In this article, Gyandeep Kaushal pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Status of the property of a partnership firm post-dissolution.
There are various legal structures into which a business can be molded and partnership is one of them, wherein the relationship and disputes between the partners are governed as per the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
- Section 14 of the Act talks about the property of the firm in the following terms:
- Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
- Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired by the firm.
- The clear implication of the abovementioned provision is that subject to any contract between the partners, the property may be brought into the stock of the firm either at the time of the formation of the said partnership or anytime later during the course of the business of the firm. Summing this up, there are three ways to make a property the property belonging to the firm: it may either be originally brought into the stock of the firm; or during the course of the business of the firm, the same is purchased or it is acquired.
- Although during the subsistence of the firm, the property acquired or bought for the firm belongs to it, the question is what happens to the said property once the partnership is dissolved. It is this question with which this article is concerned.
Chapter VI of the Partnership Act, 1932
Chapter 6 (Sections 39 to 55) of the Indian Partnership Act, 1932 talks about the dissolution of a firm.
Under this section, the act describes what is meant by the dissolution of a firm to mean the dissolution of partnership between all the partners.
Further outlines of the act, the ways in which dissolution can take place:
- It can either be dissolved with the consent of all the partners together, or
- According to the provisions of a contract that may have been entered between the partners.
This section provides that if an event happens such that the business of the firm is made unlawful to be carried, the firm is dissolved. However, if the firm carries multiple adventures, the mere illegality of one adventure doesn’t render the entire firm dissolved.
Section 42 of the act provides for the dissolution of a firm in case of the happening of certain contingencies.
This section of the act provides that where the partnership is at will, dissolution may take place by the issuance of notice by one partner to the rest.
provides the grounds on which the court may dissolve the partnership.
Section 45 of the act provides that the liability of the partners which may continue to third parties for acts done by any of the partners which would have been an act of the firm before the dissolution until the issuance of public notice. The other provisions in the chapter except for the provisions relevant to the issue at hand do not have any direct relevance to the issue at hand.
Provisions relevant for the ascertainment of the status of the partnership property post its dissolution
The provisions relevant to the present issue are Sections 46 to 49 of the Indian Partnership Act, 1932:
Section 46, Representative Rights
This section provides that once the firm is dissolved, each partner or their representative shall be entitled against the rest of the partners to have the firm’s property applied to pay the debts and liabilities of the firm. The surplus property, if any is to be distributed among each partner or their representatives as per their respective rights in the firm.
Section 47, Firm is not bound by the act of an insolvent partner.
This section of the act provides that post the firm’s dissolution, each partner’s authority to the firm survives the dissolution, so far as it may be necessary to wind up the firm’s affairs and to complete any transaction which began but wasn’t finished at the time the firm was being dissolved. A proviso to the Section provides that the firm isn’t bound by the acts of an insolvent partner. However, the liability of any person remains unaffected who has posted the adjudication of an insolvency of such partner represented himself as a partner of the insolvent.
Section 48, Modes of the settlement of accounts
This section the Act provides for the mode of settlement of accounts between the partners after the dissolution of the firm.
Section 48 (b) (iv) Assets divided among the partners
This section of the act provides that if there is any residue of assets of the firm even after application of the said assets in the manner laid down in clauses (i), (ii) and (iii) of subsection (b) of Section 48, then it should be divided among the partners in the same proportion in which they were entitled to profit sharing.
Section 49 Property of the firm must be applied first to pay the firm’s debt
Section 49 of the Act provides that when there are joint debts due from the firm and separate debts due from any partner, the property of the firm must be applied first to pay the firm’s debts and if any surplus remains post that, then the share of every partner shall be applied to pay their separate debts.
Status of Partnership Property Post Dissolution
In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:
- Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital, and if necessary by the partners individually in the proportions in which they were entitled to share profits.
- The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner or order:
- In paying the debts of the firm to third parties.
- In paying to each partner rateably what is due to him from the firm for advances as distinguished from the capital.
- In paying to each partner rateably what is due to him on account of capital, and
- The residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.
Shanti Bai Agrawal and Ors. v. Uma Bai Agarwal
In the above case, the Court considered mainly with the status of the partnership property post the dissolution of the partnership.
- The Court observed that section 46 of the Indian Partnership Act makes it clear that in post-dissolution of the partnership, the firm’s property must first be applied to pay the debts and liabilities of the firm and only thereafter the surplus, if any, is to be distributed among the partners per the rights they have in respect of the partnership.
- Section 47 provides for partners’ authority to continue only so far as it may be necessary to wind up the firm’s affairs and to complete transactions that began but remained unfinished at the time of dissolution but not otherwise.
Addanki Narayanappa & Another v. Bhaskara Krishnappa & Ors
The Supreme Court in the above case observed that the share of a partner in a partnership is nothing more than the partner’s proportion of the assets of the partnership after they have been turned into money and applied in the partnership’s liquidation, irrespective of the property comprising of land or otherwise. Also, upon the partnership’s dissolution, first the debts and liabilities should be met out of the property of the firm and thereafter the assets of the firm be applied in rateable payment to each partner of the firm of what is due to him on account of advances made by him as distinguished from the capital and secondly, on account of capital, the residue, if any, being divided rateably among all partners.
The Apex Court also pointed out that the Act presupposes total liquidation of the partnership’s assets before the settlement of accounts between the firm’s partners post-dissolution of the same.
Mohd. Laiquiddin & Anr. v. Kamala Devi Misra By LRs & Others
The Supreme Court held that under the Partnership Act, property which is brought into the partnership by partners upon formation or which may be acquired in course of firm’s business, becomes partnership property and a partner is subject to contract between partners, entitled to a share in the money representing the value in the property upon the dissolution of the firm.
S. V. Chandra Pandian and Ors v. S. V. Sivalinga Nadar & Ors
The Supreme Court held that post-dissolution of firm each partner becomes entitled to his share in the profits of the firm post the settlement of accounts as per Section 48 of the Indian Partnership Act, 1932. The interest of the partners is in accordance with the proportion of their share in the firm.
- The Supreme Court in such cases has further held that the entire property of the firm shall become the firm’s property and any individual partner shall only be entitled to his share of profits if any accruing to the firm from the realization of the property and post-dissolution of the firm to a share in the money representing the property’s value.
- Clearly, the application of this principle implies that the property of a firm would be movable property, irrespective of whether it was immovable originally or otherwise, for the distribution among the partners. The same cannot be said to be an immovable property for purposes of dissolution between the respective partners.
- Post-dissolution of the firm and dissolution of the property, the immovable property belonging to the firm before the dissolution becomes “a movable asset” in the hands of the partners inter se, who have their rights in terms of Section 48 of the Indian Partnership Act.
- The property’s value must be assessed by a technical expert and partners are according to Sections 46 to 49, entitled for appropriate adjustment of their shares from the amount according to their share they held in the firm before the dissolution.
- Consequently, the question regarding the status of the firm property post-dissolution may be answered in the following way:
- All properties of a partnership are to be converted into money, and
- Therefore, any immovable property which belonged to the undissolved firm loses such ‘immovable’ character. Such properties have a status of ‘movable property’ post-dissolution, from which the respective shares of the partners must go to them.