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Authors – Rashi Suri (Managing Partner), Dikshita Damodaran and Pradyun Chakravarty (Associates)

In India, partnership law is governed under the Indian Partnership Act, 1932 (“Act“). Under Section 4 of the Act partnership is defined as “The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. The Act comprehensively covers the full gamut of legal relations shared between the partners, their rights and duties while laying down the consequences of retirement of a partner and the dissolution of a partnership firm.

In a recent judgment in the case of Guru Nanak Industries, Faridabad and Another v/s Amar Singh (Dead) through Legal Representatives, the Supreme Court of India a three-judge bench comprising Justices NV Ramana, Sanjiv Khanna and Krishna Murari, have distinguished the law by clarifying between retirement of a partner and dissolution of a partnership firm when there are only two partners in a partnership firm. In such a case of two partners where one of them retires the same will lead to the dissolution of the firm.

Through this article we talk about the principles associated and the rights and obligation of partners on the dissolution of partnership 

Dissolution – Principles & Differences

• As per Section 39 of the Act “the dissolution of partnership between all the partners of a firm is called the ‘dissolution of a firm’.” The same implies a complete breakdown of the relation of partnership between all the partners thus bringing it into an end.

• Dissolution of Partnership & Dissolution of Firm

It is notable to mention here that the dissolution of partnership is quite different than the dissolution of the firm.

• In a dissolution of a partnership there is merely a change in the relation of partners; while in case of dissolution of the firm, the same amounts to a full closure of the firm with the business of the firm ceasing to exist. 

• In the former, in case any of the partners dies, retires or become insolvent but the remaining partners are agreeing to continue the business of the partnership firm, then it the same is a dissolution of partnership and not the dissolution of the firm. 

• In the aforementioned case, a two person partnership was formed between the Appellant (Swaran Singh) and Respondent (Amar Singh) under the name of Guru Nanak Industries. A civil suit was filed by the firm and Swaran Singh against Amar Singh to claim that Amar Singh had retired from the firm. The suit was contested by Amar Singh on the grounds that he had not resigned and filed a suit for dissolution of partnership and rendition of accounts. The appeal process against trial court judgment and High Court’s dismissal of appeals led the legal heirs of Swaran Singh to file a further appeal from the decision of the High Court before the Supreme Court. The essential issue to be examined by the Supreme Court was whether Amar Singh had resigned from the firm or was the partnership dissolved?

The Supreme Court while adjudicating the appeals reiterated the established principles by stating the distinction between “retirement of a partner” and “dissolution of a partnership firm”: 

• In case of a retirement of a partner, the partnership firm continues as it was while the retiring partner is paid his dues according to Section 37 of the Act. 

• However, in dissolution, all the accounts of the firm needs to be settled and distributed as prescribed under Section 48 of the Act. 

• When the partners agree to dissolve a partnership, it is a case of dissolution and not retirement as per the case of Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others.

• It was also reiterated by the Court that a partnership firm must needs to have at least two partners and when there are only two partners while one has agreed to retire then the retirement of one of the partners out of the two causes the dissolution of the firm. As there being only two partners of the partnership firm, the firm cannot continue to operate as business when out of the two, one partner exits the partnership firm. The said principle has been laid down in Erach F.D. Mehta v. Minoo F.D. Mehta. 

Rights & Liabilities post-Dissolution

• As per Section 46 of the Act which deals with the rights of partners after dissolution, the partners will have the following rights regarding:

• Equitable lien: Every partner will be entitled to certain rights like that of having the property of the partnership firm used in payments of debts and liabilities and rights to have surplus distributed among all the partners.

• Return of premium: this is the amount paid at the time of the partnership which is in the form of a premium and on dissolution the partners have the right to get that premium back.

• Use of firm’s name or property: the dissolution of the firm ends the use of its name and property as well, therefore a partner after dissolution has been effected can restrain other partners from using the name of the firm.

• As per Section 45 of the Act the liabilities of partners post-dissolution of the partnership firm are:

• Liability towards 3rd parties: Until a formal public notice of the dissolution of the partnership firm is given, the liabilities shall be continuing.

• Winding up affairs: Even after the dissolution of the partnership a partner may be liable for paying his debt and to wind up the affairs regarding the partnership.

• Share in profits: After the dissolution, partners are liable to share the profit which they have decided in agreement or accordingly.

Winding up a firm’s business is a strenuous affair however, the Partnership Act clearly lays down the rights and liabilities along with dissolution grounds and the Courts have at different junctures enumerated the principles by which the above can be effected so that no member of a partnership takes an undue advantage from the other members. The certainty of law and principles laid down and abided by subsequent judgments of the Supreme Court provides definitiveness to the law which in turn maintains good business environment in the overall ecosystem. 

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*Judgment dated 26 May 2020 in Civil Appeal Nos. 6659-6660 of 2010*
* (2003) 3 SCC 445*
*(1970) 2 SCC 724*
*Right of partners to have business wound up after dissolution: On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights*
*Liability for acts of partners done after dissolution.—(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution: Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner. (2) Notices under sub-section (1) may be given by any partner.*