CONTRACTS PROJECT

DISSOLUTION OF PARTNERSHIP
UNDER INDIAN PARTNERSHIP ACT

Submitted to : Submitted by :

Talat Chaudhary

B.A.LLB(Hons)1st
Prof. Eqbal Hussain
 Dissolution of a firm

Section.39 The dissolution of partnership between all the partners of a firm is called
dissolution of the firm.

A firm is not said to be dissolved by the fact of one or more members ceasing to be partners in it
while other remain, but only when all and every one of the members of the firm cease to carry on
its business in partnership.

Sathappa v. Subramanian1

A dissolution does not necessarily follow because the partnership has ceased to do business for
the partnership may continue for the purpose of realizing the assets.

In the law of partnership stoppage of partnership is one thing; dissolution of partnership is quite
another. Every dissolution of business may be carried on, if only for the purpose of mere
beneficial winding up of affairs of partnership. Where partners send notices through lawyer to
other partners intimating that the partnership was stopped it was held that such notices could not
be construed as notice for dissolution of partnership.

Section.40 A firm may be dissolved with consent of all partners or in accordance with a
contract between the partners.

Contracts between the partners: This is new in terms but quite familiar law. “contracts between
partners” obviously means a contract already made the most likely case is that of a clause in
partnership articles providing for dissolution in certain events.

Couwasjee v. lallbhoy2

A contract between a partner and his co-partners for remuneration to him for the management of
the partnership business by a commission on sale during his lifetime does not, in the absence of
any express agreement to that effect, imply a renunciation of the rights of the co-partners to
dissolve the partnership if they find that it cannot be carried out except at a loss nor does it imply
an obligation to pay the managing partner the partnership is dissolved for that reason.

Section.41 A firm is dissolved-

(a) By the adjudication of all partners or of all the partners but one as insolvent or

1
A.I.R. 1927 P.C. 70,53
2
1 Bom. 468 L.R. 3 I.A. 200
 (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 partnership:

Provided that when 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 respect and undertakings.

Under clause (a) a partner adjudged insolvent ceases from that date to be a partner. If no partner
or only one partner is left it is obvious that there can no longer be a firm.

Commr of I.T. M.P. v. Seth Gobindran Sugar Mills3

The Supreme Court held that where one of the partners dies, the firm automatically comes to an
end and there is no partnership for a third party to be introduced therein. In deference to wishes
of the deceased partner, the surviving party may enter into partnership with the heir of the
deceased partner but it would be new partnership.

Under clause(b) it may be noted that the partner knowledge or lack of knowledge of the illegality
is irrelevant.

Illustartions:

A and B charter a ship to go to foreign port and receive a cargo on their joint venture. War breaks out
between England and the country where the port is situated before ship arrives at the port, and continues
until after the time appointed for loading. The partnership between A and B is dissolved.

Section.42 Subject to contract between 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 completion
thereof;
(c) By the death of partner; and by the adjudication of a partner as an insolvent.

Under clause(a) A firm is constituted for a term is of course not exempt from dissolution by any
of the other possible causes before expiration of the term.

Keshavlal lalubhai patel v. patel bhailal narandas4

The contract may expressly provide that the partnership will determine in certain circumstancs
but even if there is no express term, an implied term as to when partnership will determine
maybe gathered from the contract and the nature of the business.

Under clause(b)

3
A.I.R. (1966) S.C. 24
4
(1968) Guj. 157
Banshilal jalan v. chiranjilal sarangwi5

A partnership to undertake work of white washing of military barrack and for construction of
latrines was held to have ceased to exist after the close of business.

Under clause (c)

Abdul Hak v. Tumulari Vyakuntum6

The fact that partnership is entered into a single adventure and therefore is to last till the
termination of the adventure does no preclude dissolution by death.

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 the date mentioned in the notice as the date from the dissolution
or if no date mentioned as from the date of communication.

Moss v. Elphink

There is an agreement that partnership shall be terminated by mutual agreement.

Banarsi Das v. Kanshi Ram7

The Supreme court was concerned with the case where earlier suit was filed in Lahore by one of
the partners for dissolution and it was dismissed for default, the parties having migrated to India
consequent on the partition of the country. Later on another declaration was sought by one of the
partners that the firm is dissolved on May 13, 1944 when the earlier suit was instituted. It was
held that the analogy of suits for partition of joint Hindu family property with regard to which it
is settled law that if all the parties are majors, the institution of a suit partition will result in the
severance of the joint status of joint status in family was inapplicable under section 43(1)
because the rights of the firm are of a different character from those of members of joint Hindu
family.

Section.44 At the suit of the partner, the court may dissolve a firm on any of the following
grounds, namely-

5
A.I.R. (1968) Pat.96
6
(1927) 52 Mad. L.J. 318
7
A.I.R. (1963) S.C. 1165
(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 a partner;
(c) That a partner other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of business, regard 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 matters relating to the
business that it is not reasonably practicable for other partners to carry on the
business of partnership with him;
(e) That the business of cannot be carried on save at a loss;or
(f) On any ground which renders it is just and equitable that the firm should be
dissolved.

This declaration on the grounds of judicial dissolution answers, with verbal variation and
Indian provisions adapted to Indian procedure. The section confers a right to pray for
dissolution on any of the ground specified therein notwithstanding any term of the
partnership deed. It is rather difficult to fix the point at which acts of a partner tending to
shake the credit of the firm and other partner’s continuance in the firm is injurious to credit
of the firm and other partner’s continuance in the firm is injurious to its credits and customs
is not of itself a ground for dissolution where it cannot be imputed to that partner’s own
willful misconduct.

Section.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 dissolution, until public notice is given to dissolution:

(2) notices under sub-section (1) may be given by any partner.

Illustrations

A and B partners in trade, agree to dissolve the partnership and executes a deed for that
purpose declaring that partnership dissolved as from January 1; but they do not discontinue
the business of the firm or give notice of dissolution. On February 1, A endorses a bill in the
partnership name to C who is not aware of the dissolution. The firm is liable on the bill.

Section.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 debt and liabilities of the firm and to have surplus distributed
among the partners or their representatives according to their rights.

No suit will lie as a general rule by one partner against another by partnership accounts
without praying a dissolution. In the case of a dissolution it closes the dealings between the
partnership and others eventually accounts between partnership firm and other parties. Every
partner’s legal right to have the accounts taken on dissolution is unaffected by any question
however grave about his conduct in partnership affairs.

section.47 After the dissolution of a firm the authority of each partner to bind the firm,
and the other mutual rights and obligations of partners, continue notwithstanding the
dissolution so far as may be necessary to wind up affairs of the firm and to complete
transactions begun but unfinished at the time of dissolution not otherwise;

provided that the firm 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.

Illustrations

A and B are partners A become bankrupt, B gives acceptance of the firm as security for an
existing partnership debt to C, who knows of A’s bankruptcy. C endorses the bill for value to
D, who does not know of the bankruptcy. D is entitled to rank as creditor of the firm for the
amount of the bills.

Section.48 In settling the accounts of a firm after dissolution, the following rules shall,
subject to agreement by 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 following manner and order:-
(i) In paying the debts of the firm to the third parties;
(ii) In paying to each partner rateably what is due to him from the firm for
advances 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 proportions in
which they were entitled to share profits.
 This section provides the mode for the settlement of accounts between the partners. It
provides the sequence in which the various outgoings are to be applied and the residue remaining
is to be divided between the partners. 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.

Jugal Kishore maheshwari v. Hari Narain8

Amounts owned by a partner to the firm can only be settled when the settlement of the accounts
takes place on the dissolution of the partnership and they never get barred by limitations so long
as a suit for dissolution of partnership and rendition of accounts is not barred.

Section.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 or paid to him. The separate property
of any partner shall be applied first in payment of his separate debts, and surplus in the
payment of debts of the firm.

Payne v. Hornby9

A surviving or continuing partner makes fresh acquisitions of property in the course of carrying
on the business after dissolution, the property so acquired is not subject to the claim of other
partners or their executors and they will not in the event of his becoming bankrupt be entitled to
dispute the creditors thereon.

Section.50 Subject to contract between the partners shall apply to transactions by any
surviving partner or by the representatives a deceased partner undertaken after the firm is
dissolved on account of 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 be affect his right to use the firm name.

Thomson’s trustees v. Heaton10

A partner was not at liberty to acquire gain at the expense of his co-partners without their full
knowledge and consent, either by directly making profit out of them or by appropriating himself
benefits which he ought to acquired if at all for the common advantage of the firm.

8
A.I.R. (1971) Raj.111
9
(1858) 25 beav 280, 286
10
(1974) 1 W.L.R. 605
Section.51 where a partner has paid premium on entering into partnership for a fixed
term, and the firm is dissolved before the expiration of that term otherwise than by the
death of the 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) The dissolution is mainly due to his own misconduct,

(b) The dissolution is in pursuance of an agreement containing no provision for return
of the premium or any part of it.

Illustration:

A and B enter into a partnership for five years, on the terms of A paying a premium of 1,050
pound to B, 500 pound immediately and the rest in instalments. In second year of the
partnership term and before the whole of the premium has been paid. A is adjudicated a bankrupt
on the petition of B, B is not entitled to any further payments on account of the premium the
partnership having been defined by his own act and he may retain only so much of the part
already been paid to him as the court thinks just.

Section.52 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, entitled:-

(a) To a lien on, right of retention or surplus or the assets of the firm remaining after
debts of the firm have been paid for any sum paid by him for the purchase of share
in the firm and for any capital contributed by him.
(b) To rank as creditor of the firm in respect of any payment made by him towards the
debts of the firm;
(c) To be indemnified by the partner or the partners guilty of the fraud or
misrepresentation against all the debt of the firm.

Petroleum co. v. mardon

Where a person is induced to enter into a partnership as a result of a negligent misrepresentation

or negligent mis-statement a remedy in damages in respect of tort of negligence would prima-
facie be available

Section.53 after a firm is dissolved every partner or his representative may in absence of a
contract between partners to the contrary, restrain any other partner from carrying on a
similar business in the firm name or from using any of the property of firm to his own
benefit, until the affairs of the firm have been completely wound up.
Section.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 a specified local limits.

Section.55 (1) in settling the accounts of a firm after dissolution, the goodwill shall, subject
to contract between the partners, included in the assets, and it may be sold either
separately or along with other property of the firm.

(2) where the goodwill of the firm is sold after dissolution a partner may carry on a
business competing with that of 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) represents himself as carrying on the business of the firm

(c) solicit the custom of persons who were dealing with the firm before dissolution.

Gordon v. gonda11

Where a partnership has been dissolved as the result of the trading with enemy legislation and
where one active partner has made use of the assets, such a partner is a trustee of those assets and
must pay the other partner share of profits with interest.

11
(1955) 2 A.E.R. 762