WHAT IS PARTNERSHIP?
Partnership is the relation between two or more persons carrying the business by all or one acting them for all and sharing the profit in their profit sharing ratio. Section 4 of partnership act defines partnership.
A partnership is a kind of business where a formal agreement between two or more people is made and agreed to be the co-owners, distribute responsibilities for running an organisation and share the income or losses that the business generates. In this agreement, all the rights and responsibilities of each partner who has set up the business.
However, this partnership can be dissolved only when some predefined provisions, according to the Partnership Act of 1932 are matched, such as:
- Dissolution by Agreement (section 40)
- Dissolution by Notice (section 43)
- Dissolution by the Court (section 44)
- Compulsory Dissolution (section 41)
- Conditional Dissolution (section 42)
Dissolution of partnership and dissolution of the partnership firm are two different concepts. The dissolution of a partnership means a change of business relationship between partners whereas the dissolution of a firm means dissolving of the firm along with the relation between partners. In this case, all the assets and liabilities are settled and appropriately disposed.
Reasons of Partnership:
- Death of a partner.
- Admission of a new partner.
- Insolvency of an existing partner.
- Early retirement of a partner.
- Due to expiry of a partnership period after a certain time as mutually agreed upon by all partners.
SECTION 39. DISSOLUTION OF FIRM.
The dissolution of a partnership between all the partners of a firm is called the “dissolution of the firm”.
SECTION 40. DISSOLUTION BY AGREEMENT.
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
SECTION 41. 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
SECTION 42. DISSOLUTION ON 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.
SECTION 43. DISSOLUTION BY NOTICE
(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
(2) 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.
SECTION 44. DISSOLUTION BY COURT
At the suit of a partner, the Court may dissolve a firm on any of the following
grounds, namely :-
(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;
(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;
(c) 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;
(d) that a partner, other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm of 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;
(e) 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;
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.
DIFFERENCE :-
| DISSOLUTION OF PARTNERSHIP FIRM | DISSOLUTION OF FIRM BY COURT |
| It means that a firm dissolved by a partner giving notice in partnership at will. | This dissolution is done through the court. |
| If the purpose fulfilled or time lapses, then partnership can be dissolved automatically. | But this dissolution is not done when time lapses or purpose fulfilled. |
| If a firm is in loss, then it can’t be dissolved. Its upon the discretion of partner. | If a firm is in loss, then court can pass orders for dissolution. |
| All partners give consent to dissolve | No need to obtain consent from all partners. one can move to court. |
| Any breach of agreement does not dissolve partnership generally. | Any breach of agreement can dissolve partnership if application filed in court. |
DIFFERENCE BETWEEN DISSOLUTION OF PARTNERSHIP AND DISSOLUTION FIRM
| DISSOLUTION OF PARTNERSHIP | DISSOLUTION OF FIRM |
| A partnership involves 2 or more persons or entities working together under a shared agreement. | A firm generally refers to a broader business entity, which can include partnerships, corporations, or other business structures. |
| Dissolution of Partnership does not require legal procedures | But dissolution of firm requires legal procedures to be followed |
| Partners are personally liable to any debt or liabilities. | In a firm, liability may be shared among the partners, shareholders, or members, but it can also be limited, depending on the legal structure. |
| Dissolution of partnership can often be initiated by mutual consent of the partners or as specified in the partnership agreement. | Dissolution of a firm typically follows specific legal procedures mandated by the jurisdiction’s laws. |
| Assets and liabilities of the firm are only revalued. | The firm is wound up. Assets are realized and liabilities are settled. |
| There is no final disclosure of books | There is final disclosure of books |
| After dissolution, the business continues. However, the partnership is reconstituted. | After dissolution, the business discontinues. |
RELEVANT CASE LAWS
Saligram Ruplal Khanna v. Kanwar Rajnath AIR 1974 SC 1094
Facts: Appellant and Respondent both formed partnership and make a lease agreement with the Custodian of Evacuee Property for a mill and the term for lease was 5 years. After failing to pay one rent installment, the Custodian served the partners with a show-cause notice on 12/2/1954, requesting that they explain why the lease should not be terminated. Due to financial difficulties, they both entered into second agreement. Due to disagreements, both the parties made oral agreement not to dissolve the partnership despite the lease agreement.
They requested a declaration that the partnership between them and the respondent continued to exist under the terms of the agreement as stipulated in the partnership document dated February 24, 1954, and also prayed for a rendition of the partnership accounts.
Both Trial and High Court decide that there was an oral agreement between the parties which appellant had failed to maintain and that the claim for a rendition of accounts was time-barred.
Issue: Whether the Tribunal was correct in ruling that there was nothing improper with the assessee valuing the closing stock at cost rather than market price based on the certitudes and incidents of the case?
Whether the Tribunal was legally correct in holding that the assessee-capital firm’s assets were not transferred to the partners, notwithstanding the fact that the assessee-firm was dissolved on December 18, 1987, based on the case’s certitudes and incidents?
Whether their is an oral agreement between the parties?
Judgement: According to section 47 of the indian partnership act after the dissolution of the 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 dissolution but not otherwise.
The word ‘transaction’ in Section 47 before not merely to a commercial transaction of purchase and sale but would include also all other matters relating to the affairs of the partnership. The completion of a transaction would cover also the taking of necessary steps in connection with the adjudication on a dispute to which the firm before its dissolution was a party.
The supreme court held observed the proposition could not be disputed. The partnership exists only to complete ongoing transactions, wind up the business, and adjust partners’ interests after dissolution. Unless a contract specifies otherwise, a firm formed for a specific period will be dissolved at the end of that period. The appeal was dismissed, although without cost, due to the circumstances.
M/s. Juggilal Kamlapat v. M/s. Sew Chand Bagree AIR 1960 Cal. 463
Facts: Sew Chand Bagree started a family business in the year 1924 as it appears from the entries of the Registrar. Later, the business turned into the partnership firm along with their three sons, i.e., Manik Chand, Moti Chand and Jankidas, on october, 1933.
Moti Chand and Manik Chand contended that the firm was dissolved in 1945 by mutual consent of the partners and thereafter their brothers started a new business in the name of Sew Chand.
The Juggilal Kamlapat made an application in Calcutta High Court to execute the decree on the award, against Manik Chand Bagree, Moti Chand Bagree and Jankidas Bagree as partners of the firm of Sew Chand Bagree.There was a document which doesn’t show that there has been any change in the constitution of the firm and no public notice of the dissolution of the firm was given.
Issue: Whether sub section (1) of section 45 is brought into play ?
Whether the point is covered by the proviso to the said section?
Judgement: The Court observed that Manik Chand Bagree and Moti Chand Bagree were not known to Juggilal Kamlapat as the partners of the firm, as the firm was dissolved before the contract.
The proviso is attracted to this case and Manik Chand and Moti Chand cannot be made liable for payment of the decretal amount.
Thus Judge G K Mitter concluded that M/s Sew Chand Bagree had been dissolved in 1945. The Court also referred to various sections of the Indian Partnership Act, 1964 as well as the Indian Contract Act, 1870 Judge G K Mitter after considering the shreds of evidence presented in Court and the intricacies connected with it, came to a conclusion that Manik Chand and Moti Chand were not a partner of M/s Sew Chand Bagree while the contract was being executed.
The Court considered the fact that although the Registrar of Firms did not reflect the dissolution of M/s Sew Chand Bagree; it also kept in mind that Juggilal while entering into the contract with Sew Chand did not run through these records as a basis for entering this contract. Thus Moti Chand Bagree and Manik Chand Bagree were rescued from having any liability. Jankidas Bagree was directed to pay a sum of Rs 31,000 to M/s Juggilal Kamlapat and the claimant was allowed to add costs to this claim as they deemed fit.
Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda (1998) 2 SCC 171
Facts: There was a partnership firm consisting of 6 partners, one of them died in 1986, and in their place, his wife was admitted as a new partner into the firm. Reconstitution was made by the firm’s partners, including the changing profit-sharing ratios.
The induction of a new partner was not brought to the notice of the Registrar of Firms.
Another partner also died at the firm in 1994, and the fact of his death was not intimated to the Registrar.
The first Respondent gave notice of the firm’s dissolution to the Appellant and also filed a suit for dissolution. The Court held that the suit was not maintainable because the firm was not registered after reconstitution.
Issue: Whether the registration given to the firm under the first partnership deed ceases when a new partner was introduced into the firm?
Judgement: Supreme Court said that to answer the issue, we must refer to the relevant sections, i.e., 58, 59 and 63. A close perusal of these provisions with Forms A, E, G, H will show that there is a definite distinction between the Certificate of Registration given to the firm and any alterations to be entered in the Register of Firms.
This will suggest in no uncertain terms that the changes in the constitution of the firm will not affect the registration once made. In other words, it is not required that every time a new partner is induced, fresh registration has to be applied and obtained.Court held that the existing firm was only reconstituted and no need to get a fresh registration. Section 69 (2A) will not apply here, appeal dismissed.
PRESENT CASE
Q. 4/2022. Quint and Roger can seek dissolution of partnership even if Peter does not agree. According to section 44(f), if the business is run on loss and matter taken to court, then partnership can be dissolved.
Q. 2/2020. The partnership agreement contains mutual consent to dissolution and P & Q gave their consent to dissolve, then they have a strong case for dissolution. They can proceed if they proved that continued operation of business is impracticable or breakdown of any trust.
