Sem 7 Dissolution of Firm

Dissolution of Firm
VI
Dissolution of Partnership
+ Dissolution of partnership means coming to an end of the relation, known as
partnership between various partners. When one or more partners cease to be
partners but others continue the business in partnership, there is dissolution of
partnership between the outgoing partners on the one hand and remaining
partners on the other. The remaining partners as between themselves still
continue as partners.
+ Eg when the firm consists of A B and C and A retires, there is dissolution of
partnership between A and others but partnership as between B and C is not
dissolved. In such a case, there is dissolution of partnership between some of the
partners only, but there is no dissolution of the firm.
Dissolution of Firm
+ When a firm is put to an end as between all the partners that is called dissolution.
+ When the relation between all the partners of the firm comes to an end, this is called
dissolution of the firm.
+ Section 39 of the Indian Partnership Act, provides that “the dissolution of the
partnership between all the partners of a firm is called the dissolution of a firm.”
+ It implies the complete break down of the relation of partnership between all the
partners. When the dissolution of partnership between all the partners of the firm
occurs is dissolution of firm.
+ Eg When in a firm consisting of A, B and C all of them cease to be partners with one
another, it amounts to dissolution of the firm
Dissolution of partnership is different from the
dissolution of firm
+ Dissolution of partnership is different from the dissolution of firm- Dissolution of a
partnership merely involves a change in the relation of partners; whereas the dissolution of
firm amounts to a complete closure of the business.
+ When any of the partners dies, retires or become insolvent but if the remaining partners still
agree to continue the business of the partnership firm, then it is dissolution of partnership not
the dissolution of firm.
+ Dissolution of partnership changes the mutual relations of the partners. But in case of
dissolution of firm, all the relations and the business of the firm comes to an end.
+ On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up
by selling the assets and by paying the liabilities and discharging the claims of the partners.
The dissolution of partnership among all partners of a firm is called dissolution of the firm.
Dissolution of partnership is different from the
dissolution of firm
+ Thus the dissolution of firm means the discontinuation of the jural relation
existing between all the partners of the firm. But when only one or more partners
retires or becomes incapacitated from acting as a partner due to death, insolvency
or insanity, the partnership i.e. relationship between as a partner and other is
dissolved, but the rest may decide to continue. In such cases, there is in practice,
no dissolution of the firm. The particular partner goes out but the remaining
partners carry on the business of the firm, it is called dissolution of partnership. In
the case of dissolution of the firm, on the other hand the whole firm is dissolved.
The partnership terminates as between each and every partner of the firm.
cases
+ Dissolution is different from the retirement of a partner, because in retirement the

business is continued by one or more of the partners. Where immediately after
dissolution, the firm is re-constituted and the business resumed by some of the
partners, even if in the same name and place, that remains a dissolution. Where,
on the other hand, on the death of a partner, his legal heirs joined the firm in
accordance with the provisions of partnership deed, the firm would not stand
dissolved, although its constitutional documents would have to be altered. Wajid
Ali v CIT 1988 SC
dissolution of firm vs Dissolution of partnership
Basis of difference Dissolution of Firm Dissolution of Partnership
Continuation of business It involves discontinuation of It does not affect continuation of
business of partnership business. It involves only
reconstitution of the firm
Winding up It involves winding up of the firm It involves only reconstitution and
and requires realization of assets requires only revaluation of assets
and settlement of liabilities and liabilities of the firm
Order of court A firm may be dissolved by the Dissolution of partnership is not
order of the court ordered by the court
Final closure of books It involves final closure of books of It does not involve final closure of
the firm the books
Dissolution of a Partnership firm
+Dissolution of a Partnership firm may be effected in the following ways: -
+Dissolution without the intervention of the Court.
+Compulsory –
+1. If all or all except one partner are declared insolvent or die.
+2. If entire business becomes unlawful
+Optional
+1. By agreement
+2. By giving notice in partnership at will
+3. On happening of certain contingencies:
+(a)Expiry of term
+(b) Completion of venture
+(c) Death of a partner
+(d) Insolvency of a partner
Dissolution of a Partnership firm
+Dissolution with court’s intervention
+A partner may file a suit for dissolution of the firm on anyone of the following grounds,
and the court may dissolve the firm if it is satisfied about the same:
+1) Insanity of a partner
+2) Permanent incapacity of a partner
+3) Misconduct of a partner
+4) Persistent breach of agreement
+5) Transfer of interest
+6) Perpetual losses in business
+7) Any other just and equitable grounds
Dissolution without the intervention of Court- By
Agreement
+Dissolution without the intervention of Court:-
+Various modes of dissolution without the intervention of Court are:
+By Agreement (S.40)
+Dissolution by Agreement- A firm may be dissolved with the consent of
all the partners or in accordance with a contract between the partners.
+Thus firm can be dissolved in 2 ways:
+With the consent of all the partners or
+In accordance with contract between the partners.
Agreement
+A partnership firm can be dissolved any time with the consent of all the
partners this applies to all cases whether the partnership firm is at will or
for a fixed duration. A partnership can be dissolved in accordance with the
terms of the Partnership Deed or of the separate agreement. Section 40
gives right to the partners to dissolve the partnership by agreement with the
consent of all the partners or in accordance with a contract between the
partners. ‘Contract between the partners’ means a contract already made.
+Eg A dissolution was held to have taken place in the case of a partnership
at will when the partners decided not to carry on the business of the firm
from an agreed date. Harish Kumar v Bachan Lal AIR 1991
Agreement
+As partners can create partnership by making a contract as between
themselves, they are also similarly free to end this relationship and
thereby dissolve the firm by their mutual consent. When all the
partners so agree they may dissolve the firm at any time they like.
+The firm can’t be dissolved by majority of partners unless there
was a contract in relation to it.
Agreement
+Sometimes there may have been a contract between the partners
indicating as to when and how a firm may be dissolved, a firm can be
dissolved, in accordance with such a contract.
+Eg if the contract between the partners provides that on 2 months
notice by the partners, the firm may be dissolved then in accordance
with this contract, a partner could give 2 months notice and get the
firm dissolved
Agreement
+A firm may be dissolved in accordance with a contract between the
partners. The contract providing for dissolution may be contained in
the partnership deed itself or in a separate agreement.
+Dissolution by consent and by agreement within same section are
different. Partners can consent to a dissolution regardless of what their
previous agreements are. But in dissolution by contract they have to
follow their subsisting agreement, whether all the partners give their
consent or not.
Agreement
+Reconstitution after Dissolution
+A dissolution is, in the opinion of the SC is different from a continuation
of the firm after reconstituting it. It will be a question of fact in each
case whether the intention was to dissolve or to continue.
+Where the partnership was for a fixed period, after the expiry of which it
was stated to have been dissolved by mutual consent of the partners and
some of the partners continued the business in the name and style of the
firm, it was held that the assessee firm entitled to relief under Income
Tax Act 1922 section 25(4). CIT v Pigot Champan & Co 1988 SC
Agreement
+Dissolution brings the partnership to an end while a
reconstitution means a continuation of the partnership under
altered circumstances but in law there would be no difficulty
in a firm being followed by the constitution of a new firm by
some of the partners who may take over the assets and
liabilities of the dissolved firm.
Agreement
+Shri Kishan Gupta v Ram Babu Gupta AIR 1990, One of the three
partners stepped out of business as getting old and remaining two partners
along with their sons constituted a new firm and continued the same business
at the same place and with the same registration number. A partner
subsequently died. A suit was filed by the partners of the new firm for
dissolution and rendition of accounts against the retired partner. The court
said that the old firm was dissolved by mutual agreement. The new
partnership came into existence in place of the old one. The retired partner
was not a partner in the new firm. Nor he was being paid anything whatsoever
by the new firm. Hence, he could not be sued for rendition of accounts.
Dissolution without the intervention of Court-
Compulsory Dissolution
+Compulsory Dissolution (Sec.41):-
+Compulsory Dissolution- “A firm is dissolved (a) by the adjudication of
all the partners or of all the partners but one as insolvent, or (b) by the
happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership :
+Provided that, where more than one separate adventure or undertaking
is carried on by the firm, the illegality of one or more shall not of itself
cause the dissolution of the firm in respect of its lawful adventures and
undertakings.”
+Compulsory dissolution means that the firm is bound to be dissolved due to
subsequent event i.e. unlawfulness of business. That dissolution is involuntary
dissolution. It means partner wants to continue the business but law declares that
business of the firm is unlawful. So, firm has to be dissolved.
+If the business of the firm is lawful when the firm came into existence but it
subsequently becomes unlawful, then there is no choice other than to dissolve the
firm because for a valid contract, the object and consideration must be lawful as it
is provided under Section 23 of ICA.
+According to Proviso, where more than one separate adventure or undertaking is
carried on by the firm, then, the illegality of one or more shall not of itself cause
dissolution of the firm.
+Section 41 mentions certain events on the happening of which there is
compulsory dissolution of the firm. Such dissolution is compulsory
and if the partners want to continue in partnership by agreeing to the
contrary they cannot possibly do that. The two events namely, the
insolvency of all, or all but one, partners, or illegality of business, are
known as grounds of compulsory dissolution because they operate to
bring about such necessary dissolution that there can be no agreement
to the contrary. No amount of clauses in the partnership agreement can
prevent the operation of the clauses of Section 41.
+In case, any of the following events take place then it becomes
compulsory for the firm to dissolve:
+(i) Insolvency of Partners: In case all the partners or all the partners
except one adjudicated insolvent the firm is compulsorily dissolved.
According to section 34 when a partner is adjudicated insolvent he is
ceases to be a partner. Therefore, when all the partners or all except
one adjudicated insolvent there is no question of persons remaining
partners with one another and therefore there has to be dissolution of
the firm.
+Where all the partners of the firm have been adjudicate as insolvents,
the partnership inevitably ends. This is so because partnership is a
contract and insolvents, till they are not discharged, cannot contract
either among themselves or with those dealing with the firm. The same
result follows where only one partner remains solvent and all others
have been adjudicated as insolvents. A single person cannot make a
partnership and therefore, the matter is over.
+(ii) Unlawful Business/Illegality of Business: where the business of a
firm is illegal from the very beginning, the agreement of partnership
by itself is unlawful under section 23 of ICA. Such a case does not fall
within the scope of section 41. the section applies when the business is
lawful in the beginning but subsequently, on account of some change
in law or outbreak of hostilities, the business becomes unlawful.
Section 56 of the ICA says that when the performance of a contract
becomes unlawful, the contract becomes void.
+Section 41(b) of IPA says that when the business of a firm becomes unlawful, the firm
is, by force of law, dissolved. The clause contemplates two kinds of possibilities.
+Either the business itself becomes unlawful eg on the introduction of prohibition, wine
business becomes unlawful, or the business remaining lawful, but carrying it on in
partnership becomes unlawful, as, for example, where there is no prohibition, there
may still be prohibition on partnership running liquor licences. In such cases the
business is lawful, but it is lawfully allowed only to individuals and not to
organisations of individuals. Many licences are, for example, issued only to individuals
and not to partnerships. A partnership for such businesses becomes an unlawful
organisation though the business itself is lawful. In either case, the effect upon the firm
is the same, that is, the firm stands dissolved by a compulsory provision of law.
+(ii) Unlawful Business: if the business of the firm though lawful when the firm
came into existence, subsequently becomes unlawful there has to be dissolution
of the firm. This provision is based on the rules of the law of contract. For a valid
contract the object and consideration have to be lawful as defined under section
23 of ICA. Section 56 of ICA further provides that when the contract to do an act
becomes unlawful after making the contract, such a contract becomes void.
+Eg a number of persons join together as partners to sell liquor in a certain area.
Subsequently the government imposes prohibition in that area and the sale of
liquor is banned. As soon as the sale of liquor in that area becomes unlawful the
firm is dissolved.
+ The proviso to the section deals with cases in which the firm is carrying on not one business, but
more than one type of business. In such cases if at least one type of activity remains lawful, the
partnership escapes compulsory dissolution.
+ A partnership firm to carry on a wagering business has been held by SC to be not unlawful in the
case of Gherulal Parakh v Mahadeodas Maiya AIR 1959 SC.
+ It survives for the business which remians lawful, though its other business operation being now
unlawful, would have to be abandoned.
+ R v Kupfer 1915, where a partnership between persons, three of whom were in Germany and one
in England was held to have become illegal on the outbreak of war between England and Germany
+ If the firm was carrying on more than one adventures or undertakings
the illegality of one or more of them shall not of itself result in the
dissolution of the firm in respect of those adventures or undertakings
which are still lawful.
+ Thus, In case the firm is engaged in more than one business which may
have become unlawful, the better view appears to be that the firm will
not dissolve as to the other legitimate businesses unless all of them are
so inter connected that stoppage of one would paralyze the others
+ There is also compulsory dissolution of the firm if some event
happens because of which it becomes unlawful for the partners to
continue as partners with each other.
+ Eg two partners reside and carry on trade in two different countries. If
war breaks out between these two countries and further commercial
intercourse between the two partners thereby becomes against public
policy and thus unlawful, there is compulsory dissolution of the firm.
+ e.g. A and B charter a ship to go to foreign port and receive a cargo on
the joint venture. War breaks out between England and the country
where the port is situated before the ship arrives at the port, and
continues until after the time appointed for loading. The partnership
between A and B is dissolved.
+ Eg A firm is carrying on the business of trading a particular chemical
and a law is passed which bans on the trading of such a particular
chemical. The business of the firm becomes unlawful and so the firm
will have to be compulsorily dissolved.
Dissolution without the intervention of Court- Dissolution
on the happening of contingent event
+ Dissolution on the happening of contingent event (S.42)
+ DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES.
Subject to contract between the partners a firm is dissolved
+ (a) if constituted for a fixed term, by the expiry of that term;
+ (b) if constituted to carry out one or more adventures or
undertakings, by the completion thereof;
+ (c) by the death of a partner; and
+ (d) by the adjudication of a partner as an insolvent.
+ This section provides 4 grounds for the dissolution. As a general rule under section 42, if
any of the conditions mentioned in section 42 is fulfilled, then the firm is to be dissolved
but it is subject to contract between the partners, so it means that if there is a contract
between the partners that the firm is not dissolved on the happening of certain
contingencies then the firm is not dissolved.
+ Section 42 mentions certain contingencies on the happening of which the firm is
dissolved, unless there is a contract to the contrary. Unlike the dissolution under section
41, which is compulsory, the dissolution contemplated under section 42 is not
compulsory. Even on the happening of the contingencies mentioned in section 42,
partners may agree that the firm will not be dissolved, but the business of the firm will
be continued as before.
+ Thus, Subject to contract between the partners, a firm can be dissolved
on the happening of any of the following contingencies:
+ 1)Where the firm is constituted for a fixed term, on the expiry of that
term
+ 2)Where the firm is constituted to carry out one or more adventures or
undertaking then when they are completed
+ 3)By the death of a partner and
+ 4)By the adjudication of a partner as an insolvent
+ 1) Expiry of Term: where a firm is constituted for a fixed term, it
becomes dissolved on the expiry of that term, unless the dissolution is
prevented by an agreement between the partners. The SC held that, in
the absence of an agreement to the contrary, there was no question of
the survival of a firm after the expiry of its term and the fact that the
partners, subsequent to the expiry of the term, consented to refer their
disputes to arbitration did not amount to an agreement to the contrary
as held in the case of S Ruplal Khanna v Kanwar Rajnath 1974 SC
+ A firm constituted for a term is of course not exempt from dissolution
by any of the other possible cause before the expiration of the term.
The contract may expressly provide that the partnership will determine
in certain circumstances but even if there is no such express term, an
implied term as to when the partnership will determine may be
gathered from the contract and the nature of the business. The
provision of this section make it clear that unless some contract
between the partners to the contrary is proved, the firm, if constituted
for a fixed term would be dissolved by the expiry of that term.
+ Thus, when a partnership is constituted for a fixed term, then on
expiry of such term, the firm is to be dissolved.
+ If the partners like to continue the business, then they may agree and
continue the business. Such agreement may be express or implied.
+ If a fresh period is not mentioned then it will be considered to be a
partnership at will and according to section 17 the mutual rights and
duties continue for the extended period also.
+ 2) Completion of Business/On achievement of specific task-
+ If a partnership is created for specific adventure or undertaking then it comes to an end on the
completion of such adventure or undertaking.
+ A partnership is dissolved by operation of law when the business for which it was formed has been
completed. The section says that where a firm is constituted to carry out one or more adventures or
undertakings, it is dissolved by the completion thereof. Where, in a case of Ramnarayan v
Kashinath 1954, before the Patna High Court , a partnership firm was working a salt licence and
the control on salt having been lifted and the licence becoming inoperative, the question arose
whether the firm had come into being only for working the licences or to carry on salt business
whether with or without control.
+ In this case, it is manifest that the object of the partnership was to exploit the salt
licence and the salt agency and that the salt agency was the substratum or the
underlying basis of the contract of partnership. It is clear that the intention of the
parties was that the partnership should continue so long as the agency of salt
continued or till separate agencies were obtained by the parties in their respective
names. If this interpretation is right there was dissolution of partnership under the
provisions of section 42(b) as soon as salt control was lifted and the agency and
licence granted to the firm came to an end.
+ Where a firm is constituted for a particular term or venture and a partner dies
earlier, it would end as from the date of death irrespective of the fact that neither
the term has expired nor business completed.
+ Partnership created for some specific adventures or undertakings comes to an end
on the completion of such adventures or undertakings. Thus when the partnership
was created specifically for carrying out contract of construction of a road and the
road was completed on 24.7.63 and final bill prepared on 18.2.65, the partnership
stood dissolved on 18.2.65. the suit for dissolution filed within 3 years of 18.2.65
was held to be within time. Dayalal v Harjiwandas 1983
+There can, however, be an agreement by which the

partnership may not be dissolved and the business may be
continued for some other adventures or undertakings after the
completion of the earlier ones. Unless otherwise agreed the
same mutual rights and duties between the partners continue
in respect of their relationship for the new adventures and
undertakings also. Section 17(c)
+ 3) Death of Partner- In the absence of a contract to the contrary, a
partnership is dissolved by the death of a partner. Death of a partner
means the dissolution of the partnership. When the deed of partnership
did not provide that the death of a partner would not dissolve the
partnership, the partnership stood dissolve on the death of a partner.
Firm, stands dissolved automatically on death of one partner.
Continuance of business after such death would not tantamount to
continuance of earlier partnership.
+ Death of a partner results in the dissolution of the firm unless the remaining partners agree to the
contrary. This provision is applicable when there are more than two partners in a firm, where on
the death of one of them the others may agree to still continue the same old firm without its being
dissolved. If there are only two partners and they agree that on the death of one of them the firm
would not be dissolved but will continue with the surviving partner and the heir of the deceased
partner, the agreement is meaningless because on the death of one of them there remains only one
partner. There is no partnership to which somebody else could be introduced. If the heir of the
deceased partner is to carry on the business in partnership with the surviving partner, it will be a
new partnership for which an agreement between the two persons to create partnership has to be
entered into.
+ Mt Sughra v Babu 1952, held that when a firm consisted of just two partners, a
term in their contract not to dissolve the firm on the death of one of them was
invalid. In the case of partnership consisting of only two partners, no partnership
remains on the death of one of them and therefore, it is contradiction in terms to
say that there can be a contract between two partners to the effect that on the death
of one of them the partnership will not be dissolved but will continue.
+ CIT v Seth Govindram 1966 SC, in this case A and B entered into a partnership
in 1943 to work as sugar mill. It was agreed between them that on the death of
either of them the firm should not dissolve but the legal heir or nominee of the
deceased should be taken in his place.
+ A died in 1945. held that on A’s death the original partnership between A and B
had come to an end and the same partnership could not continue with A’s widow
taking A’s place or A’s son claiming that he became a partner in pursuance to the
agreement between A and B in 1943.
+ It was observed that there is a possibility that in pursuance to the wishes or
the directions of the deceased partner the surviving partner may enter into a
new partnership with the heir of the deceased partner, but that would
constitute a new partnership and not the continuance of the old one.
+ Kesrimal v Dalichand 1959, it was contended against a firm that it should not be permitted to sue
because one of the partners died and the firm became dissolved; if the business was continued, it
should have been registered a new and that not having been done it was not competent to sue. The
court allowed the action. Section 42 provides that a firm is dissolved by the death a partner. It is
not necessary that a contract between the partners need be express, but may be implied and it may
be possible to spell out such a contract from the subsequent conduct of the surviving partners and
the heirs of the deceased. Whether a firm, which should have otherwise been dissolved by the
death of one of the partners, still continued to exist without being dissolved would depend upon
the facts and circumstances of each case. The business in this case was continued by the surviving
partners along with the heirs of the deceased partner.
+ There was held to be an automatic dissolution where one of the two
partners died. There was a clause in the partnership deed that the firm
would be continued for a certain number of years despite the death of
one of the two partners. The court said that the clause did not save the
firm from dissolution because the legal heirs of the deceased partner
had expressed their unwillingness to continuation of the firm. Jai
Narayan v Hashmathunnisa Begum 2002
+ Thus, as a general rule, on the death of a partner, the firm dissolves unless the remaining partners
agree to contrary.
+ But this provision is applicable when there are more than 2 partners in the firm, where on the
death of one of them, the other agrees to still continue the same.
+ If there are only 2 partners and they agree that on the death of one of them, the firm wouldn’t be
dissolved but will continue with the surviving partners and the legal representative of the deceased
partner. Such an agreement is meaningless because on the death of one of them, there remains only
one partner and for a valid partnership, at least 2 persons are required.
+ If the LRs of the deceased partner is to carry on business in partnership with the surviving partner,
it will be a new partnership for which an agreement between 2 person is to be entered into.
+ 4) Insolvency of Partner-
+ When a partner is adjudicated as insolvent then he ceases to be a partner (section 34). According to
general rule of section 42, the firm is also dissolved unless there is an agreement between the partners
to the contrary.
+ In the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm. The
rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet
expired or has been constituted for particular venture and the same has yet not been completed.
+ When a partner is adjudicated insolvent he ceases to be a partner. The firm is also dissolved unless there is an
agreement between the remaining partners to the contrary. This provision has to be read along-with Section
41(a) which states that when all or all except one partner become insolvent there is compulsory dissolution of
the firm. If therefore, there are only two partners and one of them is adjudicated insolvent there is compulsory
dissolution under Section 41 and there is no question of there being a contract to the contrary making the firm
to continue.
+ A partnership is dissolved by the adjudication of a partner as an
insolvent. Thus, the insolvency even of a single partner operates as a
dissolution. This being also subject to an agreement to the contrary,
the partners can agree that the insolvency of a partner will not have the
dissolving effect. Such an agreement will be subject to the provisions
of the Act relating to compulsory dissolution that on the insolvency of
all the partners or all but one, the firm would stand compulsorily
dissolved.
Dissolution by notice
+ DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL
(Section 43)
+ (1) Where the partnership is at will, the firm may be dissolved by
any partner giving notice in writing to all the other partners of his
intention to dissolve the firm.
+ (2) The firm is dissolved as from the date mentioned in the notice
as the date of dissolution or, if no date is so mentioned, as from the
date of the communication of the notice.
+ When the partnership is at will as defined in section 7, the partners are not
bound to remain as partners or continue the partnership for any fixed period.
+ According to section 43 such a firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.
The notice must clearly and in unambiguous terms indicate the intention of the
partner giving notice to dissolve the firm. C S Oswal v Radhakrishna 1956
+ Dissolution by a notice under this section will be valid even though one of the
partners to whom the notice is given is insane. Melleresh v Keen 1859
+ When the partnership was originally constituted for a fixed term, but
the partners continue the business even after the expiry of that term,
unless otherwise agreed, the partnership is now deemed to be a
partnership at will (Section 17(b)) and therefore it can now be
dissolved by a notice as stated in this section. A notice for dissolution
once given cannot be withdrawn unless the other partners agree to the
same. Janes v Lloyd
+ The notice for dissolution is a statutory requirement and therefore the requirements of
section 43 have to be satisfied. Therefore, where a letter was addressed by a partner to
his own lawyer appointing him as the arbitrator in the dispute between him and the other
partners and asking him to consider the matter of the dissolution of the firm, it was held
that this was neither a notice of dissolution nor it has the effect of dissolving the firm as
there is no intention to dissolve the firm by notice to the other partners. Tilokram
Ghosh v Gita Rani Sadhukhan 1989
+ Although a partnership at will can be dissolved by a notice there is however nothing
which prevents the dissolution of such partnership under the other provisions of the Act.
Thus, a partnership at will could also be dissolved by mutual consent, insolvency or
death of a partner.
+ When the partnership is at will, which means partnership the duration of which has not been
fixed, it may b dissolved at any time by any partner by giving notice of his intention to
dissolve it. Notice should be in writing, signed by the partner giving it and should be served
upon all the partners. The notice must not be ambiguous or vague. It must be factual, explicit
and final. A notice that accounts should be rendered and that a certain work must not be
proceeded with was held to be not a notice of dissolution. A majority resolution to dissolve the
firm was also held to be not a notice of dissolution. Dhulia Amlaner MT v Raychand 1952
+ A Gopala Reddi v E Jayarami Reddi 2003, A firm constituted for a fixed period cannot be
dissolved by notice. An order of the court would have to be sought under Section 44 by
establishing any of the grounds eg prejudicial conduct or circumstances making dissolution to
be just and equitable.
+ But where the partners stopped the work some three years before a suit was
filed by one of the partners for accounts, it was held that the firm stood
dissolved from that time by implied agreement and therefore, the suit for
accounts was time barred. He could not save himself from the bar of time by
subsequently giving notice of dissolution. Harish kumar v Bachan Lal 1991
+ Shivraj Reddy & Bros v S Raghu Rao Reddy 2002, a firm was held to have
become dissolved on the serving of summons to the defendants after filing of a
suit. The plaintiff was thereafter entitled to seek only the rendition of accounts
for a period of three years prior to the filing of the suit.
+ Date of Dissolution
+ Section 43 (2), “The partner giving a notice for the dissolution of a partnership at will may
mention the date from which he wants the dissolution to be effective. If that is so the firm will be
dissolved from the date mentioned in the notice. If no such date has been mentioned the dissolution
will take effect from the date of the communication of the notice.
+ A partner could give such a notice without going to the court, but if a partner so likes he may effect
the dissolution by going to the court. In such a case “a partnership will be deemed to be dissolved
when summons accompanied by a copy of the plaint is served on the defendant, where there is only
one defendant, and on all defendants, when there are several defendants. Since a partnership will
be deemed to be dissolved only from one date, the date of dissolution would have to be regarded to
be the one of which the last summons were served.” Banersi Das v Kansi Ram 1963 SC
+ The firm is dissolved as from the date mentioned in the notice or if no date is
mentioned as from the date of communication of notice. (Some of the High Courts
have gone to the extent of holding that notice of proceedings to dissolve is a
sufficient notice for the purposes of the section.)
+ N Venkareswarlu v C Lakshmi Narsimha Rao 2002, notice becomes effective
from the date mentioned on it or where no date is mentioned, from the date of
service.
+ Filing of a case for dissolution has been considered to be equivalent to the giving of
a notice of a dissolution and the firm is dissolved from the date of service of
summons. Sharyau Armandu Pereira v Vishnu Yeshwant Swami 1981
+ But where a partner gives notice at an importune moment or at a time when
dissolution will give him some advantage over the other partners, the court may
hold him in the firm till at least pending transactions are completed and
liabilities paid out. Crawshay v Maule 1818
+ Thus, where a partner was guilty of an act of fraud and admitted it and while the
other partners expelled him from the firm, he claimed that he had given a notice
of dissolution even before that and therefore, the firm being dissolved, the others
had no power to expel him, it was held that as he had served notice of
dissolution to conceal his own fraud the notice was invalid. Walters v Bingham
1988
+ A partnership which is not at will cannot be determined by notice. Thus in Moss v
Elphick 1910, A deed, constituting a partnership of two persons for an undefined
time, provided that the firm could be terminated “by mutual agreement only”. It
was held that the notice of dissolution given by one of the partners was invalid as
the operation of Section 43 was excluded by agreement to the contrary.
+ Where there was a clear provision in the deed that the partnership would continue
as long as there were at least two partners, the SC held that the partnership and its
continuance was not dependent upon the will of the partners and therefore, no
partner had the right to dissolve it by notice. Uduman v Aslum 1991 SC
+ Where the existence of a partnership was exclusively dependent upon the fact whether a
licence to run a cinema hall was granted or not, it was held to be a firm at will.
Gobardhan Chakraborty v Abani Mohan 1991
+ Erach F D Mehta v Minoo F D Mehta 1970 SC, The SC has expressed the opinion that
in a partnership consisting of two partners only, if there is any provision regulating the
mode of retirement, it will in essence be an agreement as to dissolution. The firm will not
be “at will” and the provision relating to retirement will have to be followed for
dissolution also.
+ In ignorance of this decision the Calcutta High Court had held in the case of Talakchand
Kanji Vora v Keshavlal 1973 that in a partnership consisting of two partners only, a
provision that a partner will retire by six
+ Months’ notice only will not prevent the operation of Section 43 and a partner
could dissolve the firm by notice, though for retirement he would need to wait
for six months.
+ The Bombay High Court in the case of Iqbal Nath v Rameshwar Nath 1976
following SC decision in Karumuthu v E M M Chettiar 1961 SC, held that a
provision in a deed of partnership that any partner could retire by two months’
notice did not amount to a provision for the dissolution of the firm and therefore
the firm was at will. The firm consisted of more than two partners. A firm at will
can also be dissolved with the consent of all the partners. S K Gupta v R B
Gupta 1990
+ Where all the partners but one retire, this may involve a dissolution but not a
necessary dissolution; the single partner may take in some other partners and the firm
shall be deemed to have been continued. Abbasbhai v R G Shah 1988
+ A partnership at will may also dissolved on the death of a partner. If a partner dies
before the dissolution could become effective by a notice of a partnership at will, the
dissolution would take place from the date of the death of a partner and the rights will
be the same as they would have been on the dissolution by the death of a partner.
+ Where a partner sent a notice of dissolution to his only other partner and died before
the other received the notice, it was held that the firm became dissolved by the death
of a partner and not by notice. Mcleod v Dowling 1927
+ In case of partnership at will, a partner can dissolve it by giving
written notice of dissolution to other partners duly signed by him. In
such a case consent of other partners is not required. Notice must be
very clear and certain. A notice once given cannot be withdrawn
without the consent of other partners. In those cases where a partner
has given notice of dissolution at a time when dissolution will give
him some advantage over the other partners, he may be held in the
firm till the pending transactions are completed.
+ Thus, section 7, partnership at will means where no duration or determination is
fixed. According to section 43, such a firm may be dissolved by any partners by
giving notice in writing to all the other partners of his intention to dissolve the
firm. It means that notice must be clear which indicates or shows the intention of
the partner to dissolve the firm.
+ If the notice for dissolution is once given, it can’t be withdrawn unless the other
partners agree to the same. The giving of notice is a statutory requirement and
therefore, the notice must be given, otherwise, a firm can’t be dissolved.
+ The partner giving a notice may mention the date from which he wants the dissolution to be
effective. So, if the date is mentioned then the firm is to be dissolved on that date.
+ If no such date has been mentioned, then the dissolution will take effect from the date of
communication of notice to all.
+ If communication is by summons, then the date when summons are served to all the partners is the
date of dissolution.
+ The other modes by which partnership at will can be dissolved:
+ With the consent of all the partners
+ Dissolution on the death of a partner.
Dissolution by Court
+ DISSOLUTION BY THE COURT- At the suit of a partner, the Court may dissolve a firm on any
of the following grounds, namely :-
+ (a) that a partner has become of unsound mind, in which case the suit may be brought as
well by the next friend of the partner who has become of unsound mind as by any other
partner;
+ (b) that a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner;
+ (c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business regard being had to the nature of the business;
+ (d) that a partner, other than the partner suing, wilfully or persistently commits breach of
agreements relating to the management of the affairs of the firm of the conduct of its
business; or otherwise so conducts himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on the business in partnership with
him;
+ (e) that a partner, other than the partner suing, 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 under the provisions of rule 49 of Order
XXI of the First Schedule to the Code of Civil Procedure, 1908, or has
allowed it to be sold in the recovery of arrears of land revenue or of any
dues recoverable as arrears of land revenue due by the partner;
+ (f) that the business of the firm cannot be carried on save at a loss; or
+ (g) on any other ground which renders it just and equitable that the
firm should be dissolved.
+ The need for dissolution by the court arises when all the partners do not want the dissolution.
The partner or partners who want dissolution can file a suit and the other partners may contest
the same. So the partner or partners who wants dissolution can file a suit on the grounds
provided under section 44 which permits a partner to invoke the jurisdiction of the court for
the dissolution of the firm, is not subject to the contract between the partners permitted under
section 11. Therefore, a partner can always file a suit for the dissolution of the firm if his case
is covered under section 44. N Satyanarayan v M V Bala 1989
+ A suit for dissolution can be filed only when one or the other ground mentioned in section 44
is there. Even when there is a valid ground for filling the suit for dissolution and a partner
accordingly files the suit, the court is not bound to decree dissolution as this section clearly
provides that “at the suit of a partner, the court may dissolve the firm”.
+ Dissolution by Court (S 44) The court may order for the dissolution of
the firm on the following grounds:-
+ 1) Insanity of Partner/Unsoundness of mind- when a partner becomes
of unsound mind neither he can protect his own interest nor can he
perform his duties as a partner. Therefore, when a partner becomes of
unsound mind a suit for the dissolution of the firm can be filed. Such a
suit may be filed either on behalf of the partner by the next friend of the
partner who has become of unsound mind or by any other partner.
+ On the application of any of the partner, court may order for the dissolution of the
firm if a partner has become of an unsound mind. Insanity of a partner does not
itself dissolve the partnership but it will be a ground for dissolution at the instance
of other partners. In the case of a dormant partner the court may not order
dissolution even on the ground of permanent insanity, except in special
circumstances.
+ Thus where a partner (not a sleeping partner) has become of unsound mind, the
court may dissolve the firm on a suit of the other partners or by the next friend of
the insane partner. Temporary sickness is no ground for dissolution of firm.
+ Thus, when one of the partners had become a person of unsound mind, any partner, including the
insane, may apply for dissolution. Insanity renders the partner incapable of performing his duties
as a partner and is, therefore, a good ground for putting an end to the firm. Dissolution may be
necessary both to protect the interest of the insane (Jones v Lloyd 1874) and of the other partners
(Rowlands v Evans )
+ Williams v Rowlands 1861 where the court refused to appoint a manager to act for the insane
partner and ordered dissolution.
+ Thus, when a partner becomes of unsound, then he can’t protect his own interest as well as he
can’t perform his duties as a partner. So, when a partner becomes of unsound mind, a suit for
dissolution of the firm can be filed. Such a suit may be filed on behalf of the partner who has
become of unsound mind or the other partners can also apply for dissolution. Both defaulting and
other innocent partner can file.
+ 2) Incapacity of Partner/Permanent Incapacity- If a partner has
become permanent incapable of discharging his duties and obligations
then court may order for the dissolution of firm on the application of
any of the partner. Thus when a partner, other than the partner suing
has become in any way permanently incapable of performing his
duties as partner, then the court may dissolve the firm. Such permanent
incapacity may result from physical or mental disability or illness etc
but it should be a permanent nature.
+ So it is a good ground for applying to the court for the dissolution of the firm where a partner
becomes permanently incapable of performing his or her duties as a partner. When the incapacity is
not permanent the court would not grant relief.
+ Whitwell v Arthur 1865, one partner filed a suit for the dissolution of the firm when the other
suffered from the paralytic attack and was thereby incapacitated from performing his duties as a
partner. It was found from medical evidence that the incapacity was not likely to be permanent as the
defendant’s health was improving. The court did not grant the dissolution of the firm.
+ When a partner becomes permanently incapable of performing his duties, the suit for dissolution can
be filed only by any other partner and not by the partner who suffers from the incapacity.
+ Thus when a partner becomes permanently and not temporarily incapable of performing his duties as
a partner, then it is a ground to apply to the court for dissolution of the firm. In such a case, suit can
be filed by any other partner but not by the partner who suffers from incapacity.
+ 3) Misconduct of Partner/ conduct injurious to partnership business- If any
partner other than partner suing is responsible for any loss to the firm, which
amounts to misconduct and prejudicially affects the carrying on of business then
the court may order for the dissolution of the firm.
+ Thus, where a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on of business, the court may order for
dissolution of the firm, by giving regard to the nature of business. It is not
necessary that misconduct must relates to the conduct of the business. The
important point is the adverse effect of misconduct on the business. In each case
nature of business will decide whether an act is misconduct or not.
+ When a partner is guilty or conduct which is likely to affect prejudicially
the carrying on the business of the firm, the court may dissolve the firm
on that ground. Misconduct need not be with regard to the partnership
business but the conduct should be such as should prejudicially affect the
partnership business. Conviction for breach of trust (Essel v Hayward)
or the adultery by one partner with another partner’s wife (Abbot v
Crump) are grounds for the dissolution of the firm
+ The suit for dissolution cannot be brought by the guilty partner. It can
only be brought by a partner other than one who is guilty of conduct.
+ When a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the business of the firm the court may order dissolution. It is not necessary that the
misconduct should be connected with the business of the firm. Its only connection with the firm
need be that it will damage the business prospects of the firm. Thus conviction for travelling
without tickets (Carmichael v Evans 1904), or for breach of trust is sufficient but misconduct in
personal life may not be so.
+ The act of adultery by a partner in a firm of bankers has been considered to be no ground for
seeking dissolution by the other partners but that may be so if it is a firm of medical practitioners.
+ Act of adultery by a partner with the wife of another partner or conviction for breach of trust.
+ But subsequently court provided that the adultery with the wife of another partner doesn’t have
any relation with the business so it is not a ground for dissolution of the firm.
+
+ Snow v Milford 1868, A partner of a firm of bankers committed adultery with several women in
the city where the business was carried on and his wife has left him. The other partners applied
for dissolution on this ground. But the court rejected the action. And said that however much the
court may reprove the conduct of a man who is guilty of adultery, that is no reason for turning
him out of common trading partnership. There are no doubt various cases in which moral conduct
of a man would affect business, as where a medical man had entered into partnership with another
and it was found that his conduct was very immoral towards some of his patients of course, this is
a ground for putting an end to the partnership. But in the case of bankers, how can the court say
that a man’s money is less safe because one of the partners commits adultery.”
+ Thus, when a partner is guilty of conduct likely to effect the carrying on of the business, then the
court may dissolve the firm. Misconduct nee not to be with regard to partnership business but it
include any conduct which effects the partnership business.
+ 4) Persistent breach of Agreement/Constant breach of agreement by partner-
when a partner willfully and persistently commits breach of agreements relating to the
management of the affairs of the firm, or so conducts himself in matters relating to the
firm’s business that it is not reasonably practicable for the other partners to carry on
the business in partnership with him, a suit for the dissolution of the firm may be filed.
+ Thus when a partner other than the partner suing persistently commits breach of
agreements relating to the management of the firm or otherwise so conduct himself in
matters relating to the business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him, the court may order
dissolution.
+ The court may order for the dissolution of the firm if the partner other than the
suing partner is found guilty for constant breach of agreement regarding the
conduct of business or the management of the affairs of the firm and it becomes
impossible to continue the business with such partner.
+ Thus, where a partner other than the partner suing wilfully or persistently
commits breach of agreements relating to the management of the affairs of the
firm or the conduct of its business, or otherwise so conduct himself in matters
relating to the business that it is not reasonably practicable for other partners to
carry on the business in partnership with him then the court may dissolve the firm
at the instance of any of the partners.
+ Thus, any conduct which is destructive of mutual confidence between the partners is
sufficient. Harrison v Tenant 1856, one of the partners in a firm of solicitors ignored the
other two partners and declined to settle their disputes by mutual consultation. It was held
that the conduct of one of the partners being destructive of mutual confidence, which
could not be restored was a valid ground for the dissolution of the firm.
+ When due to frequent quarrels there is no hope of mutual co-operation (Baxter v West),
or a partner prepares false accounts enters in the accounts smaller sums of money than
actually received from the customers (Cheeseman v Price 1865), or when a partner
refuses to render accounts and takes away the books of accounts of the firm (Vali
Venkataswami v Venktasawmi 1954), or a partner misuses partnership funds for paying
personal debts (Smith v Jeyes 1841), the court may order dissolution.
+ Breach of agreement and conduct destructive of mutual confidence
give rise to a ground for dissolution of the firm. (V H Patel & co v H
H Patel 2000), Refusal to meet on matters of business (De Bevenger
v Hammel 1829), have been held sufficient to justify a dissolution.
+ The suit for dissolution in this case also cannot be filed by the guilty
partner. Only a partner other than him may file a suit.
+ Following comes in to category of breach of contract:
+ Embezzlement
+ Keeping erroneous accounts
+ Holding more cash than allowed
+ Refusal to show accounts despite repeated request etc.
+ Eg if one of the partners keeps erroneous accounts and omits to enter receipts or if there is continued
quarrels between the partners or there is such a state of things that destroys the mutual confidence of
partners, the court may order for dissolution of the firm.
+ Thus when a partner willfully and continuously commits breach of agreement relating to management
of the affairs of the firm, then it is not reasonably practicable for the other partners to carry on the
business in partnership with him. So in such a case, a suit for dissolution of the firm may be filed.
+ 5) Transfer of Interest- When any of the partner other than the suing partner transfers
whole of its share to the third party for permanently. So where a partner other than the
partner suing has transferred the whole of his interest in the firm to a third party or allowed
his share or interest to be charged under the provisions of the CPC or has allowed it to be
sold by the court, in the recovery of arrears of land revenue, or of any dues recoverable as
arrears of land revenue, the court may dissolve the firm at the instance of any other partner.
+ It is necessary that the transfer must be of the whole of the partner’s interest rather than
merely a part of it. For dissolution in this case also the suit can be filed only by a partner
other than the one whose interest has been transferred.
+ Thus when a partner has transferred the whole of his interest in the firm to a third party then
it can be a ground on which the court may dissolve the firm.
+ 6) Perpetual Losses/ Continuous Losses- The object of every partnership
is to make profits. If it appears that the business of the firm cannot be
carried on except at a loss, any of the partners may apply to the court for
the dissolution of the firm.
+ The court may order for dissolution if the firm is continuously suffering
losses and there is no more capital available for the future growth of the
firm.
+ Thus, where the business of the firm cannot be carried on except at a loss
in future also, the court may order for its dissolution
+ When the business of the firm cannot be carried on save at a loss the court
may dissolve it. The whole object of a partnership is to make profits and if that
object cannot be attained, it is needless for the firm to continue. Thus where
the whole of the capital contributed by the partners had already been spent and
there were no business prospects unless they contributed further capital which
they refused to do, the court granted dissolution. Jennings v Baddeley 1856
+ Thus the object of every partnership is to make profit. If it appears that the
business of the firm can’t be carried on except at loss then any of the partners
may apply for the dissolution of firm.
+ 7) Just and Equitable – The court has been given very wide power of dissolution. Apart
from ordering the dissolution of the firm on the grounds stated above the court has been
vested with power of dissolving the firms on any other ground which renders it just and
equitable that the firm should be dissolved.
+ Thus under this point the court has been given very wide powers for dissolution. Apart from
the grounds mentioned in section 44 the court has been vested with the power of dissolving
the firm on any other ground which renders it just and equitable.
+ The court may order for dissolution on any other ground which court think is just, fair and
equitable. e.g. loss of total confidence between the partners was held in case of Havidatt
singh v. Mukhe Singh
+ Abbot v Crump 1870, adultery by one partner with another partner’s wife was
held to be a good ground for the dissolution of the firm by court.
+ Thus, where the court considers any other ground to be just and equitable for the
dissolution of the firm, it may dissolve a firm. The following are the cases for the
just and equitable grounds:
+ Deadlock in the management
+ Where the partners are not in taking terms between them
+ Loss of substratum
+ Gambling by a partner on a stock exchange
+ Dissolution may be ordered when on any other ground the court thinks it just
and equitable that the firm should be dissolved. The expression, “just and
equitable” gives the court a very wide discretionary power, which is not to be
fettered by any rules, to order dissolution whenever in the circumstances it
seems to be desirable. (N Satyanarayana v M V Bala 1989)
+ Where the terms of a partnership deed provided to a partner the facility of with
drawing from the firm by transferring his interest to others, the court said that
this would keep the right to seek dissolution in abeyance unless a crisis is
created by others by refusing to pay him out. Gur Dayal Prasad v L
Raghunath Prasad 1976
+ Whether right to apply for dissolution can be excluded
+ The right of a partner to ask for dissolution on any of the above grounds cannot be
excluded by any agreement to the contrary. Where no other mode of dissolution is
available, section 44 being the lender of last resort, its operation cannot be allowed to be
nullified. A Gopala Reddi v E Jayarami Reddi 2003
+ Hardutt Singh v Mukha Singh 1973, J&K High Court stated that it can be safely said
that section 44 confers an absolute and independent right and it is not open to the partners
to take away that right by means of an agreement between them. The court held that the
requirement of the partnership agreement that there should be one month’s notice and
reference of every dispute to arbitration must give way to the clear provisions of section
44.
+ The court equally concerns itself with the interest of the other partners.
+ Where the managing partner supplied to the firm from his personal business certain material for which he
overcharged, this was held to be a breach of faith entitling other partners to demand dissolution in which
no notice is necessary under section 43. Saritha Enterprises v S Rajagopal 2003
+ The court has to take into account all the facts and circumstances and mould relief according to the
exigencies of the case. Pannalal v Padmavati 1960
+ Jai Narayan Misra v Hashmuthunnisa Begum 2002 Mismanagement of affairs has also been held to
be a good ground for ordering dissolution. The firm was running a cinema theater in which plaintiff was
entitled for minimum profit share every months but no given and no explanations for the same. Accounts
of books and Income tax returns not given and submitted the incorrect returns with Income Tax purposes.
All this showed that the defendant partner was mismanaging the affairs and court ordered dissolution.
+
+ Suit for Accounts without seeking dissolution
+ The bombay high Court has expressed the opinion that even if the suit
is only for accounts, the court would order dissolution. It is open for
the courts, irrespective of the parties’ pleadings, to call upon the
plantiff to amend his plaint suitably so as to include the prayer for
accounts and dissolution as without seeking dissolution, accounts
ordinarily cannot be demanded. Manmohan Muttappa Attavar v
Harendra Sakarlal Parikh 2003
+ Suit for Partition without seeking dissolution
+ A suit for partition of the assets of the firm without dissolution is not
possible. An agreement to create a partnership need not be express. It
can arise out of mutual understanding evidenced by course of conduct.
A suit for partition of property without there being dissolution was
held to be not maintainable. Kinjarapu Chinnayya v Kinjrapu v
Chinnammi 2003
+ Property situate out of territorial jurisdiction of court
+ A suit for dissolution is not to be barred on the ground that certain immovable
properties of the firm were situated beyond the territorial jurisdiction of the court.
The primary object of a dissolution suit is not relief in respect of some immovable
property. Mohd Hassen Hashmi v Kaberi Roy 1993
+ A suit was filed for declaration of the dissolution of a partnership firm. The theatres
of the firm which were a part of its property were situate beyond the jurisdiction of
the High Court. The head office of the firm was within jurisdiction. The notice of
dissolution was issued and received within jurisdiction. It was held that the High
Court had jurisdiction to entertain the suit. Smriti Jaiswal v Romi Jaiswal 1999
Consequences of Dissolution- Liability for acts of partners done
after dissolution
+ 1. LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION ( S.45)-

+ (1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to
third parties for any act done by any of them which would have been an act of the firm, if
done before the dissolution, until public notice is given of the dissolution :
+ Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a
partner who, not having been known to the person dealing with the firm to be a partner,
retires from the firm, is not liable under this section for acts done after the date on which he
ceases to be a partner.
+ (2) Notices under sub-section (1) may be given by any partner.
Consequences of Dissolution- Liability for acts of partners
done after dissolution
+ Public Notice of Dissolution:
+ The first step in the process of dissolution is to give a public notice of dissolution.
After dissolution of firm, public notice has to be given in relation to it. The notice
may be given by the firm or any partner. This is necessary to terminate the liability
of the partners by holding out and of the firm by estoppel, for, without it, the firm
and every partner would continue to be liable to third parties for any act done by
them which would have been an act of the firm if done before its dissolution. C
Assiamma v SB Mysore 1990
+ As long as public notice is not given the whole number of partners remains liable.
K Lakshminarayanan v Lakshmi venkata 1988
+ According to section 72, public notice means a notice in the official gazette, in at
least one vernacular newspaper circulating in the district where the firm to which
it relates has its place or principal place of business and if the firm is registered, to
the Registrar of Firms concerned. Therefore merely publication of the notice in a
local newspaper is not sufficient and such a notice does not absolve the outgoing
partner from liability towards a third person. C Assiamma v SB Mysore 1990
+ A public notice may be given by any partner.
+ If the act is committed after dissolution of firm, but before public notice, then
every partner shall be liable in the same manner as if the act of the firm was
done before dissolution.
+ The rights of the third parties to proceed against the estate of a deceased partner
for liabilities incurred up to the date of death would be there even if the firm has
been dissolved. Dastur v Raja Ram 1987
+ M Manjunatha Nayak v U Dayananda 1984
+ Held that in the case of old customers, individual intimation of the fact of
dissolution would be necessary in addition to public notice. In this case after the
dissolution the partner who took over the business started signing receipts for
delivery of goods as “proprietor” after striking out the word “partner”. This was
held to be a sufficient notice to protect the old partner from any further liability.
+ Where public notice is not necessary
+ This principle, however, does not apply to the case of a deceased partner,
insolvent partner or to the case of a partner who was not known to be a
partner and who has retired. Thus, where a firm was dissolved and a new
firm was constituted after dropping one of the partners and no public
notice whatsoever was given, the partner who was dropped was held not
liable when three years later the continuing partners incurred a liability
towards a third party who never knew about the existence of the retired
partner in the firm. Glorious Plastics ltd v Laghate Enterprises 1993
Consequences after Dissolution- Liability for acts of partners
+ Section 45 has two fold objectives;

+ 1) it seeks to protect third parties dealing with the firm who has no notice of prior
dissolution and
+ 2) it also seeks to protect partners of a dissolved firm from liability towards third
parties.
+ Eg X and Y who carried on business in partnership for several years, executed on
Dec 1, a deed dissolving the partnership from the date, but failed to give a public
notice of the dissolution. On dec 20, X borrowed in the firm’s name a certain sum
of money from R who was ignorant of the dissolution. In such a case, Y also
would be liable for the amount because no public notice was given.
Consequences after Dissolution- Liability for acts of
partners done after dissolution
+ This section provides that despite dissolution, the partners cannot escape their
liability to third parties for acts done even thereafter unless public notice of
dissolution is given. These provision emphasis the necessity of giving a public
notice before a partner could terminated his future liability whether it is a case of
dissolution, retirement or expulsion.
+ However, there are exceptions to the rule states in above example i.e. even where
notice of dissolution has not been given, there will be no liability for subsequent
acts in the case of:
+ 1)the estate of a deceased partner
+ 2) an insolvent partner or
+ 3) a dormant partner, i.e. a partner who was not known as a partner to the person
dealing with the firm.
+ In the following cases the liability of the partners does not arise after the date of
dissolution even though no public notice of dissolution of the firm has been given:
+ 1) when a partner dies, his estate is not liable for the acts done after his death. No
public notice is needed on the death of a partner because the fact of death of a
partner is deemed to have come to the knowledge of the persons who knew him.
+ 2) the position of a partner who is adjudicated insolvent is similar to that of a
deceased partner. In his case also no public notice is needed and his estate is not
liable for the acts done after the dissolution of the firm.
+ 3) no public notice is needed in case of a retired partner who was not known to be
a partner to the third party dealing with the firm. This provision is similar to the
one contained in proviso to section 32(3).
+ Juggilal kamalapat v Sew Chand Bagree 1960 a firm consisting of three
partners A B and C was established in 1933 in the firm namr “M/s Sew Chand
Bagree” and got registered also. In the year 1945 the firm was dissolved and
thereafter only A carried on the business.
+ In 1948, while the business was being carried by A alone he made a contract in
the same name with the appellants. The appellants who obtained a decree against
the firm, wanted to make A B and C liable. It was contended that public notice of
dissolution had not been given and therefore, B and C were also liable alongwith
A. it was established that when the appellants entered into the contract B and C
were not known to be partners in the firm. They came to know of the facts that B
and C were also at one time partners only after the dispute in respect of the
contract had arisen. It was held that B and C could not be made liable as they
were not known to be partners to the appellants when the contract in question was
made and therefore they were protected under the proviso to section 45.
+ Liability for prior acts
+ Partners remained liable for certain debts which were incurred before the
dissolution of the partnership and were ongoing, such as the rent on the firm
premises. Hurst v Bryk 1997
+ Each and every partner remained liable for the dishonour of the firm’s cheques
upto the time that the notice of retirement of partner or of dissolution was not
published as required by the Act including information to the Registrar to make
necessary changes in the Register of the Firms. The order of the Magistrate
discharging the partner from liability was set aside. Anil Kumar Singh v Kanak
Prabha Dutta 2003
Consequences after Dissolution- Rights of partners to have
business wound up after dissolution
+ 2. Rights of partners to have business wound up after dissolution
(S.46)
+ On the dissolution of a firm every partner or his representative is
entitled, as against all the other partners or their representatives,
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 according to their
rights.
+ On dissolution of partnership firm, every partner has following two
rights against all the other partners:
+ 1) the partner is entitled to have the property of the firm applied in the
payment of debts or liabilities of the firm.
+ 2) if there is surplus left, then partners are entitled to get it and
distribute among them according to their rights.
+ By dissolution the relation of partnership between various partners
comes to an end. Thereafter there has to be winding up of the affairs of
the firm. That includes realization of the assets of the firm and also
paying off all the liabilities and then to distribute the surplus, if any,
amongst the partners. On the dissolution of a firm every partner or his
representative has a right to see that the affairs of the firm are properly
wound up. He has a right to have the property of the firm applied in
payment of the debts and liabilities of the firm.
+ If, on the dissolution of the firm, the debts and liabilities of the firm remain
unsatisfied, each partner continues to be exposed to the risk of being made jointly
and severally liable for the same towards third parties. To avoid any such
situation every partner or his representative has been made entitled, as against all
the other partners or their representatives, to have the property of the firm applied
in payment of the debts and liabilities of the firm, and then there is distribution of
the surplus amongst the partners or their representatives according to their rights.
The right contained in this section is also known as the partner’s general lien over
the surplus assets of the firm. The lien is not on any specific property but it is
only in the form of a claim against the surplus assets on realisation.
+ Application of property
+ On the dissolution of a firm every partner or his representative has the right 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 in accordance
with their rights. In terns of the Partnership Act, the partners, while dissolving
the firm, may evolve a scheme for distribution of the property among
themselves. But by reason of the provisions of section 46 and 48, whatever be
the method evolved by the partners, there can be only a pro rata division of the
residue, if any, left after taking into account the liabilities of the firm. Keshari
Engg Works v Bank of India 1991
+ The nature of a partner’s share in the property of the firm was explained by the SC in the case
of Naravanappa v Bhaskara Krishnappa 1966 SC, “what is meant by the share of a partner
is his proportion of the partnership assets after they have been all realised and converted into
money and all the partnership debts and liabilities have been paid and discharged.”
+ Popat v Shonchhatra 1997, two persons entered into partnership at will to run business of
newsagents from leasehold premises in joint names together with fixtures and fittings and
goodwill of the business. One of the partner contributed most of the capital. The other non
contributing partner determined the partnership and other one continued the business and
acquired free hold of the premises. And later sold the business including goodwill, fixture and
fittings and premises at profits. The non-contributing partner claimed proportional share in the
post dissolution capital profits arising out of the sale.
+ The court allowed the action and said that when the premises, goodwill and
fixtures and fittings were contributed to the business, they became partnership
property, which was held to be exclusively for the purposes of the partnership.
Although each partner had a proprietary interest in every asset, there was no
entitlement to any specific assets, and on dissolution the position remained the
same. In the absence of any implied or express agreement between the
partners, the general rule is that all the partners are entitled to share equally in
the capital and revenue profits realized after dissolution of the firm and not in
proportions according to the partners’ respective shares of partnership capital
at the date of dissolution.
+ Order in which property to be applied
+ The property of the firm is first applied in payment of joint debts and
the surplus, if any, falling to a partner’s share may be used to pay the
partner’s personal debts. Conversely, a partner’s property is first
applied in payment of his personal debts and the surplus, if any, may
be used in payment of debts of the firm. (Section 49)
+ The liability of the partners to pay to third parties what is due to them
from the firm remains irrespective of the dissolution of the firm.
Consequences after Dissolution- Continuing authority of
partners for purposes of winding up
+ 3. Continuing authority of partners for purposes of winding up ( S.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
notwithstanding the dissolution, so far as may be necessary to wind up the
affair of the firm and to complete transactions begun but unfinished at the
time of the dissolution, but not otherwise:
+ Provided that the firm is in no case bound by the acts of a partner who has
been adjudicated insolvent; but this proviso does not affect the liability of
any person who has after the adjudication represented himself or knowingly
permitted himself to be represented as a partner of the insolvent.
+ The commencement of dissolution does not at once terminate the
authority of the partners. The partners’ authority to act for the firm and
to bind their co-partners continues at least for two purposes.
+ 1) the authority continue so far as it is necessary to wind up the affairs
of the firm,
+ 2) to complete transactions begun but not finish at the time of the
dissolution.
+ Section 47 concludes that the authority continues for no other purpose.
+ If the firm has been dissolved and to wind up the business of the firm i.e some
unfinished transactions of the firm are required to be completed, ten in such a
case rights and liabilities of a partner continue till transactions are not completed.
+ Therefore, section 47 provides 2 principles;
+ 1) on dissolution of firm, the rights and obligations of partner towards each other
come to an end
+ 2) but if some transactions was pending and is required to be finished for purpose
of winding up of business of the firm, then in such a case, mutual rights and
obligations of parties to each other continue till that transaction.
+ By dissolution of the firm the partners cease to be partners with one another and therefore, the
mutual agency which existed between them to act on behalf of each other to continue to carry on
the business of the firm also comes to an end. But after dissolution the winding up of the affairs of
the firm has got to be done. Eg. The contracts already entered into have to be performed, amount
due to the creditors has got to be paid, amount due from the firm’s debtors has got to be realized,
joint property has got to be disposed off and converted into cash. Moreover, capital contributed by
the partners has to be refunded. Sometimes for realizing the debts suit may have to be filed.
Although mutual agency between the partners comes to an end for the purpose of making fresh
transactions or continuing the business, but the authority of each partner to bind the firm, and other
mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as
may be necessary to wind up the affairs of the firm and to complete transactions begun but
unfinished at the time of the dissolution. (Section 47)
+ When a partner dies and the partnership comes to an end, it is not only the
right but the duty of a surviving partner to realize the assets for the purpose of
winding up the partnership affairs including the payment of partnership debts.
Bourne v Bourne 1906
+ When a partner dies during the pendency of a suit there is no necessity of the
legal representatives of the deceased partner to be brought on record because
under section 47 on the death of a partner the remaining partners may
represent the dissolved firm including the interest of the deceased partner to
recover any debt due to the firm. Shambhu dayal v Chunnilal 1980
+ Proviso to section 47 states that the rule of the existence of mutual
agency between the partners for the purpose of winding up does not
apply in the case of an insolvent partner and the firm is in no case
bound by the acts of a partner who has been adjudicated insolvent.
However, any person who has after the adjudication represented
himself or knowingly permitted himself to be represented as a partner
with the insolvent, can be made liable as a partner, under the doctrine
of holding out.
Consequences after Dissolution- Mode of settlement of
accounts between partners (S.48)
+ 4. Mode of settlement of accounts between partners (S.48)
+ MODE OF SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS-
+ In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners,
be observed :
+ (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if
necessary, by the partners individually in the proportions in which they were entitled to share profits;
+ (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 third parties;
+ (ii) in paying to each partner rateably what is due to him from the firm for advances as 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 proportions in which they were entitled to share
profits.
+ It may be noted that prima facie, accounts between the partners shall be settled
in the manner prescribed by partnership agreement. The above mentioned
rules apply subject to any agreement between partners. The rules laid down in
section 48, just specified, as to what will be the mode of settlement of
accounts in the usual course of business. But if the partners, by their
agreement, express any different intention as to the mode in which losses will
have to be borne eventually or the manner in which capital or advances will
have to be paid to any partner, such an intention must be given effect to.
However, any such agreement cannot affect the rights of the creditors of the
firm.
+ The significance of the foregoing provisions is that if the assets of the firm are not sufficient to pay
off the liabilities of the firm including the amount due to each partner on account of capital, each
partner would individually be liable to contribute towards the losses, including deficiencies of
capital, in the proportion in which he is entitled to share profits.
+ Eg X and Y were partners sharing profits and losses equally and X died. On taking partnership
accounts, it transpired that he contributed Rs 660000 to the capital of the firm and Y only Rs 40000.
the assets amounted to Rs 200,000. the deficiency i.e. 660000+40000-200000 will be Rs 500000
would have to be shared equally by Y and X’s estate.
+ If in the above example, the agreement provided that on dissolution the surplus assets would be
divided between the partners according to their respective interests in the capital and on the
dissolution of the firm a deficiency of capital was found then the assets would be divided between
the partners in proportion to their capital with the result that X’s estate would be the main loser.
+ In settling the accounts of a firm after dissolution, the following rules
shall, subject to agreement by the partners, be observed-
+ (a) Deficiencies of capital- When a partnership is dissolved, and after
the debts to the third parties have been paid and advances made by a
partner have been repaid, the assets are insufficient to repay each
partner his capital in full, any deficiencies must be borne by the
partners in the same proportion as the profits would have been divided
+ (b) The assets of a firm are to be applied in paying
+ 1. Joint debts to third parties
+ 2. Advances, as distinguished from capital, of each partner
+ 3. To each partner what is due from the firm to him in respect of capital. In after the above
payments are made, there is surplus, that surplus is to be divided in the proportion.
+ Nowell v. Nowell in this case A and B trade as partners and it is agreed that profits should be
shared and losses borne equally. On dissolution it is found that A has advanced more capital than
B to the extent of Rs.1900. the net assets were only Rs.1400. there is thus a deficiency of capital
to the extent of Rs500.
+ Under sub section(a) both the partners must contribute in the proportion in which they have
agreed to share profits that is equally. Therefore B should pay to A sum of Rs 250.
+ S 48 mentions the mode of the settlement of accounts between the partners on the dissolution
of the firm. The rules as stated in this section are applicable when the partners have not made
an agreement on these points. The rules which emerge from this section are as under:
+ 1. Losses are to be shared equally- The deficiency in capital is also to be treated like an
ordinary loss and the partners are to bear that loss in the same proportion in which they were
sharing profits and losses. For example, A,B and C contributed a capital of Rs. 25,000/-, Rs.
20,000/- and Rs. 5,000/- respectively, but they share the profits and losses equally. The total
capital is Rs. 50,000/-. If the assets realise Rs. 20,000/- only, there is deficiency of capital to
the extent of Rs. 30,000/- Each partner is bound to contribute Rs. 10,000/- for the loss. After
the partners make good this deficiency, total amount of Rs. 50,000/- will be available and that
will be utilised for the return of capital contributed by the partners.
+ In Nowell v Nowell (1869 L.R. 7 Equity Cases 538), A and B have contributed
unequal amount of 1929 pounds and 29 pounds towards the capital. They had agreed
to share the profits and losses equally. A deficiency of 500 pounds in capital having
arisen, it was held that the same was to be shared equally between A and B.
+ 2. On the dissolution of the firm, if the amount available is sufficient to meet all the
claims of the partners and the third parties, there is no problem. If, on the other hand,
the amount available is insufficient, the payments are to be made in a certain order.
+ S 48 (2) provides that the amount available is to be utilised for making payments in
the following order:
+ i) Making payments for the debts of the firm to the third parties;
+ ii) If some partners have given advance over and above the capital, then the amount is
to be utilised in making payment to each one of them rateably;
+ iii) Making payment to each partner rateably what is due to him on account of capital;
+ iv) The residue, if any, is deemed to be profit and the same is to be divided among the
partners in the proportions in which they were entitled to share profits. In K.A. Gundu
Rao v Shri Ramnarayana (AIR 1994 Kant. 217), it has been held that the term
'capital' cannot be equated with the term 'assets'. It cannot be said that the benefit of the
assets should accrue only to those who had contributed capital. Assets are acquired not
merely by utilising capital, but also by credibility and skill of all the partners.
+ In Deoki Prasad v Anar Dai Poddar (AIR 1999 Pat. 122), it has been
held that a suit for accounts of the dissolved firm under s 48 has to be
filed within prescribed limitation period. In this case, the firm was
dissolved in 1964 on the completion of the job of construction of a
particular work. The suit for the accounts of the dissolved firm
instituted in 1980 was held to be time barred, as it was filed much after
the lapse of period of three years prescribed for such an action.
+ The mode of settlement of accounts is laid down in section 48. the section
lays down two fundamental principles, first as to payment of losses, and
second as to application of assets.
+ As to the losses, it includes deficiencies of capital, shall be paid first out of
profits, next out of capital and lastly, if necessary, by the partners
individually in the proportion in which they were entitled to share profits.
+ As to the application of the assets, the section lays down that the assets
including any sums contributed by the partners to make up deficiencies of
capital, shall be applied in the following manner and order:
+ First-in paying the debts of the firm to third parties
+ Second-in paying to each partner rateably what is due to him from the firm for
advances as distinguished from capital i.e. loans given by the partner to the firm are
paid after aying off the outside creditors. Partners’ claims on the firm are not equated
with outside claims.
+ Third-in paying to each partner rateably what is due to him on account of capital
+ Fourth-the residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits.
+ It is subject to agreement between the partner means they can alter the scheme of the
section 48
+ Garner v Murray 1904, Under the terms and conditions of a partnership
the partners contributed capital in unequal shares but they shared profits in
equal shares. The firm was dissolved and after paying off outside creditors
and paying back the partners’ advances, the assets were not sufficient to
pay back the partner’s capital. Two of the partners contributed their shares
of the deficiency but the third failed to do so. Held that every partner was
bound to contribute equally to make up the deficiency and secondly that if
a partner failed to contribute his share of the deficiency, the other partners
were not bound to make contributions in respect of that default.
+ Harmohan singh v GurbaxSingh 2001, where under the agreement
between the one partner for relinquished and surrendered his rights to
other partner, provides that “the said assets and rights included
goodwill and any other rights whatsoever” the court held that
“goodwill and all other rights” included the right in the trademark of
the firm also.
+ Keshari Engg works v Bank of India 1991, where a loan was given by a bank
to a partnership firm under the signatures of all the partners all of them were
held liable to pay. It would make no difference to the rights of the lending
banker that one partner was acknowledging the loan to be his personal liability.
+ Barber ex p, the accounting practice adopted by a firm was to treat the loss
occasioned by an asset turning out to be bad as belonging to the year in which
the asset was discovered to be bad. A partner died. A balance sheet was made
which showed various assets to be irrecoverable. Held that the share of the
deceased partner was not to be affected by bad assets discovered to be so after
his death.
Consequences after Dissolution- Payment of firm debts and
of separate debts
+ 5. Payment of firm debts and of separate debts ( S.49) Where there
are joint debts due from the firm, and also separate debts due from any
partner, the 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 payment of his separate debts
or paid to him. 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.
of separate debts
+ Sometimes there may be joint debts due from the firm and separate
debts due from a partner and the property of the firm may not be
enough to satisfy them all. The question arises as to which debts are to
be satisfied out of the firm's property. A similar question also arises
when there is a claim against the separate property of a partner of the
joint debts and the separate debts. S 49 incorporates the following
rules in this connection:
of separate debts
+ 1) the 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 payment of his separate debts or paid to him. It is corollary to
section 46 of the Act which provides that a partner has a right to get the joint
property of the firm applied in payment of the debts and liabilities of the firm
and then the distribution of the surplus amongst the partners or their
representatives.
+ 2) the separate property of any partner shall be applied first in the payment of
hid separate debts and the surplus if any may be utilised in the payments of the
debts of the firm
Consequences after Dissolution- Personal profits earned after
dissolution Section 50
PERSONAL PROFITS EARNED AFTER DISSOLUTION- Subject

to contract between the partners, the provisions of clause (a) of
section 16 shall apply to transactions by any surviving partner or by
the representatives of deceased partner, undertaken after the firm is
dissolved on account of the death of a partner and before its affairs
have been completely wound up :
Provided that where any partner or his representative has bought the
good will of the firm, nothing in the section shall affect his right to
use the firm-name.
Consequences after Dissolution- Personal profits earned
after dissolution Section 50
+ Personal profits earned after dissolution (S.50) Where a partner,
after dissolution and before the affairs of the partnership are wound
up, derives any personal profit for himself from any transactions of the
firm, or from the use of the property or business connection of the firm
or the firm name, he shall account for the profit and pay his share to
the surviving partner or the representative of the deceased partner. But
if a partner carries on another business of a similar nature, this section
would not apply.
after dissolution
+ Proviso – Where on dissolution a partner has bought the goodwill of the firm,
he may use the firm name even before the affairs of the partnership have been
completely wound up. Clements v. Hall In this case A and B carry on business
in partnership. The firm holds leasehold for the purpose of the business. A
dies before the affairs of the firm are completely wound up, the lease expires
and B renews it. The renewed property is partnership property. Alder v.
Fouracare. In this case A,B and C are partners. A agrees to take a lease in his
own name, but in fact fact partnership purpose, and dies before the lease is
executed. The representative of A can’t deal with lease without the permission
of B and C
after dissolution
We have already noted s 16 (a), according to which no partner can make a
personal gain out of any transaction of the firm or the use of the name, property
or business connection of the firm. If he makes any such gain, he shall account
for that to the firm. A similar duty is contained in s 50 on the dissolution of a
firm by the death of a partner. Therefore, a partner making personal profits after
dissolution and before winding up has to account for those profits. The reason
is that until there is winding up, all the partners continue to be the owners of
the firm and also the joint property and, therefore, no partner can gain any
personal advantage by the use thereof for his personal gain.
after dissolution
S 53 of the Act empowers the partners or their representatives to restrain

any other partner or his representatives from carrying on the 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. If, after the dissolution of the firm, any partner or his
representative buys the goodwill of the firm, he can make use of the
firm name and he shall not be subject to the liability subject above. This
provision also does not apply to the case of a partner or his
representative who has purchased the goodwill of the firm.
after dissolution
Where a firm is dissolved on account of the death of a partner and if before its
affairs are completely wound up, any transaction is undertaken by the surviving
partner or the representative of the deceased partner, which brings him some
advantage at the expense of the firm, he is bound to share it with other partners
under the principle of Section 16(a). Where a partner died and the business of
the firm was continued by the other partners without paying out the deceased’s
interest, his representatives were allowed to claim proportional profits subject
only to deduction of an allowance by the managing partners. Manley v Sartori
1927 But where a partner or his representative has bought the goodwill of the
firm, he will not be bound to share profits earned by use of the firm’s name.
Consequences after Dissolution- Return of premium on
premature dissolution ( S.51)
+ Return of premium on premature dissolution ( S.51)-Where a partner has
paid a premium on entering into partnership of a fixed term, and the firm is
dissolved before the expiration of that term otherwise than by the death of a
partner, he shall be entitled to repayment of the premium or of such part
thereof as may be reasonable, regard being had to the terms upon which he
became a partner and to the length of time during which he was a partner,
unless-
+ (a) Dissolution is mainly due to his own misconduct, or
+ (b) Dissolution is in pursuance of an agreement containing no provision for
the return of the premium or any part of it.
Consequences after Dissolution- Rights where Partnership
Contract is Rescinded for fraud or misrepresentation Section 52
+ Rights where partnership contract is rescinded for fraud or misrepresentation- Where

a contract creating partnership is rescinded on the ground of fraud or
misrepresentation of any of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitle –
+ (a) to a lien on, or right of retention of, the surplus of the 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;
+ (b) to rank as a creditor of the firm in respect of any payment made by him towards
the debts of the firm; and
+ (c) to he indemnified by the partner or partners guilty of fraud or misrepresentation
against all the debts of the firm.
Consequences after Dissolution
+ Airey vs. Barbam in this case A and B entered into a partnership for five years. A paid premium to
B. The partnership was dissolved with into two years as a result of mutual disagreement due to A’s
failure to devote time to business as agreed. It was held that no part of premium was payable
because the dissolution has been caused by the misconduct on the part of A
+ Atwood v. Maude In this case A and B entered as solicitors for a term of seven years. A paying a
premium of Rs.800.B before entering into the partnership know that A was inexperienced and
incompetent. After the expiration of two years B complained that A’s incompleteness was injuries
to business and called him to dissolve the partnership. A thereupon filed a suit for repayment of
proportionate premium. A succeed.
+ Pease v. Hewitt In this case A and B become partners for 10years. A paying B a premium of
Rs1000. A quarrel occurs at the end of eight years, both parties being in the wrong and dissolution
is decreed. A is entitled to a return of Rs.200.
+ When a person is admitted as a partner to an already established business, he
has generally to pay some consideration, known as premium to secure the right
of becoming and remaining a partner in the firm. The premium goes to the
pockets of those persons who were already carrying on the business. If a
person pays premium to become a partner for a certain specified period, but
the partnership ends before the expiry of that term, he is entitled to refund of
premium. How much premium is to be refunded will depend on the term on
which he became a partner and the length of time during which he was a
partner (s 51). Regard being had to these things, whatever is reasonable will be
returned.
+ It may be noted that the return of the premium or part thereof is allowed when a
person became a partner for a fixed term, and there is dissolution of partnership before
the expiry of that term. Therefore, there is no question of return of premium if the
partnership was at will. In the following exceptional cases, even though the
partnership is for a fixed term, there will be no refund of premium on its premature
dissolution: 1. When the dissolution of partnership occurs by the death of a partner,
there is to be no refund of premium unless there is an express stipulation in a contract
between the partners. But if a person knowing himself to be ina dangerous state of
health and suffering from a fatal disease conceals this fact and receives the premium,
it is a case of fraud and the premium will have to be refunded if there is premature
dissolution due to the death of such partner.
+ 2. When the dissolution of the firm is mainly due to the misconduct of the
partner who paid the premium, he is not entitled to any refund. The reason is
that a guilty person should not take advantage of his own wrong. But if the
person receiving the premium is guilty, or both the partners, i.e., the one
receiving and the one paying the premium are guilty, or where none of them is
guilty, the court will order the refund of premium. 3. When the dissolution is
by an agreement but the agreement does not contain any provision for the
return of premium or any part thereof, nothing is to be refunded. In such a
case, the inference is that if the partners while agreeing to the dissolution are
silent about the return of the premium, they do not intend any return.
+ Rights where partnership contract is rescinded for fraud or misrepresentation (S.52) Where a
contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of
the parties thereto the party entitled to rescind is, without prejudice to any other right, entitled-
+ (a) Lien on surplus assets- He has a right of lien on the surplus assets which are left after the debts of
the firm have been paid. The right can be used with regard to sums paid by him for purchasing share
in the firm or for the capital contributed by him.
+ (b) Right of subrogation- The partner who is rescinding a contract has a right to become creditor of
the firm for the payments which he makes out of his personal assets to pay-off the debts of the firm
+ (c) Right to be indemnified- The partner rescinding the contract has a right to be indemnified by the
partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.
+ When a person becomes a partner, he invests capital. He may sometimes give advance
over and above the capital, or he may have paid premium for becoming a partner. During
partnership he may make payments on behalf of the firm. Apart from that, for all acts of
the firm done while he is a partner, he incurs joint and several liability towards third
parties. When a partner rescinds the contract of partnership and leaves the firm on the
ground of fraud or misrepresentation of the other partners, all his interests have got to be
protected. S 52 grants necessary protection to the partner thus rescinding the contract.
Apart from the right of avoiding the contract on the ground of fraud or misrepresentation
which is available to him according to s 19 of the Indian Contract Act, and also a right to
claim damages for fraud under the law of torts, he is entitled to the following rights:
+ 1. He has a right of lien on, or a right of retention of, the surplus assets
so far as it may be necessary to return the capital contributed by him and
also for any other sum which he may have paid for the purchase of share
in the firm, i.e., payment of premium made by him. 2. He is to rank as a
creditor of the firm in respect of any payment made by him towards the
debts of the firm. Being treated as a creditor means priority in the
payment of that amount, as is stated in s 48(2)(i).
+ 3. He has also a right to claim indemnity from the partners guilty of
fraud or misrepresentation against all the debts of the firm.
+ 9. Right to restrain from use of firm name or firm property ( S.53)
After a firm is dissolved, every partner or his representative may, in the
absence of a contract between the partners to the contrary, 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.
+ Proviso – Where on dissolution a partner has bought the goodwill of the
firm, he may use the firm name even before the affairs of the partnership
have been completely wound up
+ Not only during the continuance of the firm but even after dissolution, a partner cannot
use the firm's property or firm's name for personal benefit, until the affairs of the firm
have been completely wound up. S 53 empowers a partner or his representative to 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 rule is subject to a contract between the
partners to the contrary. However, where a partner or his representative has bought the
goodwill of the firm, he can use the firm's name. In Rajendra Kumar Sharma v B.K.
Sharma (AIR 1994 All 62), it has been held taht in the absence of a contract between the
partners, after the dissolution of the firm and before its winding up, no partner can use the
property of the firm for his own benefit without the consent of the other partners.
+ 10. Agreements in restraint of trade (S.54) Partners may, upon or in
anticipation of the dissolution of the firm, make an agreement that
some or all of them will not carry on a business similar to that of the
firm within a specified period or within specified local limits; and
notwithstanding anything contained in section 27 of the Indian
Contract Act, 1872 (9 of 1872), such agreement shall be valid if the
restrictions imposed are reasonable.
+ On the dissolution of the firm, one of the partners sometimes may
purchase the business, or sometimes the business may be sold to a
third party. The partners may, upon or in anticipation of the dissolution
of the firm, make an agreement that some or all of them will not carry
on a business similar to that of the firm within specified period or
within specified local limits. Notwithstanding the rule contained in s
27 of the Indian Contract Act that an agreement in restraint of trade is
void, such an agreement has been declared to be valid by s 54, if the
restrictions imposed are reasonable.
+ 11. Sale of goodwill after dissolution (S.55)
+ (1) In settling the accounts of a firm after dissolution- The goodwill
shall, subject to contract between the partners, be included in the
assets, and it may be sold either separately or along with other
property of the firm.
+ (2) Rights of buyer and seller of goodwill- Where the goodwill of a
firm is sold after dissolution, a partner may carry on a business
competing with that of the buyer and he may advertise such business,
but, subject to agreement between him and the buyer, he may not-
+ (a) Use the firm name,
+ (b) Represent himself as carrying on the business of the firm, or
+ (c) Solicit the custom of persons who were dealing with the firm
before its dissolution.
+ (3) Agreement in restraint of trade—Any partner may, upon the sale of the goodwill of
a firm, make an agreement with the buyer that such partner will not carry on any
business similar to that of the firm within a specified period or within specified local
limits and, notwithstanding anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are
reasonable.
+ Curt Brothers Ltd. V. Webster in this case A sells the goodwill of his business to B and
sets up a new business. X who remains customer of the old firm deals his own accord
with the new firm set by A. A is not entitled to solicit even such a customer as X, though
if X continues to deal with A of his own accord, A would be entitled to deal with him.
+ Goodwill being an asset of the firm, on the dissolution of a partnership
firm, the same may be sold either separately or alongwith other
property of the firm [s 55(1)]. According to s 55 (2), after the sale of
goodwill, a partner is entitled to carry on a business competing with
that of the buyer of goodwill and he may also advertise such business.
The carrying on such business by a partner is, however, subject to the
following restrictions:
+ 1. He cannot use the name of the firm. On the sale of goodwill, it is only the buyer
of the goodwill who can use the name of the firm. 2. He cannot represent himself to
be carrying on the business of the firm. In Hookham v Pottage (1872 8 Ch. 9), on
the dissolution of the firm, 'Hookham and Pottage', by a decree of the court, it was
decided that the goodwillshould belong to Hookham. Hookham now continued the
business under the name 'Hookham & Co.' The other partner, Pottage, also starteed a
business in the same area and named his shop as, "Pottage from Hookham and
Pottage." It was held that use of the firm name like that would create an impression
that he was connected with the old firm and, therefore, Hookham was entitled to
obtain injunction restrain Pottage too use the firm name like that.
+ 3. He cannot solicit the custom of persons who had been dealing with the firm before dissolution. It
means that he cannot canvass for the customers being diverted from the old business towards him. If
they themselves come to him, he may attend to them, but it will be wrong if he approaches them with
an idea to persuade them from being diverted towards himself. In Trego v Hunt (1896 A.C. 7), Trego,
who was a varnish and japan manufacturer took Hunt into partnership on the condition that the
goodwill of the business will be the sole property of Trego. Trego died and then Hunt made an
agreement with Mrs. Trego, who succeeded Mr. Trego, that he would continue as partner for 7 years
and the goodwill will remain the sole property of Mrs. Trego. When approximately one year of
partnership was left, it was discovered by Mrs. Trego that Hunt had employed a clerk of the firm to
prepare a list of the firm's customers, after the office hours. His object obviously was to approach
them after retirement to canvass them for becoming his customers. It was held that Mrs. Trego was
entitled to obtain an injunction to restrain Hunt from making such copies of the lists of the firm's
customers.
+ Agreement restraining similar business If the buyer of the goodwill
wants further protection of his interest, he may make an agreement
with the seller of the goodwill, i.e., the partners of the firm, stipulating
that any such partner shall not carry on any business similar to that of
the firm within a specified period or within specified local limits.
Notwithstanding the rule contained in s 27, Indian Contract Act, that
an agreement in restraint of trade is void, such an agreement will be
valid if the restrictions imposed are reasonable [s 55 (3)].
+ In Hukmi Chand v Jaipur Ice & Oil Mills (AIR 1980 Raj. 155), at the time of dissolution of
the firm under the dissolution deed, the retiring partner sold his share of goodwill in favour of
other partners and agreed with them that he would not carry on the same kind of business
carried on by the firm within the area of land in his possession and adjoining the factory of
the firm. Subsequently, the retiring partner sold his land to his father, and the father entered
into a partnership for carrying on the same kind of business on that very land. The other
partners filed a suit for injunction against the retiring partner, his father and the father's
partners restraining them from carrying on the said business on the said land. It was held that
the condition in the agreement of not carrying on similar business by the retiring partner, only
on the adjoining premises was reasonable and binding on the transferees of the retiring
partner, and therefore an injunction restraining the carrying on of similar business was issued,
+ "Goodwill" is an asset of the partnership firm It was clear that the goodwill was an asset of the
firm and may be taken into account when there was general dissolution of the firm. Every
partner had a right, in the absence of agreement to the contrary, to have the goodwill of the
business sold for the common benefit of all the partners. This, however, did not mean that the
goodwill was to be taken into account only when there was a general dissolution. Even the
legal representatives of deceased partners will be entitled to a share in the goodwill of a
partnership which is continued. By virtue of s 55(1) the goodwill had to be disposed of as
provided by the agreement. Where the partners had made no provision for it by their
agreement the goodwill has to be included in the asset. And in consequence of such
conclusion it may either be alloted to any of the partners or may be sold, if it was to be sold,
either separately or along with other property of the firm ( Sujan Suresh Sawant v Kamlakant
Shantaram Desa AIR 2004 Bom. 446).

Sem 7 Dissolution of Firm

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Sem 7 Dissolution of Firm

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Dissolution of Firm

+ Dissolution is different from the retirement of a partner, because in retirement the

+There can, however, be an agreement by which the

+ 1. LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION ( S.45)-

+ Section 45 has two fold objectives;

PERSONAL PROFITS EARNED AFTER DISSOLUTION- Subject

S 53 of the Act empowers the partners or their representatives to restrain

+ Rights where partnership contract is rescinded for fraud or misrepresentation- Where

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