In a recent judgment, Delhi High Court has upheld a demerger notice in accordance with rule 4 of Merger & De-merger of Institute of Chartered Accountants of India (ICAI) which require that concurrence/acceptance for demerger can be effected at the option of 75% or more partners of one of the erstwhile firms. It was also observed that the demerger need not be necessarily from the date of the notice and can be from a date prior to .
Case Details:
W.P.(C) No.9698/2015
Arun Khanna (Petitioner) vs The Institute of Chartered Accountants of India & Anr (Respondents)
Date of Order: 14-10-2015
Coram: Hon'ble Mr. Justice Rajiv Sahai Endlaw

The dispute:
The petitioner challenges the letter dated 10th August, 2015 of ICAI informing M/s Arun Khanna & Associates Chartered Accountants that the notice served on 24th July, 2015 by six parteners of M/s Sawhney Verma & Co. Chartered Accountants to M/s Arun Khanna & Associates Chartered Accountants of demerger w.e.f. 1st July, 2015 satisfies the criteria laid down by the Council and that the firm is eligible to demerge the firm w.e.f. 1st July, 2015.

Relief Sought:
1. declaration of restoration of petitioner�s rights as partner of respondent no.2 M/s Sawhney Verma & Co. under the Partnership Deed dated 14th October, 2013.
2. direction to ICAI to take disciplinary action against the other partners of M/s Sawhney Verma & Co.

Brief Facts of the Case:
(i) The petitioner was a practising Chartered Accountant and was working in the name and style of M/s Arun Khanna & Associates;

(ii) w.e.f. 14th October, 2013, he merged his said firm with M/s Sawhney Verma & Co. having six partners and intimation of the same was given to ICAI in accordance with Rules of Merger and De-merger of ICAI;

(iii) A Partnership Deed dated 14th October, 2013 was also executed between the petitioner on the one hand and the original six partners of M/s M/s Sawhney Verma & Co.;

(iv) Under the said merger, M/s Arun Khanna & Associates ceased to exist and merged with M/s Sawhney Verma & Co. and of which the petitioner besides its six original partners, became partners;

(v) The petitioner on 7th July, 2015 and 13th July, 2015 gave notices to all the banks with which the merged firm M/s Sawhney Verma & Co. had bank accounts, for freezing thereof, owing to the dispute which had arisen between the petitioner on the one hand and the original six partners of M/s Sawhney Verma & Co. on the other hand;

(vi) The original partners of M/s Sawhney Verma & Co. gave notice dated 20th / 22nd July, 2015 of meeting of all the partners of the firms for resolution of the disputes;

(vii) Though the original partners of M/s Sawhney Verma & Co. had so admitted the petitioner to be a partner till 20th July, 2015 but on 24th July, 2015 gave a notice to ICAI of de-merger w.e.f. 1st July, 2015 of M/s Arun Khanna Associates from M/s Sawhney Verma & Co.;

(viii) ICAI by a letter dated 10th August, 2015 written to the petitioner intimated that notice dated 24th July, 2015 served by the original partners of M/s Sawhney Verma & Co. of de-merger meets the rules of merger / de-merger and satisfies the criteria laid down by the Council of the respondent no.1 Institute.

Contention of the Petitioner:
The petitioner contended that the original partners of M/s Sawhney Verma & Co., could have given notice of their own de-merger and not of the de-merger of M/s Arun Khanna & Associates which was the sole proprietary of the petitioner. The Petitioner submitted that it had taken his work under the name of M/s Arun Khanna & Associates to M/s Sawhney Verma & Co. and his work and clients had been appropriated by M/s Sawhney Verma & Co. It was also contended that M/s Sawhney Verma & Co. has indulged in forgery by de-merging w.e.f. 1st July, 2015.

Excerpts from the Judgment:
It is not in dispute that notice given by the original partners of respondent no.2 M/s Sawhney Verma & Co. to the respondent no.1 Institute is dated 24th July, 2015. By the said notice, they intimated of the de-merger w.e.f. 1st July, 2015. In the Rule quoted by the petitioner in the paper book, there is nothing prohibiting the same. No case of forgery can thus be said to have been made out. There is nothing to show that the original partners of respondent no.2 M/s Sawhney Verma & Co. on 24th July, 2015 were not entitled to notify of the de-merger w.e.f. 1st July, 2015.

The Format of Notice of Demerger, given in the Rules supra also requires the date with effect from which demerger is sought to be effected to be specified, meaning that the demerger need not be necessarily from the date of the notice and can be from a date prior to or after the date of notice of demerger.
A perusal of the complete Rules, which the counsel for the petitioner himself perhaps did not peruse, clarifies the position beyond doubt and negates the contentions urged before this Court. The same, I may highlight, expressly provides that no concurrence / acceptance from the partners is required and can be effected at the option of 75% or more partners of one of the erstwhile firms. Here, all the partners of one of the two merging firms, opted to demerge. Upon such demerger, the other merging firm viz. Arun Khanna & Associates stood revived.

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