“The dissolution of partnership between all the partners of a firm is called the dissolution of the firm.”
“A firm is not said to be dissolved merely by the fact of one or more members ceasing to be partners in it while others remain, unless and until all and everyone of the members of the firm cease to carry on its business in partnership. But where there are only two partners in a firm and one retires or relinquishes his share in favour of the other, the firm dissolves. However, where there are more than two partners, the relinquishment of his right by one of the partners in favour of another does not dissolve the firm.
1. Karumurthi Thiagarajan Chettiar v. EM Muthappa Chettiar, MANU/SC/0059/1961 : AIR 1961 SC 1225.
2. C.I.T. West Bengal v. AW Figgis & Co. MANU/SC/0042/1953 : AIR 1953 SC 455.
A law with respect to retiring partners as enacted in the Partnership Act is, to a certain extent, a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm name but a collective name for individuals carrying on business in partnership and mercantile usage which recognise the firm as a distinct person or quasi-corporation.
Re-constitution means a continuation under altered circumstances. There can be dissolution followed by the constitution of a new firm by some of the erstwhile partners.
1. Sharad Vasant Katak v. Ramniklal Mohanlal Chowda, MANU/SC/0910/1998 : (1998) 2 SCC 171:
Reconstruction implies that the firm never became extinct. It is only a structural alteration of the membership.
2. Commr. of Income-tax v. Pigat Champan & Co., MANU/SC/0137/1982 : (1982) 2 SCC 330:
The principle is well-settled that it is on the examination of relevant document and relevant facts and circumstances that the court has to be satisfied in each case as to whether there has been a succession or a mere change in the constitution of partnership.
3. Chandrasekharan v. Kumaresan, (2000) 3 Mad LJ 475:
If a new firm is formed by agreement between some of the former partners, it will nonetheless be new, however closely that agreement may follow on the dissolution of the old firm.
Santdas Moolchand Jhangiani v. Shivdayal Gurudasmal Massand, MANU/MH/0042/1971 : AIR 1971 Bom 237:
It has been held that winding up of a partnership has been treated in the Act as a part and parcel of dissolution of partnership and has not been treated as a distinct, separate or independent matter or transaction.
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. For instance if a contract between the partners provides that on a six months notice by a partner the firm may be dissolved, then in accordance with this contract, a partner could give six months’ notice and get the firm dissolved.
“A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.”
Section 40 gives right to the partners to dissolve the partnership by agreement with the consent of all the partners or in accordance with the contract between the partners.
Mohd. Uduman v. Mohd. Aslym, MANU/SC/0238/1991 : (1991) 1 SCC 412:
Although this is new in terms, however, it is a quite familiar law. Contract between the partners obviously means a contract already made, the most likely case is that of a clause in the partnership articles providing for dissolution in certain events.
This section deals with the dissolution of the firm by agreement i.e., with consent of all the partners as well as by contract. Where there is properly drawn up deed of dissolution very little difficulty is realised in gathering the intention of the partners. Where a written contract is of a doubtful nature, conduct of the parties might be looked into so as to help the court to obtain an explanation of the intent and design of the contract.
Partnership can be dissolved with the agreement between parties. This agreement may be either express or implied. Express agreement would be one which is either written or spoken through words. Implied agreement is expressed through conduct of the partners. Where no term is fixed regarding duration of partnership or where no term is fixed by the nature of business this will amount to partnership at Will and any partner may dissolve it any time without consent of his co-partners. But where the partnership is for a fixed term, no partner has a right by his own act, to dissolve the firm prior to the expiration of such term.
K.R. Mallesha v. Ramnath, MANU/AP/0061/1974 : AIR 1974 AP 53:
It has been held by the Andhra Pradesh High Court that if partnership exists between two partners and one of them after receiving his share becomes separate then this agreement shall be treated as dissolution deed for partnership.
Sathappa v. Subramaniam, MANU/PR/0004/1927 : AIR 1927 PC 70:
The Privy Council did not lay down any such principle unless all the debts of the firm are realised, firm cannot be dissolved. It, therefore, means that firm can be dissolved even when all the debts have not been realised.
Jopari v. Laxmana Swami, AIR 1971 SC 1953:
Partnership is dissolved on account of the implied agreement between parties. In this case annual account of partnership transaction was being given to one of the partners from 1868-1891. In April 1891, his account in capital and profit of the said business was cleaned and rest of the partners were running the business without interference of the plaintiff. In the year 1902, plaintiff instituted a suit against rest of the partners for his share in profits. On the basis of aforesaid facts it was held that the implied agreement for dissolution of the firm had already taken place in the year 1891.
Question may arise whether the old firm is dissolved and whether a new firm has come into being. This will be inferred with the help of relevant materials.
Bajinath v. Chottelal, (1928) 26 MLJ 243:
It was held that after the dissolution of firm the legal status of the firm is completely abolished but staying or stopping the work for sometime is not a decisive proof of the dissolution of the firm.
Though the dissolution of the firm leads to the dissolution of partnership as between partners but the partnership itself subsists though only for the purpose of winding up its business and adjusting the rights of the partners inter se; Chaturbhuj Dharamdas Factory v. Damodar Jamunadas Zawar, MANU/MH/0067/1960 : AIR 1960 Bom 424.
Cessation of business of a firm coupled with other surrounding circumstances may legitimately lead to the inference that firm was dissolved. Such was the case where the business of a firm was stopped, all its assets were disposed of, servants of the firm were dismissed and most of the accounts of the firm finally closed.
Court has a duty to consider all the circumstances of the case and arrive at a conclusion without attaching undue weight to any particular fact. Thus where the main business of the firm was stopped and some of the partners refused to advance further sum on the capital account but there was some evidence that the business of the firm was carried on in some of its departments, the court declined to treat the stoppage of business or refusal by partners to supply capital as dissolution of the firm.
Harmohan v. Sudharsan, (1921) 25 Cal WN 847; N.B. Singh v. C.I. Stamp, MANU/UP/0001/1972 : AIR 1972 All 1:
It has been held that mere dissolution of the firm is the starting of the process by which legal existence of the firm comes to an end. The firm continues to exist until its affairs are finally wound-up.
Erach F.D. Mehta v. Minoo F.D. Mehta, MANU/SC/0002/1970 : AIR 1971 SC 1653:
When a partnership consists of two partners an agreement to the effect that one of the partners will retire amounts to dissolution of partnership.
“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”.
Illustration
(1) A and B charter a ship to go to a foreign port and receive a cargo on this joint ventures. 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.
(2) A is a partner with ten other persons in a certain business. An act is passed which makes it unlawful for more than ten persons to carry on that business in partnership. The partnership is dissolved.
(3) A an Englishman and domiciled in England is a partner with B, a domiciled foreigner. War breaks out between English and the country of B’s domicile. The partnership between A and B is dissolved. The true test is not domicile but voluntary residence.
This section lays down following conditions for compulsory dissolution—
(a) where there is an adjudication of insolvency of all the partners, or of all the partners but one,
(b) when the further proceedings in prosecutions of the firm become illegal.
(c) when it becomes illegal for the partners to carry on its partnership.
(d) when one of the partners becomes so situated that his carrying on the partnership business becomes illegal.
(e) when it becomes impossible to run the business further.
Laxmichand v. Amirchand, AIR 1932 Sind 164:
It is to be noted that in India dissolution of a partnership does not take place at its own on the insolvency of a partner. An insolvent partner is competent for and on behalf of the firm, to make a valid transfer of a decree obtained by a firm, specially when it is necessary to the winding up of the partnership.
Chettiar Firm v. Dayabhoy, AIR 1935 Rang 59:
If there are two or more partners, dissolution automatically follows on the adjudication of all the partners or all but one as insolvent. It follows that where all the partners or all but one are adjudicated as insolvent, firm can no longer remain in existence for the reason that there must be two partners competent to carry on the trade.
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.
A firm constituted for a term is of course not exempt from dissolution by any of the other possible causes 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 nature of the business.
Keshavlal Lallubhai Patel v. Patil Bhailal Narendar, MANU/GJ/0059/1968 : AIR 1968 Guj 157:
The provision of this section makes 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. It cannot be disputed that after such dissolution by the expiry of that term, if a partner dies or is adjudicated as an insolvent, then in the absence of contrary contract between partners, the firm is dissolved. The term of the partnership being fixed is clearly not a contrary provision under section 42. It may also be noted here that even after the expiry of a fixed term, by mutual consent partners may continue the partnership. But if there is no such mutual consent, the partnership is dissolved on the expiry of the fixed term.
Subject to contract between the partners a firm is dissolved if constituted to carry out one or more adventures or undertakings, by the completion thereof. Section 42(b) applies in such cases where the partnership firm has been constituted for one or more adventures or undertaking although no period has been fixed. In such cases, the nature of the undertakings and the conduct of the partners are considered.
Gherulal Parekh v. Mahadev Das Maiya, MANU/SC/0024/1959 : AIR 1959 SC 781:
the partnership was constituted for the speculative transactions relating to sale and purchase of wheat under it. Speculative transaction were to be catered for the sale and purchase of wheat in future. After the supply of a part of goods, the contract was terminated before time. The Supreme Court held that the firm was not immediately dissolved. It would be dissolved only after the realisation of the assets.
Karumuthi Thiagarajan Chettiar v. EM Muthappa Chettiar, MANU/SC/0059/1961 : AIR 1961 SC 1225:
Where partnership was for sole business of carrying on the managing agency, it was held that by necessary implication, the partnership would determine under section 42(b) on determination of the managing agency.
Basantlal Jalan v. Chiranjilal Sarawgi, MANU/BH/0033/1968 : AIR 1968 Pat 96:
Where a firm was constituted for a specific undertaking to supply certain quantity of grain and the contract was prematurely terminated after supply of a part of the goods, it was held that the partnership did not come to an end and was dissolved only on the final realisation of the assets.
Dayalal Trikamal v. Harjivandas Madhavji Mali; Banshilal v. Jamuna Prasad, MANU/UP/0207/1981 : AIR 1981 All 324:
A contract to carry out murram work on a road was undertaken in partnership which was constituted for that venture. It was held that the work could not be said to be completed till the final bill is prepared. It was observed that even if the roadwork was completed, the contract was not completed till reciprocal promises were fulfilled.
A partnership may be dissolved as regards all the partners by the death of any partner. A partner gives a valid notice of a dissolution but dies before the receipt or the expiration of the notice, the partnership is dissolved by the death not by the notice.
Where partner dies his estate is not liable for partnership debts contracted after the date of the death and no contract is necessary in order to determine the liability where goods are ordered before, but delivered after the death of a partner, the debt accrues on the delivery of the goods and the vendor, therefore, although he had notice of the death cannot make the deceased partner’s estate liable for the price.
Nandlal Sohanlal, Jullunder v. C.I.T., Patiala, AIR 1977 P&H 320:
Thus on the death of a partner the firm is dissolved provided that there is no contract to the contrary between partners. If the remaining as surviving partners continue the business of the firm, it will be deemed that they have constituted a new firm by mutual consent.
Jai Narayan Misra v. Hasmathunnisa Begum, MANU/AP/0333/2002 : AIR 2002 AP 384:
When one of the two partners of a firm dies, the firm is automatically dissolved. Even a clause in partnership deed that the firm would continue for certain number of years despite death of one of the two partners will not save the firm from dissolution where heirs of the deceased partner are not willing to continue the firm.
Ravi Prakash Goel v. Chandra Prakash Goel, MANU/SC/7232/2007 : AIR 2007 SC 1517:
It has been held by the Supreme Court that if a dispute had arisen during the lifetime of the deceased, the deceased’s legal representative can take legal proceedings under section 20 of the Arbitration Act, 1940.
C.I.T., Madhya Pradesh v. Seth Govind Ram Sugar Mills, MANU/SC/0170/1965 : AIR 1966 SC 24:
The Supreme Court has held that where one of two partners dies, the firm automatically comes to an end and there is no partnership for a third party to be introduced therein. An agreement that on the death of a partner but it would be a new partnership. There cannot be a contract between two persons, two partners that on the death of one of them the partnership will not be dissolved.
S. Pravathammal v. C.I.T., (1987) MANU/TN/0112/1984 : 163 ITR 161:
Where a partnership deed between two persons required that the partnership would continue for 42 years, the death of one of the partners would lead to dissolution of the partnership.
A partnership may be dissolved among all the partners by the bankruptcy of any partner, and the estate of the bankrupt thereupon ceases to be liable for the partnership debts incurred after the bankruptcy. If a changing order is made upon a partner’s share in respect of his separate debt, the other partners may at their option dissolve the partnership.
The firm is also dissolved unless there is an agreement between the remaining partners to the contrary. This provision has to be read alongwith section 41(a) which states that when all or all except one partner become insolvent, there is compulsory dissolution of the firm.
(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.
This section deals with dissolution by notice in case of partnership at Will.
Where the partnership is at Will, it is the duty of the partner intending to dissolve the firm that he must give a notice to this effect to the remaining partners.
Sohanlal v. Amia Chand & Sons, AIR 1977 SC 2572:
It has been held by the Supreme Court that the trade mark of the firm is also a property of the firm and that if a retiring partner asks the other partners not to use the firm name then the other partners cannot be stopped from using that firm name.
Section 43 deals with dissolution of a partnership at Will by notice. Section 43 does not contract the other provisions of Chapter (i) and that it is possible to have partnership of a firm dissolved even where no notice in writing has been given under section 43. Under this section a partnership at Will may be terminated by notice to this extent, that the court will compel the parties to act as partners in a partnership existing only for the purpose of winding up the affairs.
Where a valid notice is given by a partner but has died before the expiration of the period mentioned in the notice as the date of dissolution or even before the receipt of the notice, where the notice was intended to dissolve the partnership the date of the dissolution is the date of the death of the partner and not the date of notice.
McLood v. Dowing, (1927) 43 TLR 655:
By section 32(c) of the Partnership Act, 1980, “Subject to any agreement between the partners, a partnership is dissolved if entered into for an undefined time, by any partner giving notice to the others of his intention to dissolve the partnership”. The partnership 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.
Carrying on business is, no doubt, the purpose of partnership and discontinuance of business ordinarily puts an end to the main partnership activity, but it does not, by itself bring an end to the legal relationship between the partners. Indeed there are cases where even after dissolution, the business may be carried on if only for the purpose of the more beneficial winding up of the affairs of the partnership.
It is settled principle of the law of partnership, that if it be without any definite period, any partner may withdraw at a moment’s notice, when he pleases, and dissolve the partnership. It is true that if a reasonable notice is given it would be advantageous to the firm, but the section does not make it requisite.
Banarsidas v. Kanshiram, 1963 SCD 758: MANU/SC/0302/1962 : AIR 1963 SC 1165:
In case of partnership at Will mere filing of a suit for dissolution of partnership does not amount to a notice of dissolution of the partnership and a partnership shall be dissolved when the summons accompanied by a copy of the plaint is served on the defendant, when 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 on which the last summon was served.
Featherst for Laugh v. Fenwick, (1810) 17 Ves 298:
Date of dissolution of the deed in the case of a partnership at Will is the date of execution of the deed of dissolution notwithstanding that a future date is mentioned as a date of dissolution which should be treated as the date of dissolution.
Erach F.D. Mehta v. Minoo F.D. Mehta, MANU/SC/0002/1970 : (1970) 2 SCC 724: AIR 1976 SC 1653:
The Supreme Court has expressed the opinion that in a partnership consisting of the 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 provisions relating to retirement will have to be followed for dissolution also.
Abbasbhai v. R.G. Shah, MANU/MH/0336/1988 : AIR 1988 Bom 187:
Where all the partners but one retires, this may invoke 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.
McLood v. Dowling, (1927) 43 TLR 655:
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 death of a partner and not by notice.
Subhash Chandra Kesarwani v. Asstt. Registrar Firms Societies & Chits Allahabad, MANU/UP/0219/2003 : AIR 2003 All 254:
Where there is an agreement between the partners that partnership shall not be dissolved after the death of any partner and will be continued with remaining partners or with any modification but on the death of a partner, one partner is not willing to continue as partner thereafter and the remaining partners are willing to continue partnership business, in such circumstances, order of the Registrar registering reconstituted firm is not improper.
“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 as 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, regards being had to the nature of the business,
(d) that a partner, other than the partner suing, willfully 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 conducts himself in matter 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 (5 of 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.”
Section 44 empowers the court, at a suit of a partner, to dissolve the firm on the happening of any one of the ground enumerated in clauses (a) to (g). These grounds for judicial dissolution corresponds, with verbal variation and additional provisions adapted to in Indian Procedure to section 35 of the English Act, which was itself a somewhat enlarged version of section 254 of Indian Contract Act. According to section 44 the Court may dissolve a firm on any of the following grounds—
Since a person of unsound mind cannot properly perform the works of partnership firm, it is in the interest of such a person as well as other partners that the firm be dissolved.
At the suit of a partner, the court may dissolve a firm on the ground that a partner other than the partner suing, has become in any way permanently incapable of performing his duties as partner.
At the suit of a partner, the court may dissolve a firm on the ground that a partner, other than a partner suing, is guilty of conduct which is likely to affect prejudicially the carrying of the business.
When a partner, other than the partner suing persistently commits breach of agreement relating to the management of the firm or otherwise so conducts himself in matters relating to the business than it is not reasonably practicable for the other partners to carry on the business in partnership with him, the court may order dissolution.
When a partner, other than the partner suing has transferred the whole of his interest in the firm to a third party, or has allowed his interest to be charged.
V.H. Patil & Co. v. Hirubhai Himabhai Patel, (2000) 4 SCC 38:
At the suit of a partner the court may dissolve a firm on the ground 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.
At the suit of a partner, the court may dissolve a firm on the ground that the business of the firm cannot be carried on or save at a loss.
Jennings v. Baddley, (1856) 3 K&J 78; 69 ER 1029:
If the circumstances are such that this chief objective cannot be attained and the business of the firm cannot be carried on save at a loss, firm may be dissolved by the court on this ground.
Section 44(g) gives very wide powers to the court. Whenever a case is brought to the court under section 44(g), the court has to decide whether it would be just and equitable to dissolve the firm and such matters cannot be left for the decision or award of the arbitration.
Narinder Singh Randhwa v. Hardial Singh Dhillion, AIR 1985 P&H 41 (42); Suraj Bhadur v. Mahadeo, MANU/RH/0077/1963 : AIR 1963 Raj 241:
A partnership is always established in order to attain a given objective. When it becomes no longer possible to attain that objective with which the partnership was started, there is no hesitation in saying that a case is made out for dissolution which may be the only remedy under the circumstances.
“(1) Notwithstanding the dissolution of a firm, the partner continues 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.”
Parmanand Vadilal Vasanti v. State of Gujarat, MANU/GJ/0146/1994 : AIR 1994 Guj 206:
On dissolution of the firm, the partnership assets would devolve upon its partners or the representatives of the partners as tenants-in-common. It would mean that each person getting his or her share in the partnership assets would be getting his distinct share therein even if the partnership assets remain undivided.
Mayo Pharmacy v. Aboobacker Haji, 1990 (1) KLT 153:
This section provides that notwithstanding dissolution the partners continue to be liable to parties for any act done by any of them which would have been an act of the firm if done before its dissolution until public notice of the dissolution. This section thus makes it clear that partners, continue to be liable to third parties until public notice is given of the dissolution.
“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.”
Section 46 applies after the firm is dissolved for distributing the assets of the firm and for settlement of accounts. During this period partnership exists for a limited purpose.
Trilok Chand Jain v. Darshan Lal Jain, AIR 1985 JK 50:
Where a suit for dissolution of partnership is instituted directions were given to the commissioner for taking accounts. It is as such clear that the accounts have to be taken of the partnership business including all its assets, liabilities, goodwill as also profits and losses.
“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 affairs of the firm and to complete transaction 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”.
“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 ratably which is due to him from the firm for advances as distinguished from capital,
(iii) in paying to each partner ratebly 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.”
K.A. Gundu Rao v. Shri Ramnarayan Avadhani, MANU/KA/0030/1994 : AIR 1994 Kant 217:
Section 48(b)(iii) provides for the refund of the actual capital contributed and if the available assets are insufficient to refund the said amount, a rateably reduced amount shall have to be refunded. The term ‘capital’ referred here cannot be equated to the term assets of the firm as all capital contributed by the partner is in the nature of the advance or a loan advanced to the firm by a partner, it has no higher quality at all. Just as the loan advanced by the partner does not get expanded in proportion to the enhanced value of the assets the capital contributed by a partner also does not get augmented in proportion to the assets of the firm.
Commissioner of Income-Tax, Madhya Pradesh v. Dewas Cine Corporation, MANU/SC/0140/1967 : AIR 1968 SC 676:
The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership, it does not amount to transfer of assets.
Challakuru Chandrashekhar Reddy v. Pamuru Vishunu Vinodh Reddy, MANU/AP/0007/1995 : AIR 1995 AP 49:
In cases where there is an agreement to purchase the share of a partner, the value of the share of the outgoing partner or retiring partner shall be ascertained on the basis of the value on the date of his retirement unless it is a case where the valuation is directed by the court in the exercise of its discretion in which event the relevant date will be the date on which the share is actually valued.
“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 and 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.”
“Subject to contract between partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of a 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 goodwill of the firm, nothing in this section shall affect his right to use the firm.”
The principle underlying this section is that as long as the affairs of the dissolved firm are in process of winding up it is still the duty of every partner or his representative as the case may be not to make any private advantage out of transaction which are in substance on the firm’s behalf.
Clement v. Ball, (1818) 3 De G&J 173:
where private profits were earned from a renewal of the lease by the surviving partner, it was held that the representatives of the deceased partner were entitled to share such profits.
Janaki Prasad v. Someshwar Prasad, AIR 1923 Oudh 23:
Where before dissolution of a partnership certain goods had been ordered and price had been paid on behalf of the firm and the goods were received and profits were realised by the sale after dissolution and division of the stock, it was held that the defendant partner who had realised the profits was bound to pay the plaintiff, his co-partner his share of such profits.
“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, regards being had to the terms upon which he became a partner and to the length of time during which he was partner unless—
(a) the dissolution is mainly due to her own misconduct, or
(b) the dissolution is in pursuance of an agreement containing no provisions for the return of the premium or any part of it.”
“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) to a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchases 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 be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.”
“After a firm is dissolved, every partner or her 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:
Provided that where any partner or his representative has brought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.”
Section 53 lays down the right of a partner to restrain any other partner or his representative from carrying on a similar business but where any partner has purchased the goodwill of the firm this restriction shall not apply. It is to be noted that under section 50 provision has been made regarding personal profits earned by a partner after dissolution of the firm.
“Partners may, upon or in anticipation of the dissolution of the firm, make an agreement with 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, and notwithstanding anything contained in section 27 of Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restriction imposed are reasonable.”
In settling the account 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.
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.
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 Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.”
Goodwill is a part of the assets of the firm and section 55(1) enacts that in settling the accounts of a firm after dissolution and 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. The prima facie rule therefore is that the goodwill of the firm being a part of the assets has to be sold just like other assets before the accounts between the partners can be settled and the partnership wound up; Laxmidas Dayabhai Kabrawala v. Nanabhai Chunilal Kabrawala, MANU/SC/0019/1963 : AIR 1964 SC 11.
On the dissolution of a partnership; every partner has a right, in the absence of any agreement to the contrary to have the goodwill of the business sold for the common benefit of all the partners.
Khushi Lal Khemgar Shah v. Khorshed Banu Dadiba Boatwala, MANU/SC/0014/1970 : AIR 1970 SC 1147:
This, however, does not mean that goodwill is to be taken into account only when there is a general dissolution. Even the legal representative of deceased partner will be entitled to share in the goodwill of a partnership which is continued.
It was formerly supposed that on the death of a partner in a firm the goodwill survived, i.e., the surviving partners were entitled to the whole benefit of it without any express agreement to that effect. However, it is now well settled that this is not so. Surviving or continuing partners may, in various ways have the benefit of the goodwill and an intention to let them have it may be shown by conduct as well as words.
Menendoz v. Holt, (1888) 128 US 514:
“Where a partner retires from a firm, assenting to or acquiescing in the retention by the other partners of possession of the old place of business and the future conduct of the business by them under the old name, the goodwill remains with the latter as of course.”
Khushi Lal Khemgar Shah v. Khorshed Banu Dadiba Boatwala, MANU/SC/0014/1970 : AIR 1970 SC 1147:
“An agreement between the partners that the name, the place of business and the reputation of the firm are to be utilised by the surviving partners will not necessarily warrant an inference that it was intended that the heirs of the deceased partner will not be entitled to a share in the goodwill.
After a dissolution, each of the partners in the dissolved firm or his representatives may, in the absence of any agreement to the contrary, restrain any other partner or his representatives from carrying on the same business under the partnership name until the affairs of the firm have been wound up, and the partnership properly disposed of. Section 53.
Burchell v. Wilde, (1900) 1 Ch 551:
After the affairs of a dissolved firm are wound up, every partner is free to use the firm name in the absence of agreement to the contrary provided that he does not expose any late partner to liability.
Arenson v. Casson Beckman Ruttley & Co., (1977) AC 405:
When valuation of the goodwill of the firm is honestly made by the agreed values, it will bind the parties. Such valuation can, however, be set-aside on the ground of fraud or collusion. The dissatisfied partner may have remedy against the agreed values for damages in respect of his negligence.
Where a partnership has been dissolved as the result of the trading with the enemy legislation and where one active partner has made use of the assets, such a partner is a trustee of those assets, and he must pay the other partner for his share of the profits with interest.
Ramnik Vallabhdas Madhvani v. Taraben Pravinlal Madhavani, MANU/SC/0891/2003 : (2004) 1 SCC 497:
The term ‘goodwill’ signifies the value of the business in the hands of successor, so far as increased by the continuity of the undertaking being preserved in the shape of the right to use the old name and otherwise. The goodwill is generally considered to be an asset of the partnership. Whenever a firm is dissolved, the value of the goodwill has to be worked out and divided between the partners. The High Court had assigned sufficient and cogent reasons for awarding a sum towards the plaintiff’s share in goodwill.
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