- Sakshar Law Associates
Dissolution of partnership
Updated: Sep 3, 2022
A partnership is a sort of business where two or more than two people comes into a formal agreement to run an organization and agrees to be the co-owners and assents to distribute duties and obligations and share the income, profit or losses that the business produces as per their ratio. The provisions under “The Indian Partnership Act 1932” regulate all the aspects and elements of the partnership in India. This particular law clarifies that organization is a relationship between at least two people or parties who have acknowledged sharing the benefits created from the business under the management of the members or sake of different individuals. This partnership agreement consists of each and every member’s rights and responsibilities who agree to be the co-owners or who has established the business. This agreement contains the objective and the very reason for which this association has come into existence; it also highlights each and every partner’s investment amount and their profit sharing ratio which is an essential term.
Once this association is formed there are many reasons that this association can come to an end and there can be multiple reasons to end the same. Like formation, there are provisions which regulate the dissolution of partnership under ‘The Indian Partnership act, 1932’ only. Partnership dissolution refers to the termination of a partnership as well as the cessation of its various business activities. There can be many reasons and circumstances which can bring an end to the partnership. When this termination happens, the share of profit and losses amongst the partners is equal, and also this dissolution doesn’t have any tax consequences nonetheless, the accomplices do need to represent all properties engaged with the business and whether they have acknowledged in an incentive after some time.
At the very beginning it would be applicable to make reference that termination of partnership is not the same as dissolution of a firm. When the partnership is dissolved there are certain adjustments and changes in the shared relation of partners like death, retirement or insolvency of a partner, however the existing partner can continue with the business. In the event of dissolution of partnership firm/firm there is dissolution of partnership which means the partnership business comes to an end. Section 39 of the Indian Partnership Act defines the dissolution of the firm, it states that when the dissolution of partnership between all the partners of the firm occurs, this is called dissolution of the firm. This article specifically analyses the dissolution of partnership and not of partnership firm.
While discussing the meaning of dissolution of partnership and its provisions, the question aries as to when this dissolution of partnership happens? There can be various explanations behind the dissolution of a partnership like the introduction of the new partner or the death or the retirement of the previous one, and so forth and the rest of the partners can continue their business. And when any of this happens i.e. change in partners occurs, this led to the end of an earlier partnership deed and as a result new partnership is formed with the liability and assets of the old one.
Below mentioned are the reasons for the dissolution of partnership:
· Death of a partner
· Admission of a partner
· Retirement of a partner
· Bankruptcy of a partner
· Expiry of the partnership period, if it’s for a particular period
Modes of Dissolution
When any of the partners leaves, the partnership dissolves. So, there are various ways discussed below through which dissolution can happen and those are:
1. By an act of partners: This is one of the way by which partners mutually agrees to terminate the partnership at a specific time. There are certain partnerships which are made for a particular time, so as soon as the time completes the partnership can come to an end. In certain cases it may end in the middle too, because of certain circumstances but needs to be dissolve under specific conditions.
2. By operation of law: Partnership is the result of a formal agrrement which is regulated by law. So if any partner tries to do something which is contrary to law or which is not in according to the agreement this can result ina partnership is the consequence of an agreement which is governed by law. Therefore if any unlawful activity is performed so it will be dissolved. You can make a valid partnership for illegal work.
3. By the court’s decree: a partnership can be dissolved by the court and the court will only allow under these conditions:
a. If the partner is incapable to work;
b. If the partner is mentally unstable;
c. If the partner misbehaves which creates a bad impact on the partnership;
d. If there is a breach of the agreement by a partner.
4. Statement of dissolution: dissolution can be done by filing the statement to the state’s secretary. The form must contain the information regarding the partnership name, date and reason of dissolution.
5. Personal Notification- This can be done by giving personal notice to the partnership’s creditors. Also, inform who is associated with the partnership by publishing the notification in a newspaper.
STATUTORY PROVISIONS REGULATING PARTNERSHIP DISSOLUTION
· Section 4 defines the meaning of partnership.
· Section 6 defines the modes of the existence of the partnership.
· Section 45 defines the liabilities of the partner after the dissolution of a partnership.
· Section 46 defines the rights of the partner regarding the business after dissolution.
· Section 48 defines the modes of the settlement of the account of partners after dissolution.
RIGHTS AFTER DISSOLUTION
Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners after dissolution. After the dissolution of the partnership, partners have certain rights regarding the same:
Right to an equitable lien: As the firm dissolves there are certain rights which every partner of the firm possesses like right to retain the share of property which have been utilized in paying off debts and liabilities and rights to have surplus distributed among all the partners.
Right to return of premium: When the partnership is formed, every partner deposits an amount in the form of premium and every partner gets back that premium according to the share mentioned in the agreement when the partnership is dissolved.
Rights where partnership contract is revoked for fraud or for other reasons: If a partner agrees to join a firm by fraud or by misrepresentation by the other partners or if he finds so he has the right to put an end to the partnership agreement.
Right to restrain the use of the firm’s name or property: Once the firm is dissolved, partner of the firm can restrain the other partner from using the name of the firm for other or any business.
The right to earn personal profit by using the firm’s name: if on the dissolution, the partner has a right to use the name of the firm as he buys goodwill of the firm and can earn profit from it.
LIABILITIES AFTER DISSOLUTION
Section 45 of the Indian Partnership Act, 1932 deals with the liability for acts of partners done after the dissolution. Liabilities are:
The partners continue to be liable to the third party until the public notice of the dissolution is given, it will not be applied to the partner who is dead or the partner who is insolvent or to the sleeping partner or to the retired partner. · After the dissolution of the partnership, the partner is liable to pay his debt and to wind up the affairs regarding the partnership.
After the dissolution, partners are liable to share the profit which they have decided in agreement or accordingly.
In the case of Narendra Bahadur Singh vs Chief Inspector Of Stamps, U.P. (1971) the partnership was dissolved and with that, the third party (Narendra Bahadur Singh) was given with all the assets (stocks) liabilities including all the debts as per the account and he was entitled to use the old name of the firm and can carry out the business with all profit and losses. The other three parties were not entitled to any profit, losses or any other liability. The capital, profit, and loss of the other 3 people have agreed to receive and Narendra Bahadur Singh has agreed to pay the mentioned amount. As to settle the amount securely, he hypothecated and charged certain property but it was said by the court that the property of the firm is vested to all partners equally as you are not the only owner of the firm and the settlement will be done according to the mode of settlement under Section 48 of Indian Partnership Act.
Supreme Court clarifies the difference between “Retirement of Partner” and “Dissolution of Partnership Firm”
On May 6th, 1981 a partnership of two people came into existence under the name of Guru Nanak Industries. Partnership was formed between Swaran Singh and Amar Singh who are appellant and Respondent respectively in this given case. A civil suit was filed against Amar Singh by the appellants contending that Amar singh has retired from the firm, where Amar singh disagreed to the point and filed a suit for dissolution of partnership and rendition of accounts.
The Trial Court dismissed the suit filed by Amar Singh and as a result two appeals were filed by the respondent against the order of the trial court. Appellate court rendered judgment in favor of the respondent and with this legal heirs of Swaran Singh preferred two appeals before the High Court of Punjab and Haryana who also rejected the appeal. Further, the appellants filed an appeal before the Supreme Court too.
Considering all the facts and circumstances of the case, an issue was raised that:
“Whether Amar Singh had resigned from the firm or was the partnership dissolved”?
The Supreme Court in its judgment upheld the decision of the first appellate court that Amar Singh had not resigned as a partner and there was a shared comprehension and understanding that the firm would be dissolved. The Supreme Court anyway held that the dissolution of the firm would not be from the date of the institution of suit for the dissolution of firm but from the Amar Singh’s supposed retirement. Further, the Supreme Court relied on the case of Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others (2003) 3 SCC 445 , to once again emphasize on the settled principle of partnership law and clarified the difference between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. When one of the accomplices resigns, the reconstituted firm proceeds, and all the payments which are due to him need to be settled as per the terms laid down in section 37 of the Indian Partnership Act. There is another provision under the Indian Partnership Act, i.e. section 48 which specifically and separately deals with the dissolution of partnership. With this it is clear that when the accomplices consent to disintegrate an association, it is an instance of disintegration and not retirement.
Again, the court induced the relevance from the Supreme Court Judgment and reiterated the well-established principles laid down in Erach F.D. Mehta v. Minoo F.D. Mehta, that to constitute a partnership firm there should be two or more than two partners. In case if there are only two partners one has agreed to retire, then this will result in a dissolution of the firm. As per the law two partners should be there to carry a partnership business otherwise it defeats the the very purpose of partnership.
By way of the present judgment the Supreme Court once again clarified the distinction between the two. It clarified the different provisions of law applicable in both the instances, which lead to completely different consequences. In the event of the retirement of a partner, the partnership firm continues to operate with the remaining partners while in the event of a dissolution, the firm ceases to exist.
In light of the above discussion it can be concluded that if there are only two partners in the partnership firm, retirement of one partner will automatically lead to the dissolution of the partnership. As mentioned above partnership firm cannot be continued with only partner because it defeats the settled principle which supreme court reiterated in various judgments.
With the termination of the partnership, there are certain rights and liabilities of both the retiring as well as of existing partners which one can claim as per the provisions mention under the Indian Partnership Act, 1932. The act clearly provides grounds for dissolution of the partnership, so that nobody can take advantage of the same and it also helps to maintain a good environment in the firm.
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