ASSIGNMENT
TOPIC NAME- DISSOLUTION OF PARTNERSHIP FIRM BY COURT
SUBJECT- COMMERCIAL LAW
ASSIGNMENT SUBMITTED TO FACULTY OF LAW, UNIVERSITY OF LUCKNOW
For the Partial Fulfilment of the Requirement in
B.A.LL.B.(Hons.)-IV SEM (SECTION-B)
Under Guidance of : Submitted by:
Bandana Singh Ashutosh Verma
Guest Faculty 200013015155
Faculty of Law
University of Lucknow
FACULTY OF LAW
UNIVERSITY OF LUCKNOW
LUCKNOW, U.P.
ACNOWLEDEGEMENT
In preparation of my assignment, I had to take the help and guidance of some respected
persons, who deserve my deepest gratitude. As the completion of this assignment gave me
much pleasure, I would like to show my gratitude to Mrs Bandana Singh, Faculty of Law,
University of Lucknow for giving me a good guideline for assignment throughout
numerous consultations. I would also like to expand my gratitude to all those who have
guided me in writing this assignment.
INDEX
S Content Page No.
No.
1. Introduction 1
2. Meaning of Dissolution of Partnership Firm 2
3. Modes of Dissolution of Partnership Firm 2
4. Dissolution by the Court (Section 44) 2
a) Insanity 3
b) Permanent Incapacity 3
c) Partner guilty of conduct likely to affect prejudicially the carrying on of 3
the business
d) Persistent Breach of Agreement 5
e) Transfer of Interest 5
f) Perpetual Losses 6
g) Just & Equitable 6
5. Conclusion 7
6. Bibliography 8
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 (herein refer as
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the Contract Act was repealed and replaced by the Partnership Act of 1932.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.
Dissolution of partnership means coming to an end of the relation known as partnership,
between various partners. when one or more partners cease to be partners, but others continue
the business in partnership, there is dissolution of partnership between the outgoing partners
on the one hand and the remaining partners on the other. the remaining partners as between
themselves continue as partners. For example, when the firm consists of A, B and C and A
retires, there is dissolution of partnership between A and others but partnership as between B
and C is not dissolved. In such a case, there is dissolution of partnership between some of the
partners only, but there is no dissolution of the firm.
According to Section 39 of Partnership Act, when the dissolution of partnership between all
the partners of the firm occurs, this is called dissolution of the firm. For example, when in a
firm consisting of A, B and C all of them cease to be partners with one another, it amounts to
dissolution of the firm.
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Meaning of Dissolution of a Partnership 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. 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’.
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 – Section 40
• Dissolution by notice of partnership at will – Section 43
• Compulsory Dissolution – Section 41
• Dissolution on the happening of certain contingencies – Section 42
• Dissolution by the Court – Section 44
Dissolution by the Court (Section 44)
In some cases, the partners approach the court to dissolve the firm. The courts can dissolve
partnership firms after careful consideration of the facts and circumstances for assessing the
situation and render equitable justice. 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.
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At the suit of a partner, the Court may dissolve the firm on the below mentioned grounds: -
a) Insanity-
Insanity does not dissolve the partnership ipso facto confirmed lunacy provides aground
for dissolution by the court if other partners apply to court for dissolution.1 It is now
clear that in the case of insanity, a next friend on behalf of the lunatic may sue for
dissolution. The judge exercising jurisdiction in lunacy is also empowered to dissolve
a partnership in the case of a partner becoming a lunatic (as per Section 52 of Indian
Lunacy Act, 1912). It is not necessary that the partner of unsound mind should be found
a lunatic by inquisition. The same was found in the case of Jones v. Lloyd2 where
dissolution was necessary to protect the interest of insane and the other partners.
b) Permanent Incapacity-
Whether any partner has become permanently incapable ofperforming his duties as a
partner; any partner can apply for dissolution. The incapacity maybe due to illness,
mental or physical in nature but it must be permanent. 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
likely hood 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. 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.
where a partner is imprisoned fora long period of time the court may dissolve the
partnership was held in case of Whitwell v. Arthur3. In this case, a partner suffered
from an attack of paralysis and that would have been a good ground for dissolution for
the fact that the medical evidence showed that the attack was only temporary, and he
was already improving.
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
1
Jugal Chandra Bhattacharjee v. Gunny Hajee Ahmed, (1925) SCC OnLine Cal 119.
2
Jones v. Lloyd, L.R. 18 Eq. 265.
3
Whitwell v. Arthur, 35 Beav. 340.
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carrying on of the business regard being had to the nature of the business. 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. 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.
• 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.
As remarked in Harrison v. Tenant4, “No party is entitled to act
improperly and then to say that the conduct of 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 to act
and thus to take advantage of his own wrong.
➢ The second important thing to be noted in Section 44 (c) is that 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 will fully, the mere fact that his continuance in
the partnership firm will be detrimental for the firm will not be sufficient
to dissolve the firm.
It may also be noted that much depends on the nature of the business. In
Snow v. Milford5, 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 because of this his wife had deserted
him. Other partners filed a suit for dissolution of the firm on the ground
of the said bad conduct of Milford.
4
Harrison v. Tenant, (1856) ALL ER 945.
5
Snow v. Milford, (1868) 18 LT 142.
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d) Persistent Breach of Agreement -
Under Section 44(d) it is necessary that there is wilful 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 wilful, a single breach shall not be sufficient to dissolve a firm.
Constant or continuous behaviour 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 of gross misconduct in the
business, and to maintain wrong accounts and not to enter the receipts, are the examples
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. When a partner, other than suing persistently commits
breach of agreement relating to the management of the firm or otherwise so conducts
himself in matters relating to business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him, the court may order
dissolution. Any conduct that is destructive of mutual confidence gives rise to the
ground of dissolution of the firm. “Keeping erroneous accounts and not entering
receipts refusal to meet on matters of business, continued quarrelling, and such a state
of animosity as precludes all reasonable hope of reconciliation and friendly co-
operation, have been held sufficient to justify a dissolution.” A father’s treatment of his
partner’s son (opening his private letters, and like some parents, failing to realize that
his son is now a grown up) has been held to justify dissolution.
The court may order for the dissolution of the firm if the partner other than the suing
partner is found guilty of 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.
e) Transfer of Interest –
When a partner has transferred the whole of his interest in the firm, toa third party or
has allowed his interest to be charged, or has allowed it to be sold in, the recovery of
arrears of land revenue, or any of the dues recoverable for land revenue, the court may
order dissolution. When any of the partner other than the suing partner transfers whole
of its share to the third party for permanently. If a partner transfers whole of his interest
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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 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 partner and the transferee shall accept the
account of profits agreed to by thepartners32. 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 dissolution.
f) Perpetual Losses–
When the business of the firm cannot be carried on save at a loss, the court may dissolve
it. The whole object of the Partnership is to make profits and if that object cannot be
attained, it is needless for the firm to continue. Thus, where whole of the capital
contributed by the partners had already been spent and there were no business prospects
unless they contributed further capital which they refused to do, the court granted
dissolution. 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 reasons to
resolve the firm before the expiry of the period.
g) Just & Equitable –
Dissolution may be ordered when on any other ground the court thinks it just &
equitable that the firm should be dissolved. The expression, “just and equitable” gives
the court a very wide discretionary power, which is not fettered by any rules, to order
dissolution whenever in the circumstances it seems desirable. Where the terms of a
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partnership deed provided to a partner, the facility from withdrawing from a firm by
transferring his trust to others, the court said that this would keep the right to seek
dissolution in abeyance unless a crisis is created by others by refusing to pay him out.
The court equally concerns itself with the interests of the other partners. Where the
managing partner supplied to the firm from his personal business certain material for
which he overcharged, this would hold to be a breach of faith entitling other partners to
demand dissolution. It is not necessary that a notice as per Section 43 should be given.
The court must consider all the facts and circumstances and moulds the relief according
to the exigencies of the case. Where the dissolution was prayed for, the court provided
relief of retirement.
Whenever a case is brought to the case under Section 44(g), the court must 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. Under Section 44(f), the court must
decide according to its discretion, but this discretion cannot be restricted by rigid or
inflexible rules. The court must use its discretion based on 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 was 7/9. There was no cooperation 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.
Whether Right to Apply for Dissolution can be Excluded:
The right of a partner to ask for dissolution on any of the above grounds cannot be excluded
by nay agreement to the contrary. Where the no other mode of dissolution is available,
Section 44 being the lender of last resort, its operation cannot be allowed to be nullified. The
Allahabad High Court has, however, held differently. In a case before it the partnership deed
provided that a partner could withdraw it by selling his interests to his co-partners or, in the
event of their failure to buy it, by selling it to the others and dissolving the firm. The other
partner failed to buy and, therefore dissolution was prayed for, but was not granted, the court
saying that the provision had taken away a partner’s right to cause dissolution. This view is,
however, now no longer tenable. Following a Privy Council Decision, the Jammu and Kashmir
High Court stated that “It can be safely said that Section 44 confers an absolute and independent
right, and it is not open to the partners to take away that right by means of an agreement between
them.”
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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(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 no 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. Finally, 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.
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CONCLUSION
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.
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BIBLIOGRAPHY
Books:
• Avtar Singh, Introduction of Law of Partnership (Eastern Book Company 10th ed.
2011).
• Sir Dinshah Fardunji Mulla, The Sale of Goods Act & The Indian Partnership Act
(10th ed. 2012).
Websites:
• https://www.lawyersclubindia.com/articles/dissolution-of-partnership-firm-section-
39-44-of-the-partnership-act-1932--14404.asp
• https://vakilsearch.com/advice/dissolution-of-partnership-by-court-order-indian-
partnership-act-1932/
• https://www.legalraasta.com/blog/dissolution-of-partnership-firm/
• http://www.rdscollege.ac.in/studymaterial/1594871184.pdf?uid=
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