This article is written by Ilashri Gaur, a law student pursuing B.A. LLB(Hons.) from Teerthanker Mahaveer University (CLLS). This article lays down the whole concept of the dissolution of a partnership.
Table of Contents
Introduction
Sometimes a situation arises where the owners and partners of a firm have to put an end to the partnership firm either on their own or due to the external forces, the process when the partnership comes to an end is called dissolution of the partnership.
From the legal point of view, the partnership firm is not a separate legal entity from its partners. Partners and their business are not separate from one another.
Let us first discuss some of the terms which are important regarding this:
- Partners: The people who have entered into a partnership with one another on an individual capacity.
- Partnership: It is an arrangement of two or more people to perform a business activity and share profit and loss. In a partnership firm, the minimum members can be two and maximum can be 20.
- Firm: When all the partners enter into a partnership and work collectively under an organization, it is called a Firm.
Dissolution of partnership means a process by which the relationship between the partners is terminated and comes to an end and all the assets, shares, accounts and liabilities are disposed of and settled.
Section 39 of the Indian Partnership Act, 1932 defines the dissolution of the firm.
The Indian Partnership Act, 1932
The Indian partnership act,1932, tells about the terms and conditions under which one can enter into a partnership or how the partnership can be dissolved. There are certain provision regarding the Indian partnership act, some of them are:
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Types of Partners
There are different kinds of partners in a firm:
- Working partner: The partner who contributes his capital and actively participates in the business activities.
- Sleeping partner: The partner who contributes his capital but does not take part in business activities. It is also known as a dormant partner.
- Nominal partner: The partner who neither contributes his capital nor takes part in the business activities of the firm. His contribution is limited but allows other partners to make use of his name.
- Partner by estoppel: The person is not a partner in the firm but by his action and conduct with outsiders, he makes them believe that he is also a partner of the firm. This happens when the partner is retired but people don’t know about it.
- Secret partner: The person who is a partner of the firm but his partnership is kept a secret from the public.
- Partner by holding out: The partner who is actually not a partner in the firm but allows the firm to show to others that he is a partner of the firm.
Kinds of Partnership
- Partnership at will: It means that such a partnership depends upon the will of the partners and any partner can bring the partnership to an end by giving a notice. Such a partnership is done for a particular lawful business.
- Particular partnership: It means such a partnership is done for a continuous business or for a particular venture.
- Partnership for a fixed period: It means when a partnership is done for a particular time period either for 2 years or for 5 years as soon as the period expires the partnership automatically dissolves.
- General partnership: It means when the partnership is done generally to carry out a business and in which the liability of each partner is unlimited.
Dissolution of a Partnership
Before the dissolution of the partnership, let us understand the difference between the ‘dissolution of the partnership’ and the ‘dissolution of the partnership firm’. Dissolution of partnership means the end of the partnership business and dissolution of partnership firm means the end of partnership business along with the firm.
The dissolution of a partnership firm means termination of every contractual relationship between the partners and that all the operations which are being performed in a company are suspended and all the assets and liabilities are settled and disposed off.
Now the question arises when the partnership is going to be dissolved? There can be different reasons for the dissolution of a partnership as when a new partner is added or when a partner is dead or leaves the partnership, etc and the remaining partners can continue their business. And when there is a change in the partners so the prior partnership comes to an end and the new partnership takes place with the liability and assets of the old one.
The partnership may be dissolved due to the following reasons:
- Due to the death of the partner.
- Due to the admission of a new partner.
- Due to the retirement of a partner.
- Due to the bankruptcy of a partner.
- Due to the expiry of the partnership period, if the partnership is for a particular period.
Modes of Dissolution
There are some modes by which a partnership can be dissolved and those are:
- By an act of partners: when a partner agrees to dissolve a partnership at a particular time. Partners can come into an agreement regarding a particular time period maybe five years. In which partners can end the agreement at the end of the five years. Sometimes partners can dissolve it in the middle of the time period under specific conditions.
- By operation of law: a 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.
- By the court’s decree: a partnership can be dissolved by the court and the court will only allow under these conditions:
- If the partner is incapable to work;
- If the partner is mentally unstable;
- If the partner misbehaves which creates a bad impact on the partnership;
- If there is a breach of the agreement by a partner.
- 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.
Statutory provisions regarding the Dissolution
There are certain provisions which are mentioned in the Indian Partnership Act regarding the dissolution are:
| 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: 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.
- Right to return of premium: 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.
- 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: after the dissolution of the partnership, the partner has a right to stop other partners from using the same name of the firm.
- 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.
Case Laws
In this case, 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 has 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.
In this case, 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. In the end, it was said 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.
In this case, the plaintiff-respondent filed a suit for the dissolution of the partnership and claimed that as per the terms of the agreement the plaintiff was entitled to 18% of the profit in the first Rs.75,000, 12% in the next Rs.75,000 of book profit and 8% in the balance amount of book profit.
As the relation was not well mentioned in the plaint due to which it was difficult to continue the partnership. So a notice of suit issued to the petitioners who moved an application under Section 8 of the Act claiming that the suit raised is covered under the arbitrary agreement.
But in the end, it was held that the petitioners are seeking the dissolution on the just and equitable ground covered under Section 44 of the arbitrary act and not as the term of the partnership deed and therefore the matter could not be referred to the arbitration under section 8.
In this case, Guruva Reddy, son of Chenchu Rami Reddy and other six persons and legal heirs of Smt. P. Sri Devamma was carrying a partnership business. The legal representative and five other partners show their desire to retire from the partnership.
A dissolution of the partnership was executed. The dissolution was executed on the stamp paper. In the end, it was said that a charge was created in favour of the partners in the respective amount, which are payable under the deed of the dissolution.
Conclusion
It can be derived from the above explanation of dissolution of the partnership that with the dissolution of the relationship between the partners they have certain rights and responsibilities which they need to fulfil and one can claim for it with the help of the Indian Partnership Act, 1932 as it gives certain provision regarding the same.
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.
References
- Section 4 of the Indian Partnership Act, 1932.
- Section 6 of the Indian Partnership Act, 1932.
- Section 45 of the Indian Partnership Act, 1932.
- Section 46 of the Indian Partnership Act, 1932.
- Section 48 of the Indian Partnership Act, 1932.
- B.K. Kapoor & Anr vs Mrs. Tajinder Kapoor & Anr (2008).
- Santdas Moolchand Jhangiani And … vs Sheodayal Gurudasmal Massand (1970).
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