All you Need to Know about Dissolution of Partnership

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April 11, 2018

At the very outset it would relevant to mention that a dissolution of partnership is different from dissolution of a firm. In case of dissolution of partnership there is a change in the mutual relations of partners, for instance death, retirement or insolvency of a partner, however the partnership business continues with the remaining partners.

In case of dissolution of partnership firm/firm there is a dissolution of partnership between all the partners of the firm resulting in dissolution of the complete partnership business. Section 39 of the Indian Partnership Act  states that when the dissolution of partnership between all the partners of the firm occurs, this is called dissolution of the firm.

Various Modes of Dissolution:

A partnership firm may be dissolved in the following ways:

  1. By Agreement
  2. Compulsory Dissolution
  3. On happening of certain contingencies
  4. By Notice
  5. By the Court

Dissolution by Agreement

Section 40 of the Act provides dissolution by agreement i.e. a partnership firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. In the absence of contract between the partners, consent of all the partners is necessary for dissolution as provided in Section 40.

Thus under Section 40, a partnership may be dissolved:

  1. With the consent of all the partners; or
  2. In accordance with a contract between the partners

Compulsory Dissolution

The law relating to compulsory dissolution of a partnership firm is stipulated under Section 41 of Indian Partnership Act. Section 41 provides that 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.

Dissolution of Firm on Happening of Certain Contingencies

Section 42 states that subject to contract between the partners a firm is dissolved on the occurring of the following contingencies:

(a) If constituted for a fixed term, by the expiry of that term– As per this clause, if the partnership has been formed for a fixed term, then on the expiration of the term the partnership will be dissolved. However, if the partners wish they can continue their partnership even beyond the stipulated term. Such an agreement to continue partnership beyond the fixed term may be either express or implied. If a fresh term is not stipulated then the partnership will be at will.

(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof– It means that if a partnership has been created for a specific object, adventure or undertaking and if that object or adventure is accomplished then the partnership would come to an end.

(c) By the death of a partnerPrima facie a partnership firm dissolves on death of a partner unless the partners agree to the contrary[1]. Thus, if the partners agree that a partnership firm would continue even after the death of a partner, then the partnership will not dissolve. Such agreement may be either express or implied from the conduct of the partners.

In the case of Pawan Nandlal Agrawal v. Asian Dye Chemicals[2], the Bombay High Court was confronted with the law pertaining to dissolution of partnership on account of death of a partner. In the case the defendant argued that the plaintiff was not a registered partnership firm and therefore the suit filed by the firm was not tenable in view of the provisions of Section 69 of the Partnership Act. It was alleged that on the death of one of the partners of the firm, it was necessary for the other partners to notify the change with the Registrar of Firms under the provisions of Sections 63 and 63(1-A) of the Partnership Act.

The Bombay High Court in the case dismissed the defendant’s arguments that on the death of one of the partner, the partnership ceased to exist. The Court observed that in view of the provisions of Section 42 of the Act a firm would dissolve automatically on the death of one of its partners only in case where there is no contract to the contrary. It is, however, necessary to consider that it is not necessary that the contract between the parties must be express. The contract may be implied and could also be spelt out from the subsequent conduct of the other partners. This may, however, not be the case where one of the partners of the firm consisting of two partners, dies. With reference to the facts of the case, the Court noted that the defendant had filed a civil suit against the plaintiff firm treating the plaintiff to be a partnership firm. Moreover, the defendant had entered into an agreement with the plaintiff firm after the death of the partner, hence the defendant considered the plaintiff to be a partnership firm and the objection about the non-existence of the partnership firm on the date of the institution of the suit was merely one of the several objections raised by the defendant to the tenability of the suit.

Whether failure to record changes in the constitution of the firm will lead to cancellation of registration? In this context the Bombay High Court in Pawan Nandlal case stated that that the changes in the constitution of the firm will not affect the registration once made and failure to comply with the provisions of Sections 63  of the Partnership Act attracts the penalties under Section 69A of the Partnership Act.

Mohd. Laiquiddin & Anr vs Kamala Devi Misra (Dead) By Lrs.- In this case, the Supreme Court, ruled that on the death of a partner of a firm comprising of only 2 partners, the firm is dissolved automatically, this is notwithstanding any clause to the contrary in partnership deed.

Right of Legal Representatives of Deceased Partner- Many at times, the partners at the time of forming a partnership discuss the role of legal representatives in the event of death of a partner. Pragmatically it is always advisable to stipulate such terms to avoid any dispute or objections later.

Effect of death of a partner on the arbitration agreement– The Supreme Court in Prem Lata (Smt) & Anr. v. M/s Ishar Dass Chaman Lal & Ors.[3], considered the effect of death of a partner on arbitration agreement to hold that with the demise of the partners, ipso facto, the partnership stood dissolved. What the legal representatives of the deceased partner, are seeking to enforce is for accounts of a dissolved firm or any right or power to realise the property of the dissolved firm. The right “to sue” for the dissolution of the firm must, of necessity, be interpreted to mean the right to enforce the arbitration clause for resolution of the disputes relating to dissolved firm or for rendition of accounts or any right or power to realise the property of the dissolved firm.

(d) By the adjudication of a partner as an insolvent– It implies that when a partner is adjudicated insolvent then he ceases to be a partner of the firm. Section 41(a) of the Partnership Act providing for compulsory dissolution of partnership also states that when all or all except one partner becomes insolvent, then there is compulsory dissolution of the firm.

Dissolution by Notice

A partnership is dissolved by serving notice in case of partnership at will. According to Section 7 of Partnership Act, where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership-at-will”.

According to Section 43 a partnership may be dissolved by any partner by serving notice in writing to other partners in the firm. In the case of Chainkaran Sidhkaran Oswal v. Radhakrishan[4], the Court stated that such notice shall clearly and in unambiguous terms indicate the intention of the partner to dissolve the firm.

 

 

 

 

[1] Section 42 of Partnership Act

[2] 2008 (1) MhLj 290

[3] (1995) 2 SCC 145

[4] AIR 1956 Nag. 48