Dissolution of Indian Firms- Various Modes

An Expert's View about Banking, Finance and Insurance in India

Posted on: 18 Mar 2010

The paper 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? It 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.

DISSOLUTION OF INDIAN FIRMS- VARIOUS MODES Raghvendra Singh Raghuvanshi & Nidhi Vaidya1 Table of contents ? Statement Of Purpose ? Introduction ? Meaning of Dissolution of a Firm ? Modes of Dissolution- 1. Dissolution by Agreement 2. Compulsory Dissolution 3. Dissolution on happening of certain contingencies 4. Dissolution by notice 5. Dissolution by Court ? Conclusion 1 The Authors are Lawyers practicing in High Court of MP, Indore, India and can be reached at raghav_nliu@rediffmail.com. STATEMENT OF PURPOSE The paper 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? It 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 As a result, Chapter XI of the Contract Act was repealed and replaced by the Partnership Act of 1932.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 2 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. 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. 1 CIT, West Bengal v. M/s AW Figgis & Co AIR 1953 SC 455 3 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 wou 2ld not be subject to separate duty on such matters. 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 3 of fact. 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 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. 4 DISSOLUTION BY AGREEMENT ?A firm may be dissolved with the consent of all the partners or in accordance with a 5 contact between the partners? 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 7 articles, be a ground for dissolution of partnership without the intervention of the court. 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 5 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 dissolv 9e. 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: 9 Hitchman v. Crouch Butlet Savage Associates (1983) 80 LS Gaz 550. 10 Kali Ram v. Ram Ratan AIR 1977 NOC 31 (Del) 6 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 p 2artner. 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 3. A firm is dissolved by the adjudication of all the partners or of all the partners but one as insolven 4t . 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 2 CIT Madhya Pradesh v. Seth Govindram Sugar Mills AIR 1966 SC 24. 3 Lindley on Partnership, 15th edn, pp 693-4. 4 Section 41(a). 7 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 p 5artnership. 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 6. In the English case of Esposito v. Bowden 7 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. Watson8 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 9 be carried on or for the partners to carry on in partnership. 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 5 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. 6 15th edn, pp 89-91. 7 (1857) 7 E&B 763. 8 (1978) QB 451. 9 Section 41(b). 8 of itself cause the dissolution of the firm in respect of its lawful adventures and und 10ertakings. 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 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 illegality 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 1 in 1915 1. 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 12. 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 10 Proviso to Section 41(b). 11 Porter v. Freudenberg & Co., [1915] KB 857. 12 Sovfracht v. Van Uden?s Scheepvaart, [1943] AC 203. 9 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 shareho 13lders. 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 no 4t conclusiv 1e. DISSOLUTION ON 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. 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 15. 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 13 The Roumanian, [1915] 1 26. 14 Daimler Co?s case, [1916] 2 AC 307. 15 Section 42(a). 10 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 th 6ereo 1f. 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 considered. 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. Gheru Lal Parekh v. Mahadeo Das Maiya17 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 18 final realization of assets. 16 Section 42(b). 17 AIR 1959 SC 781. 18 Basanthlal Jalan v. Chiranjilal sarawgi & others, AIR 1968 Pat 96. 11 19 In Mann v. D?Arcy, 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. BY THE DEATH OF A PARTNER Subject to the contract between the partners a firm is dissolved by the death of a partn 20er. 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 p 21ersons who have agreed to carry on the business. 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, Patiyala22 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. 19 (1968) 1 WLR 893; J&J Cunningham v. Lucas, (1957) 1 Lloyd?s Rep. 416. 20 Section 42 (c). 21 Dulli Chand Lakshminarayan v. CIT, Nagpur, AIR 1956 SC 354. 22 AIR 1977 P&H 320 at p. 324. 12 Commissioner Of Income Tax, Madhya Pradesh, Nagpur v. Seth Govindram Sugar Mills L 23td. Facts: 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. The Appellate Assistant Commissioner dismissed both the appeals. In the appeal against the order of assessment, the Appellate Assistant Commissioner exhaustively 23 AIR 1966 SC 24. 13 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 lead 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. 14 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, 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. Kisho 24ri Lal 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 24 AIR 1946 All. 259. 15 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 Dix 25it This question was directly raised and clearly answered by a Division Bench of the Allahabad High Court in Mt. Sughra v. Babu26 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 dissolved 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. Uma 7ya 2l 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 Pand 28ey 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 25 AIR 1956 Nag. 46. 26 AIR 1952 All. 506, 507. 27 AIR 1959 Mad. 283, 284. 28 [1961] 66 C.W.N. 262. 16 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 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 pa 29rtner as an insolvent. 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.? 29 Section 42(d). 17 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 th 30is. 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 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 30 AIR 1963 SC 1165; (1964) 1 SCR 316. 18 plaint does not arise. Thus plaint cannot be deemed to be as a notice under section 43(2 ) 31 . In Mc Leod v. Dowling 32, it was held that if before such notice becomes 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 33, 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 Kashiram34 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. 31 Pratap Singh J. had also upheld this position in Venugopal v. Jaya, (1993) 2 Mad LJ 434. 32 (1927) 43 TLR 665. 33 [1910] 1 KB 465. 34 AIR 1963 SC 1165 19 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 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 20 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. 21 (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 22 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 While the rights of the partners of a It is settled law that if all the firm to the property of the firm are of a parties are majors, the institution of a suit different character from those of the for partition will result in the severance of members of a joint Hindu family. the joint status of the members of the family. While the members of a joint Hindu 2. But on the other hand, the partners of family hold an undivided interest in the a firm hold interest only as tenants-in- family property, common. Now as a result of the institution of a 3. In a partnership at will, if one of the suit for partition, normally the joint status partners seeks its dissolution, what he is deemed to be severed, but then, from that wants is that the firm should be wound up, time onwards they hold the property as that he should be given his individual share tenants-in-common i.e., their rights would in the assets of the firm (or may be that he thenceforth be somewhat similar to those should be discharged from any liability of partners of a firm. 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 23 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 CPC35 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). 35 Code of Civil Procedure, 1908. 24 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 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. Sugan 36thi 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. 36 AIR 2000 Mad. 62, at p. 65. 25 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 OF 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 partn 37er. 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 partn 38er. 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 improving speedily by treatment, the firm cannot be dissolved on this ground. In order to dissolve the incapacity must b 39e permanent. 37 Section 44(a), The Indian partnership Act, 1932. 38 Section 44(b), The Indian Partnership Act, 1932. 39 Whitewell v. Arthur, (1865) 147 RR 73, 55 ER 848. 26 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 b 40eing had to the nature of the business. 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. A 41s remarked by Lord Romilly in Harrison v. Tenant 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. 40 Section 44(c), The Indian Partnership Act, 1932. 41 [1856] ALL ER 945. 27 In Snow v. Milford 42, 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. 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 dissolv 43ed. Similarly, if the conduct of a partner is such that partners may lose faith in each other the firm may be dissolved 44. 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 42 (1868) 18 LT 142. 43 See Carmichael v. Evans, (1904) 90 LJ 573; (1904) 1 Ch. 486. 44 Supra note 18. 28 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 45. 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 du 46e by the partner. 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 45 Section 44 (d), The Indian Partnership Act, 1932. 46 Section 44 (e), The Indian Partnership Act, 1932. 29 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 p 7artner and the transferee shall accept the account of profits agreed to by 4 the partners. 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 d 48issolution. In Commissioner of Income Tax v. Sunil J. Kinariwala49 the 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 Redd 50y 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 1 lo 5ss. 47 Section 29(1), The Indian Partnership Act, 1932. 48 Section 29 (2). 49 AIR 2003 SC 668. 50 AIR 1994 AP 26 51 Section 44(f). 30 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. 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 52 should be dissolved. 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 53. 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. 52 Section 44(g). 53 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. 31 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 54(g). 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. 54 Oliver v. Hillier, [1959] 2 All ER 220. 32 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. 33
Posted: 18 March 2010

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