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DISSOLUTION OF A FIRM

Table of Contents

QUESTION BANK.

Q.1. What are the consequences of dissolution of firm.

Q.2. State the various circumstances in which a firm may be dissolved. What are the consequences of dissolution?

Q.3. What are the different modes of dissolution of partnership firm?

Q.4. Explain various circumstances in which partnership firm may be dissolved. Nov. 07.

Q.5. What are the various circumstances in which a firm may be dissolved. Nov. 05.

Q.6. What are the various circumstances in which a firm may be dissolved? Upon dissolution how are the accounts are settled? Apr. 04.

Q.7. Whether registration of partnership is compulsory or optional? What are the consequences of non-registration of firm? Discuss the provisions of law in this regard. Apr. 2010.

SHORT NOTES.

Consequences of non-registration of partnership firm.

SYNOPSIS.

DISSOLUTION OF FIRM (S. 39):-
MODES OF DISSOLUTION: –
A) Dissolution of firm without intervention of court (S. 40 to 43):-
Dissolution by agreement (S. 40):-
a) Consent:-
b) Agreement: –
Compulsory dissolution (S. 41):-
a) Insolvency: –
Illegality of business: –
i) Illegality of business: –
ii) When carrying any legal business in ‘partnership’ is illegal:
Contingent dissolution (S. 42): –
a) Expiry of term: –
b) Completion of business: –
c) Death of partner: –
d) Insolvency of partner: –
Dissolution by notice (S. 43): –
B) Dissolution by the Court (S. 44): –

a). Insanity: –

b). Permanent incapacity: –

c). Misconduct: –

Persistent breach of agreement: –

e). Transfer of interest: –

f). Perpetual losses: –

g). Just and equitable ground: –

III. Rights of partners after dissolution (S. 46 and 51 to 54):-

Right to surplus (S. 46): –
Right to refund of premium (Bonus) (S. 51):-

According to this section, no refund is possible-

3). Right where the partnership contract is rescinded for fraud or misrepresentation (S. 52):-

i). Right to lien: –

ii). Right to rank as creditor: –

iii). Right to indemnity: –

iv). Right to restrain other partners from use of firm name or firm’s property (S. 53-54): –

LIABILITIES OF THE PARTNERS AFTER DISSOLUTION: –

1). Liability for acts of partner, done after dissolution (S. 45):-

2). Continuing authority, right, obligations of partners for purpose of winding up (S. 47): –

3). Liability to share personal profits (S. 50): –

SHORT NOTES: –

EFFECT OF REGISTRATION AND NON-REGISTRATION OF FIRM-

A). Effect of registration of firm (S. 68):-

Effect of non-registration of firm (S. 69):-
Suit between co-partners not possible (S. 69(1)): –
Firm can not sue to third party (S.69 (2)): –
Firm can not claim set off (S. 69 (3)): –

Exceptions to above disabilities: –

Action for dissolution and accounts: –
Suit for recovery of insolvents share: –
Action where value of suit is not above Rs. 100/-
Statutory and non-contractual rights: –
Suit by third parties: –

I. DISSOLUTION OF FIRM[1] (S. 39):-

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

In other words, when the firm is dissolved between all the partners, the life of the firm comes to an end.

II. MODES OF DISSOLUTION: –

A firm may be dissolved in any of the following two ways:

Without the intervention of the court (S. 40 to 43).
By the court (S. 44).

A) Dissolution of a firm without the intervention of the court[2] (Ss. 40 to 43):-

Dissolution of a firm without the court’s intervention takes place in the following modes.

1. Dissolution by agreement (S. 40):-

A firm may be dissolved by: –

a) Consent:-

Clause (a) provides that a firm may be dissolved at any time with the consent of all the partners. This applies to all cases, whether the firm is for a fixed period or at will.

b) Agreement: –

Clause (b) provides that a firm may be dissolved in accordance with the contract between the partners. The contract for dissolution may be contained in the partnership deed or a separate agreement.

2. Compulsory dissolution[3] (S. 41):-

Two clauses of dissolution of a compulsory nature mentioned in this section are as follows: –

a) Insolvency: –

Where all the firm’s partners have been adjudicated as insolvents, the partnership inevitably ends. This is so because the partnership is a contract, and insolvents are incapable of making any contract. The same result follows where only one partner remains solvent, and all others have been adjudicated as insolvents. This is because a single person can not form a partnership.

b. Illegality of business: –

S.41(b) of the Act provides that-

1). When the business of a firm becomes unlawful or

2). Doing any legal business in partnership is unlawful; the firm is dissolved by force. E.g. On the introduction of ‘Gutkha’ prohibition legislation, the business of Gutkha becomes unlawful.

In other words, the clause provides that the firm is dissolved compulsorily irrespective of the contract to the contrary, in the following two circumstances of illegality-

i) Illegality of business: –

S.41 (b) of the Act is attracted not to the illegality of a business from the beginning but to the business that subsequently becomes illegal. However, it was legal at its beginning.

For example, since the introduction of the ‘Ghutka’ prohibition legislation, the business of ‘Ghutka’, i.e., its production, trading, and holding, has become illegal in Maharashtra. However, the business of’ Ghutka’ has not been prohibited since its inception.

ii) When carrying any legal business in ‘partnership’ is illegal:

In some cases, the business is lawful, but carrying it on in ‘partnership’ becomes unlawful. For where there is no prohibition on carrying on a business of liquor son the licence, still the licence can not be conferred to partnership firms but to an individual person.

So, in the above circumstances, the partnership firm is dissolved compulsorily, irrespective of any provision to the contrary.

Proviso to this section provides that in a case where the firm is carrying on more than one business, and at least one business remains lawful, the partnership firm survives with that one business. It can not compulsorily dissolve if at least one business is lawful, but the firm can not carry on the rest of the illegal businesses.

3. Contingent dissolution[4] (S. 42): –

A firm is dissolved on the happening of any of the following contingencies, provided there should not be a contract to the contrary-

a) Expiry of the term: –

If the firm is constituted for a fixed period and that period has expired.

b) Completion of business: –

When a partnership is formed to do any particular business, it dissolves after the completion of that business.

In Banship Lal V. Jamuna Prasad[5]

It was held that the firm constituted to colour military barracks and construct latrines for the military dissolved when such work was over.

c) Death of partner: –

In the absence of a contract to the contrary, the firm dissolves by the death of a partner.

In Mohd. Laiquiddian v. Kamladevi Mishra (2010 (2) SCC 407)

Supreme Court held– that when there are only two partners, on the death of one of them, the firm is deemed to be dissolved, irrespective of a clause in the deed saving such dissolution.

d) Insolvency of partner: –

A partnership is dissolved by a partner’s adjudication as insolvent. Subject to the agreement, a single partner’s insolvency operates as a firm’s dissolution.

Dissolution by notice (S. 43): –

When the partnership is at will (i.e., the duration of which is not fixed), any partner may dissolve it at any time by giving notice of his intention to dissolve it. The notice should be in writing, signed by the partner giving it, and served upon all the partners.
The firm is dissolved on the date mentioned in the notice; if no date is mentioned, it should be dissolved on the date the notice is communicated.

B) Dissolution by the Court (S. 44): –

By S.44, the court is empowered to order the dissolution of a firm in the suit of a partner in the following cases-

a) Insanity: –

If any of the partners becomes insane, the suit for dissolution of a firm may be brought by any of the remaining partners or by the next friend of the insane partner.

b). Permanent incapacity: –

Any partner other than the one who has become ‘permanently incapable’ may file suit for dissolution of a firm on the ground of incapacity of one of them. Such incapacity to perform his duties as a partner should be permanent in nature.

c) Misconduct[6]: –

When a partner other than the suing is guilty of conduct likely to affect the firm’s business prejudicially, the court may order dissolution. Such misconduct doesn’t need to be connected to a firm’s business.

In Snow V. Milford[7]

Facts: – A partner of a firm of bankers committed adultery with several women in the city where the business was carried on, and his wife had left him. The other partners applied on this ground for the dissolution of a firm.

Held: A partnership can not be dissolved because, in a banking firm, it can not be said that keeping money in the bank is not safe due to any partner’s adultery.

d) Persistent breach of agreement[8]: –

When a partner, other than the partner suing-

i). persistently commits a breach of the agreement relating to the management of the firm;

ii). Otherwise, so conduct himself in a matter relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him. E.g. continued quarrelling, refusal to meet on matters of business, conduct distrusting the mutual confidence between the partners, etc.

e) Transfer of interest[9]: –

When a partner, other than the partner suing-

i). has transferred the whole of his interest in the firm to a third party, or

ii). has allowed his share in the firm to be charged under Order 21, rule 49 of the C.P.C, 1908, or

iii). has allowed his share to be sold in the recovery of arrears of land revenue or any other dues which are recoverable as arrears of land revenue.

f) Perpetual losses[10]: –

The whole object of the partnership is to make a profit, and if that object can not be attained, it is needless for the firm to continue; therefore, the firm may be dissolved.

g) Just and equitable ground[11]: –

When, on any other ground, the court thinks it just and equitable that the firm should be dissolved, it may order dissolution. This ground provides the court with wide discretionary power to dissolve the firm.

Thus, if the partnership’s purpose has been lost or if partners are equally divided into groups, the court may dissolve the partnership on just and equitable grounds.

III Rights of partners after dissolution (S. 46 and Ss.51 to 54):–

After dissolution, partners have the following rights: –

1. Right to surplus[12] (S. 46): –

On a firm’s dissolution, every partner is entitled to have the firm’s property applied to pay the firm’s debts and liabilities and to have the surplus distributed among the partners (or their representatives) according to their rights.

2. Right to refund of premium[13] (Bonus) (S. 51):-

Sometimes, when a new partner is admitted to an already established firm, he has to pay a sum of money to the old partners as a premium for admission. It is a kind of compensation to the old partners for the goodwill they have created and of which the new partner will enjoy benefits. The new partner pays it in the hope that the firm shall continue to exist and he shall enjoy the fruits of its goodwill. But if the firm is prematurely determined (ended), the question arises as to whether a new partner is entitled to a refund of his premium.

51 provides that in such cases, the new partner is entitled to refund back the premium or such part of the premium as may be reasonable.

According to this section, no refund is possible-

1) Where the firm is not constituted for a fixed period.

2). Where the firm is dissolved by the unexpected death of a partner.

3). Where the dissolution is mainly due to the misconduct of the new partner himself.

4). Where the dissolution is in pursuance of an agreement between the partners, which contains no provision for the return of the premium or any part of it.

3). Right where the partnership contract is rescinded for fraud or misrepresentation (S. 52):-

The partner, against whom fraud or misrepresentation is made, can have the following rights after rescinding the contract of partnership, viz.-

i). Right to lien: –

He has the right to retain or exercise lien on the partnership property left after paying partnership debts for any sum he pays to purchase a share in the firm or for any capital contributed by him.

ii). Right to rank as a creditor: –

He is entitled to rank as a creditor of the firm with respect to any payment made by him towards the debt of the firm.

iii). Right to indemnity: –

He has the right to recover indemnity from the partner guilty of fraud or misrepresentation.

iv). Right to restrain other partners from use of the firm name or firm’s property (Ss. 53 to 54): –

After a firm is dissolved, every partner (or his representative) may restrain any other partner (or his representative) from –

1). Carrying on a similar business in the firm name, or,

2). From using any of the property of the firm for his own benefit, – until the affairs of the firm have been completely wound up.

This right is not available-

1). Where there is a contract to the contrary between partners.

2). Where any partner or his representative has bought the goodwill of the firm.

S.54 provides that if partners have agreed that some or all of them will not carry on a business similar to that of a firm-

1). Within a specified period, or

2). Within specified limits.

Such an agreement is valid if the restrictions imposed are reasonable. This agreement would not be treated as an agreement in restraint of trade under S. 27 of the Indian Contract Act.

In Pathirana V. Pathirana[14]

Facts: – A partner terminated the partnership with a petrol pump by a notice when he obtained a renewal of the petrol agency from the petrol company. He continued to operate the new pump on his personal account.

Held: – He was held liable to share his profits with the other partners.

IV. LIABILITIES OF THE PARTNERS AFTER DISSOLUTION: –

Following are the liabilities of the partners after the dissolution of a firm, namely: –

1). Liability for acts of partner, done after dissolution (S. 45):-

The first step in the process of dissolution is to give the public notice of dissolution. A firm or any partner may give the notice. This is necessary to terminate the liability of the partners by holding out and of the firm by estoppel. Without such notice, the firm and every partner would continue to be liable to third parties for any act done by them which would have been an act of the firm if done before its dissolution. All the partners remain liable as long as the notice is not given.

When public notice is not necessary: –

Public notice of the dissolution of a firm is not necessary in the following cases: –

i). Where a partner dies,

ii). Where a partner is adjudicated insolvent.

iii). Where a partner who was not known as a partner to the party dealing with the firm retires.

2). Continuing authority, rights, and obligations of partners for the purpose of winding up (S. 47): –

The partner’s authority to act for the firm and to bind their co-partners continues even after dissolution. The partners’ authority, rights, and obligations continue even after dissolution for two main reasons. Viz-

Firstly, for the purpose of winding up the affairs of the firm.

Secondly, to complete transactions begun but not finished at the time of dissolution. The authority continues only for the above reasons and not for any other reason.

In Re-Bourne V. Bourne[15]

Fact: -A Partnership having been dissolved by the death of a partner, the surviving partner deposited the firm’s title deeds with a bank to secure an overdraft.

The court held that this is binding on all other partners, including the representatives of deceased partners.

3). Liability to share personal profits (S. 50): –

Where a firm is dissolved on account of the death of a partner and if, before its affairs completely wound up, any transaction is undertaken by the surviving partner or the representatives of the deceased partner, which brings him some advantage at the expense of the firm, he is bound to share it with other partners.

NOTES: –

REGISTRATION OF PARTNERSHIP: –

QUESTION BANK

Q.1. Whether registration of a partnership firm is compulsory or optional? What are the consequences of non-registration of a firm? Discuss the previsions of Law in this regard.

Q.2. Must a firm be registered? What are the consequences of non-registration of a firm? Apr. 05.

Short Notes

Registration of a partnership firm.

EFFECT OF REGISTRATION AND NON-REGISTRATION OF A FIRM[16]–

A) Effect of registration of a firm (S. 68):-

The Partnership Act does not make it obligatory to register a firm. A partnership firm may or may not be registered. However, it is highly advisable to register with a partnership firm. S.68 provides the effect of registration.

It provides that any statement, notice or intimation recorded with the Registrar of a firm by any person is conclusive proof of the facts stated therein.
A certified copy of any entry relating to a firm in the registrar of firms may be produced in fact in question on the registration of such firm and the contents of any document recorded therein.

So, a firm’s registration is conclusive proof of its existence and the contents of the documents registered. It is conclusive proof of the fast as to whether the firm is in existence or not.

B. Effect of non-registration of a firm (S. 69):-

Registration of a firm is not necessary. It is optional, and there is no penalty for non-registration yet; registration becomes necessary at one or another time because S. 69 makes a non-registered firm and its partners handicapped from suing. Neither the firm nor any partner can sue any person for goods supplied to him. This disability compels the firm to register. The effects of non-registration are serious. They are as follows: –

1. Suit between co-partners not possible (S. 69(1)): –

A partner of an unregistered firm can not sue the firm or its present or past co-partners for the enforcement of any right arising from a contract (or conferred by the Partnership Act). Only a partner of a registered firm whose name has appeared in registration can sue for enforcement of such rights.

This difficulty, however, may be overcome by getting the firm registered before action is brought.

In Mahalakshmi V. J. Traders[17]

Held: – When a suit is filed between partners without registration, it is liable to be dismissed and can not be registered by subsequent registration.

2. Firm can not sue a third party (S.69 (2)): –

An unregistered firm can not sue a third party for the enforcement of any of the rights arising from the contract. A suit can be brought only by a person whose name appears as a partner in the register of firms. This difficulty, however, may be overcome by getting the firm registered before an action is brought. The action of an unregistered firm is, however, liable to be dismissed, and it can not be rectified by subsequent registration[18].

3. The firm can not claim set-off[19] (S. 69 (3)): –

The above two disabilities also apply to a set-off or other proceedings to enforce a right arising out of a contract.

A claim of set-off means that, for example, A’ a third party sued ‘B & C’, a partnership firm, to recover a sum of Rs. 10,000/-. But at the same time, A has not paid Rs. 8,000/-of goods purchased by him from the firm. Here if the firm is unregistered, it can not take the defence of set-off that the amount of Rs. 8,000/- be adjusted to Rs. 10,000/-, which the firm owes to A.

Exceptions to the above disabilities: –

The section, however, admits the following exception to above clauses (1), (2)and(3) (partners can not bring, i.e. suit in themselves or against a third party by a non-registered firm).

They are as follows: –

1. Action for dissolution and accounts: –

An unregistered firm and its partners can take action for the dissolution of the firm or for accounts of a dissolved firm. They can also enforce any right or power to realise the property of the dissolved firm.

2. Suit for recovery of insolvent share: –

The official assignee or court acting for an insolvent partner may bring an action to realise the insolvent share, whether the firm was registered or not.

3. Action where the value of a suit is not above Rs. 100/-

An unregistered firm of its partners may sue or claim a set-off where the subject matter of the suit does not exceed Rs. 100/- in value.

4. Statutory and non-contractual rights[20]: –

Statutory and non-contractual rights are outside the scope of the disability inflicted by the section.

For example, if a person damages the firm’s property, he can be sued, whether the firm is registered.

In many cases, an unregistered firm can sue to enforce the payment of a cheque in its capacity as a payee because it is a statutory right under the Negotiable Instrument Act.

5. Suit by the third party: –

A third party can always sue a firm, whether it is registered or not. The disability is that of the firm and does not apply to outsiders.

*****

[1] भागिदारी संस्थेचे विसर्जन. [साझेदारी फर्म का विघटन।]

[2] न्यायालयाच्या परवानगीषिवाय भागिदारी संस्थेचे विसर्जन. [न्यायालय की अनुमति के बिना साझेदारी फर्म का विघटन।]

[3] सक्तीचे विसर्जन. [जबरन विसर्जन।]

[4] घटनेमुळे विसर्जन. [घटना के द्वारा विसर्जन]

[5] (Air 1981 All 324.)

[6] भागिदाराचे गैरवर्तन. [भागीदार का दुराचार]

[7] 1868.

[8] वारंवार भागिदारीच्या कराराचा भंग. [ साझेदारी समझौते का बार-बार उल्लंघन।]

[9] भागाचे हस्तांतरण. [भाग का स्थानांतरण।]

[10] सततचा तोटा. [लगातार घाटा।]

[11] इतर न्याय व योग्य कारण. [अन्य न्याय और अच्छे कारण।]

[12] वाढ मिळविण्याचा अधिकार. [.अधिशेष का अधिकार]

[13] उत्तेजन रक्कम परत मिळविण्याचा अधिकार. [प्रोत्साहन राशि की वसूली का अधिकार।]

[14] 1967

[15] 1906.

[16] भागिदारी संस्थेच्या नोंदणी व न नोंदणीचा परिणाम. [साझेदारी फर्म के पंजीकरण और गैर-पंजीकरण का प्रभाव।]

[17] (Air 1990 A.P. 288.)

[18]In V. Naidu V. R. Mudaliar Air 1937 Mad. 767.)

Held : – That, a fresh suit will have to be filed after registration provided that it is still within the period of limitation.

In Navbhart Kuries v. C.E. Job (AIR 2007 (DOC) 124 KER)

Held:- Partner cannot sue firm if it is not registered.

[19] भागिदारी संस्था वजावाट करुन मागू शकत नाही. [एक साझेदारी फर्म कटौती का दावा नहीं कर सकती है।]

[20] कायदेशिर व कराराशिवायचे अधिकार. [वैधानिक और गैर-संविदात्मक अधिकार।]