INDEX

INTRODUCTION
WHAT IS GOODWILL
SECTION 55 OF INDIAN PARTNERSHIP ACT
VALUATION OF GOOD WILL
WHERE GOOD WILL IS NOT SOLD
SUBSECTION 2 OF 55 SECTION
AGREEMENT IN RESTRAINT OF TRADE
CONCLUSION
BIBILIOGRAPHY

Introduction:
Dissolution of a firm implies dissolution of the partnership between all partners of a firm. It
may be by agreement, compulsory, due to contingency, by will and by the court. Now, the
special provision for Goodwill is Section 55 which deals with the mode of dealing with
goodwill at the time of dissolution

What is Good will:

Goodwill is essentially an intangible asset of a firm accruing to it by the good conduct and
business performance. Therefore it can effectively be defined as the benefits arising from
connection and reputation of the business and is primarily an asset. It is intangible and rather
difficult to identify per se. Its is also difficult to specify when the goodwill takes existence
and no business which commences possesses goodwill from the start. It is generated as the
business is carried on and may be augmented with the passage of time.1
Section 55 of the Indian partnership Act:
Sale of Goodwill after dissolution.- (1) In settling the accounts of a firm after dissolution ,
the goodwill shall, subject to contract between the partners, be included in the assets , and it
may be sold either separately or along with other property of the firm.
Rights of buyer and seller of goodwill.- (2) Where the goodwill of a firm is sold after
dissolution , a partner may carry on business competing with that of the buyer and he may
advertise such business, but, subject to agreement between him and the buyer., he may not,(a)use the firm name,
(b) present himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.

1 http://www.businessdictionary.com/definition/goodwill.html

Agreements in restraint of trade-(3) Any partner may, upon the sale of the goodwill of a firm
, make an agreement with the buyer that such partner will not carry on any business similar to
that of the firm within a specified local limits and notwithstanding anything contained in
Section 27 of the Indian Contract Act , 1872 ,such agreement shall be valid if the restrictions
imposed are reasonable.
Good will is an asset of firm under section 14 of the Indian partnership Act. Goodwill is a
part of the assets of a firm. The prima facie rule is that the goodwill of the firm being a part of
that assets has to be sold just like other assets before the account between the partners can be
settled and partnership wound up.
In case of Shadi Lal v Nagin chand2 an appellant ,one of the partnerships of the dissolution
of the firm ,purchased the goodwill of the firm carried on hosiery business in the name of the
same firm and obtained quota of woollen yarn after the dissolution of the firm in the firms
name for the textile commissioner on the basis of the firms consumption figures before its
dissolution .The question arised that for the determination was whether the quota allotted to
appellant after the dissolution of the business and all the accounts settled between the parners
is the property partnership or not.
Supreme court held that the fact quota was granted in the firms name does not convert the
quota into partnership asset as the business name did not belong to Apellant .
Valuation of the Good will:
In valuing the good will the court should set the such a value upon it as it might consider to
have been attached to the business at the date of dissolution and the value of the good will
ought to be praised on the footing that if it were sold ,the old partners would be at liberty to
carry on a rival business but would not have the right to solicit any person who was customer
of the old firm or right to carry on business under the firm name3
Where Good will not sold:

2 AIR 1973 S.C 773

3 Re David v Mathews 1899 1 Ch 378

Upon the dissolution of the firm or the partnership without any sale or assignment of the good
will and without any provision as to the use of the firm name each of the partners is entitled
to carry on business under that name ,provided that he does not by so doing expose his former
partners to any risk of liability.Whether there will be any such risk is a matter to be
determined having regard to the circumstances of each case
In case of Burchell v Wilde4 J.W Burchell, C.T.D Burchell and Wilde carried on a business as
a solicitor under the style if the Burchell and Co .The partnership was dissolved by consent
there being no sale of the good will and no provision as to the use of the firm name
.Thereafter J.W Burchell and C.T.D Burchell carried on a business under the style of Burchell
and Co.
It was held that the business being one of the solicitors there was no substantial risk of the
Burchells being held liable and there fore Wilde and Son were entitled to carry business
under the style of Burchell and Co

Rights and Duties of Partners: at the time of sale of goodwill

At the time of dissolution all partners have the right to sell the goodwill of the firm for the
common benefit of the partners. This does not restrict the right merely to general
dissolution. The legal representatives of the deceased partner are also entitled to a share in the
goodwill of the partnership which is continued after the death of the partner.
Goodwill is essentially an estimation by the customers and protecting goodwill means
protecting the custom of the firm. The seller may continue to trade in the same field, can offer
competition in every lawful manner, advertise to the general public and follow other
commercial tactics.
However if the seller of the goodwill represents to the customer that he is the same person
carrying on the old business, it would destroy the buyer's purchase of goodwill. Therefore
certain restrictions are required to be imposed on the seller and buyer of goodwill. This

4 1900 1 Ch 551

section essentially speaks of such restrictions and the boundary within which both parties
have to function
Sub section 2 of Section 55 provides that though the seller may continue the business as he
pleases, he may however not

Use the firm name,

Cannot represent to the people that he is carrying on the old business
He cannot solicit the custom of persons who were dealing with the firm before its

dissolution.
He cannot approach customers with the intention of diverting them to his business
but is at liberty to deal with them if they come to him of their own accord. Even the
representatives of a deceased partner cannot do such solicitation

In an important case5, where a partnership business was being carried on by three persons.
One of them J.D retired and the other partners continued the business under the name of Late
J.D. & Co. ,instead of the previous name J.D. & Co.. They also resumed business in premises
adjoining the old premise and distributed a circular to the customers to this effect.

It was held that, though the remaining partners had a right to establish a rival business, but
they had no right to use the same name or to solicit the customers of the old firm.
The case also held that the restriction laid down in this section applies not only to the use of
the firm name but also use of any other name, so similar to the firm name as to lead the
public to believe that they are dealing with the old firm.
The person may be allowed to use the firm name if that happens to be his own name , though
he may be restricted from using his name dishonestly. He can be restrained if it is established
that the similarity of the to be assigned trade name is such as its use would be, under the
particular circumstances a derogation from the grant.

5 Churton v. Doughlas

Use the Firm Name:

The name under the business is carried on is called the Firm name .The sale of good will
includes right to use the firm name unless it would lead people to believe that the old
business was still being carried on on might cause the vendor to incur liability
In case of Chatteris v Isaacson6 A carried on business under the name of Madame Elise
which was the name of his wife. A sold the business with the goodwill together with the right
of using the name Madame Elise and company .The buyer persisted in using the name
Madame Elise .It was held that the purchaser was not entitled to trade under the old name
alone in as much as it would leasd people to believe that the old business was still being
carried on and might cause the vendor to incur liability
Represent himself as carrying on the old firm
The vendor may advertise the fact that he had been with the old firm but he must take care
not to do so in a way calculated to lead the public to believe that he is carrying on the
business of the old firm or is in any way connected with it
In case of Hookam v Pottage7 On Hookham , an old established tailor took one Pottage into
partnership and they carried on business under the style of Hookham and Pottage .The
partnership was afterwards dissolved by the Decree of the court in which it was provided that
the goodwill should belong to Hookham .Hookham continued the business Under the name of
Hookham and Co .Pottage setup a shop only a few doors from that business and painted over
the doors that Pottage from Hookham and Pottage . It was held that having regard to the
manner in which the names were painted up.Pottage had done that which was calculated to
lead the public to suppose that he was still connected with the old firm ,and Hookham was
therefore entitled to injuction
Soliciting Old Customers
The vendor cannot solicit the customers of the old firm

6 1887 57 L.T .177

7 1872 8 Ch. 91

In case of Curt Brothers Ltd v Webster8 A sells the goodwill of his business to B and sets up
a nwe business.X who was and remains a customer of the old firm deals of his own accord
with new firm set up by A .A is not entitled to even such customer as X ,though if X
continues to deal with A of his own accord ,A would be entitled to deal with him.

Subsection 3 deals with agreement in restraint of trade:

It lays down that any partner may, upon sale of goodwill of a firm, make an agreement with
the buyer that such partner will not carry on any business similar to that of the firm within a
specified period or within a specified local limit, and not withstanding anything contained in
Section 27 of the Indian Contract Act 1872., such agreement shall be valid if the restrictions
imposed are reasonable.

The essential components of the section are as follows:

The seller may make an agreement with the buyer of not carrying on business

Similar to the firms

Within a specified period
Within the specified local limits, if the restrictions imposed are reasonable.

The parties provide for restrictions in the agreement. In order to maintain the value of the
goodwill it is usual for the buyer to require the seller to enter into an agreement restricting his
right of competition.
Sub-section 3 legitimizes this. The object of the agreement is to enable the buyer of goodwill
to have time to establish himself and attach to himself the custom he has bought and make it
his very own. Accordingly the restriction cannot be absolute and thus the section provides
that the
8 1904 1 Ch .685

It should specify the period of local limits of the restraint.

The restriction must be reasonable

The reasonableness of the restriction depends on the nature of the business

In case of Krishnarao v. Shankar9 Where a partner of the firm manufacturing and selling
bakelite goods, sold the business to the other partner and agreed not to carry on a similar
business for three years within the city of Bombay.
The court held that it was reasonable
In Hukmi Chand v. Jaipur Ice & Oil Mills Co10 There was a partnership composed of six
partners. Two partners left the firm and the remaining continued the business upto March 31,
1958, the date on which it dissolved. Firm had a factory and a residential house. On the day
of dissolution one partner Kalicharan retired and was paid his of assets and Rs. 11001 as
goodwill share. At the time of dissolution , it was agreed between Kalicharan and the others
like Kishanlal, Mahadeo Prasad, Satya Narayan that the land premise and the house could be
the exclusive property of Kalicharan with full rights of sale and mortgage and that Kalicharan
could get a boundary wall constituted or have a wire fencing and open a separate door
towards the road side , but there could be no entry or exit towards the factory compound. It
was also decided that Kalicharan could not carry the same kind of business on the Land.
Now, Kalicharan sold his share to his father for a consideration, by a registered sale deed.
Later, Kalicharan's father, wife and son (Hukum Chand-major son, Rajgopal- minor son)
entered into a partnership to carry on the business on the land. The company filed a suit
through Mahadeo Prasad and asked for a permanent injunction.
The Trial Court adjudged in favour of the Company

9 1954 56 BOMLR 973

10 1969 WLN 570

Important observation in this case

The onus to prove that the condition imposed on an agreement in restraint of trade is
reasonable is on the party which pleads that they are reasonable.
In case of Shaikh Kalu v. Ram Saran Bhagat11 , it was held that whether the limits
prescribed in the contract are reasonable or not depends upon the kind of business to protect
which the contract is made and the reasonableness of the restraint imposed must be
ascertained by reference to nature of business and situation of parties.
A restraint can only be reasonable when

Its in the interest of the restraining parties

Its in the interest of public.

Conclusion:
The position on Section 55 is well settled and that goodwill is a saleable asset at the time of
dissolution and renders certain obligations on part of both the buyer and the seller. The
restraint under this section is similar to the one under Section 27 of the Indian Contract Act.
The situation tackled by this section, is essentially one that falls within the exceptions of
section 27. The underlying principle of this section is benefit of the buyer of goodwill which
here is assured by a relative restraint on trade by the seller.
BIBILIOGRAPHY

Indian Contract Act,1882

Mulla,The Indian Partnership Act
Venkatesh Iyers,Indian comtracts Act and Tenders

Websources

www.advocatekhoj.com

11 1 Ind Cas 94

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