DISSOLUTION AND WINDING UP OF PARTNERSHIP UNDER THE

PARTNERSHIP ACT, 1932: A COMPREHENSIVE STUDY

Submitted by:
Ankita Bal

Batch 2021-26, BBA LLB.

PRN: 21010224203

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University), Pune

In
November 2021

Under the Guidance of

Ms Pallavi Mishra & Mrs Kanan Divetia

Assistant Professor

Symbiosis Law School NOIDA

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CERTIFICATE
The project titled ‘Dissolution and Winding up of Partnership under the Partnership Act, 1932:
Comprehensive Study’ submitted to the Symbiosis Law School, NOIDA for Special Contracts as
part of Internal Continuous Evaluation is based on my original work carried out under the
guidance of Ms. Pallavi Mishra. The material borrowed from other sources and incorporated in
the research has been duly acknowledged.

I understand that I myself could be held responsible and accountable for plagiarism, if any,
detected later on.

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 ACKNOWLEDGEMENT

First of all, I would like to extend my heartfelt gratitude towards Ms. Pallavi Mishra and Mrs
Kanan Divetia for helping me and being my guiding light for this project. They provided me
with valuable insight which aided me in understanding all the basics of this project, and also
helped me with any doubts I had regarding the project.

I would also like to thank the library department and academic support of Symbiosis Law
School, Noida for providing me with different research sources and materials to help make my
project with the best of originality.

I would also like to thank Symbiosis Law School, Noida for providing me with this project so
that I could understand the basic information regarding Special Contracts easily and satisfactorily
and with full detail.

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 INDEX
Sl. No. Particulars Pg. No.
1 Certificate 2
2 Acknowledgement 3
3 Introduction 5
4 Dissolution of Firms 6
5 Relevant cases 7
6 Analysis of cases 8
7 Conclusion 10

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 INTRODUCTION

Partnership in India is governed by The Indian Partnership Act, 1932 and defined in Section 4 of
the same. A partnership refers to the relationship created by individuals who have agreed to share
and proportionately distribute the profits of a business carried on by all or represented by people
who act for the majority of the rest. The persons entering into such a relationship for business
purposes are termed as partners and these persons collectively form a firm. The name under
which such a business is managed is called the firm-name.1

A partnership created for any purpose whatsoever after having served said purpose may cede to
exist and may be dissolved with or without intervention of the court. The dissolving of a
partnership between all the partners of a firm automatically creates dissolution of a firm.2

Dissolution of partnership however differs from dissolution of the firm wherein, if a partner dies,
retires or becomes insolvent, the remaining partners continue bearing the liabilities and
responsibilities of the business or continuing the progress of the firm causing only dissolution of
the partnership but not the dissolution of the firm as a whole.

RESEARCH QUESTIONS / RESEARCH OBJECTIVES

1. Understanding how and when does dissolution of a partnership firm occurs

2. Exploring the rights and liabilities of a partner after the dissolution of the firm
3. Understanding the continuing authority of a partner subsequent to dissolution of the firm

1
Indian Partnership Act, §4, Acts of Parliament, 1932 (India).
2
Indian Partnership Act, §39, Acts of Parliament, 1932 (India).

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 DISSOLUTION OF A FIRM

Dissolution of a partnership firm may be executed with or without court intervention. If a

dissolution is executed with accordance of the Partnership Deed by lapse of time as agreed upon
by the partners for the calculated duration of the partnership in question or with the willingness
for a dissolution by a separate agreement, the dissolution is finalized thus with the consent of all
partners. Dissolution by agreement is as such governed by Section 40 of The Indian Partnership
Act, 1932.3

Compulsory dissolution may be employed in cases wherein there is an insolvency of all partners
or of all partners except one or when the business is deemed an unlawful one to be carried on or
for the partner to progress with the business as in the partnership due to the happening of an
event. Compulsory dissolution is governed by Section 41 of The Indian Partnership Act, 1932.4

A dissolution may occur on the basis of following contingent events: (i) expiry of a fixed term
for which the firm is constituted (ii) on fulfilment or completion of certain responsibilities and
duties (iii) death of a partner (iv) declaration of an insolvent partner. Dissolution on the basis of
contingencies is subject to the jurisdiction of Section 42 of The Indian Partnership Act, 1932.5

A dissolution by notice may occur if the partnership is at will and any partner issues a notice to
other partners detailing an intent to dissolve the firm wherein the firm is dissolved on the date
mentioned to be the date of dissolution and in the case of no date being mentioned, the firm
dissolves on the date of communication of said notice. Dissolution by notice is subject to the
jurisdiction of Section 43 of The Indian Partnership Act, 1932.6

Dissolution by court intervention may be initiated in circumstances wherein –

o A partner involved in such partnership is found to be of an unsound mind or mentally
incapable to carry forward with such partnership
o A partner is rendered permanently incapable of being present and managing and carrying
forward their operations as a dutiful partner of the firm
o A partner is found guilty of misconduct that affects the nature of the business being
carried out prejudicially and brings forth considerable losses by such misconduct

3
Indian Partnership Act, §40, Acts of Parliament, 1932 (India).
4
Indian Partnership Act, §41, Acts of Parliament, 1932 (India).
5
Indian Partnership Act, §42, Acts of Parliament, 1932 (India).
6
Indian Partnership Act, §43, Acts of Parliament, 1932 (India).

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 o A partner is found to have caused breach of agreements voluntarily relating to the
management or conduct of the firm and causes unreasonable misconduct by such breach.
o A partner allows their share to be charged under the jurisdiction of rule 49 of Order XXI
of the First Schedule to the Code of Civil Procedure, 1908 or transfers whole of their
interest in the partnership or firm to a third party or allowed it to be sold in the recovery
of or any dues recoverable of arrears of land revenue due by the partner
o The firm runs at a constant loss where dissolution is necessary
o Any other suitable ground for dissolution deems fit so long as the court has rendered or
decreed it just and equitable for the firm to be dissolved7
Dissolution via court proceedings is governed by Section 44 of The Indian Partnership Act,
1932.

RELEVANT JUDGEMENTS WITH RESPECT TO DISSOLUTION OF

FIRMS

K. Laxminarayana Reddy vs Vardhi Reddy Dasrath Ram Reddy8 – The firm in question being
M/s. Viraj Communications was dissolved as per the provisions of Chapter VI, Section 43 of the
Partnership Act, 1932 which deals with dissolution by notice. The plaintiff reiterated the
verbatim of the provisions of Sections 46 and 48 of the Partnership Act emphasizing his rights as
a partner and objecting to the transfer of assets of the dissolved firm in favour of the new firm
replacing the previous one and claimed that such act was to be void ab initio. The plaintiff
reaffirmed his claim on the shares of the dissolved firm while bearing the liabilities of the same.
Section 46 notes and delegates the rights of the partners to have the business wound up after
dissolution of the firm9 and Section 48 narrates and adjudicates the mode of settlement of all
accounts necessary after the dissolution of the firm.10

Yogendra N. Thakker vs Vinay Balse And Anr11 – The petitioner filed an arbitration petition
under Section 37 of the Arbitration and Conciliation Act and held that the learned arbitral
tribunal as an adjudicating authority, where disputes between parties are concerned, has the
jurisdiction concerning dissolution “at will” between the parties. The respondents had previously
held that the arbitral authorities did not have jurisdiction over dissolution by just and equitable
7
Indian Partnership Act, §44, Acts of Parliament, 1932 (India).
8
K. Laxminarayana Reddy v. Vardhi Reddy Dasrath Ram Reddy, 2012 SCC OnLine AP 1061.
9
Indian Partnership Act, §46, Acts of Parliament, 1932 (India).
10
Indian Partnership Act, §48, Acts of Parliament, 1932 (India).
11
Yogendra N. Thakkar v. Vinay Balse, 2018 SCC OnLine Bom 1200.

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grounds as is explicated in Section 44(g) of the Partnership Act.12 This order was later impugned
by the petitioner to the extent of determining the validity of jurisdiction over Section 44(g). It
was found that there is no legal bar or impediment against an arbitrator over any provisions of
law including Section 44(g). Dissolution of partnership firms was found to be arbitrable and
subject to only two exceptions where –
(1) if the action is an action in rem
(2) or, if the same is expressly excluded or not arbitrable

The learned counsel then held that disputes pertaining to Section 44(g) were disputes in
personam and not in rem and thus, fall into the jurisdiction of arbitral tribunal and placed
reliance on Section 39 and 43 of the Partnership Act and stated that a partner need not file for
proceedings in Court with respect to the situation arising therefrom. The judgment in the present
proceedings further drew reference to a previous judgment in Madras High Court where it was
noted that if an arbitration clause provides for the dissolution of a partnership firm and if such
clause is wide then the application of dissolution even under Section 44 would be valid.
However, it was also noted that the case at Madras High Court with the arbitration clause not
being wide, the provision of Section 44(g) did not apply to the firm in question at that time.

ANALYSIS OF THE CITED JUDGEMENTS

The first case, being K. Laxminarayana Reddy vs Vardhi Reddy Dasrath Ram Reddy, details
about the plaintiff utilizing the provisions that the partners are subject to after dissolution as a
defence and asserting his rights as a partner after dissolution subject to provisions of Section 46
and 48 and rightfully lays a claim to his shares after dissolution. The court approved of such
claims expressing that the lower court will establish within a period of six months from the date
of judgement a payment of 25% of the sale proceeds to the petitioner after the discharge of
liabilities of the dissolved firm.13

The second case explores the validity of the jurisdiction of arbitral tribunals over dissolution of
firms placing emphasis on Section 44(g) and that due to the disputes of that section of nature
being disputes in personam were thus admissible in courts of arbitration. However, the
understanding of an arbitration clause being wide or not remains vague to the interpretation of
the author and as such the adjudication of cases pertaining to Section 44(g) by the arbitral
tribunals thus seem questionable in the view of the author.

12
Indian Partnership Act, §44, No. 7, Acts of Parliament, 1932 (India).
13
K. Laxminarayana Reddy v. Vardhi Reddy Dasrath Ram Reddy, 2012 SCC OnLine AP 1061.

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 CONCLUSION

This research has explored in depth the provisions pertaining to dissolution of partnership firms
and reviewed judgements that utilize such provisions in their defence. Dissolution of a
partnership firm to the author’s understanding is when the liabilities and responsibilities of that
firm created through such partnership is discharged and dissolved while having the appropriate
necessities taken care of where the necessities in question may require having the accounts
settled after dissolution of the firm, the sale of goodwill and having the business wound up.

Partners after dissolution are subject to the authority and jurisdiction of the provisions in Chapter
VI of the Partnership Act, 1932. Some of these being –

Section 45 – Partners in a dissolved partnership remain liable for their acts done during the
course of the partnership, excluding acts done after the date they ceased to be a partner. Sub-
section 1 of the section is open to perusal by any partner for the issuance of notices regarding the
same.14

Section 46 holds that each partner or their representative(s) is entitled to their share of the
property in the payment of debts, liabilities, and surplus shares to be distributed against all
partners or their representatives.15

Section 47 establishes the continuity of authority of each partner following the dissolution of the
firm during the settlement and winding up of the firm's affairs. The provision does not bind the
firm to the acts of those adjudicated insolvent, nor does it alter the liabilities of those presenting
themselves as an insolvent's partner.16

The provisions of Sections 48, 50 and 55 should also be adequately noted while determining the
responsibilities of a partner after dissolution. Thus we have successfully explored the
responsibilities of partners after dissolution.

14
Indian Partnership Act, §45, Acts of Parliament, 1932 (India).
15
Indian Partnership Act, §46, Acts of Parliament, 1932 (India).
16
Indian Partnership Act, §47, Acts of Parliament, 1932 (India).