Dissolution Of Firm: Various Modes

Raghvendra Singh Raghuvanshi

Nidhi Vaidya ∗

Statement of Purpose

The project report aims to study how and under what circumstances a dissolution can be affected in
a partnership firm and what can be the aftereffects of dissolution of firm on the partners of the said
firm?
The project can be broadly divided in to two parts.
The first part of the study describes the meaning of dissolution of a firm and second part focuses on
the various important modes under which partnership firm can be dissolved.

Introduction

The Indian law of partnership in India is based on the provisions of the English law of partnership.
Until the English Partnership Act of 1890 was passed, the law of partnership even in England was
largely based on legal decisions and custom. There were very few acts of parliament relating
directly to partnership. The Indian Partnership Act of 1932 (Partnership Act) was the result of a
Report of a Special Committee.

Prior to the enactment of the Partnership Act, the law relating to partnership was contained in
Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872 (Contract Act). These provisions
contained in the Contract Act were not found adequate. As a result, Chapter XI of the Contract Act
was repealed and replaced by the Partnership Act of 1932. The Partnership Act is a comprehensive
framework for contractual relationships amongst partners, and the basis for a most popular form of
organization for small businesses. It is interesting to note that the Partnership Act has not been
subject to any significant amendment since its enactment.

The Indian Partnership Act enacted in the Year 1932 defining the law relating to partnership the
relation between the persons who have agreed to share the profits of a business carried on by all or
any of them acting for all -- makes it obligatory to have a partnership registered with the Registrar
of Firms, failing which the firm is prohibited from enforcing any right in a Court of Law. This Act
defines the relationship of partners to one another and to third parties and lays down provisions as
regards incoming and outgoing partners, dissolution of a firm, etc. Under the Act partners are
bound to carry on the business of the firm to the greatest common advantage, to be just and faithful
to each other and to render true accounts and full information of all things effecting the firm to any
partner or its legal representative. A partner is liable to indemnify the firm for any loss caused to it
by his willful neglect in the conduct of the business of the firm. A partner is the agent of the firm
for the purpose of the business of the firm. The act also provides for the sale of goodwill of the firm
after its dissolution and the rights of the buyer and seller of the goodwill.

∗
IV Year students of B.A., LL.B. (Hons.) at National Law Institute University, Bhopal.

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The dissolution of partnership between all the partners of a firm is called the dissolution of the firm.
[Section 39]. - -. As per section 4, Partnership is the relation between persons who have agreed to
share profits of business carried on by all or any of them acting for all. - - Thus, if some partner is
changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is dissolved,
but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’. However,
complete breakage between relations of all partners is termed as ‘dissolution of firm’. After such
dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different from
‘dissolution of firm’. ‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution
of firm’ means the firm no more exists after dissolution.

Meaning of Dissolution of A Firm

A firm is not said to be dissolved by the fact of one or more members ceasing to be partners in it
while others remain, but only when all and every one of the members of the firm cease to carry on
its business in partnership. The law with respect to retiring partners as enacted in the Partnership
Act is to a certain extent a compromise between the strict doctrine of English Common Law which
refuses to see anything in the firm name but a collective name for individuals carrying on business
in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi
corporation.1

Matters pertaining not only to the fact of dissolution and fixing the date thereof but also matters
arising out of the fact of dissolution which pertain to the winding up of the partnership, settlement
of accounts, taking over of the goodwill and assets of the partnership, restrictions on the outgoing
partners carrying on business in the case of transfer of goodwill to one of them, are all matters dealt
with under the subject ‘dissolution of a firm’.

A deed of dissolution must necessarily cover other matters, which arise directly out of dissolution,
such as settlement of accounts, payment of amounts found due on such settlement, closing down or
continuation of business collection of outstanding and payment of liabilities. Notwithstanding such
clauses in a deed of dissolution, it would be liable to payment of stamp duty under art 47, Sch I of
the Bombay Stamps Act 1958 and would not be subject to separate duty on such matters.2

If a new firm is formed by agreement between some of the former partners, it will nonetheless be
new, however closely that agreement may follow on the dissolution of the old firm. Whether a new
firm is formed or not is a question of fact.3

1
CIT, West Bengal v. M/s AW Figgis & Co AIR 1953 SC 455
2
Santdas Moolchand Jhangiani & another v. Sheodayal Gurudasmal Massand
AIR 1971 Bom 237 (DB).
3
MM Valliamai Achai & ors v. KNPLV Ramanathan Chettiar & ors AIR 1969 Mad 257.

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Modes of Dissolution of A Partnership Firm
A partnership firm can be dissolved by many modes like by agreement on the happening of certain
contingencies, or judicially. There are basically five modes of dissolution given under Sections 40 –
44 of the Indian Partnership Act.

• Dissolution by Agreement – Sec. 40

• Compulsory Dissolution – Sec 41
• Dissolution on the happening of certain contingencies – Sec.42
• Dissolution by notice of partnership at will – Sec.43
• Dissolution by the Court – Sec.44

These are now being discussed in detail as follows-

Dissolution by Agreement

“A firm may be dissolved with the consent of all the partners or in accordance with a contact
between the partners”5

Contract between the partners-

Although this is new in terms, however it is a quite familiar law. ‘Contact between the partners’
obviously mean a contact already made; the most likely case is that of a clause in the partnership
articles providing for dissolution in certain events. In addition to a dissolution clause where in a
partnership deed reference is made to the Partnership Act, that where special provision is not made
in the deed the provisions of the Act shall apply, it cannot be said that a partner of the firm is not
entitled to ask for dissolution of the firm and that only course open him is to retire as provided by
another clause in the deed. 6

Any circumstance such as unsoundness of mind, physical incapability, incompatibility of

temperament, or dishonesty (even outside the business) may by an express clause, in the articles, be
a ground for dissolution of partnership without the intervention of the court.7

The principle is well settled that it is on the examination of relevant documents and relevant facts
and circumstances that the court has to be satisfied in each case as to whether there has been a
succession or a mere change in the constitution of the partnership. It cannot be disputed that
‘dissolution’ and ‘reconstitution’ are two distinct legal concepts, for, dissolution brings the
partnership to an end while a reconstitution means the continuation of the partnership under altered
circumstances. In law, there would be no difficulty in the dissolution of a firm being followed by
the constitution of a new firm by some of the erstwhile partners who may take over the assets and
liabilities of the dissolved firm.8

5
Sec. 40, Indian Partnership Act.
6
Sheonarain Jaiwal & ors v. Kripa Shankar Jaiswal & anor AIR 1972 Pat 75
7
Underhill’s Principles of the Law of Partnership 11th edn. P 76; citing Peyton v. Mindham (1971) 3 All ER 1215.
8
CIT, West Bengal v. M/s Pigot Champan & Co. AIR 1982 SC 1085,1089

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In cases of express agreement to dissolve the firm between all the partners barring questions as to
its construction and effect, no problem arises. However, circumstances may also indicate existence
of such agreement and consequential dissolution. It has now been affirmatively decided that the
doctrine of repudiation has the same applicability to partnerships as in the case of other contracts.
The repudiation of the partnership by one or more of the partners, which is accepted by the others,
would indicate an implied agreement to dissolve. 9 Dissolution may also be inferred where the
service by a partner or his partners of an invalid notice to determine the partnership is accepted by
the co-partners as a valid notice or where the conduct of the partners is inconsistent with the
continuance of partnership. In a case where in a partnership at will, notice of dissolution was given
to the other partner who did not do anything in respect of the notice or partnership business for
about three years after the notice, it was held that failure to do anything amounted to consent for
dissolution.10

In the matter of P. Venkateswarlu v. Lakshmi Narshima Rao, AIR 2002 AP 62, the court held
that in case of dissolution of partnership, firm might be dissolved by any partner giving notice in
writing to all the other partners of his intentions to dissolve the firm.

Compulsory Dissolution

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.

Thus according to section 41, compulsory dissolution of a firm may take place on the following two
grounds -

a. All partners or all the partners but one becoming insolvent

Clause (a) is new as an express enactment. In substance it is necessary corollary to Section 34, sub-
section (1), under which a partner adjudged insolvent ceases from that date to be a partner. If no
partner or only one partner is left it is obvious that there can no longer be a firm. The Supreme
Court has held that where one of two partners dies, the firm automatically comes to an end and
there is no partnership for a third party to be introduced therein. In deference to the wishes of the
deceased partner, the surviving partner may enter into a partnership with the heir of the deceased
partner but it would be a new partnership. An agreement that on the death of the partner in such
partnership his heir or nominee would take his place does not make the heir or nominee
automatically a partner.1

9
Hitchman v. Crouch Butlet Savage Associates (1983) 80 LS Gaz 550.
10
Kali Ram v. Ram Ratan AIR 1977 NOC 31 (Del)
1
CIT Madhya Pradesh v. Seth Govindram Sugar Mills AIR 1966 SC 24.

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As regards insolvency proceedings in a foreign country the view appears to be that they would
cause dissolution, at any rate if taken in the country in which the insolvent partner is domiciled. 2

A firm is dissolved by the adjudication of all the partners or of all the partners but one as insolvent3.
Reference may also be made here to section 34(1) which provides, where a partner in a firm is
adjudicated an insolvent, he ceases to b e a partner on the date on which the order of adjudication is
made, whether or not the firm is thereby dissolved. Thus a partner is adjudicated an insolvent; he
ceases to be a partner. One of the main reasons, inter alias, for this is that when he adjudicated an
insolvent he becomes incompetent to contract. Similarly when all the partners but one are
adjudicated an insolvent, the firm is compulsorily dissolved, because for partnership, there must be
at least two persons competent to contract. Similarly where there are only two partners in a firm,
and one of them dies, the firm is dissolved and it cannot be said to be in wishes of deceased partner,
the remaining partner admits a new partner, in law it is a new partnership.4

b. Happening of any event making the business of the firm unlawful

Clause (b) is in the same words as Section 34 of the English Act, and the illustrations and
comments to this section are taken, with some modifications, from Pollock on Partnership.5
In the English case of Esposito v. Bowden 6 A and B charter a ship to go to a foreign country and
receive a cargo on their joint venture. War breaks out between England and the country where the
port is situated before the ship arrives at the port, and continues until after time appointed for
loading. The partnership between A and B is dissolved.

In another case of Hudgell Yeafes & Co. v. Watson7 where A is a partner with ten other persons in
a certain business. An Act is passed which makes it unlawful for more than two persons to carry on
that business in partnership. The partnership is thus dissolved.

A firm is dissolved 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 on in partnership.8

Proviso to section 41(b), however provides 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.9

The proviso is based on the doctrine of severability. According to this principle, where there are
several parts of the contract and one of the parts becomes illegal, then if the illegal part can be

2
Lindley on Partnership, 15th edn, pp 693-4.
3
Section 41(a).
4
See Erach F.D. Mehta v. Minoo F.D. Mehta, AIR 1971 SC 1653; Commissioner of Income Tax, M.P. v. Seth Govind
Ram Sugar Mills, AIR 1966 SC 24.
5
15th edn, pp 89-91.
6
(1857) 7 E&B 763.
7
(1978) QB 451.
8
Section 41(b).
9
Proviso to Section 41(b).

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separated from the legal part, only the part, which has become illegal, shall be void and the legal
part shall remain valid. Similarly where the business of the firm consists of several undertakings or
adventures and one of the undertakings becomes illegal, the other undertakings shall remain valid if
the said illegal undertaking is severable from the other undertakings.

Effects of War

The first war brought the question of ille gality based on alien enemy character back into
prominence after many years. Commercial relations involving subjects of a state which has
become hostile, or persons carrying on their business in the territory of such a state, had to be
considered in the light of two quite distinct rules of common law, one as to personal
disqualification, the other as to trading with enemies. There was considerable doubt as to
several doubts until the full court of appeal dealt with a group of cases early in 1915.10 The
result of that considered judgment, and of some others are as follows:

The term ‘alien enemy’ includes persons of any nationality voluntarily resident in a hostile
country. 11 However, it does not include for the purpose of the common law rules, a subject of
an enemy state residing within the realm with the license of the Crown; and registration of an
alien under the Aliens Registration Act, 1914.

Transactions with a foreign company having a seat of business in England are governed
by the same rules as transactions with an individual alien. A company registered and having
its place of business in a hostile country is treated in Prize Courts as an enemy wi9thout
regard to the nationality of its shareholders.12

In as much as a body corporate may be a partner, it has power to note that the friendly or
hostile character of such a body is not conclusively determined by the place of its registration
and its official seat, nor by the nationality of its members or the majority of them. A company
incorporated or registered here may be an enemy if it carries on business in an enemy
country, or if its business is under the control of persons resident in an enemy country or
adhering to or controlled by enemies; on which last question the prevailing character of the
shareholders is material though not conclusive.13

Dissolution On The Happening Of Certain Contingencies

Subject to contract between the partners a firm is dissolved –

a) If constituted for a fixed term, by the expiry of that term;
b) If constituted to carry out one or more adventures or undertakings, by the completion
thereof;
c) By the death of a partner; and
d) By the adjudication of a partner as an insolvent.

10
Porter v. Freudenberg & Co., [1915] KB 857.
11
Sovfracht v. Van Uden’s Scheepvaart, [1943] AC 203.
12
The Roumanian, [1915] 1 26.
13
Daimler Co’s case, [1916] 2 AC 307.

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According to section 42, subject to contract between partners, a firm is dissolved on the following
contingencies:

By The Expiry of Fixed Term

A firm is dissolved, if constituted for a fixed term, by the expiry of that term.14

It may be noted here that Sections 42(a) and 42(b) relating to completion of one or more adventures
or undertakings are subject to sections 42(c) relating to death of a partner and 42(d) regarding
adjudication of a partner as an insolvent. If a partner dies or is adjudicated as an insolvent, there in
the absence of contrary contract between partners, the partnership firm is dissolved. The term of the
partnership being fixed is clearly not a contrary provision under section 42. It may also be noted
here that even after the expiry of a fixed term, by mutual consent partners may continue the
partnership. But if there is no such mutual consent, the partnership is dissolved on the expiry of the
fixed term.

On Completion of Adventures Or Undertakings

Subject to contract between he partners a firm is dissolved if constituted to carry out one or more
adventures or undertakings, by the completion thereof.15

Section 42 (b) applies in such cases where the partnership firm has been constituted for one
or more adventures or undertaking although no period has been fixed. In such cases the nature of
the undertakings and the conduct of the partners are considere d. If it is found that the firm was
constituted for one or more undertakings, the firm is dissolved on the completion of one or more
undertakings, as the case may be. But when the partners install flourmill, oil mill etc, the question
of completion of undertaking does not arise and Section 42(b) will not apply.
In Gheru Lal Parekh v. Mahadeo Das Maiya 16 The partnership was constituted for the speculative
transactions relating to sale and purchase of wheat. Under it speculative transactions were to be
entered for the sale and purchase of wheat in future. After the supply of a part of goods, the contract
was terminated before time. The question for consideration before the Supreme Court was, had the
firm was immediately dissolved. The Supreme Court held that the firm was not immediately
dissolved. It would be dissolved only after the realization of the assets.

Where a firm was constituted for a specific undertaking to supply certain quantity of grain
and the contract was prematurely terminated after supply of a part of the goods, it was held that the
partnership did not come to an end and was dissolved only on the final realization of assets.17

In Mann v. D’Arcy, 18 the managing partner of a firm of produce merchants had entered into
a single venture co-partnership with the plaintiff for the purchase and resale of a particular quantity
of potatoes on the terms of equal share in the profits and the validity of the co-partnership for the
said venture was upheld.

14
Section 42(a).
15
Section 42(b).
16
AIR 1959 SC 781.
17
Basanthlal Jalan v. Chiranjilal sarawgi & others, AIR 1968 Pat 96.
18
(1968) 1 WLR 893; J&J Cunningham v. Lucas, (1957) 1 Lloyd’s Rep. 416.

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By The Death of A Partner

Subject to the contract be tween the partners a firm is dissolved by the death of a partner.19

The main reason for this rule is that a law firm is not a “person”, it is only a group of
persons and the name of the firm is only the collective name of the persons who constitute the firm.
In other words, the name of the firm is a mode of describing the persons who have agreed to carry
on the business.20 Law also recognizes the distinction between the continuation of business and
member of the firm who carry on the business. For limited purposes of section 37, the firm is
dissolved on the death of a partner. If the surviving or remaining partners, a new partnership comes
into existence. So is the case when a new partner is admitted into partnership or a partner retires or
is allowed to retire. In all such cases a new group and a new form comes into existence.

The above view has been expressed by the full bench of Punjab and Haryana High Court in
M/s. Nandlal Sohanlal, Jullandar v. CIT, Patiyala 21 thus on the death of a partner the firm is
dissolved provided that there is no contract to the contrary between the partners. If the remaining or
surviving partners continue the business of the firm, it will be deemed that they have constituted a
new firm by mutual consent.

In Commissioner Of Income Tax, Madhya Pradesh, Nagpur V. Seth Govindram Sugar Mills
Ltd., AIR 1966 SC 24., After the death of Kalooram Todi, his two sons by name Govindram and
Gangaprasad constituted a joint Hindu family which owned extensive property in Jaora State and a
sugar mill called "Seth Govindram Sugar Mills" at Mahidpur Road in Holkar State. In the year
1942 Bachhulal filed a suit for partition against Govindram and obtained a decree therein. In due
course the property was divided and a final decree was made. We are concerned in these appeals
only with the Sugar mills at Mahidpur Road. After the partition Govindram and Bachhulal jointly
worked the Sugar Mills at Mahidpur Road. After the death of Govindram in 1943, Nandlal, the son
of Govindram, and Bachhulal as kartas of their respective joint families, entered into a partnership
on September 28, 1943, to carry on the business of the said Sugar Mills. Nandlal died on December
9, 1945, leaving behind him the members of his branch of the joint family, namely, the three
widows and the two minor sons shown in the genealogy. After the death of Nandlal Bachhulal
carried on the business of the Sugar Mills in the name of "Seth Govindram Sugar Mills".

For the assessment year 1950-51, the said firm applied for registration on the basis of the
agreement of partnership dated September 28, 1943. The Income-tax Officer refused to register the
partnership on the ground that after the death of Nandlal the partnership was dissolved and
thereafter Bachhulal and the minors could be treated only as an association of persons. On that
footing he made another order assessing the income of the business of the firm as that of an
association of persons. Against the said orders, two appeals - one being the Appeal No. 21 of 1955-
56 against the order refusing registration and the other being Appeal No. 24 of 1955-56 against the
order of assessment - were filed to the Appellate Assistant Commissioner.

19
Section 42 (c).
20
Dulli Chand Lakshminarayan v. CIT, Nagpur, AIR 1956 SC 354.
21
AIR 1977 P&H 320 at p. 324.

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 The Appellate Assistant Commissioner dismissed both the appeals. In the appeal against the
order of assessment, the Appellate Assistant Commissioner exhaustively considered the question
whether there was any partnership between the members of the two families after the death of
Nandlal and came to the conclusion that in fact as well as in law such partnership did not exist.
Two separate appeals, being Income-tax Appeal No. 8328 of 1957-58 and Income-tax Appeal No.
8329 of 1957-58, preferred to the Income-tax Appellate Tribunal against the orders of the Appellate
Assistant Commissioner were dismissed.

Decision of High Court: The High Court held that in the assessment year 1949-50 the status of the
assessee was that of a firm within the meaning of s. 16(1)(b) of the Income-tax Act and thus it was
a partnership firm.
Clause (3) of the partnership deed provided, "The death of any of the parties shall not dissolve
the partnership and either the legal heir or the nominee of the deceased partner shall take his place
in the provisions of the partnership."

Section 31 of the Partnership Act reads:

(1) Subject to contract between the partners and to the provisions of section 30, no person shall
be introduced as a partner into a firm without the consent of all the existing partners."
Converting the negative into positive, under s. 31 of the Partnership Act if there was a contract
between the partners, a person other than the partners could be introduced as a partner of the firm
without the consent of all the existing partners. A combined reading of Ss. 42 and 31 of the
Partnership Act, would el ad to the only conclusion that two partners of a firm could by agreement
induct a third person into the partnership after the death of one of them.
“Partnership,” under Section 4 of the Partnership Act, is the relation between persons who
have regard to share the profits of a business carried on by all or any of them acting for all.

Section 5 of the said Act says that the relation of partnership arises from contract and not
from status.
The fundamental principle of partnership, therefore, is that the relation of partnership arises out of
contract and not out of status. Section 42 can be interpreted without doing violence either to the
language used or to the said basic principle.

Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are
more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the
contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners
of the firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a
third party to be introduced therein and, therefore, there is no scope for applying cl. (c) of s. 42 to
such a situation. It may be that pursuant to the wishes or the directions of the deceased partner the
surviving partner may enter into a new partnership with the heir of the deceased partner, but that
would constitute a new partnership.

In this light Sec. 31 of the Partnership Act falls in line with Sec. 42 thereof. That section only
recognizes the validity of a contract between the partners to introduce a third party without the
consent of all the existing partners. it presupposes the subsistence of a partnership; it does not apply
to a partnership of two partners which is dissolved by the death of one of them, for in that event,

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there is no partnership at all for any new partners to be inducted into it without the consent of
others.

Conflict of Judicial Decisions

There is conflict of judicial decisions on this question. The decision of the Allahabad High
Court in Lal Ram Kumar v. Kishori Lal22 is not of any practical help to decide the present case.
There, from the conduct of the surviving partner and the heirs of the deceased partner after death of
the said partner, the contract between the original partners that the partnership should not be
dissolved on the death of any of them was inferred. Though the partnership there was only between
two partners, the question of the inapplicability of Section 42(c) of the Partnership Act to such a
partnership was neither raised nor decided therein.

The same criticism applies to the decision of the Nagpur High Court in Chinkaram Sidhakaran
Oswal v. Radhakisan Vishwanath Dixit 23 This question was directly raised and clearly answered
by a Division Bench of the Allahabad High Court in Mt. Sughra v . Babu24 against the legality of
such a term of a contract of partnership consisting of only two partners. Agarwala, J. neatly stated
the principle thus:
"In the case of the partnership consisting of only two partners, no partnership remains on the death
of one of them and, therefore, it is a contradiction in terms to say that there can be a contract
between two partners to the effect that on the death of one of them the partnership will not be
dissolv ed but will continue…. Partnership is not a matter of status; it is a matter of contract. No
heir can be said to become a partner with another person without his own consent, express or
implied."

Ramachandra Iyer J. in Narayanan v. Umayal25 observed thus:

".......if one of the partners died, there will not be any partnership existing to which the legal
representatives of the deceased partner could be taken in. In such a case the partnership would
come to an end by the death of one of the two partners, and if the legal representatives of the
deceased partner joins in the business later, it should be referable to a new partnership between
them."

But Chatterjee J., in Hansraj Manot v. Messrs. Gorak Nath Pandey26 struck a different note. His
reasons for the contrary view are expressed thus:

"Here the contract that has been referred to is the contract between the two partners Gorak
Nath and Champalal ... Therefore, it cannot be said that the contract ceased to have effect because
a partner died. The contract was there. There was no new contract with the heirs and there was no
question of a new contract with the heirs because of the original contract, and by virtue of the
original contract the heirs become partners as soon as one if the partners died .......... As soon as
there is the death, the heirs become the partners automatically without any agreement between the

22
AIR 1946 All. 259.
23
AIR 1956 Nag. 46.
24
AIR 1952 All. 506, 507.
25
AIR 1959 Mad. 283, 284.
26
[1961] 66 C.W.N. 262.

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 original partners by virtue of the original agreement between the partners while they were
surviving. There is no question of interregnum. As soon as the death occurs the right of somebody
else occurs. The question of interregnum does not arise. The heirs become partners not because of
a contract between the heirs on the one hand and the other partners on the other but because of the
contract between the original partners of firm."

Decision of the Supreme Court: It held that this Section does not apply to a partnership of two
partners. There cannot be a contract between the partners that on the d4eath of one of them, the
partnership will not be dissolved.

BY THE ADJUDICATION OF A PARTNER AS AN INSOLVENT

Subject to the contract between the partners a firm is dissolved by the adjudication of a partner
as an insolvent.27

Dissolution By Notice Of Partnership At Will

According to section 43 of the Indian Partnership Act, 1932:

1. “Where the partnership is at will the firm may be dissolved by any partner giving notice to
all the other partners of his intention to dissolve the firm.”

2. “The firm is dissolved as form the date mentioned in the notice as the date of dissolution
or, if no date is so mentioned, as from the date of communication of the notice.”

This again is familiar law, except that notice is required to be in writing, as can be seen in the
English Act, section 32 (c) . A notice contemplated under this provision must, in order to be
effectual, be explicit and be communicated to all the partners. If before such notice becomes
operative an event occurs which dissolves the partnership, the notice would become redundant
since there would then exist no partnership on which it can operate. If however there is an
agreement that the partnership shall be terminated by mutual agreement only, this right stands
excluded.

Under section 43(1), if the partnership is at will, any partner may dissolve the firm by giving notice.
But in order to dissolve the firm the following conditions must be fulfilled:

A. Notice must be in writing;

B. Notice must express the intention of the partner to dissolve the firm; and
C. Written notice must be given to all the other partners.
Filing a suit in a court is not deemed to be a notice under Section 43(1). The Supreme Court in
Banarsi Das v. Seth Kashiram held this.28 In this case the earlier suit filed at Lahore by one of the
partners for dissolution of partnership and accounts was dismissed for default, the parties having

27
Section 42(d).
28
AIR 1963 SC 1165; (1964) 1 SCR 316.

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migrated to India, consequent on the partition of the country. Later on, in another suit a declaration
was sought by one of other partners that the firm was dissolved on 13 May 1944 when the earlier
suit was instituted. It was held that analogy of suits for partition of joint Hindu family property with
regard to which it is settled law that if all the parties are majors, the institution of suit will result in
the severance of the joint status of the family was inapplicable under section 43(1) because the
rights of the partners of a firm to the property of the firm are of a different character from those of
members of a joint Hindu family.

The Supreme Court observed that under section 43(2), notice must contain the date from which the
firm will be dissolved. The question of writing the date of dissolution in a plaint does not arise.
Thus plaint cannot be deemed to be as a notice under section 43(2) 29.

In Mc Leod v. Dowling,30 it was held that if before such notice become s operative an event
occurs which dissolves the partnership, the notice would become redundant since there would
exist no partnership on which it can operate.

In Moss v. Elphick,31 it was held that if there is an agreement that the partnership shall be
terminated by mutual agreement only, this right stands excluded.

In Banarsi Das v. Seth Kashiram, AIR 1963 SC 1165, The plaintiff Kundanlal and the defendants
1 to 5 Banarsi Das, Kanshi Ram, Kundan Lal, Munnalal, Devi Chand and Sheo Prasad are brothers
and formed a Joint Hindu Family till the year 1936. Amongst other properties the family owned a
sugar mill at Bijnor in Uttar Pradesh called "Sheo Prasad Banarsi Das Sugar Mills". After the
disruption of the family the brothers decided to carry on the business of the said sugar mill as
partners instead of as members of a Joint Hindu Family. The partnership was to be at will and
each of the brothers was to share all the profits and losses equally. The mill was to be managed
by one of the brothers who were to be designated as the managing partner and the agreement
arrived at amongst the brothers provided that for the year 1936-37, which began on September 1,
1936, the first defendant Banarsi Das, who is the appellant was to be the managing partner.

The agreement provided that for subsequent years the person unanimously nominated by
the brothers was to be the managing partner and till such unanimous nomination was made, the
person functioning as managing partner in the previous year must continue.

For the years 1941-44, Kundanlal was the managing partner. On May 13, 1944, Sheo Prasad
defendant No. 5 now deceased, instituted a suit in the court of the Sub-ordinate Judge, First Class,
Lahore, for dissolution of partnership and rendition of accounts against Kundanlal and joined the
other brothers as defendants to the suit. In the course of that suit the court, by its order dated August
3, 1944, appointed one Mr. P. C. Mahajan, Pleader, as Receiver but as the parties were dissatisfied
with the order the matter was taken up to the High Court in revision where they came to terms. In
pursuance of the agreement between the parties the High Court appointed Kanshiram as Receiver in
place of Mr. Mahajan as from April 5, 1945. In the meanwhile, the District Magistrate, Bijnor took
over the mill under the Defence of India Rules and appointed Kundanlal and his son to work the

29
Pratap Singh J. had also upheld this position in Venugopal v. Jaya, (1993) 2 Mad LJ 434.
30
(1927) 43 TLR 665.
31
[1910] 1 KB 465.

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mill as agents of the U.P. Government for the year 1944-45. The Government for the year 1945-46
renewed this lease. On August 28, 1956, the parties, except Devi Chand, made an application to the
Court at Lahore praying that the Receiver be ordered to execute a lease in favour of Banarsidas for
period of five years. It may be mentioned that this application was made at the suggestion of the
District Magistrate; Bijnor. The Subordinate Judge made an order in terms of the application. In
September 1946, Banarsidas obtained possession of the mill. It may be mentioned that Sheo Prasad
had in the meanwhile applied to the court for distribution amongst the erstwhile partners of an
amount of Rs. 8,10,000/- (out of the total of Rs. 8,30,000/-) which was lying with the Receiver and
suggested that the amount which fell due to Kundanlal and Banarsidas should be withheld because
they had to render accounts. However, the aforesaid amount lying with the receiver was distributed
amongst all the brothers and Devichand acknowledged receipt on November 14, 1946. On October
11, 1947, the Lahore suit was dismissed for default, the parties having migrated to India consequent
on the partition of the country.

On November 8, 1947, Sheo Prasad instituted a suit before the court of Civil Judge, Bijnor against
his brothers for a permanent injunction restraining Banarsidas from acting as Receiver. The suit,
however, was dismissed on March 3, 1948. On July 16, 1948, Sheo Prasad transferred his 1/6th
share to Banarsidas and since then Banarsidas has been getting the profits both in respect of his
own share as well as in respect of that of Sheo Prasad.

On July 30, 1949, Banarsidas filed his written statement but none of the other defendants
put in an appearance. On December 18, 1950, an application, which had been made for the
appointment of a Receiver, was dismissed on the ground that Kanshi Ram who had been appointed
as Receiver by the Lahore High Court continued to be the Receiver. It may be mentioned that
during the pendency of this suit the appellant Banarsidas entered into an agreement with Devichand
and Kanshi Ram where under he took over all their rights and interests in the said mill for a period
of five years commencing from July 1, 1951. On February 19, 1951, he made an application to the
court for directing Kanshi Ram to give a lease of the mill to him for a period of five years
commencing from July 1, 1951. It may be mentioned that under an earlier arrangement Banarsidas
had obtained a lease for a similar term, which was due to expire on June 30, 1951. On April 26,
1951, one Mr. Mathur was appointed Receiver by the court and in July 1951, he granted a lease for
five years to Kundanlal on certain terms, which would be settled by the court. It may be appropriate
to mention here that issues in the suit instituted by Kundanlal were framed on December 7, 1951,
and one of the important issues was whether the lease dated September 12, 1946, granted to
Banarsidas was void ab initio or was voidable and in either case what was its effect.

Contentions of Banarsidas:

(1) Under the Partnership Act, the partners are entitled to have the business of the
partnership wound up even though a suit for accounts is barred under Art. 106 of the Limitation
Act.

(2) Kanshi Ram having been appointed a Receiver by the Court stood in a fiduciary
relationship to the other partners and the assets, which were in his possession, must be deemed
to have been held by him for the benefit of all the partners. Therefore, independently of any
other consideration, he was bound to render accounts.

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(3) The question of limitation was not raised in the plaint or the grounds of appeal before
the High Court and as it is a mixed question of fact and law, it should not have been made the
foundation of the decision of the High Court. If it was thought necessary to allow the point to
be raised in view of the provisions of s. 3 of the Limitation Act, the courts should at least have
followed the provisions of O. 41, r. 25, Code of Civil Procedure, and framed an issue on the
point and remitted it for a finding to the trial court.

(4) The Court was wrong in holding that limitation for the suit commenced on May 13,
1944.

(5) The High Court was wrong in resorting to the provisions of O. 41, r. 33, of the Code of
Civil Procedure.

Ratio decidendi:

“Even assuming, however, that the term "notice" in the provision is wide enough to include within
it a plaint filed in a suit for dissolution of partnership, the sub-section itself provides that the firm
will be deemed to be dissolved as from the date of communication of the notice. It would follow,
therefore, that a partnership would be deemed to be dissolved when the summons accompanied by
a copy of the plaint is served on the defendant, where there is only one defendant, and on all
defendants, when there are several defendants. Since a partnership will be deemed to be dissolved
only from one date, the date of dissolution would have to be regarded to be the one on which the
last summons was served.”

Decision:

The Supreme Court held that the High Court's decision must be set aside and that of the trial court
restored. We may, however, mention that some of the parties including the appellant Banarsidas
and the plaintiff-respondent, Kundanlal as well as the defendant-respondent Kanshi Ram were
agreeable to certain variations in the decree. But as there were other parties besides them to whom
these variations are not acceptable, we are bound to decide the appeals on merits. For the aforesaid
reasons, we allow the appeals of Banarsidas and Kundanlal and restore the decree of the trial
court.

Dissolution of Firm & Joint Hindu Family: Distinction

Joint Hindu Family Partnership Firm

It is settled law that if all the parties are While the rights of the partners of a firm to
majors, the institution of a suit for partition the property of the firm are of a different
will result in the severance of the joint status of character from those of the members of a joint
the members of the family. Hindu family.

While the members of a joint Hindu 2. But on the other hand, the partners of a
family hold an undivided interest in the family firm hold interest only as tenants-in-common.

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property,

Now as a result of the institution of a suit 3. In a partnership at will, if one of the

for partition, normally the joint status is
deemed to be severed, but then, from that time
onwards they hold the property as tenants-in-
common i.e., their rights would thenceforth be
somewhat similar to those of partners of a firm.
partners seeks its dissolution, what he wants is
that the firm should be wound up, that he
should be given his individual share in the
assets of the firm (or may be that he should be
discharged from any liability with respect to
the business of the firm apart from what may
be found to be due from him after taking
accounts) and that the firm should no longer
exist.
He can call for the dissolution of the
firm by giving a notice as provided in sub-s.
(1) of s. 43 i.e., without the intervention of the
court, but if he does not choose to do that and
wants to go to the court for effecting the
dissolution of the firm, he will, no doubt, be
bound by the procedure laid down in O. 20, r.
15, of the Code of Civil Procedure.

Order 20, Rule 15, of CPC32 reads thus:

"Where a suit is for the dissolution of a partnership or the taking of partnership accounts, the
Court, before passing a final decree, may pass a preliminary decree declaring the proportionate
share of the parties, fixing the day on which the partnership shall stand dissolved or be deemed
to have been dissolved, and directing such accounts to be taken, and other acts to be done, as it
thinks fit."

This rule makes the position clear. No doubt, this rule is of general application, that is, to
partnerships at will as well as those other than at will; but there are no limitations in this provision
confining its operation only to partnerships other than those at will.

Section 43(1) of the Partnership Act does not say what will be the date from which the firm
will be deemed to be dissolved. For ascertaining that, we have to go to Sub –Section (2).

Sub –Section (2), which reads thus:

"The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no
date is so mentioned, as from the date of the communication of the notice."

Now, it will be clear that this provision contemplates the mentioning of a date from which
the firm would stand dissolved. Mentioning of such a date would be entirely foreign to a plaint in a

32
Code of Civil Procedure, 1908.

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suit for dissolution of partnership and therefore such a plaint cannot fall within the expression
"notice" used in the sub-section. It would follow therefore that the date of service of a summons
accompanied by a copy of a plaint in the suit for dissolution of partnership cannot be regarded as
the date of dissolution of partnership and s. 43 is of no assistance.

In Devi Textiles v. S. Suganthi, AIR 2000 Mad. 62, In this case there was a partnership at will
and both the partners (plaintiff and defendant) had 50% shares in the firm and both agreed to have
the firm dissolved and thereafter partners did not have good relationship, but the defendant
continued the business of the firm as if nothing happened and it is still in existence.

Decision: In such circumstances, it was held that the appointment of a receiver would be proper for
rendition of accounts and for completing winding up process.

Dissolution By Court

This declaration of the grounds for judicial dissolution corresponds, with verbal variation and
additional provision adapted to Indian procedure, to section 35 of the English Act, which was itself
a somewhat enlarged version of section 254 of the Contract Act . The section confers a right to pray
for dissolution on any of the grounds specified therein notwithstanding any term of the partnership
deed.

According to Section 44, Indian Partnership Act, 1932, the court may dissolve a firm on any of the
following grounds, namely:

a. A Partner Becoming o f Unsound Mind

At the suit of a partner, the court may dissolve a firm on the ground that a partner has become of
unsound mind, in which case the suit may well be brought as well by the next friend of the
partner who has become of unsound mind as by any other partner.33

Since a person of unsound mind cannot perform the works of a partnership firm, it is in the
interest of such a person as well as other partners that the firm be dissolved. Hence the next friend
of unsound partner or any other partner may through a suit request the court to dissolve the firm.

b. A Partner Becoming Permanently Incapable

At the suit of a partner, the court may dissolve a firm on the ground that a partner, other than
the partner suing, has become in any way permanently incapable of performing his duties as
partner.34

If the incapacity is temporary or is such that does not affect the duties of a partner, the firm
cannot be dissolved on this ground. For example there is fracture of the bone of leg or hand and
there is every likelihood of it being rectified or where a partner suffers from paralysis or he is

33
Section 44(a), The Indian partnership Act, 1932.
34
Section 44(b), The Indian Partnership Act, 1932.

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 improving speedily by treatment, the firm cannot be dissolved on this ground. In order to dissolve
the incapacity must be permanent. 35

c. Partner Guilty Of Conduct Likely To Affect Prejudicially The Carrying On Of The

Business

At the suit of a partner, the court may dissolve a firm on the ground 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.36

Two aspects of section 44(C):

• The first thing to be noted in section 44(c) is that if the partner filing the suit himself is
guilty of conduct which is likely to affect prejudicially the carrying on of the business, the court
will not order the dissolution of the firm.

As remarked by Lord Romilly in Harrison v. Tenant37 as:

“No party is entitled to act improperly and then to say that the conduct f the partners and their
feelings towards each other are such that the partnership can no longer be continued and certainly
this court would not allow any person so as to act and thus to take advantage of his own wrong.”

• The second important thing to be noted in section 44 (c) is that in order to dissolve the firm
on this ground, it is necessary that the partner must be guilty of a conduct which keeping in view
the nature of the business is likely to affect prejudicially the carrying on of the business. If the
partner is guilty of wrongful act willfully, the mere fact that his continuance in the partnership firm
will be detrimental for the firm will not be sufficient to dissolve the firm.

Nature of the Business-

It may also be noted that much depends on the nature of the business.

In Snow v. Milford,38 In this case a partnership firm carried on the business of the bankers. A
partner of the firm named Milford was guilty of living in adultery with several women and as a
result of this his wife had deserted him. Other partners filed as suit for dissolution of the firm on the
ground of the said bad conduct of Milford.

Reasoning + Decision: The court dismissed the suit holding that it cannot be said that a customer’s
money is not safe because one of the partners of the firm is guilty of adultery. Though the court
condemns the act of adultery of a person but this cannot be a ground for the dissolution or expelling
the partner.

35
Whitewell v. Arthur, (1865) 147 RR 73, 55 ER 848.
36
Section 44(c), The Indian Partnership Act, 1932.
37
[1856] ALL ER 945.
38
(1868) 18 LT 142.

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 Undoubtedly in some cases the moral conduct of a person may prejudicially affect the
business of a firm. For example, if a doctor enters into a partnership with another doctor to run the
clinic and it is found that he is immoral towards some patients, partnership firm may be dissolved
on this ground. But this is not so in the case of business of bankers because in tit he moral conduct
of a partner is not likely to affect prejudicially the business of the firm.

But if the moral conduct of a partner is likely to affect prejudicially the business of the firm even
though the crime is less serious, keeping in view the business of the firm the court may dissolve the
firm. For example, if a partner in a firm of drapers is found without ticket and is convicted, the firm
may be dissolved.39 Similarly, if the conduct of a partner is such that partners may lose faith in each
other the firm may be dissolved. 40

d. Willful or persistent breach of agreement relating to the business or management of

the affairs of the firm.

At the suit of a partner, the court may dissolve a firm on the ground that a partner, other
than the partner suing, willfully or persistently commits breach of agreements relating to the
management of the affairs of the firm or the conduct of its business or otherwise so conducts
himself in matters relating to the business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him.41

Under section 44(d) it is necessary that there is willful or persistent breach of agreements
relating to the business of the firm or the conduct of the partner is such that it is not reasonably
practicable for other partners to carry on business with him. If the breach of agreement is not
willful, a single breach shall not be sufficient to dissolve a firm. Constant or continuous behavior of
enmity between the partners making the cooperation between them impossible, persistent refusal by
one partner to perform his duties, one partner habitually accusing the other partner pf gross
misconduct in the business, and to maintain wrong accounts and not to enter the receipts, are the
4examplaees of some of the grounds on which the firm may be dissolved under this section. In the
end it may be noted that the firm may be dissolved by the court on the suit of a partner other than
the one who is guilty.

e. Transfer Of The Whole Interest In The Firm By A Partner To A Third Party

At the suit of a partner the court may dissolve a firm on the ground 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.42

39
See Carmichael v. Evans, (1904) 90 LJ 573; (1904) 1 Ch. 486.
40
Supra note 18.
41
Section 44 (d), The Indian Partnership Act, 1932.
42
Section 44 (e), The Indian Partnership Act, 1932.

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 If a partner transfers whole of his interest to a third party he will have no interest left in the
firm and therefore, any other partner can get the firm dissolved by filing a suit in court on this
ground. Such a third party or transferee does not thereby become a partner in the firm. It does not
entitle the transferee, during the continuance of the firm to interfere in the conduct of the business,
or to require account or to inspect the books of the firm, but entitles the transferee only to receive
share of profits of the transferring partner and the transferee shall accept the account of profits
agreed to by the partners.43
If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled,
as against the remaining partners, to receive the share of the assets of the fir to which the
transferring partner is entitled, and for the purpose of ascertaining the share, to an account as from
the date of the dissolution. 44

In Commissioner of Income Tax v. Sunil J. Kinariwala, AIR 2003 SC 668, In this case Hon’ble
Supreme Court held that when the partner assigns 50 % of his share in a partnership firm in favour
of trust, the case of such assignment couldn’t be treated as one of sub-partnership.
In A.Chinna Ramanatham Naidu v. B. Subbarami Reddy, AIR 1994 AP 26, In this case the court
held that under section 44 if grounds for dissolution of the firm sought by a particular party are
numerous, it could be open to such party to approach a competent civil court, so that a entire matter
could be decided by that court on the basis of oral and documentary evidence. Even if one of the
clauses of partnership deed envisages referring the disputes to the named arbitrators, then also the
fact that arbitrators are chosen by both the parties and a date was also fixed for arbitration
proceedings, cannot be ground for a seeking stay of further proceedings in a regular suit filed for a
comprehensive relief.

f. Perpetual Loss

At the suit of a partner, the court may dissolve a firm on the ground that the business of the firm
cannot be carried on save at a loss.45

According to the definition of the partnership as given in Section 4, the chief objective of
partnership is to acquire profit. If the circumstances are such that this chief objective cannot be
attained and the business of the firm cannot be carried on the court on this ground may dissolve
save at loss, firm. Every partnership firm is established to attain a particular objective and if the
circumstances are such that it is not possible to attain that objective, the remedy in such cases is to
dissolve the firm.
For example, in a case partnership firm was established for the exploitation of mica from
mines, one of the partners filed a suit for the dissolution of the firm on the ground that the firm is
suffering loss continuously. Other partners opposed the suit on the ground that the partnership was
for a fixed period and that the plaintiff had no valid treasons to resolve the firm before the expiry of
the period. The court held that Section 44(f) will apply in this case and that the plaintiff is entitled
to sue for dissolution and accounts.

43
Section 29(1), The Indian Partnership Act, 1932.
44
Section 29 (2).
45
Section 44(f).

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 g. Just and Equitable

At the suit of partner, the court may dissolve a firm on the ground that it is just and equitable
that the firm should be dissolved.46
Section 44(g) gives very wide powers to the court. Whenever a case is brought to the case under
section 44(g), the court has to decide whether it would be ‘just and equitable’, to dissolve the firm
and such matters cannot be left for decision or award of the arbitration.47

Under section 44(f), 6the court has to decide according to its discretion but this discretion cannot be
restricted by rigid or inflexible rules. The court has to use its discretion on the basis of facts and
circumstances of the case. For example, in one case 4 out of 9 partners wanted dissolution of the
firm and their shares in the firm were 7/9. There was no co-operation and mutual faith between the
partners. There were many and long-persisting disputes among them. The court held that it would
be just and equitable to dissolve the firm.

But where the management of the firm was in the hands of the defendants and they were running
the business properly and in profit, the court would not order the dissolution on the mere ground
that the plaintiff was violating the agreement and was creating obstructions in the management of
the business by the defendants. Besides the court will order dissolution on the suit of a partner who
himself is guilty of misconduct.
Under Section 44(g), the court possesses very wide powers. To arrive at the inference that it would
be just and equitable to dissolve the firm the court may consider the events subsequent to the filing
of the suit.

Last but not least, it may be noted that Section 44 is not subject to contract between partners. It
confers right on the partners to file suit for the dissolution of the firm on the ground mentioned in
the Section.

Stay of Arbitration

Although the arbitration clause in a partnership agreement may be sufficiently wide to

include the question whether the partnership should be dissolved, the court in its discretion
may not stay a suit for dissolution, if dissolution is sought under Section 44(g).48 Whenever
dissolution of partnership is sought under Section 44(g), then it is for the court to decide,
whether it would be just and equitable to dissolve the partnership or not and such a matter
cannot be left to be gone into and decided by the arbitrator in pursuance of the arbitration
clause contained in the partnership deed.

Last but not least, it may be noted that Section 44 is not subject to contract between partners. It
confers right on the partners to file suit for the dissolution of the firm on the ground mentioned in
the Section.
46
Section 44(g).
47
Nainder Singh Randhava v. Hasrdial Singh Dhillon, AIR 1985 P&H 41; See also Kalpana Kothari v. Sudha Yadav,
(2002) 1 SCC 203; AIR 2002 SC 89.
48
Oliver v. Hillier, [1959] 2 All ER 220.

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Conclusion

The firm is dissolved when all the partners of a firm is called the “dissolution of the firm”. Thus
we can conclude that the firm is dissolved when all the partners stop carrying on the partnership
business. If some partners dissociate from the firm and the remaining partners continue the business
of the firm, the firm is not dissolved. The dissolution of a firm is distinct from the retirement of a
partner because in latter situation others or remaining partners continue the business of the firm and
the firm is not dissolved. Thus dissolution of partnership between all the partners of a firm is called
dissolution of the firm.
The dissolution of the partnership brings about a change in the relations between partners but
partnership between them does not completely end. The partnership continues for the purpose of
realization of assets or properties of the firm.

Further, after the dissolution of a firm the authority of each partner to bind the firm, and the other
mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as
may be necessary to wind up the affairs of the firm and to complete transactions begun but
unfinished at the time of the dissolution, but not otherwise.

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