DISSOLUTION OF A PARTNERSHIP FIRM

3.1 Law of contracts II

Submitted by:

Harsh Awasthi

UID No. UG19-48

B.A.LL.B. (Hons.) 2nd Year, 3rd Semester

Submitted to:

Prof. (Dr.) Manish Yadav

(Assistant Professor of Law)

MAHARASHTRA NATIONAL LAW UNIVERSITY

Table of Contents
Introduction..............................................................................................................................................................3
Research design........................................................................................................................................................4
Research objectives..............................................................................................................................................4
Scope and limitations...........................................................................................................................................4
Dissolution of partnership firm................................................................................................................................5
Modes of dissolution of a partnership firm..........................................................................................................5
By consent........................................................................................................................................................5
Compulsory dissolution...................................................................................................................................6
Contingent dissolution......................................................................................................................................6
Dissolution by notice of partnership at will.....................................................................................................7
Dissolution by court.........................................................................................................................................7
Retirement and Dissolution.................................................................................................................................9
Conclusion..............................................................................................................................................................10
Introduction

Partnership has been defined under the partnership act as the relation between the parties who
have agreed to share profits of the business carried on by either one of them for all or all of
them1. It defines the parties to a partnership agreement individually as partners and
collectively as firm. And the name of the partnership firm under which the business is carried
on as ‘firm name’. it is to be noted that the perquisite to form a partnership shall be a business
which is carried on either by one of the partners acting for all or by all of the partners jointly.

The essential elements for forming a partnership are2:

 The partnership has been formed by result of an agreement.

 The aim of partnership is to carry on business
 The partnership agreement provides for sharing of profits
 The business of the firm is carried either by one of the partners acting for all, or all of
them.

Section 5 of the partnership act further mandates that the partnership shall be formed as a
result of a contract, and the status3 merely cannot be taken as to evidence the existence of a
valid partnership, this has been incorporated to make a distinction between partnership and
other business relations, also it is important to note here that the partnership agreement as
required by section 5 need not always be a written agreement, and in the absence of a written
agreement court can decide upon the existence of the partnership. However, the written
agreement to form a partnership is called as partnership deed and it is generally advisable to
form partnerships by entering into a written deed, so as to ensure that the partnership firm can
be assessed as a firm for the purposes of income tax act, and also the exemptions available to
the firm can be availed. When The relationship is based on the agreement between them. The
basis of a partnership, is a partnership agreement. A partnership agreement is the source of a
partnership; It also expresses the other ingredients that are to be perused while defining
partnership and the rights and liabilities accruing thereof, specifying the agreed business to be
carried out, the people who will actually carry out the business, the actions in which the

1
Sec. 4 of the partnership act, 1932.
2
Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. K. Kelukutty, (1985) 4
SCC 35.
3
The term ‘status’ used here refers to, in particular, Hindu undivided family carrying on a family business or a
Burmese Buddhist husband and wife carrying on business as such.
profits will be distributed and other considerations that constitute such an organic
relationship. Hence, it can be said that a partnership deed forms and identifies a partnership.

Section 6 of the partnership act states that, in determining whether or not a group of persons
is a firm, or whether or not a person is a partner in a firm, the actual relationship between the
parties shall be taken into account, as all the relevant facts taken together show. In Laxmibai
Roshan Lal4, the Rajasthan High Court held that, under a contract with such a person, a
contract merely to take a share of profits or give a loan to a person engaged in any trade
receives interest alongside the latter.”

thus, in determining the existence of a partnership, the essence of partnership must also be
taken into consideration and satisfaction of section 4 must not be the sole criteria.

Research design
Research objectives
 What is dissolution of partnership firm?
 What are the modes of dissolution of partnership firm?
 What is the effect of retirement of partner from a partnership firm?

Scope and limitations

scope of this project is to understand the principles of and method of dissolution of
partnership firm, while the researcher has focused mainly on the provisions of partnership act
and several case laws have been referred to, this project is a general outlook of the scheme of
law o dissolution of partnership firm, it doses not claim to provide all the loopholes regarding
the law.
Research methodology
Grounded in the purview of the main problems, as noted, the following research has been
answered by purely doctrinal research. Being an intensive study and collecting some
observations of a case which may be an individual, a system, an event, an organisation, a
system, or even the entire culture. Case study is a method to analyze the facts and given
events
which is not merely data collection but a research strategy. The researcher was unable to do
the empirical research because of the lapse of time and sources. As empirical research
investigates a contemporary phenomenon by using various sources of evidence that projects
the representation. Secondary data collection is done in entire study based on historical
documents, magazines, newspaper articles, reports, libraries, surveys of India and

4
AIR 1972 Raj 288.
governmentalreports.
Considering the sources as provided, the judgments are read by an authentic source known
scc
online.

Dissolution of partnership firm

When a firm is put to an end as between all the partners, that is called dissolution of
partnership firm5. The relevant section in partnership act declares as: the dissolution of
partnership between all partners of the firm is called dissolution of the firm 6 thus the
dissolution of partnership firm and the retirement of a partner from a partnership firm has
striking differences, as in, in the case of retirement of a partner (discussed later) the business
is continued by the remaining partners, but In the case of dissolution of partnership firm, even
if the firm has been immediately reconstituted by some of the erstwhile partners, under same
firm name and same place of business, the status of the erstwhile firm shall be considered to
be dissolved.

The question of determination remains, when shall be a partnership firm said to be dissolved
and when it shall be deemed to be succeeded by the formation of new firm. The situation
came before the supreme court in the case of Commissioner of Income Tax, West Bengal-III
v. Pigot Champan & Partnership7, wherein the supreme court held that it is to be decided on
case-to-case basis by taking into account the facts, circumstances and the documents
available in any particular case.

Modes of dissolution of a partnership firm

As we have already made a reference to what is meant by dissolution of a partnership firm,
now we shall endeavour to explore how the dissolution of a partnership firm is made out.
While the

By consent
The partnership act provides for the dissolution of partnership by consent of all the partners
or in accordance with the contract between the partners 8, the supreme court in its
interpretation has held that the agreement to dissolve the partnership firm can be an implied
agreement too, and the application of this section extends to the cases where the partnership
5
Avtar Singh, INTRODUCTION TO LAW OF PARTNERSHIP, 11th edn., 2018, EBC Publications.
6
See section 39 of the partnership act, 1932.
7
1982 (2) SCC 330.
8
See Sec. 40 of the partnership act, 1932.
firm has been constituted for a fixed time, i.e., the partners are at a liberty to dissolve the
firm, by mutual consent, at any time subject to interest of any third parties which might be
hampered by such a dissolution.

The agreement to dissolve the partnership might be contained in the partnership deed itself,
but there is difference between dissolution by consent and dissolution by agreement, that is,
the partners can consent to dissolve the partnership firm, but in the case the dissolution is
being done by the provisions of a contract, all the partners are bound to that regardless of
their individual consent.

Compulsory dissolution
Under the partnership act9 a firm shall be compulsorily dissolved, if the business carried on
by the firm becomes unlawful. However, it is to be noted that in cases where more than one
business is being carried on by the firm, the dissolution shall extend only to the business
which are unlawful. Also, the provisions of section 41 are not subject to contract between the
partners, that is, the partners cannot make provisions in the contract which are in negation of
section 41, and the unlawful business shall be unlawful irrespective of the contract between
the parties.

The illegality of business, if from the beginning of partnership firm, such business agreement
shall not be a valid contract 10 and the partnership in that case will be void ab initio, however
there might be cases where the business carried on by the firm was not unlawful from the
beginning but became unlawful due to changes in circumstances, law etc., in such a case
where the carrying on of the business becomes unlawful, the firm shall be dissolved by the
force of law under section 41(b) of the partnership act

Contingent dissolution
This mode of dissolution of the partnership firm has been defined under the partnership act 11
the partnership when agreed for a fixed tenure of time, partnership when formed for a specific
work, death of a partner and by adjudication of a partner as an insolvent. However, it is to be
noted that the opening clause of the section declares the provisions of this section to be
subject to contract between parties, on the other hand the dissolution of partnership on

9
See Sec. 41 of the partnership act, 1932.
10
Sec. 23 of the Indian Contract Act, 1872, is negative provision and describes following as unlawful
considerations and object of an agreement, when forbidden by law, is of such a nature if permitted would defeat
provisions of any law, is fraudulent, involves or implies injuries to person or property of another, or if the court
regards it immoral or opposed to public policy.
11
Sec. 42 of the partnership act, states, dissolution on happening of certain contingencies.
completion of business or ending of the fixed tenure shall be complete as soon as the said
‘contingencies’ happen.

Dissolution by notice of partnership at will

Firstly, it is fitting to take a look of what is a partnership at will, the partnership at will is
defined under section 7 of the partnership act, which states, that where no provision is a made
by contract between the parties for the duration of the partnership or determination of their
partnership, such a partnership is a ‘partnership at will’. As we can see that in case of
partnership at will there exist no prior contract between the partners with regard to
dissolution, so the provision has been made in the act itself that a partnership at will can be
dissolved by any partner giving notice in writing to all other partners expressing intent to
dissolve the firm12 the notice should not be ambiguous or vague and should clearly
demonstrate the intent of the partner to dissolve the partnership firm.

Dissolution by court
“At the suit of a partner, the court may dissolve a firm on any of the following grounds:

 that a partner become of unsound mind, in which case the suit may be brought as well by
the next friend of partner who has become of unsound mind or by any other partner
 that a partner, other than the partner suing, has become in any way permanently incapable
of performing his duties as partner
 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
 that a partner, other than the partner suing, wilfully or persistently commits breach of
agreements relating to the management of the affairs of the firm of the conduct of the
business; or otherwise so conducts himself in matters relating to business that it is not
reasonably practicable for other partners to carry on the business in partnership with him
 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, 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;
 that the business of the firm cannot be carried on save at loss or

on any other ground which renders it just and equitable that the firm should be dissolved.”

12
Sec. 43 of the partnership act,
Retirement of a Partner

Section 32 of the Act deals with the retirement of a partner as under:

“(1) A partner may retire with the consent of all the other partners in accordance with an
express agreement by the partners, or where the partnership is at will, by giving notice in
writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the
firm done before his retirement by an agreement made by him with such third party and the
partners of the reconstituted firm, and such agreement may be implied by a course of dealing
between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to
be liable as partners to third parties for any act done by any of them which would have been
an act of the firm if done before the retirement, until public notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with the firm without
knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.”

“The meaning of word ‘retire’ in the said section is restricted to situations where a partner has
withdrawn from the partnership firm and the remaining partners in the firm continue to carry
on the business without dissolution of the firm. And it does not include the cases where the
partner withdraws from the firm by dissolution and not by retirement.

The sub section Sub-section (2) of the same section holds that a partner can be discharged
from any liability against any third party for the act of the firm, by way of an agreement
between the former partner and such third party and partners of the firm, however this
agreement can be said to be implied when the third party has knowledge of retirement of the
partner from the firm. But, the sub section 3 states that irrespective of the retirement of the
partner, the partner and the other partners will continue to be liable to third parties for any
acts which have the effect of act of firm, if the acts were done before the retirement of
partner, however the retired partner would liable to third parties who deals with firm without
knowledge that he was a partner.”

Retirement and Dissolution

The retirement of a partner from the firm and dissolution of partnership firm are two
different things, when the partnership firm comprises of more than two partners, the firm
cannot be said to be dissolved when one of the partners has retired, however in case when the
firm consists of only two partners, if one partner retires, the firm would be said to be
dissolved.

In the case of,West Bengal v. A.W. Figgies & Co 13., the hon’ble supreme court of India, has
elucidated upon the provisions of retirement of a partner as:

It is true that under partnership law, a firm has no legal existence apart from its partners and
this is only a short name to describe its partners, but it is also true that by virtue of this law,
there is no dissolution of the partnership by the entrants. single or partner outings. A partner
can opt out with the consent of the other partners and a person can join the partnership with
the consent of the other partners. The reconstituted partnership can operate under the same
corporate name until its dissolution. The Retired Partners Act enacted in the Partnership Act
is to some extent a compromise between the strict doctrine of English common law which
refuses to see anything in the signature except a collective name for individuals. to exercise
an activity in the partnership and a use which recognizes the association as a different person
or a quasi-partnership.

"Therefore, the retirement of an associate of a partnership does not dissolve the partnership,
but simply cuts off the partnership between the outgoing partners and the permanent partners,
without affecting the partnership between the permanent partners."

The distinction between retirement and dissolution has also been highlighted by the Calcutta
High Court in Sohanlal Pachisia & Co. v. Bilasray Khemani14 as:

“But it is clear from Section 32 of the Partnership Act read with the relevant sections in
Chapter VI of the said Act that by mere retirement of a partner, a firm is not dissolved but the
retiring partner must give notice of his intention to dissolve the firm in order to bring about a
dissolution…”

13
1954 SCR 171
14
1953 SCC OnLine Cal 98
 The above distinction has been further elucidated by the Supreme Court in Pamuru Vishnu
Vinodh Reddy v. Chillakuru Chandrasekhara Reddy15, as under:

“"The use of the word "to retire" in section 32 of the law is limited to cases where a partner
withdraws from a partnership and the other partners continue to carry on the activities of the
partnership without dissolution of the partnership between them. When a partner leaves a
partnership by dissolving it, it is a dissolution and not a retirement. The departure of a partner
from a partnership does not dissolve it, that is to say, it does not determine the partnership
between all the partners. It only breaks the association between the outgoing member and the
permanent members, leaving unchanged the association between the latter and the association
continues with the new constitution which includes the permanent members. Section 32
provides for the retirement of a partner, but there is no express provision in the law for the
separation of his party and the intention seems to be that it be determined by agreement
between the parties. … ”

Most recently, the Supreme Court in Guru Nanak Industries, Faridabad Amar Singh 16, also
explained the distinction between ‘retirement of partner’ and ‘dissolution of partnership
firm’, observing as under:

“There is a clear distinction between "withdrawing a partner" and "dissolving a partnership".

When the partner retires, the reconstituted business continues and the outgoing partner must
pay his contribution in accordance with section 37 of the partnership law. In the event of
dissolution, the accounts must be settled and distributed according to the method prescribed
in section 48 of the partnership law. When the partners agree to dissolve a partnership, it is a
case of dissolution and not retirement…. In this case, since there are only two partners, the
association could not have continued to develop its activities as a partnership. A partnership
firm must have at least two partners. When there are only two partners and one has agreed to
retire, retirement is equivalent to dissolution of the firm

Conclusion
The dissolution of a partnership firm involves a crucial aspect of ease of doing business in
any country, it is advised as easier the process of setting up and winding up of business are,
the more likely are people to invest in that economy. However, in countries like India the

15
(2003) 3 SCC 445
16
2020 SCC OnLine SC 469
process to set up and wind up the businesses is quite cumbersome, and to some extent, rightly
so.

BIBLIOGRAPHY

 INTRODUCTION TO LAW OF PARTNERSHIP, Avtar Singh, EBC Publications.

 THE LAW OF PARTNERSHIP INDIA. ST Desai, 8th edn., Lexis Nexis.