THAKUR RAMNARAYAN COLLEGE OF LAW

FARHAN HAMEED KHAN

(A/23)

FOURTH YEAR BLS/LLB

SEM- VIII SEMESTER

SUB:- CONTRACT – II

TOPIC:- A Study of Modes of Dissolution of Firm Under the Indian

Partnership Act, 1932.

Date:
PROFESSOR; Ms. AMRITA SANYAL

Page 1 of 20
 TABLE OF CONTENTS
S. No Particulars Page Nos.
1. Introduction 3

2. Meaning of Dissolution of a Firm 4

3. Modes of Dissolution 5 - 18
(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

4. Conclusion 19

5. Bibliography 20

Page 2 of 20
 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Contract Act was repealed and replaced by the Partnership Act of 1932.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.

Page 3 of 20
 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.

Page 4 of 20
 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

Page 5 of 20
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

Page 6 of 20
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. 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. One 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 Court
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.

Page 7 of 20
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 Lal, 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.

Section 41: Compulsory Dissolution.

A firm is dissolved: -

Page 8 of 20
 (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 insolvent. 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 Court 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
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

Page 9 of 20
 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 earlier.

(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.

(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

Page 10 of 20
 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
partnerships. 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. 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 adventure. 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 partner: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 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, 2002.

Page 11 of 20
 (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.

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

Page 12 of 20
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. 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.

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;

Page 13 of 20
 (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.

At the suit of a partner, the Court may dissolve the firm on the below 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 dissolution. 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 partners.

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

Page 14 of 20
 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. Arthur, 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
of the business regard being had to the nature of the business. If any partner other than
partner suing is responsible for any loss to the firm, which amounts to misconduct and
prejudicially affects the carrying on of business then the court may order for the dissolution
of the firm. 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. Tenant, “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

Page 15 of 20
 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
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. 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

Page 16 of 20
 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, refusal to meet on matters of business, continued
quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation
and friendly co-operation, have been held sufficient to justify a dissolution.” 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 dissolution.”

The court may order for the dissolution of the firm if the partner other than the suing partner
is found guilty for constant breach of agreement regarding the conduct of business or the
management of the affairs of the firm and it becomes impossible to continue the business
with such partner.

(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

Page 17 of 20
 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.

(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. 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. 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 . 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.

Page 18 of 20
 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.

Page 19 of 20
 BIBLIOGRAPHY

• 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=Pn6MGa6qJ7byFnMI_NEFkDaObo&hl=e
n&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

Page 20 of 20