Dissolution of Partnership Firm under The Partnership Act, 1932

Aditya Pratap is a lawyer practicing in the Bombay High Court. He can be reached at aditya@adityapratap.com

Introduction of Dissolution of Partnership Firm

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.

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

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, 1932.

  • Dissolution by Agreement (Section 40)– A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
  • Compulsory Dissolution (Section 41)– Dissolution by the adjudication of all or one of the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners.
  • Dissolution on the happening of certain contingencies (Section 42)– Subject to contract between the partners of a firm is dissolved when 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 c) By the death of a partner and d) By the adjudication of a partner as an insolvent.
  • Dissolution by notice of partnership at will (Section 43)– Dissolution where the partnership is at will of the firm, which may be dissolved by any partner by giving notice to all the other partners, his intention to dissolve the firm.
  • Dissolution by the Court (Section 44)– Dissolution by the court may dissolve a firm on the ground 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.

Stay of Arbitration in a Dissolution of Partnership Firm

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) of The Partnership Act, 1932.

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.

Rights after Dissolution of Partnership Firm

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 given powers:

  1. Right to an equitable lien, when on the dissolution of the firm, every partner is entitled to certain rights like the right to have the property of the firm used in payments of debts and liabilities and rights to have surplus distributed among all the partners.
  2. Right to return of premium entitled at the time of the partnership, partners pay an amount in the form of premium when the partnership dissolves. Partners get that premium according to the agreement.
  3. 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.
  4. Right to restrain the use of the firm’s name or property: after the dissolution of the partnership, the partner has a right to stop other partners from using the same name of the firm.
  5. 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 the Dissolution of a Partnership 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 as entitled under section 45 of The Partnership Act, 1932 namely-

  • 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.

Case Laws under the Dissolution of Partnership Firm

  • Santdas Moolchand Jhangiani vs. Sheodayal Gurudasmal Massand

Matter in the court of Bombay High Court, where there were two plaintiffs and one defendant who entered into a partnership and carried on partnership business afterward they decided to dissolve it and settle the accounts of partnership. The plaintiff to whom a certain amount was payable, filed a suit for damage and when the issues were observed by the judge said that it was not only the deed of dissolution but also a bond. 

He impounded the document and asked the plaintiff to pay the deficit stamp duty. It was held that the deed of dissolution in this matter is not liable to be stamped as a bond and that it’s having been stamped as a deed for dissolution is sufficient.

  • A.Chinna Ramanatham Naidu v. B. Subbarami Reddy

The Andra Pradesh court held that under section 44 if grounds for dissolution of the firm sought by a particular party are numerous, it could be open to such party to approach a competent civil court, so that a entire matter could be decided by that court on the basis of oral and documentary evidence.

Even if one of the clauses of partnership deed envisages referring the disputes to the named arbitrators, then also the fact that arbitrators are chosen by both the parties and a date was also fixed for arbitration proceedings, cannot be ground for a seeking stay of further proceedings in a regular suit filed for a comprehensive relief.

About the Author – Aditya Pratap

Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.

Cases argued by Aditya Pratap can be viewed here.

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