Dissolution of a Partnership Firm: When? How? & Can it be by filing of Suit For Dissolution

  • What is PARTNERSHIP?

A voluntary contract between two or more competent persons to place their money, effects, labor, and skill, or some or all of them, in lawful commerce or business, with the understanding that there shall be a proportional sharing of the profits and losses between them. 

  • Registration of Partnership

      As per the Partnership Act 1932, it is not compulsory to register a partnership firm.The firm does not have a separate legal identity and registration will not alter this fact. However, registration is the definite proof of the existence of the firm and its legality.

Non-registration of a firm has some real-life legal consequences for the partners and the firm itself.So it is always advisable to draw up a written partnership deed and register the firm with the Registrar of Firms. The consequences of not doing so are as follows,

  • The firm cannot file legal proceedings against any third party for any situation. For example, if the client has not paid his dues to the firm, the firm cannot sue him if it is unregistered.
  • An unregistered firm cannot fail a case against a partner for any reason (like mismanagement, theft etc.)
  • A partner of an unregistered firm cannot file a suit against one of the other partners either.

    Dissolution of Firms

When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.” It implies the complete break down of the relation of partnership between all the partners.

  • Dissolution of a Partnership firm may be effected in the following ways:
  • Dissolution without the intervention of the Court.
  • Dissolution by Court.

a. Dissolution without the intervention of Court:-

1. By Agreement (S.40)

A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.

2. Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes compulsory for the firm to dissolute:

a. Insolvency of Partners: In case all the partners or all the partners except one become insolvent.

b. Unlawful Business: In case the firm is engaged in more than one business which may have become unlawful, the better view appears to be that the firm will not dissolve as to the other legitimate businesses unless all of them are so inter connected that stoppage of one would paralyze the others.

3.Dissolution on the happening of contingent event (S.42)

A firm may be dissolved on the happening of any of the following contingent event:

  1. Expiry of Fixed Period

A firm constituted for a term is of course not exempt from dissolution by any of the other possible cause before the expiration of the term. The contract may expressly provide that the partnership will determine in certain circumstances but even if there is no such express term, an implied term as to when the partnership will determine may be gathered from the contract and the nature of the business. The provision of this section make it clear that unless some contract between the partners to the contrary is proved, the firm, if constituted for a fixed term would be dissolved by the expiry of that term.

  1. On achievement of specific task

A partnership constituted to carry out contracts with specified persons during a particular season would be taken to be dissolved once the contracts are closed. In the case of Basantlal Jalan v. Chiranjilal[1](AIR 1968 Pat 96) , Where the 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 the assets.

  1. Death of Partner

When the deed of partnership did not provide that the death of a partner would not dissolve the partnership, the partnership stood dissolve on the death of a partner. Firm, stands dissolved automatically on death of one partner. Continuance of business after such death would not tantamount to continuance of earlier partnership.

  1. Insolvency of Partner

In the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm. The rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular venture and the same has yet not been completed.

  1.  Resignation of Partner

                                                 Resignation by any of the partners dissolves the partnership.

4. Dissolution by notice (S.43)

In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners.

  1. Dissolution by Court (S 44)

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner

On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances.

(ii) Incapacity of Partner

If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner.

(iii) Misconduct of Partner

If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm.

(iv) Constant breach of agreement by partner

The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner.

(v) Transfer of Interest

When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.

(vi) Continuous Losses

The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.

(vii) Just and Equitable

The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners was held in case of Havidatt singh v. Mukhe Singh.[2] (A.I.R. 1973, J&K , 46)

Observation :

Looking into the section 39 of the Partnership Act it says that-

Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.”

      When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm.

      The case in hand , where there is no bond, trust and no understanding left between the partners , it would be immaterial to continue the business.

      Dissolution of a partnership firm merely involves a change in the relation of partners; whereas the dissolution of firm amounts to a complete closure of the business. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm.

     The modes of dissolution have been discussed in detail above.

 

Issue: Does mere filing of the suit amounts to dissolution of the partnership?

There are various case laws where similar proposition has been observed.


Section 7 of the Partnership Act, 1932-

Partnership at will.—Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is ‘partnership at will’.

     Section 39 of the Indian Partnership Act, 1932-

     defines dissolution of partnership firm. It defines the dissolution of partnership between all the partners of a firm is called the dissolution of the firm.

    Section 43 of the Partnership Act –

       Dissolution by notice of partnership at will.—

(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.

      Partner in a partnership firm can dissolve it by giving notice of dissolution to other partners. The notice should be communicated to the other partners as mentioned in the agreement and if not mentioned then a mode of communication should be reasonable. The notice of dissolution should not be in between any transaction and is a partner give notice of dissolution in between the transaction his notice should be held until the time the transaction is completed. The notice should be clear and should not be confusing in any sense. It should be properly communicated to the other partners.

Dhulia-Amalner Motor Transport vs. Raychand Rupsi Dharamsi And Ors.[3] (AIR1952Bom337) Section 43 is explained in 3 points. It requires three things:

     (1) the giving of a notice,

     (2) the notice has to be in writing, and

     (3) the notice must express an intention to dissolve the firm. Unless these 3 things are complied with, the provision of section 43 of the Act would not come into operation at all.

      There are various kinds of partnership. The case in hand is a partnership at will. In partnership at will a firm shall be dissolved by the virtue of section 43 of Partnership act.

The partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain.

Section 43 of the Partnership Act next provides that 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. Once such a notice is given, 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. It is well-settled that if a suit is instituted for the dissolution of the partnership and for rendition of accounts, the service of the summons along with the copy of the plaint on the other partners is notice of dissolution within the meaning of section 43 of the Partnership Act. It is, therefore, obvious that if in a partnership at will one of the partners does not desire to carry on business in partnership with the other partners and serves notice of dissolution, the firm stands dissolved from the date of dissolution mentioned in the notice and if no such date is mentioned, from the date of communication of the notice to the other partners. That is the effect of section 43 of the Partnership Act.[4] (Kirtikumar v. Dilipkumar, C/SCA/1973/2013)

In Banarsi Das v. Seth Kanshriram[5] (AIR 1963 SC 1165) ,held that the term notice used in   Section 43 is vide enough to include within it a plaint filed in a suit for dissolution of partnership and, therefore, the partnership would be deemed to be dissolved when the summons as accompanied by the copy of the plaintiff, is served on the defendant.

      Where there are two partners in a partnership firm running the entire business having clash in the interest , a suit can be filed in the Court for dissolution of the firm, to have a final decree.

 

     Section 44 of the Partnership Act, 1932 provides a provision for the dissolution of the firm by Court.

     According to Section 44 of the Indian Partnership Act, 1932, the Court may dissolve a firm on the suit of a partner on any of the following grounds –

                              1] Insanity/Unsound mind

If an active partner becomes insane or of an unsound mind, and other partners or the next friend files a suit in the court, then the court may dissolve the firm. Two things to remember here:

  1. The partner is not a sleeping partner.
  2. The sickness is not temporary

                               2] Permanent Incapacity

 If a partner becomes permanently incapable of performing his duties as a partner, and other partners file a suit in the court, then the court may dissolve the firm. Also, the incapacity may arise from a physical disability, illness, etc.

                              3] Misconduct

When a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business, and the other partners file a suit in the court, then the court may dissolve the firm. Further, it is not important that the misconduct is related to the conduct of the business. The court looks at the effect of the misconduct on the business along with the nature of the business.

                              4] Persistent Breach of the Agreement

A partner may willfully or persistently commit a breach of the agreement relating to –

  1. the management of the affairs of the firm, or
  2. reasonable conduct of its business, or conduct himself in matters relating to business that is not reasonably practicable for other partners to carry on the business in partnership with him.

In such cases, the other partners may file a suit against him in the court and the court may order to dissolve the firm. The following acts fall in the category of breach of agreement:

  1. Embezzlement
  2. Keeping erroneous accounts
  3. Holding more cash than allowed
  4. Refusal to show accounts despite repeated requests, etc.

                               5] Transfer of Interest

A partner may transfer all his interest in the firm to a third party or allow the court to charge or sell his share in the recovery of arrears of land revenue. Now, if the other partners file a suit against him in the court, then the court may dissolve the firm.

6] Continuous/Perpetual losses

If a firm is running under losses and the court believes that the business of the firm cannot be carried on without a loss in the future too, then it may dissolve the firm.

7] Just and equitable grounds

The court may find other just and equitable grounds for the dissolution of the firm. Some such grounds are:

  1. Deadlock in management
  2. Partners not being in talking terms with each other
  3. Loss of substratum (the foundation of the business)
  4. Gambling by a partner on the stock exchange.

In the case of - A. Nagappan Vs. Mc. Adams Chemicals Manufacturing Co.[6] (1998(1)CTC694)

      Partnership has come to an end and got dissolved with effect from the date of the plaint. It is also to be noticed that Section 44 of the Indian Partnership Act specifically applies to a dissolution of a firm that has got to be dissolved only by the decree of the Court. But, if a partnership can be dissolved without going to court and at will, merely because the relief claimed in the plaint contains a prayer for dissolution within the meaning of Section 44 of the Indian Partnership Act. Section 43 of the Act is specific about the procedure for dissolution of a partnership at will. Section 44 of the Act is concerned with the grounds for dissolution. Only when the grounds exist and or proved to the satisfaction of the Court, the Court has to dissolve the firm, then only Order 20 Rule 15 of Civil Procedure Code comes to play. But if the firm or the partnership is at will, there is no necessity for establishing any of the grounds mentioned in Section 44 of the Act. Even if the plaintiffs in a suit for dissolution of a firm at will does not satisfy the Court or establish the grounds mentioned under Section 44 of the Act, he is entitled to succeed.

      Therefore, when a plaint is presented in a partnership case, the Court is bound to look into the facts of the case and particularly the constitution of the partnership. If the Court finds that the firm or a partnership is at will it has to apply Section 43 of the Act and it need not search for the grounds mentioned in Section 44 of the Act for the grant of relief to the plaintiffs.

      Section 44 of the Act is concerned with the grounds for dissolution. Only when the grounds exist and or proved to the satisfaction of the Court, the Court has to dissolve the firm,

      On the bare reading of Section 44 of the Partnership Act, 1932 provides a provision for the dissolution of the firm by Court – where the Court “may” dissolve the firm , and thus it is a discretionary provision.

      In a suit relating to partnership at will when the question of dissolution is considered, the duty of the Court as per section 44, is to see whether it is a partnership at will or not. If it is a partnership at will, the next question that has to be considered is whether notice under Section 43 has been sent or not.

If not,the Court has to take the date in the plaint, the next question that has to be considered will be as to the date of dissolution. That will be the only thing that has to be decided. Even for that service of the last summon on any one of the partners shall be deemed to be the date of dissolution.

      In the case of - Jagdish Chandra and Anr. Vs. Hari Narain and Anr. (2011 (1) ILR (Raj) 278)[7]Reliance has been placed on - Banarsi Das v. Seth Kanshriram[8]( AIR 1963 SC 1165)  held that the term notice used in Section 43 is vide enough to include within it a plaint filed in a suit for dissolution of partnership and, therefore, the partnership would be deemed to be dissolved when the summons as accompanied by the copy of the plaintiff, is served on the defendant.

      In light of the above case laws cited, so far as dissolution of partnership is concerned, mere filing amounts to dissolution wherein the –

  1. Partnership is at will
  2. Notice has been served upon
  3. Intention must be present to dissolve the firm

SECTION 43 is a provision which gives a statutory right to the partners to dissolve the firm , where as section 44 is a provision consisting of grounds for dissolution.

Where a partner has given a notice for dissolution, the firm stands dissolved. Where the plaint contains the plea for dissolution , the Court shall look into the factors , if the partnership was at will , and if the notice was served properly.

 



[1]AIR 1968 Pat 96

[2]A.I.R. 1973, J&K , 46

[3]AIR1952Bom337

[4]Kirtikumar v. Dilipkumar, C/SCA/1973/2013

[5]AIR 1963 SC 1165

[6]1998(1)CTC694

[7]2011 (1) ILR (Raj) 278

[8]AIR 1963 SC 1165


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