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DISSOLUTION OF FIRM
According to sec.4 of the Indian Partnership Act 1932,
“Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all of them or any of them acting for all.”
Persons who have entered into partnership are called individually ‘partners’
and collectively a ‘firm’.

Dissolution of a firm means a firm ceases to exist. The


relationship existing between the partners discontinues. The whole firm is
dissolved and the partnership terminates. The dissolution of partnership
between all the partners of the firm is called the ‘DISSOLUTION OF THE
FIRM’ [sec.39]. Dissolution puts an end to the right of the partners to exist
as a going concern and is followed by its liquidation.

Dissolution of a firm is different from dissolution of


partnership. Dissolution of partnership involves a change in the relationship
of partners and a new firm is reconstituted.
For eg:- A, B and C are partners in the firm and C retires.
The partnership between A, B and C comes to an end and partnership
between A and B comes into being. Thus retirement of a partner does not
dissolve the firm. It merely severs the relation between retiring partner and
continuing partners.

MODES OF DISSOLUTION

Dissolution of a firm may be brought about either by:-


i. Voluntary acts of the partners i.e. without the interference of the court
Or
ii. Order of the court.

DISSOLUTION OF A FIRM

MODES OF DISSOLUTION

Dissolution without order of Dissolution by order


the Court (Sec. 40 to 43) of the Court (Sec. 44)

By compulsory On the happening of


By agreement By notice
dissolution Certain contingencies
(Sec 40) (Sec. 43)
(Sec. 41) (Sec 42)

Willful or Transfer Business


On Permanent Misconduct Persistent or sale of of the Court being
partner incapacity of a partner Breaches whole firm satisfied on
being of of a affecting of interest Cannot any other
Unsound partner business Agreement of a be equitable
pa
partner Carried ground
mind
on
Save at a
loss
A. By voluntary acts of the partners or without interference of
the court:

1. By agreement :- [sec.40]
A firm may be dissolved-
i. with the consent of all the partners; or
ii. in accordance with the contract between the partners. The contract
may be express or implied.

2. By compulsory dissolution or by operation of law :- [sec.41]


i. By the adjudication of all the partners or of all partners but one as
insolvent
A partner on being adjudicated insolvent ceases to be a partner of
the firm. [sec.34 (1)]. Thus if all the partners are adjudicated insolvent
the firm ceases to exist. Similarly, if all but one partner is adjudged
insolvent then too a firm will cease to exist, for there must be at least two
partners to constitute the firm.

ii. By the happening of an event which makes it unlawful for the


business of the firm to be carried on i.e. business of the firm
becoming unlawful.
For eg: A and B carry on a lottery business which is not prohibited on its
formation but subsequently it is prohibited. The firm is dissolved.

However, when more than one separate adventure or


undertaking is carried on by the firm, the illegality of one or more shall
not by itself cause the dissolution of the firm in respect of its lawful
adventure and undertaking.

3. On the happening of certain contingencies :- [sec.42]


Subject to the contract between the partners, a firm is dissolved under the
following circumstances:
i. If the firm is constituted for a fixed term, then by expiry of that term
i.e. by efflux of time.
ii. If the firm is constituted to carry out one or more adventure, then by
completion thereof.
iii. By the death of a partner.
iv. By the adjudication of a partner as an insolvent. The partnership is
dissolved on the date on which the adjudication is made.

4. By notice :- [sec.43]
In case of partnership at will, the firm may be dissolved by any partner
giving notice in writing to all other partners of his intention to dissolve
the firm. The firm is dissolved from date mentioned in the notice or if no
date is mentioned then from the date of communication of the notice. The
notice must be explicit, precise and final. It should be served on all the
partners. A notice once given cannot be withdrawn unless all the other
partners consent. A partnership which is not at will cannot be dissolved
by notice.

In case of deed of dissolution, date on which the deed is executed is


the date of dissolution, not withstanding that a future date is mentioned as
the date of dissolution.

B. By the order of the court :- [sec.44]

The court may, at the suit of a partner, dissolve a firm on the following
grounds:-

1. Insanity of partner :- [sec.44(a)]


Insanity or lunacy of a partner does not, as a rule, dissolve the firm.
However, if any other partner or the nearest friend of the insane
partner files a suit for dissolution of partnership, then dissolution may
be ordered by the court.

2. Permanent incapacity of the partner :- [sec.44(b)]


When a partner becomes permanently incapable of performing his
duties as a partner, on a suit being filed by the other partner, the court
may order a dissolution of the firm. However, if on medical evidence,
incapacity of a partner is found curable, the court will not order
dissolution.

3. Misconduct of a partner :- [sec.44(c)]


Where a partner is guilty of his conduct which is likely to affect
prejudicially the carrying on of the partnership, it would also be a
ground for the other partners to file a suit and get the order for
dissolution of partnership. The misconduct must be willful.
The following cases are sufficient grounds for the dissolution of a
firm:-
i. Gambling by a partner.
ii. Fraudulent breach of trust by a partner.
iii. Refusal of a partner to attend to business.
iv. Taking away of partnership books by a partner.

4. Persistent breach of agreement :- [sec.44(d)]


Where a partner, other than the partner suing, willful or persistently
commits breach of the partnership agreements relating to the
management of the affairs of the firm or the conduct of its business,
or otherwise so conducts himself that it is not practicable for the
other partners to carry on the business of the firm with him, the court
may, at the instance of any of the other partners, dissolve the firm.
Thus if one of the partners keeps erroneous accounts or if there is
continued quarrelling between the partners or if the mutual
confidence of the partners is destroyed, the court may order for the
dissolution of the firm.

5. Transfer of interest :- [sec. 44(e)]


Where the partner has in any way transferred the whole of his
interest in the firm to a third party, or has allowed his share to be
charged or sold by the court in execution of the decree or in the
recovery of the arrears of the land revenue, the court may dissolve
the firm at the instance of any of the partners.
6. Business of the firm working at a loss :- [sec.44(f)]
Where the business of the firm cannot be carried on except at a loss,
the court may dissolve the firm at the suit of a partner. This clause
gives discretion to the court to dissolve the firm if the business
thereof cannot be carried on except at a loss. The main motive of
partnership is to share the profit. If losses are only incurred and there
are no business prospects, the partnership cannot exist.

7. Any other ground :- [sec.44(g)]


The court may dissolve the firm on any other ground which renders it
just and equitable that the firm should be dissolved.
For eg:-
i. Dead lock in the management.
ii. Partners not on speaking terms.
iii. Disappearance of the substratum of the business.
iv. Lack of co-operation or mutual confidence.

Dissolution will arise where it appears that the state of feelings and
conduct have been such that business cannot be continued at an
advantage of either party.

RIGHTS OF A PARTNER ON DISSOLUTION

1. Right to an equitable lien :- [sec.46]


Lien means ‘retention’. Section 46 gives a right of equitable lien to the
partners on the dissolution of the firm. Every partner or his representative is
entitled to have the property of the firm applied in payment of the debts and
liabilities of the firm and to have the surplus distributed among the partners
or their representatives in accordance with their rights.

2. Continuing authority of partners for purposes of winding up :- [sec.47]


After the dissolution of a firm, the authority of each partner to bind the
firm and the other mutual rights and obligations of the partners continue to
wind up the firm and to complete transactions begun but unfinished at the
time of dissolution. Winding up ends when final decree for accounts is
passed.
3. Right to have the debts of the firm settled out of the property of the
firm :- [sec.49]
When there are joint debts due from the firm and also separate debts due
from any partner, property of the firm shall be applied in the first instance in
payment of the debts of the firm, and, if there is any surplus, then the share
of each partner shall be applied in the payment of his separate debts. The
separate property of any partner shall be applied first in the payment of his
separate debts and the surplus, if any, in the payment of the debts of the
firm.

4. To account for personal profits after dissolution :-[secs.16(a) and 50]


In case of transactions by any surviving partner or by the representatives
of a deceased partner undertaken before the firm is completely wound up, he
shall account for the profits he derives from such transactions and pay it to
the firm. However, this rule will not apply in cases where any partner or his
representative has bought the goodwill of the firm on its dissolution.

5. Right to return of premium or premature dissolution :- [sec.51]


A partner shall be entitled to repayment of full or such part of the
premium as may have been agreed upon or as may be reasonable where –
i. Partnership has been constituted for a fixed term; (it does not apply to
cases where partnership is at will)
ii. The firm is dissolved prematurely , i.e., before the expiration of the
fixed term;
While paying the premium agreed upon or that which is reasonable,
regard shall be had to-
i. the terms upon which he become a partner; and
ii. the length of time during which he was a partner.
However, no premium would be payable in the following cases :-
i. Where the premature dissolution of partnership has been caused by
the death of a partner;
ii. Where the dissolution is mainly due to his own mis-conduct; or
iii. Where the dissolution is in pursuance of an agreement containing no
provision for the return of the premium or any part of it.

6. Rights where partnership contract is rescinded for fraud or


misrepresentation :- (sec.52)
Where a partnership contract is rescinded on the ground of fraud or
misrepresentation of any of the parties thereto, the party entitled to rescind is
entitled to-
i. A right of lien or retention of the surplus of assets of the firm
remaining after the debts of the firm have been paid, for any sum paid
by him for the purchase of a share in the firm and for any capital
contributed by him;
ii. To rank as a creditor of the firm in respect of any payment made by
him towards the debts of the firm; and
iii. To be indemnified by the partner or partners guilty of fraud or
misrepresentation against all the debts of the firm.

7. Right to restrain partners from use of firm name or property :- (sec.53)


After the firm is dissolved, every partner or his representative may
restrain any other partner or his representative from carrying on a similar
business in the firm name or from using any of the property of the firm for
his own benefit, until the affairs of the firm have been completely wound up.
This restriction does not apply –
(a) When there is a contract between the partners to the contrary, or
(b) When a partner has bought goodwill of the firm.

LIABILITIES OF A PARTNER ON DISSOLUTION

1. Liability for acts of partners done after dissolution :- (sec.45)


In order to absolve partners of the liability for any act done after the
dissolution of the firm, a pubic notice must be given of the dissolution. If
this is not done, the partners continue to be liable as such to third parties for
any act done before the dissolution.
The following, however, are not liable for the acts done after the
dissolution of the firm, and no notice of dissolution need be given :-
i. The estate of a deceased partner,
ii. The insolvent partner, and
iii. The sleeping or dormant partner who retires.

2. After dissolution of the firm, the authority of each partner to bind the firm
continues in two cases :- (sec.47)
i. to wind up the affairs of the firm; and
ii. to complete the transactions begun but unfinished at the time of
dissolution.
A partner adjudicated insolvent cannot bind the firm in any
case. However, if a person represents himself or knowingly permits
himself to be represented as a partner of the insolvent, he will be liable
for the acts of the insolvent. As an insolvent partner ceases to be a partner
on the date of the order of adjudication, all acts done by him upto the date
of the order of adjudication are binding on the firm.

3. If any partner earns any profit from any transaction connected with
the firm after its dissolution, he must share it with the other partners
and the legal representatives of the deceased partner.
SETTLEMENT OF ACCOUNTS

The mode of settlement of accounts between partners after the dissolution


of a firm is determined by the partnership agreement. In the absence of any
specific agreement between them in this regard, provisions of sec. 48, 49 and
55 apply.

1. Sale of goodwill :- [sec.55(1)]


In settling the accounts of a firm after dissolution, the goodwill shall
be included in the assets and it may be sold either separately or along
with other property of the firm.

2. Sharing of deficiency :- [sec.48(a)]


If the assets of the firm are insufficient to discharge the debts and
liabilities of the firm, the partners shall bear deficiency in the
proportion in which they were entitled to share profits. Thus losses,
including deficiencies of capital, shall be paid-
i. first out of profits,
ii. next out of capital, and
iii. lastly, if necessary, by the partners individually in the
proportions in which they were entitled to share profits.

3. Application of assets :- [sec.48(b)]


The assets of the firm, including any sums contributed by the partners
to make up deficiencies of capital, shall be applied in the following manner
and order :
i. in paying the debts of the firm to the third parties,
ii. in paying to each partner rateably what is due to him from the firm for
advances distinguished from capital,
iii. in paying to each partner rateably what is due to him on account of
capital, and
iv. the residue, if any, shall be divided among the partners in the
proportion in which they were entitled to share profits.

If the assets are sufficient to pay (1) and (2) above, but
insufficient to repay each partner his full capital, the deficiency in the capital
shall be borne by the partners in the proportion in which they are entitled to
share profits.

The following is the proforma of the form required to be filled in by the


partners at the time of dissolution:

FORM `E'

INDIAN PARTNERSHIP ACT, 1932

Notice of change of Constitution or Dissolution of Firm

(See rule 4)

FIRM REGN. NO. and DATE

Firm Name....................................

Registered Address............................

Partners in the above named firm

We, being agents of a partner in the abovementioned firm persons specially


authorised by a partner in the above mentioned firm to give notice in this
behalf hereby give notice that

(a) the constitution of the firm has changed as follows :-

(1) Mr./Messrs......................of.......................has/have joined the firm as new


partner/partners on
(2) Mr./Messrs......................of.......................has/have retired as
partner/partners of the firm with effect from .................

......................................

(b) the said firm has been dissolved on .......................

I/We.......................the abovenamed..................solemnly affirm that what is


stated in paragraphs.................is true to my/our knowledge, and that what is
stated in the remaining paragraphs..........is stated on information and belief,
and I/We believe the same to be true.

I/We declare on solemn affirmation that up to the date of submission of this


application there has not been any change in any of the particulars
previously intimated save and except the change notified above.

Solemnly affirmed at :

Dated this.............day of...........19.........

Name and Signatures -

(1)

(2)

(3)

Certified that the person who has signed this notice has signed it in my
presence and he has solemnly affirmed that the particulars furnished therein
are true.

In the case of person not conversant with the English language, the contents
of the above particulars have been explained to him in a language familiar to
him and he has affirmed the truth thereof.

Signature.

Note 1. - Please strike out item (a) or (b) whichever is not applicable.

Note 2. - Please give dates according to the English calendar.


Note 3. - In case there is only one person left then the firm should be
considered as dissolved and the form should be filled in accordingly.

Note 4. - This notice must be signed by every partner or his agent specially
authorised in this behalf on solemn affirmation before a Magistrate or other
Officer duly empowered to administer Oaths.

(Price Re. 1)

Note: In the above form part (a) would be striked out since it is meant for
change of constitution of firm whereas part (b) is meant for dissolution of
the firm.

CASE-STUDY NO.1.

Mohrilal

V/s

Shri Ballabh

A.I.R. 1967, Rajasthan.

This is a civil regular second appeal by the defendant Mohrilal


in a suit for dissolution of partnership rendition of accounts, which was
dismissed by the trial court but on appeal, that decision was reversed and the
case was remanded back.

The plaintiff Shri Ballabh carried on business with his name


and style whereas the defendant Mohrilal also carried on business with his
name and style in the same town. On 13th May, 1950 the plaintiff and the
defendant entered into partnership agreement by which they agreed to carry
on the business of sale and purchase of gur, sugar, potatoes, tobacco, etc.

The partnership business consisted of the sale and purchase of


tobacco among the other products and that business was conducted in the
name of partnership which was agreed to be styled as ‘Ramavatar
Company.’

Both had agreed between themselves that the work of sale and
purchase of various commodities was to be conducted by the defendant and
that they would maintain the day to day accounts Kachhi Rokar from which
the same will be entered every evening in Pakki Rokar to be maintained by
the plaintiff.

But in this case plaintiff didn’t have license to carry on


tobacco business but defendant had it under Central Excises and Salt Act.
Such a business couldn’t be done unless one was a license holder. The whole
of tobacco business, according to the plaintiff, belonging to partnership was
unlawful.

It is admitted by the plaintiff that partnership accounts between


the parties with reference to other products had been settled except for
tobacco. This forced the plaintiff to file a suit out of which the appeal arises
for dissolution. The defendant on the other hand admitted that he had entered
into partnership with plaintiff by means of agreement.

Both courts below held that tobacco business was a part and
parcel of partnership business. The learned judge felt persuaded to come to
the conclusion that tobacco business was not conducted jointly by
partnership. It seems to have been entended that plaintiff appellant and
defendant respondents were acting within the limits of authority. The real
effect of partnership was nothing more and less than pooling the profits and
losses of the said business and sharing it between the parties.

JUDGEMENT :- The suit for dissolution of partnership and rendition of


accounts couldn’t be maintained in any court of law.
CASE STUDY NO.2

Vali Venkaraswami

V/s

Gannabathula Venkataswami

A.I.R. 1954, Madras

Under the deed of partnership dated 24/01/1948, the plaintiff


and the defendants entered into partnership to erect, establish and run a
cinema on site. They decided to share profits as follows:

Plaintiff - 4 anna

Defendant 1 - 4 anna

Defendant 2 - 3 anna

Defendant 3 - 4 anna
Defendant 4 - 4 anna

Defendant 5 - 1 anna

Defendant 1 was the managing partner of the firm who was to


look after the construction and running of the cinema. The main charges
against him were as follow:

i. He retained in his hands more cash than he was allowed under the
partnership deed.
ii. No meeting of partners was ever held after the execution of the deed.
iii. In spite of repeated requests of the plaintiff, managing partner refused
to show him accounts of the firm.

As against the appeal, the defendants contended that as the


business was to be carried on for a fixed period of 10 years, the plaintiff was
not entitled to claim dissolution. It was also found that there were several
acts of malfeasance and misfeasance since the institution of suit. All the
partners acted contrary to the partnership deed. There was confusion as to
what should be the ground for dissolution. Finally the court concluded that
dissolution of firm is justified on the evidence that the confidence between
partners i.e. plaintiff and defendants had been lost.

The only contention which required consideration was the


clause 22 of the partnership deed which provided that the partner not willing
to continue in the firm can either sell his share of capital to all partners or to
some of them or any one of them but not to the outsiders. The question is
where it is open to partners to contract out of the rights conferred in sec.44.
However it was held that the rights under sec.44 cannot be taken away by a
contract between the partners. The right to seek dissolution through court is
not based on contract but it is based on statute. Thus the contention of the
defendants cannot be accepted.

The subordinate judge directed the receiver to sell the


superstructure only between the partners. However the defendants claimed
that running of the cinema should be allowed until the sale of superstructure
by the receiver. According to the learned advocate of the receiver, the
receiver should carry out the sale immediately so that the defendants cannot
run the business for a longer period.
JUDGEMENT :- Dissolution of partnership held justified. The appeal was
dismissed with costs.

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CASE STUDY NO.3

V. H. Patel and Company

V/s

Hirubhai Himabhai Patel

2000 SOL case no.262, SCC

A partnership firm, M\s V.H. Patel & Company, was


constituted consisting of four brothers, namely, Jamnadas Patel, Vallabhbhai
Patel, Gordhandas Patel and Hirubhai Patel. On the death of Jamnadas Patel
the partnership was reconstituted with Gordhandas Patel, Vallabhbhai Patel,
Hirubhai Patel, Parmanand Jamnadas Patel and, Jatin Parmanand Patel and
Akashya Parmanand Patel, sons of Parmanand Jamnadas Patel.
On August 1, 1987 a Deed of Retirement was executed by all
the partners of the firm providing for retirement of respondent No. 1 as
partner thereof on certain terms and conditions. On September 14, 1989
another suit was filed by the petitioners under the Trade and Merchandise
Marks Act, 1958 for injunction against respondent No. 1 Hirubhai Patel and
his two sons Praveen Patel and Dinesh Patel and their partnership firm not to
use and exploit the trade marks of the firm under the name of M\s. H.H.
Patel & Company and for other incidental reliefs.

According to the consent terms the parties agreed to have their dispute
resolved through sole arbitration of Mr. Justice D.M. Rege (Retd.) of
Bombay High Court. The arbitrator will file the award in the Bombay High
Court in accordance with the provisions of the Arbitration Act.

Thus the disputes between the parties which arose in the suit stood referred
to sole arbitration of Justice D.M. Rege. Claims were preferred before the
sole arbitrator by all parties. The arbitrator did not entertain the counter
claim of the respondents seeking for dissolution of the firm M\s V.H. Patel
& Company on the ground that it was beyond the scope of reference. The
award was filed in the Bombay High Court. The learned counsel submitted
that the principal question is whether the arbitrator was competent to
entertain the counter claim filed by respondent No. 1 for dissolution of the
firm M\s V.H. Patel & Company and falls within the scope of the terms of
reference made by this Court on February 15, 1991; that the counter claim
made by the respondent for dissolution of the firm was not within the terms
of reference either expressly or impliedly and the parties referred to the
arbitrator specific disputes relating to the rights and obligations of the parties
arising out of (i) the agreement dated July 3, 1987, (ii) retirement deed dated
August 1, 1987, (iii) to the user of the trade marks in question, and (iv) to
the determination of the rights of respondent No. 1 as a partner of the firm as
per the pleadings of the parties in the pending suits; that the pleadings of the
parties in the suits did not include any claim by any partner for dissolution of
the firm M\s V.H. Patel & Company, that there is no scope for raising a new
plea by way of an amendment as to dissolution of the firm, and, that the
arbitrator is bound strictly by the terms of the arbitration and cannot travel
beyond it.

"Although the arbitration clause in a partnership agreement may be


sufficiently wide to include the question whether the partnership should be
dissolved, the Court in its discretion may not stay a suit for dissolution, if
dissolution is sought under Section 44(g)(e).

The High Court is conscious of the question that the relief for dissolution of
the firm was not one of the matters on which there was a dispute which was
referred to arbitrator. However, the High Court is of the view that though in
the plaint there is no prayer for dissolution of firm it was possible for the
respondent to claim that relief in the civil suit. Even if he had not retired
pursuant to the terms of the agreement entered into between the parties, it is
certainly permissible for him when disputes had arisen between the parties to
ask for dissolution of the partnership and when that was not possible by
mutual consent a dispute could certainly arise thereto and such a dispute
could have been referred to arbitration as provided in the Partnership Deed.
If that was permissible, such a contention could be raised in the suit filed by
the parties. Power of the arbitrator will primarily depend upon the arbitration
clause and the reference made by the Court to it. If under the terms of the
reference all disputes and difference arising between the parties have been
referred to arbitration, the arbitrator will, in general, be able to deal with all
matters, including dissolution.

JUDGEMENT :- If there has been a breach of agreement and the conduct of


the partners is destructive of mutual confidence such that the business
cannot be conducted at the advantage of either party, it gives rise to a ground
for dissolution of partnership.

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--The End--