GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY

Assignment of Contract- II on the Topic

DISSOLUTION OF A PARTNERSHIP FIRM

- THE INDIAN PARTNERSHIP ACT, 1932

Submitted to: Submitted by:

Ms. Swati Kaushal Siddhant Puri
Assistant Professor 2nd Semester
Faculty of Law BBA LLB (Hons.)
JEMTEC School of Law, Greater Noida
(Affiliated to GGSIPU)

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 TABLE OF CONTENTS

S. No Particulars Page Nos.

1. Table of Cases 3

2. Abstract 4

3. Introduction 5

4. Meaning of Dissolution of a Firm 6

5. Modes of Dissolution 7
(i) Dissolution by agreement
(ii) Compulsory Dissolution
(iii) Dissolution on happening of certain contingencies
(iv) Dissolution by notice of partnership at will
(v) Dissolution by the court

6. Liability for acts of partners done after dissolution 22

7. Right of partners to have business wound up after dissolution 23

8. Continuing authority of partners for purposes of winding up 24

9. Mode of settlement of accounts between partners 24

10. Personal profits earned after dissolution 25

11. Return of premium on premature dissolution 26

12. Rights where partnership contract is rescinded for fraud or 28

misrepresentation

13. Right to restrain from use of firm-name or firm-property 29

14. Agreements in restraint of trade 29

15. Sale of goodwill after dissolution 30

16. Conclusion 32

17. Bibliography 33

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 TABLE OF CASES

1. Harish Kumar vs. Bachan Lal AIR 1991 P H 130, (1991) 99 PLR 188.
2. Gherulal Parakh vs. Mahadeo Das 1959 AIR 781, 1959 SCR Supl. (2) 406.
3. R. vs. Kupfer, (1915) 2 KB 321: (1915) 112 LT 1138.
4. Sayyed Abdul vs. Tumuluri, AIR 1927 Mad 491:(1927) 52 MLJ 318.
5. Saligram Rupal Khanna vs. Knawar Rajnath, (1974) 2 SCC 642: AIR 1974 SC 1094.
6. Ramnarayan vs. Kashinath (1824), AIR 1954 Pat 53: (1953) 1 BLJR 289.
7. Sayyed Abdul vs. Tumuluri, AIR 1927 Mad 491:(1927) 52 MLJ 318.
8. CIT vs. Vinayaka Cinema, AIR 1978 AP 51
9. Kesrimal vs. Dalichand, AIR 1959 Raj 140.
10. Narayan Misra vs. Hashmathunnisa Begum, 2002.
11. Banarsi Das vs. Seth Kashiram.
12. Parsons vs. Hayward, 1862.
13. Jones vs. Lloyd, 1874.
14. Devi Textiles vs. S. Suganthi.
15. Jugal Chandra Bhattacharjee vs. Gunny Hajee Ahmed, 1925 53 Cal 214 at 225, 226 &
235, 91 IC.
16. Rowland vs. Evans, 1824 43 Ch 826.
17. Whitwell vs. Arthur 1865 beva 140. [2].
18. Harrison vs. Tenant[1856] ALL ER 945.
19. Snow vs. Milford(1868) 18 LT 142.
20. Carmichael vs. Evans, (1904) 90 LJ 573; (1904) 1 Ch. 486.
21. Cheesman vs. Price, (1865) 35 Beav 142: 147 RR 74: 55 ER 849.
22. De Bevenger vs. Hammel, 7 Jar Blyth 1829.
23. Baxter vs. West, 1860 1 Dr & Sm 173.
24. Jeening vs. Baddeley, 1856 3 K&J 78.
25. N. Satyanarayana vs. M. Vekanta Bala, 1989 AIR AP 167, 175.
26. Panna Lal vs. Padmavati, 1960.
27. Nainder Singh Randhava vs. Hasrdial Singh Dhillon, AIR 1985 P&H 41; See also
Kalpana Kothari vs. Sudha Yadav, (2002) 1 SCC 203; AIR 2002 SC 89.
28. Hardutt Singh vs. Mukha Singh, AIR 1973 J&K 46.
29. Vishnu Chandra vs. Chandrika Prasaad, 1983.
30. Hurst vs. Bryce, 1998 2 WLR 629.
31. T. Sambaingam vs. Govt of T.N., 2003 2 CLT 398 (Mad.).
32. SAIL vs. Durga Crane, (2003) 2 Cal LJ 122(Cal DB).
33. Whincup V. Hughes Ibid., at p. 10.

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 ABSTRACT

The paper aims to study how and under what circumstances a dissolution can be affected in a
partnership firm and what can be the aftereffects of dissolution of firm on the partners of the said
firm‘ It can be broadly divided in to two parts. The first part of the study describes the meaning
of dissolution of a firm and second part focuses on the various important modes under which
partnership firm can be dissolved.

The Indian law of partnership in India is based on the provisions of the English law of
partnership. Until the English Partnership Act of 1890 was passed, the law of partnership even in
England was largely based on legal decisions and custom. There were very few acts of
Parliament relating directly to partnership. The Indian Partnership Act of 1932 was the result of a
Report of a Special Committee.

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 INTRODUCTION

The Indian law of partnership in India is based on the provisions of the English law of
partnership. Until the English Partnership Act of 1890 was passed, the law of partnership even in
England was largely based on legal decisions and custom. There were very few acts of
parliament relating directly to partnership. The Indian Partnership Act of 1932 (“Partnership
Act”) was the result of a Report of a Special Committee.

Prior to the enactment of the Partnership Act, the law relating to partnership was contained in
Chapter XI (Sections 239 to 266) of the Indian Contract Act, 1872 (Contract Act). These
provisions contained in the Contract Act were not found adequate. As a result, Chapter XI of the
Contract Act was repealed and replaced by the Partnership Act of 1932. The Partnership Act is a
comprehensive framework for contractual relationships amongst partners, and the basis for a
most popular form of organization for small businesses. It is interesting to note that the
Partnership Act has not been subject to any significant amendment since its enactment.

The Indian Partnership Act enacted in the Year 1932 defining the law relating to partnership the
relation between the persons who have agreed to share the profits of a business carried on by all
or any of them acting for all -- makes it obligatory to have a partnership registered with the
Registrar of Firms, failing which the firm is prohibited from enforcing any right in a Court of
Law. This Act defines the relationship of partners to one another and to third parties and lays
down provisions as regards incoming and outgoing partners, dissolution of a firm, etc. Under the
Act partners are bound to carry on the business of the firm to the greatest common advantage, to
be just and faithful to each other and to render true accounts and full information of all things
effecting the firm to any partner or its legal representative. A partner is liable to indemnify the
firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.

A partner is the agent of the firm for the purpose of the business of the firm. The act also
provides for the sale of goodwill of the firm after its dissolution and the rights of the buyer and
seller of the goodwill. The dissolution of partnership between all the partners of a firm is called
the dissolution of the firm. (Section 39). As per Section 4, Partnership is the relation between
persons who have agreed to share profits of business carried on by all or any of them acting for
all. Thus, if some partner is changed/added/ goes out, the ‘relation’ between them changes and
hence ‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the change is termed as
‘reconstitution of firm’. However, complete breakage between relations of all partners is termed
as ‘dissolution of firm’. After such dissolution, the firm no more exists. Thus, ‘Dissolution of
partnership’ is different from ‘dissolution of firm’. ‘Dissolution of partnership’ is only
reconstruction of firm, while ‘dissolution of firm’ means the firm no more exists after
dissolution.

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 MEANING OF DISSOLUTION OF A FIRM

A firm is not said to be dissolved by the fact of one or more members ceasing to be partners in it
while others remain, but only when all and every one of the members of the firm cease to carry
on its business in partnership. The 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 the mercantile usage which recognizes the
firm as a distinct person or quasi corporation Matters pertaining not only to the fact of
dissolution and fixing the date thereof but also matters arising out of the fact of dissolution which
pertain to the winding up of the partnership, settlement of accounts, taking over of the goodwill
and assets of the partnership, restrictions on the outgoing partners carrying on business in the
case of transfer of goodwill to one of them, are all matters dealt with under the subject
‘dissolution of a firm’.

A deed of dissolution must necessarily cover other matters, which arise directly out of
dissolution, such as settlement of accounts, payment of amounts found due on such settlement,
closing down or continuation of business collection of outstanding and payment of liabilities.
Notwithstanding such clauses in a deed of dissolution, it would be liable to payment of stamp
duty under art 47, Schedule I of the Bombay tamps Act 1958 and would not be subject to
separate duty on such matters. 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. Whether a new firm is formed or not is a question of fact.

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 MODES OF DISSOLUTION OF A PARTNERSHIP FIRM

A partnership firm can be dissolved by many modes like by agreement on the happening of
certain contingencies, or judicially. There are basically five modes of dissolution given under
Sections 40 – 44 of the Indian Partnership Act.

 Dissolution by Agreement – Section 40

 Dissolution by notice of partnership at will – Section 43

 Compulsory Dissolution – Section 41

 Dissolution on the happening of certain contingencies – Section 42

 Dissolution by the Court – Section 44

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 DISSOLUTION OF PARTNERSHIP FIRM

Dissolution Dissolution Compulsory Contingent Dissolution

by by Notice Dissolution Dissolution through
Agreement (Section 43) (Section 41) (Section 42) Court
(Section 40)

Insolvency Illegal
of Partners Business

Death of Expiry of Completion Resignation

Partner Firm of by a Partner
W o rk

Insanity of Misconduct Incapacity Breach of Transfer Regular Dispute

a Partner by the of a Partner Agreement of Shares Losses among
Partner Partners

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The Indian Partnership Act, 1932 is an Act enacted by the Parliament of India to regulate
partnership firms in India. It received the assent of the Governor-General on 8 April 1932 and
came into force on 1 October 1932. Before the enactment of this act, partnerships were governed
by the provisions of the Indian Contract Act. The act is administered through the Ministry of
Corporate Affairs. The act is not applicable to Limited Liability Partnerships, since they are
governed by the Limited liability Partnership Act, 2008.

In this paper, I will try to give an in-depth insight to the dissolution of a partnership firms in
India along with its comparison with the England Partnership Act, 1890.

The part VI of the Indian Partnership Act, 1932 from Section 39 to Section 55 which
explains the meaning of partnership and different modes through which the partnership firm can
be dissolved.

Section 39: Dissolution of a firm

The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the
firm’.

The Act recognizes the difference between dissolution of a partnership firm and a mere
retirement of a partner. On dissolution each partner is paid his share of profits, if any, whereas on
the retirement, death or adjudication of one partner, a dissolution does not necessarily follow, for
it may be a term in the partnership agreement that a firm should be continued by other partners.
The Supreme Court in the case C.I.T , W.B vs. A.W Figgis & co. 1 clarified that “ there is no
dissolution of firm by mere incoming or outgoing of partners. A partner can retire …… and a
person can be introduced in partnership by consent of the other partners”. Thus dissolution is
something different from retirement of a partner, because in retirement of a partner, the business
is continued by one or more of the partners. Where immediately after dissolution, the firm is
reconstituted and the business resumed by the partners, even if in the same name and place, that
remains dissolution. 2One out of four partners unilaterally dissolved the firm and instructed the
bank to freeze the account. He was holding minority interest of 29%. The remaining partners
with interest of 71% decided to continue the business of the firm. As per the agreement the bank
can be operated by any of the partners. It was held that 29% holder could not have dissolved the
firm unilaterally nor the bank could freeze the account at his instance. The Gujarat High Court3
also reiterated that in retirement a partner withdraws from the firm without affecting the Jural
relationship subsisting between other partners. There is no severance of the jural relation with the
partnership inter se between all the partners.

1
C.I.T , W.B vs. A.W Figgis & co. , A.I.R 1953
2
Best Enterprises vs. Elanchizian, AIR 2006 Mad 274
3
Keshavlal patel vs. Bhailal Patel, AIR 1968 Guj 157

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Section 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.
(1) By Contract: A firm may be dissolved at any time at the consent of all the partners. This
applies to all the cases whether the firm is for a fixed period or at will. 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.

(2) By Agreement: A firm may be dissolved in accordance with a contract between the
partners. The contract provided for dissolution may be contained in the partnership deed
itself or in a separate agreement.

Both the above kinds of dissolution are provided in the same section, but they are different.
Partners can consent to 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. In the case law, Harish Kumar vs. Bachan Lal4, the parties entered
into a partnership business at Barnala under the name M/s. Mehar Chand Bachan Lal and a
regular partnership deed was executed between them on 30-3-1954. The business was carried
on by them in equal shares in the assets and it was a partnership at will and any party could
retire from it on giving one months notice in writing and on the retirement of any of the
parties, the partnership would be deemed to have dissolved. Both the parties were liable in
respect of the liabilities and entitled to the assets of the partnership in accordance with their
shares. It is the common case of the parties that firm worked up to 18-7-1971 and after that it
did not do any business. According to the plaintiff, the firm was maintaining regular books of
accounts and it was alleged that the defendant was in possession of the same. Since the
partnership was at will and it was not carrying on any business, the plaintiff deemed it proper
not to continue the partnership and served a notice dated 7-4-1974 under registered A. D.
cover on the defendant for dissolution of the firm, informing that he did not want to continue
the said firm and that he be deemed to be not partner w.e.f. 10-7-1974 and firm be treated as
dissolved from that date. He further requested the defendant to settle all the accounts of the
firm and whatever amount is found due to him after rendition of accounts, he is entitled to
interest thereon at the rate of 12% per annum. This suit for rendition of accounts was filed on
23rd August, 1974. In the case, it was held that refusal and neglect on the part of any one
partner to perform the duties undertaken by him would give to any other partner the right to
apply for dissolution or without legal proceedings the partnership could by agreement be
dissolved.

4
Harish Kumar vs. Bachan Lal AIR 1991 P H 130, (1991) 99 PLR 188

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Section 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.

Provided that, where more than one separate adventure or under-taking 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: The two events mentioned in the section, 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 act can prevent the operation of Section
41. The 2 clauses mentioned in the Section are as follows:-

(a) Insolvency: The sub-Section is based upon the obvious principle that that there must be
at least 2 persons to constitute a firm. As already seen, on adjudication as insolvent
partner ceases to be a partner as from the date on which he is adjudicated an insolvent5.
Under Section 42(d), in the absence of a contract to the contrary the adjudication of a
single partner operates as a dissolution of a firm. The case contemplated, however by this
Section is where the whole firm adjudged insolvent, or all the partner but one are
adjudged insolvent. It is clear that under circumstances, the firm is dissolved, there being
no question of a contract to the contrary.

(b) Prohibition of Business: where a partnership carrying a business in British/Indian

Territory is dissolved by 1 partner becoming an alien enemy and the Indian profits made
after the dissolution by the use of his capital, payment being of course suspended during
the war, an agreement may be void but not illegal. An agreement by way of Wager is
void but not illegal under Section 30 of the Contract Act. The Supreme Court6 has held
that a partnership formed for entering into wagering would not be illegal; though it would
be void. A firm, would not be illegal and its speculative business being void would not
5
Section 34
6
Gherulal Parakh vs. Mahadeo Das 1959 AIR 781, 1959 SCR Supl. (2) 406

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 be enforceable in the court of law. Where the business of a firm is illegal from the very
beginning, the agreement of partnership is itself unlawful under Section 23 of the
Contract Act.

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. If in such a case, if one activity remains
lawful, the partnership escapes compulsory dissolution. In the case R. vs. Kupfer 7
partnership was declared unlawful simply because of a war that broke into England and
Germany. It survives for the business which remains lawful, though it’s other business
operation being now unlawful, would have to be abandoned.

Section 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.

A firm is dissolved on the happening of any of the following contingences, provided above, that
there is no agreement to the contrary:

(a) If the firm is constituted for a fixed period, by the expiry of that firm: Where a
partnership has entered into for a fixed term, the partnership is at the end of the term
dissolved by the expiry of that term, without any further act or notice, even when
there is a partnership for a fixed period, the death of a partner taking place during the
continuance of the partnership period dissolves the partnership earlier8.

(1) Expiry of a 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 Supreme Court held on the facts on the case
before it that, in the absence of an agreement to the contrary there was no question
of the survival of the firm after the expiry of the term of its term and the fact that
the partners, subsequent to the expiry of the term, consented to refer the disputes
to arbitration did not amount to an agreement to the contrary.9

7
R. vs. Kupfer, (1915) 2 KB 321: (1915) 112 LT 1138
8
Sayyed Abdul vs. Tumuluri, AIR 1927 Mad 491:(1927) 52 MLJ 318
9
Saligram Rupal Khanna vs. Knawar Rajnath, (1974) 2 SCC 642: AIR 1974 SC 1094

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 (2) Completion of Business: A partnership is dissolved by operation of law when the
business for which it was formed has been completed. The Section says that when
a firm is constituted to carry out one or more adventures or undertakings, it is
dissolved by the completion thereof. Where, in a case before the Patna High
Court, Ramnarayan vs. Kashinath, the firm was working a salt license and
control on salt being lifted, the firm became inoperative, the question arose
whether the firm had come into being only for working the licenses or to carry on
salt business whether, with or without control or license, Ramswamy, the decision
was, that the intention of the partners was that the partnership should continue so
long as the agency of salt continued or till separate agencies were obtained.

(b) If the firm is constituted to carry out one or more adventures or undertakings,
when they are completed: This sub-section refers to the dissolution of particular
partnerships10. Where a partnership was constituted only for the purpose of exploiting
a salt license, the partnership was dissolved on the salt control being lifted and on the
termination of the license 11 . So where a partnership was constituted to carry out
contract with specified persons during particular seasons and as the said contracts
were closed, the partnership was dissolved. However, the death of a partner dissolves
earlier even a partnership for a particular adventure12. Completion of an adventure or
undertaking does not mean supply of or part or even substantial part of the agreed
goods. It is completed upon the realization of amount in respect of the said supply.

(c) By the death of a partner13:The effect of clause (c) of Section 42 is that in the
absence of a contract to the contrary, a partnership is dissolved by the death of a
partner. Death of a partner means dissolution of partnership. In a case before the
Rajasthan High Court14 it was contended against a firm that it should not be permitted
to sue as one of the partners died and the firm became dissolved; if the business was
continued, it should be registered anew and that not having been done it was not
competent to sue. The court allowed the action. It is often desirable, and in practice it
is not uncommon to provide by agreement that the death of a partner shall not
dissolve the contract between others.
As to the effect of Death, I.N. Modi J15. said: “it is true that the Section 42(c) of the
Indian Partnership Act provides that a firm is dissolved by the death of a partner. It
must be however be remembered that this would be subject to contract between the
10
Section 8 (Definition of Particular Partnership)
11
Ramnarayan vs. Kashinath (1824), AIR 1954 Pat 53: (1953) 1 BLJR 289
12
Sayyed Abdul vs. Tumuluri, AIR 1927 Mad 491:(1927) 52 MLJ 318
13
If the firm remains in business after the death, it will be a new firm at any rate of the
tax purposes. CIT vs. Vinayaka Cinema, AIR 1978 AP 51
14
Kesrimal vs. Dalichand, AIR 1959 Raj 140.
15
All India Reporter

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 parties as the opening words of the Section show. Again, it is not necessary that a
contract between the partners in this connection need be express, but may be implied
and it may be possible to spell out such a contract from the subsequent conduct from
the of the surviving partners and the heirs of the deceased. Whether a firm, which
should have been dissolved by the death of one partner still continued to exist without
being dissolved would depend on 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 automatic dissolution where one of the
two partners die. There was a clause in the partnership deed that the firm would be
continued for a certain number of years even after the death of one of the partners, the
court said that the clasue did not save the firm form dissolution because the legal
heirs of the deceased partner has expressed their unwillingness to the continuation of
the firm. The above facts were seen in the case of Jai Narayan Misra vs.
Hashmathunnisa Begum, 200216.

(d) By the adjudication of a partner as an insolvent.: A partnership is dissolved at the

adjudication of a partner as an insolvent. Where a partner in a firm is adjudicated an
insolvent he ceases to be a partner on the date on which the order of adjudication is
made, whether or not the firm is hereby dissolved. Where under a contract between
the partners the firm is not dissolved by the adjudication of a partner as an insolvent,
the estate of a partner so adjudicated is not liable for any act of the firm and the firm
is not liable for any act of the insolvent, done after the date on which the order of
adjudication is made.

This being subject to an agreement to contrary, the partners can agree that the
insolvency of a partner will not have any dissolving effect. Such an agreement will be
subject to the provision of the act relating to compulsory dissolution namely that on
the insolvency of all the partners or all but one, the firm would stand compulsorily
dissolved.

Section 43: Dissolution by notice of partnership at will.

(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.

16
2002 (3) ALD 406, 2002 (3) ALT 689

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Dissolution of partnership at will.

Notice: - But in order to dissolve the firm the following conditions must be fulfilled:

A. Notice must be in writing;

B. Notice must express the intention of the partner to dissolve the firm; and
C. Written notice must be given to all the other partners.

Filing a suit in a court is not deemed to be a notice under Section 43(1). The Supreme Court in
Banarsi Das vs. Seth Kashiram held this. In this case the earlier suit filed at Lahore by one of
the partners for dissolution of partnership and accounts was dismissed for default, the parties
having migrated to India, consequent on the partition of the country. Later on, in another suit a
declaration was sought by one of other partners that the firm was dissolved on 13 May 1944
when the earlier suit was instituted. It was held that 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 suit will result in the severance of the joint status of the family was inapplicable
under Section 43(1) because the rights of the partners of a firm to the property of the firm are of
a different character from those of members of a joint Hindu family. No particular formality is
required but the notice must be an unambiguous intimation of a final intention to dissolve a
partnership 17 . The notice must be explicit, precise and final. A mere proposal to dissolve a
partnership depending upon the result of an enquiry to be made and information to be gathered
would not amount o an unconditional expression of an intention to dissolve under this section. A
resolution passed at the meeting of the partners would be a result of the deliberations; this may
come under Section 40 but not under this Section as it is not a notice in writing by a partner to
all other partners as required by this section. The service of writ and plaint in a suit for
dissolution upon all defendants maybe a sufficient notice of an intention to dissolve. The notice
should be served on all the other partners. The notice once given cannot be withdrawn unless all
the other partners consent18. The fact that one of the partner receiving the notice is of unsound
mind does not affect the validity of the notice. In a partnership at will it is open to a partner even
if there is no dispute between them to dissolve the firm. The Supreme Court observed that under
Section 43(2), notice must contain the date from which the firm will be dissolved. The question
of writing the date of dissolution in a plaint does not arise. Thus plaint cannot be deemed to be as
a notice under Section 43(2). In Devi Textiles vs. S. Suganthi19there was a partnership at will
and both the partners (plaintiff and defendant) had 50% shares in the firm and both agreed to
have the firm dissolved and thereafter partners did not have good relationship, but the defendant
continued the business of the firm as if nothing happened and it is still in existence.
Decision: In such circumstances, it was held that the appointment of a receiver would be proper
for rendition of accounts and for completing winding up process.
17
Parsons vs. Hayward, 1862
18
Jones vs. Lloyd, 1874
19
AIR 2000 Mad. 62, at p. 65.

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Section 44: 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, 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 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.

This declaration of the grounds for judicial dissolution corresponds, with verbal variation and
additional provision adapted to Indian procedure, to Section 35 of the English Act, which was
itself a somewhat enlarged version of Section 254 of the Contract Act. The Section confers a
right to pray for dissolution on any of the grounds specified therein notwithstanding any term of
the partnership deed.

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At the suit of a partner, the Court may dissolve the firm on the above mentioned grounds.

(a) Insanity- Insanity does not dissolve the partnership ipso facto confirmed lunacy provides a
ground for dissolution by the court if other partners apply to court for dissolution20. It is now
clear that in the case of insanity, a next friend on behalf of the lunatic may sue for
dissolution. The judge exercising jurisdiction in lunacy is also empowered to dissolve a
partnership in the case of a partner becoming a lunatic(as per Section 52 of Indian Lunacy
Act, 1912). It is not necessary that the partner of unsound mind should be found a lunatic by
inquisition. The same was found in the case of Jones vs. Lloyd, where dissolution was
necessary to protect the interest of insane and the other partners21.

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. Lunacy of a partner does not itself dissolve the
partnership but it will be a ground for dissolution at the instance of other partners. It is not
necessary that the lunacy should be permanent. In the case of a dormant partner the court
may not order dissolution even on the ground of permanent insanity, except in special
circumstances.

(b) Permanent Incapacity- whether any partner has become permanently incapable of
performing his duties as a partner; any partner can apply for dissolution. The incapacity may
be due to illness, mental or physical in nature but it must be permanent. If the incapacity is
temporary or is such that does not affect the duties of a partner, the firm cannot be dissolved
on this ground. For example there is fracture of the bone of leg or hand and there is every
likely hood of it being rectified or where a partner suffers from paralysis or he is improving
speedily by treatment, the firm cannot be dissolved on this ground. If a partner has become
permanent in capable of discharging his duties and obligations then court may order for the
dissolution of firm on the application of any of the partner. where a partner is imprisoned for
a long period of time the court may dissolve the partnership was held in case of Whitwell vs.
Arthur. In the case law, Whitwell vs. Arthur22, a partner suffered from an attack of paralysis
and that would have been a good ground for dissolution for the fact that the medical evidence
showed that the attack was only temporary and he was already improving.

(c) Partner guilty of conduct likely to affect prejudicially the carrying on of the business. -
At the suit of a partner, the court may dissolve a firm on the ground that a partner, other than
the partner suing, is guilty of conduct, which is likely to affect prejudicially the carrying on

20
Jugal Chandra Bhattacharjee vs. Gunny Hajee Ahmed, 1925 53 Cal 214 at 225, 226 &
235, 91 IC
21
Rowland vs. Evans, 1824 43 Ch 826
22
Whitwell vs. Arthur 1865 beva 140. [2]

Page 17 of 33
of the business regard being had to the nature of the business 23. 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. 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.

TWO ASPECTS OF Section 44(C):

 The first thing to be noted in Section 44(c) is that if the partner filing the suit himself is
guilty of conduct which is likely to affect prejudicially the carrying on of the business,
the court will not order the dissolution of the firm.

As remarked in Harrison vs. Tenant24, “No party is entitled to act improperly and then
to say that the conduct f the partners and their feelings towards each other are such that
the partnership can no longer be continued and certainly this court would not allow any
person so as to act and thus to take advantage of his own wrong.

 The second important thing to be noted in Section 44 (c) is that in order to dissolve the
firm on this ground, it is necessary that the partner must be guilty of a conduct which
keeping in view the nature of the business is likely to affect prejudicially the carrying on
of the business. If the partner is guilty of wrongful act willfully, the mere fact that his
continuance in the partnership firm will be detrimental for the firm will not be sufficient
to dissolve the firm.

It may also be noted that much depends on the nature of the business. In Snow vs.
Milford25, a partnership firm carried on the business of the bankers. A partner of the firm
named Milford was guilty of living in adultery with several women and as a result of this
his wife had deserted him. Other partners filed as suit for dissolution of the firm on the
ground of the said bad conduct of Milford.

Reasoning & Decision: The court dismissed the suit holding that it cannot be said that a
customer’s money is not safe because one of the partners of the firm is guilty of adultery.
Though the court condemns the act of adultery of a person but this cannot be a ground for
the dissolution or expelling the partner. Undoubtedly in some cases the moral conduct of
a person may prejudicially affect the business of a firm. For example, if a doctor enters
into a partnership with another doctor to run the clinic and it is found that he is immoral

23
Section 44(c), The Indian Partnership Act, 1932.
24
[1856] ALL ER 945.
25
(1868) 18 LT 142.

Page 18 of 33
 towards some patients, partnership firm may be dissolved on this ground. But this is not
so in the case of business of bankers because in tit he moral conduct of a partner is not
likely to affect prejudicially the business of the firm.

But if the moral conduct of a partner is likely to affect prejudicially the business of the
firm even though the crime is less serious, keeping in view the business of the firm the
court may dissolve the firm. For example, if a partner in a firm of drapers is found
without ticket and is convicted, the firm may be dissolved.26 Similarly, if the conduct of a
partner is such that partners may lose faith in each other the firm may be dissolved.
Similarly, if the conduct of a partner is such that partners may lose faith in each other the
firm may be dissolved.

(d) Persistent Breach of Agreement – Under Section 44(d) it is necessary that there is willful
or persistent breach of agreements relating to the business of the firm or the conduct of the
partner is such that it is not reasonably practicable for other partners to carry on business with
him. If the breach of agreement is not willful, a single breach shall not be sufficient to
dissolve a firm. Constant or continuous behavior of enmity between the partners making the
cooperation between them impossible, persistent refusal by one partner to perform his duties,
one partner habitually accusing the other partner of gross misconduct in the business, and to
maintain wrong accounts and not to enter the receipts, are the 4examplaees of some of the
grounds on which the firm may be dissolved under this section. In the end it may be noted
that the firm may be dissolved by the court on the suit of a partner other than the one who is
guilty. When a partner, other than suing persistently commits breach of agreement relating to
the management of the firm or otherwise so conducts himself in matters relating to 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. Any conduct that is destructive of
mutual confidence gives rise to the ground of dissolution of the firm. “ Keeping erroneous
accounts and not entering receipts 27 , refusal to meet on matters of business 28 , continued
quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation
and friendly co-operation29, have been held sufficient to justify a dissolution30.” A father’s
treatment of his partner’s son (opening his private letters, and like some parents, failing to
realize that his son is now a grown up.) has been held to justify dissolution31.”

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

26
See Carmichael vs. Evans, (1904) 90 LJ 573; (1904) 1 Ch. 486.
27
Cheesman vs. Price, (1865) 35 Beav 142: 147 RR 74: 55 ER 849
28
De Bevenger vs. Hammel, 7 Jar Blyth 1829
29
Baxter vs. West, 1860 1 Dr & Sm 173
30
Lindley on the law of Partnership (12 th edition) 593
31
Charles D. Drake, Law of Partnership (1912)

Page 19 of 33
 management of the affairs of the firm and it becomes impossible to continue the business
with such partner.

(e) Transfer of Interest – When a partner has transferred the whole of his interest in the firm, to
a third party or has allowed his interest to be charged, or has allowed it to be sold in, the
recovery of arrears of land revenue, or any of the dues recoverable for land revenue, the court
may order dissolution. When any of the partner other than the suing partner transfers whole
of its share to the third party for permanently. If a partner transfers whole of his interest to a
third party he will have no interest left in the firm and therefore, any other partner can get the
firm dissolved by filing a suit in court on this ground. Such a third party or transferee does
not thereby become a partner in the firm. It does not entitle the transferee, during the
continuance of the firm to interfere in the conduct of the business, or to require account or to
inspect the books of the firm, but entitles the transferee only to receive share of profits of the
transferring partner and the transferee shall accept the account of profits agreed to by the
partners32. If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled, as against the remaining partners, to receive the share of the assets of
the fir to which the transferring partner is entitled, and for the purpose of ascertaining the
share, to an account as from the date of the dissolution.

(f) Perpetual Losses – When the business of the firm cannot be carried on save at a loss, the
court may dissolve it. The whole object of the Partnership is to make profits and if that object
cannot be attained, it is needless for the firm to continue. Thus where 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
dissolution33. According to the definition of the partnership as given in Section 4, the chief
objective of partnership is to acquire profit. If the circumstances are such that this chief
objective cannot be attained and the business of the firm cannot be carried on the court on
this ground may dissolve save at loss, firm. Every partnership firm is established to attain a
particular objective and if the circumstances are such that it is not possible to attain that
objective, the remedy in such cases is to dissolve the firm. For example, in a case partnership
firm was established for the exploitation of mica from mines, one of the partners filed a suit
for the dissolution of the firm on the ground that the firm is suffering loss continuously.
Other partners opposed the suit on the ground that the partnership was for a fixed period and
that the plaintiff had no valid reasons to resolve the firm before the expiry of the period. The
court held that Section 44(f) will apply in this case and that the plaintiff is entitled to sue for
dissolution and accounts. 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.

32
Section 29(1), The Indian Partnership Act, 1932.
33
Jeening vs. Baddeley, 1856 3 K&J 78

Page 20 of 33
(g) Just & Equitable – Dissolution may be ordered when on any other ground the court thinks it
just & equitable that the firm should be dissolved. The expression, “just and equitable” gives
the court a very wide discretionary power, which is not fettered by any rules, to order
dissolution whenever in the circumstances it seems desirable. 34 Where the terms of a
partnership deed provided to a partner, the facility from withdrawing from a firm by
transferring his trust 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. The court equally
concerns itself with the interests of the other partners. Where the managing partner supplied
to the firm from his personal business certain material for which he overcharged, this would
held to be a breach of faith entitling other partners to demand dissolution. It is not necessary
that a notice as per Section 43 should be given. The court has to take into account all the
facts and circumstances and moulds the relief according to the exigencies of the case. Where
the dissolution was prayed for, the court provided relief of retirement.35 Section 44(g) gives
very wide powers to the court.

Whenever a case is brought to the case 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
decision or award of the arbitration 36 . Under Section 44(f), 6the court has to decide
according to its discretion but this discretion cannot be restricted by rigid or inflexible rules.
The court has to use its discretion on the basis of facts and circumstances of the case. For
example, in one case 4 out of 9 partners wanted dissolution of the firm and their shares in the
firm was 7/9. There was no cooperation and mutual faith between the partners. There were
many and long-persisting disputes among them. The court held that it would be just and
equitable to dissolve the firm.

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 vs. Mukhe Singh.

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 nay agreement to the contrary37. Where the no other mode of dissolution is available,
Section 44 being the lender of last resort, its operation cannot be allowed to be nullified. The
Allahabad High Court has, however, held differently. In a case before it the partnership deed
provided that a partner could withdraw it by selling his interests to his co-partners or, in the

34
N. Satyanarayana vs. M. Vekanta Bala, 1989 AIR AP 167, 175
35
Panna Lal vs. Padmavati, 1960.
36
Nainder Singh Randhava vs. Hasrdial Singh Dhillon, AIR 1985 P&H 41; See also
Kalpana Kothari vs. Sudha Yadav, (2002) 1 SCC 203; AIR 2002 SC 89.
37
Hardutt Singh vs. Mukha Singh, AIR 1973 J&K 46

Page 21 of 33
 event of their failure to buy it, by selling it to the others and dissolving the firm. The other
partner failed to buy and, therefore, dissolution was prayed for, but was not granted, the court
saying that the provision had taken away a partner’s right to cause dissolution. This view is,
however, now no longer tenable. Following a Privy Council Decision38, the 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 partner’s to take away that right by means of an agreement between
them.

Stay of Arbitration

Although the arbitration clause in a partnership agreement may be sufficiently wide to

include the question whether the partnership should be dissolved, the court in its discretion
may not stay a suit for dissolution, if dissolution is sought under Section 44(g). Whenever
dissolution of partnership is sought under Section 44(g), then it is for the court to decide,
whether it would be just and equitable to dissolve the partnership or not and such a matter
cannot be left to be gone into and decided by the arbitrator in pursuance of the arbitration
clause contained in the partnership deed. Last but not least, it may be noted that Section 44 is
not subject to contract between partners. It confers right on the partners to file suit for the
dissolution of the firm on the ground mentioned in the Section.

Section 45: Liability of acts of a partner done after Dissolution.

(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.

Public Notice for Dissolution:

The first step in the process of dissolution is to give a public notice of dissolution. 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 3rd parties for any act done by them which would have been an act

38
Vishnu Chandra vs. Chandrika Prasaad, 1983

Page 22 of 33
of the firm if done before dissolution. As long as a public notice is not given, each and every
partner is liable. The right of the 3rd parties to proceed against the estate of a deceased partner for
liabilities incurred up to the date of death would be even if the firm has been dissolved.

Liability for Prior Acts

Where two partners committed breach of the partnership agreement by giving notice of
termination and the third accepted it, the court said that although they have committed a
repudiatory breach, which he had accepted, he remained liable for certain debts which were
incurred before the partnership and were ongoing, such as the rent on the firm’s former premises.
A partner who accepts a repeudiatory breach by another partner remains liable for debts incurred
prior to the dissolution of the partnership39. The partners of a dissolved firm could not escape
liability for the dishonor of a cheque issued by the firm because no public notice for dissolution
had been published. They were also not in a position to offer any proof of the fact of dissolution.

Section 46: Right of partners to have business wound up after 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.

Right to demand winding up

The rights and liabilities of partners on dissolution cannot overreach the provisions of the Act.
The partners are bound by the provisions of the Act. When one of the two partners did not want
to continue the business and want it to be closed down, the other partner can seek for the renewal
of the firm. In the case law T. Sambaingam vs. Govt of T.N., 200340 a partner requested for the
renewal of license of a cinema hall by saying that he was in the management of the property of
the firm.

The mere execution of a deed of dissolution does not put an end to matters of rights and
liabilities of partners that happens only when the firm has been finally wound and it’s properties
are distributed.

39
Hurst vs. Bryce, 1998 2 WLR 629
40
T. Sambaingam vs. Govt of T.N., 2003 2 CLT 398 (Mad.)

Page 23 of 33
Section 47: Continuing authority of partners for purposes of winding up.

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.

Authority continues for 2 purposes: -

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. The authority continues-

(a) So far as it is necessary to wind up the affairs of the firm

(b) To complete the transactions begun but not finished

At the time of dissolution Section 47 concludes the remark that the authority continues for no
other purpose. In the case, Bourne vs. Bourne41, 1906, a partnership having been dissolved by
the death of a partner, the surviving partner deposited the firm’s title deeds with a bank to secure
an overdraft. This was held to be binding on the representative of the deceased partner. “Prima
Facie, the surviving partner has not only the right but the duty to realize the partnership property,
and for the purpose for such realization to carry on the business if it is necessary so to do for a
reasonable realization of the property”42

41
(1906) 2 Chap 427 : 95 LT 131 (CA)
42
SAIL vs. Durga Crane, (2003) 2 Cal LJ 122(Cal DB)

Page 24 of 33
Section 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 ratably what is due to him from the firm for
advances as distinguished from capital;
(iii) In paying to each partner ratably 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.

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 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 first name.

Profits by partner after dissolution and before winding up- Where a partner, after dissolution and
before the affairs of the partnership are wound up, derives any profit for himself from any
transaction of the firm, or from the use of the property or business connection of the firm or the
firm name, he shall account for that 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.

For example, A and B carry on business in partnership. The firm holds leasehold for the purposes
of the business. A dies. Before the affairs of the firm are completely wound up, the lease expires
and B renews it. The renewed lease is partnership property.

Page 25 of 33
Dissolution of firm does not put an end to rights accrued during existence of partnership.- Mere
execution of deed of dissolution did not discharge the parties thereto from their rights and
liabilities. The rights and liabilities of the partners in respect of the partnership property would be
discharged only when the firm is finally wound up and the properties of the firm are distributed.
Sections 50 and 53 of the Act indicate that it may also restrain the use of the firm’s name and
firm’s property in terms of Section 53 of the Partnership Act.

Provisions- Where on dissolution on 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.

Section 51. Return of Premium on Premature Dissolution

Where a partner has paid a 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 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) The dissolution is mainly due to his own misconduct.

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

When entitled to return of premium- In case of earlier dissolution the partner paying the
premium is entitled to a return of a proportionate part of the premium, except when the
partnership is dissolved-

(1) by death of one of the partners;

(2) owing to the misconduct of the partner paying the premium;

(3) In pursuance of an agreement, this does not provide for the return of the premium or any
part of it.

Where, therefore, the partnership is dissolved-

(1) without the fault of either party

(2) owing to the fault of both

Page 26 of 33
 (3) owing to the fault of the partner receiving the premium

(4) owing to the insolvency of the partner receiving the premium, where the partner paying
the premium was not aware of the other’s embarrassed circumstances at the time of
entering into partnership

The partner paying the premium is entitled to the proportionate part of the premium.

Return of reasonable premium- In absence of special reasons, the amount of premium to be

returned should bear the same proportion to the whole premium as the unexpired term bears to
the whole term agreed upon. But where part of the consideration of the payment of premium is
not referable to the whole of the term it may be difficult to apply the said principle. The
legislation has used the expression “as may be reasonable.” The said expression is controlled by
the words which follow it. Under the said expression it may not be possible to take into
consideration other advantages to the partner paying the premium, such as, obtaining a footing in
a large town, making a large acquaintance with the customers or a misrepresentation as to the
income of the original owner or the person was induced to enter partnership by reason of fraud.
Interest whether recoverable- In calculating what proportion of the premium should be returned,
interest on the premium paid is not to be accounted for, as under the contract it belonged to the
person who received it.

For example, A and B become partners for ten years. A paying B a premium of $1000. A
quarrel occurs at the end of the eight years, both parties being in the wrong, and a dissolution is
decreed. A is entitled to a return of $200 of the premium from B.

Sub-Section (b): Dissolution by mutual agreement – If by mutual agreement the partnership is

dissolved before the expiry of the term fixed, and nothing is provided at the time of the
dissolution for the return of the premium, the partner, who paid the premium, cannot afterwards
claim to have any part of it returned.

No return of premium in case of death- The party paying the premium is not entitled to a return
of any part of the premium on the death of his partner before the expiry of the term fixed, as it is
an implied term of the contract that the partnership should last for the fixed period, provided both
be alive. In Whincup V. Hughes43, explained the principle as follows:

“The case does not fall within the rule as to a total failure of consideration, nor within the rule as
to a mutual rescission of contract, but within the rule that where a special sum is paid for a
special consideration, and there is a partial failure, a party cannot recover even part.”

43
Ibid., at p. 10

Page 27 of 33
Insolvency of partner- Where a partner, who has paid a premium had at the time of the contract
of partnership notice of the embarrassed circumstances of his partner, the partner paying the
premium is not entitled to the return of any part of it on the insolvency of the partner receiving
the premium. Where, however, there is no similar notice of the embarrassed circumstances of the
partner, a portion of the premium is returnable on the insolvency of the partner.
Partnership at will- The Section applies only to partnerships for a fixed term, and not to a
partnership at will. In the case of a partnership at will, the premium is not returnable on
dissolution, in the absence of fraud, or an express stipulation on the point.

Section 52. Rights where partnership contract is rescinded for fraud or misrepresentation

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 right, entitled-

(a) To lien on, or a 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.

(c) To be indemnified by the partner or partners guilty of the fraud or

misrepresentation against all debts of the firm.

Without prejudice to any other right – The conferred by (a), (b) and (c) are in addition to the
other rights of such a partner. The other rights would be refund of capital, premium, contribution,
damages, interest on all payments made and costs in the suit for rescission. Upon rescission, he
cannot retain the profits received as that would amount to approbation.

Rights of a partner on rescission- This Section lays down the rights of a partner on his rescinding
the contact, but these rights he is entitled to only against the partner. But as against third parties,
it is no defense that he was fraudulently induced to become a partner. Such a contract is
voidable, and until the contract is rescinding, all the partners are liable to creditors.

For example, A fraudulently induces B to enter into partnership with him— B pays A, a
premium of Rs. 5000. within a few months the firm incurs liabilities to the extent of Rs.
10,000 and on discovering the fraud B files a suit for the rescission of the contract creating
partnership, and the contract is rescinded. In the meanwhile creditors of the firm levy attachment

Page 28 of 33
on B, who pays Rs. 3000 to the creditors. B on rescinding the contract is entitled to a decree for
Rs. 5000 and Rs. 3000 against A, and is entitled to a lien for the said amounts on the assets of the
firm. He is also entitled to a declaration that A is bound to indemnify B against all outstanding
debts, claims, demands, and liabilities which B has become or may become liable to pay.

Section 53. Right to restrain from use of firm name or firm property

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 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 representatives has bought the goodwill of the firm,
nothing in this Section shall affect his right to use the first name.

Use of the First Name— Under Section 55(1) goodwill is a saleable asset. Provisions of the
Section 55(2) are intended not to affect the goodwill which is sold off. Under Section 50 after
dissolution, a partner cannot derive profit by use of partnership property or its goodwill. This
Section supplies an effective means to check any abuse of the provisions of Section 50 and to
prevent any prejudice to the value of the goodwill which is saleable under Section 55.

A surviving partner, while he has the authority to act for the best interest of the business, is
bound not to act in such a manner as to destroy any part of its value. It quite settled in our
common law that the goodwill is an asset of the firm and does not, as once supposed, “survive”
to the continuing partner alone. Certainly, one partner may be restrained from using the firm
name or the firm’s property to do business for his own exclusive profit pending the liquidation of
the partnership affairs. After dissolution and liquidation of the firm there is no exclusive right to
the use of the old name unless it has been so agreed; but it must not be used so as to expose a
former partner to liability on the grounds of “holding out.” Whether there is any substantial risk
of that kind is a question of fact in each case.

However, this Section will not prevent a surviving partner from carrying on business subject to
the provisions of Section 55(2).

Section 54: Agreements in restrain of Trade

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
Contract Act such agreements shall be valid if the restrictions imposed are reasonable.

Page 29 of 33
Reasonable Restrictions— Whether the restrictions are reasonable will depend on the facts of
each case. The restrictions should afford a fair protection to the interest of the party concerned
and not be so large as to interfere with the interest of the public.
Restriction may be with respect to time and place. The degree of protection may vary in different
cases depending upon the character and nature of the business concerned.

Section 55: Sale of Goodwill after Dissolution

(1) Sales of Goodwill after Dissolution

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

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

(3) Agreements in Restrain of Trade

Any partner may, upon the sale of goodwill of a firm, make an agreement with the buyer that
such partner will not carry on any business similar to that of the arm within a specified period or
within local limits, and, notwithstanding anything contained in Section 27 of the Contract Act
such agreement shall be valid if the restrictions imposed are reasonable.

Goodwill— Under Section 14 “Goodwill” is an asset of the firm. It may be sold separately or
along the other property of the firm.

Valuation of Goodwill— In valuing the goodwill the court should set such a value upon it as it
might consider to have been attached to the business at the date of dissolution, and the value of
the goodwill ought to be appraised on the footing that, if it were sold, the old partners would be

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at liberty to carry on a rival business, but would not have the right to solicit any person who was
the customer of the old firm, or the right to carry on business under the firm name.

Where Goodwill not Sold— Upon the dissolution of a partnership , without any sale or
assignment of the goodwill, and without any provisions as to the use of the firm name, each of
the partners is entitled to carry on business under that name, provided that he does not by so
doing expose his former partners to any risk of liability. Whether there will be any such risk is a
matter to be determined having regard to the circumstances of each case.

For example, J.W. Burchell, C.T.D. Burchell, and W.G. Wilde carried on business as
solicitors under the style of “Burchell & Co.” The partnership was dissolved by consent, there
being no sale of the goodwill and no provision as to the use of the firm name. Thereafter,
J.W.Burchell and C.T.D. Burchell carried on business as solicitors under the style of “Burchell &
Co.” Wilde and his son carried on business under the style of “Burchell & Co.” It was held that
business being one of the solicitors , there was no substantial risk of the Burchells being held
liable, and therefore Wilde and his son were entitled to carry on business under the style of
“Burchell & Co.”

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 CONCLUSION

We can conclude that the firm is dissolved when all the partners stop carrying on the partnership
business. If some partners dissociate from the firm and the remaining partners continue the business
of the firm, the firm is not dissolved. The dissolution of a firm is distinct from the retirement of a
partner because in latter situation others or remaining partners continue the business of the firm and
the firm is not dissolved. Thus dissolution of partnership between all the partners of a firm is called
dissolution of the firm.

The dissolution of the partnership brings about a change in the relations between partners but
partnership between them does not completely end. The partnership continues for the purpose of
realization of assets or properties of the firm. Further, 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 transactions begun but unfinished at the time of the dissolution, but not otherwise.

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 BIBLIOGRAPHY

PRIMARY SOURCES

Books

 Introduction of Law of Partnership- Avtar Singh, Eastern Book Company (10th Edition,
2011)

 The Sale of Goods Act & The Indian Partnership Act, Sir Dinshah Fardunji Mulla (10th
Edition 2012)

Internet Articles

 http://admis.hp.nic.in/himpol/Citizen/LawLib/C142.htm#s39
 http://www.slideshare.net/AdityaKumar33/presentation1-16292027
 http://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents
 http://www.lawweb.in/2013/01/settlement-of-accounts-between-partners.html
 http://legal360.in/SearchDetail?topic=74667
 https://books.google.co.in/books?id=8ZE0AAAAIAAJ&pg=PR23&lpg=PR23&dq=rowl
ands+vs+evans,+1861+case&source=bl&ots=zTVaVrgvmr&sig=Pn6MGa6qJ7byF-
nMI_NEFkDaObo&hl=en&sa=X&ved=0ahUKEwjV2KaSrr_KAhXFbY4KHfv8D3oQ6
AEIKDAD#v=onepage&q=rowlands%20vs%20evans%2C%201861%20case&f=false
 http://www.lawnotes.in/Section_48_of_Indian_Partnership_Act,_1932

SECONDARY SOURCES

Articles

 The Economic Consequences of Partnership Dissolution—A Comparative Analysis of Panel

Studies from Belgium, Germany, Great Britain, Italy, and Sweden
http://esr.oxfordjournals.org/content/22/5/533.shor

 The effects of Partner and Relationship Characteristics on Alliance Outcomes

http://amj.aom.org/content/40/2/443.short

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