the firm and take the “golden handshake” was visible from the series of letters written by him.

It was also claimed that there was a complete breach of bona fides on the part of Luthra and that the two mandatory 90-day notices required for his termination from the firm as per the deed were not served on him.

Rajiv Luthra, on the other hand, argued that the L&L partnership was an “an unequal marriage” in which he retained certain special rights including the right to oust Saraf from the firm.

While clarifying that he never intended to leave the law firm that he built, Luthra accused Saraf of conduct “unbecoming of a lawyer”, for leaking confidential information of the firm and sharing private WhatsApp communication with third parties.

He thus opposed grant of any relief in the petition on account of the admitted position of both parties that they cannot work together anyone. It was also argued that the relief of reinstatement was barred under the Specific Relief Act.

Senior Advocates Abhishek Manu Singhvi, Neeraj Kishan Kaul, and Amarjit Singh Chandhiok had appeared for Rajiv Luthra.

Senior Advocates Parag Tripathi and Arvind Nigam argued for Mohit Saraf.

The relationship between the two senior-most partners at L&L Partners turned sour after they reached an impassed over the dilution of the firm’s equity.

On September 24, a firm-wide Zoom conference turned a bit ugly, with Luthra and Saraf both making allegations against each other. Luthra openly spoke against Saraf and his future plans with regard to the firm, while Saraf retaliated and made some nasty remarks against Luthra.

Even as Saraf rejected Luthra’s proposal that all partners holding equity dilute their stake in the firm, the latter went on to induct two equity partners into the firm.

Eventually, Saraf wrote to the corporate partners stating that he had accepted Luthra’s earlier offer to retire and withdraw from the firm. He also alleged that there were “material breaches of the partnership deed” by Luthra.

In response, Luthra not only denied retiring from the law firm, but also terminated Saraf’s partnership on account of the latter’s “clumsy strategy” on equity dilution.

Luthra pointed out the lack of legal sanctity of the content of Saraf’s email, as per which the founder of the firm was put on “imaginary retirement/withdrawal” from the firm.

Via Bar & Bench
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