Dissolution Of Firm Project Report

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DISSOLUTION OF FIRM According to sec.4 of the Indian Partnership Act 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all.” Persons who have entered into partnership are called individually ‘partners’ and collectively a ‘firm’. Dissolution of a firm means a firm ceases to exist. The relationship existing between the partners discontinues. The whole firm is dissolved and the partnership terminates. The dissolution of partnership between all the partners of the firm is called the ‘DISSOLUTION OF THE FIRM’ [sec.39]. Dissolution puts an end to the right of the partners to exist as a going concern and is followed by its liquidation. Dissolution of a firm is different from dissolution of partnership. Dissolution of partnership involves a change in the relationship of partners and a new firm is reconstituted. For eg:- A, B and C are partners in the firm and C retires. The partnership between A, B and C comes to an end and partnership between A and B comes into being. Thus retirement of a partner does not dissolve the firm. It merely severs the relation between retiring partner and continuing partners.

MODES OF DISSOLUTION Dissolution of a firm may be brought about either by:-

i.

ii.

Voluntary acts of the partners i.e. without the interference of the court Or Order of the court.

DISSOLUTION OF A FIRM MODES OF DISSOLUTION

Dissolution by order of the Court (Sec. 44)

Dissolution without order of the Court (Sec. 40 to 43)

By agreement (Sec 40)

On partner being of Unsound mind

By compulsory dissolution (Sec. 41)

Permanent incapacity of a partner

Misconduct of a partner affecting business

On the happening of Certain contingencies (Sec 42)

Willful or Persistent Breaches of Agreement

By notice (Sec. 43)

Transfer or sale of whole interest of a pa partner

Business of the firm Cannot be Carried on Save at a loss

Court being satisfied on any other equitable ground

A. By voluntary acts of the partners or without interference of the court: 1. By agreement :- [sec.40] A firm may be dissolvedi. with the consent of all the partners; or ii. in accordance with the contract between the partners. The contract may be express or implied. 2. By compulsory dissolution or by operation of law :- [sec.41] i. By the adjudication of all the partners or of all partners but one as insolvent A partner on being adjudicated insolvent ceases to be a partner of the firm. [sec.34 (1)]. Thus if all the partners are adjudicated insolvent the firm ceases to exist. Similarly, if all but one partner is adjudged insolvent then too a firm will cease to exist, for there must be at least two partners to constitute the firm. ii.

By the happening of an event which makes it unlawful for the business of the firm to be carried on i.e. business of the firm becoming unlawful. For eg: A and B carry on a lottery business which is not prohibited on its formation but subsequently it is prohibited. The firm is dissolved. However, when more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not by itself cause the dissolution of the firm in respect of its lawful adventure and undertaking. 3. On the happening of certain contingencies :- [sec.42]

Subject to the contract between the partners, a firm is dissolved under the following circumstances: i. If the firm is constituted for a fixed term, then by expiry of that term i.e. by efflux of time. ii. If the firm is constituted to carry out one or more adventure, then by completion thereof. iii. By the death of a partner. iv. By the adjudication of a partner as an insolvent. The partnership is dissolved on the date on which the adjudication is made. 4. By notice :- [sec.43] In case of partnership at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. The firm is dissolved from date mentioned in the notice or if no date is mentioned then from the date of communication of the notice. The notice must be explicit, precise and final. It should be served on all the partners. A notice once given cannot be withdrawn unless all the other partners consent. A partnership which is not at will cannot be dissolved by notice. In case of deed of dissolution, date on which the deed is executed is the date of dissolution, not withstanding that a future date is mentioned as the date of dissolution.

B. By the order of the court :- [sec.44] The court may, at the suit of a partner, dissolve a firm on the following grounds:1. Insanity of partner :- [sec.44(a)] Insanity or lunacy of a partner does not, as a rule, dissolve the firm. However, if any other partner or the nearest friend of the insane partner files a suit for dissolution of partnership, then dissolution may be ordered by the court. 2. Permanent incapacity of the partner :- [sec.44(b)]

When a partner becomes permanently incapable of performing his duties as a partner, on a suit being filed by the other partner, the court may order a dissolution of the firm. However, if on medical evidence, incapacity of a partner is found curable, the court will not order dissolution.

3. Misconduct of a partner :- [sec.44(c)] Where a partner is guilty of his conduct which is likely to affect prejudicially the carrying on of the partnership, it would also be a ground for the other partners to file a suit and get the order for dissolution of partnership. The misconduct must be willful. The following cases are sufficient grounds for the dissolution of a firm:i. Gambling by a partner. ii. Fraudulent breach of trust by a partner. iii. Refusal of a partner to attend to business. iv. Taking away of partnership books by a partner. 4.

Persistent breach of agreement :- [sec.44(d)] Where a partner, other than the partner suing, willful or persistently commits breach of the partnership agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself that it is not practicable for the other partners to carry on the business of the firm with him, the court may, at the instance of any of the other partners, dissolve the firm. Thus if one of the partners keeps erroneous accounts or if there is continued quarrelling between the partners or if the mutual confidence of the partners is destroyed, the court may order for the dissolution of the firm.

5. Transfer of interest :- [sec. 44(e)] Where the partner 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 or sold by the court in execution of the decree or in the recovery of the arrears of the land revenue, the court may dissolve the firm at the instance of any of the partners.

6. Business of the firm working at a loss :- [sec.44(f)] Where the business of the firm cannot be carried on except at a loss, the court may dissolve the firm at the suit of a partner. This clause gives discretion to the court to dissolve the firm if the business thereof cannot be carried on except at a loss. The main motive of partnership is to share the profit. If losses are only incurred and there are no business prospects, the partnership cannot exist. 7. Any other ground :- [sec.44(g)] The court may dissolve the firm on any other ground which renders it just and equitable that the firm should be dissolved. For eg:i. Dead lock in the management. ii. Partners not on speaking terms. iii. Disappearance of the substratum of the business. iv. Lack of co-operation or mutual confidence. Dissolution will arise where it appears that the state of feelings and conduct have been such that business cannot be continued at an advantage of either party.

RIGHTS OF A PARTNER ON DISSOLUTION 1. Right to an equitable lien :- [sec.46] Lien means ‘retention’. Section 46 gives a right of equitable lien to the partners on the dissolution of the firm. Every partner or his representative is entitled 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 in accordance with their rights. 2. Continuing authority of partners for purposes of winding up :- [sec.47] 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 to wind up the firm and to complete transactions begun but unfinished at the time of dissolution. Winding up ends when final decree for accounts is passed.

3. Right to have the debts of the firm settled out of the property of the firm :- [sec.49] When there are joint debts due from the firm and also separate debts due from any partner, property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in the payment of his separate debts. The separate property of any partner shall be applied first in the payment of his separate debts and the surplus, if any, in the payment of the debts of the firm. 4. To account for personal profits after dissolution :-[secs.16(a) and 50] In case of transactions by any surviving partner or by the representatives of a deceased partner undertaken before the firm is completely wound up, he shall account for the profits he derives from such transactions and pay it to the firm. However, this rule will not apply in cases where any partner or his representative has bought the goodwill of the firm on its dissolution. 5. Right to return of premium or premature dissolution :- [sec.51] A partner shall be entitled to repayment of full or such part of the premium as may have been agreed upon or as may be reasonable where – i. Partnership has been constituted for a fixed term; (it does not apply to cases where partnership is at will) ii. The firm is dissolved prematurely , i.e., before the expiration of the fixed term; While paying the premium agreed upon or that which is reasonable, regard shall be had toi. the terms upon which he become a partner; and ii. the length of time during which he was a partner. However, no premium would be payable in the following cases :i. Where the premature dissolution of partnership has been caused by the death of a partner; ii. Where the dissolution is mainly due to his own mis-conduct; or iii. Where the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. 6. Rights where partnership contract is rescinded for fraud or misrepresentation :- (sec.52)

Where a partnership contract is rescinded on the ground of fraud or misrepresentation of any of the parties thereto, the party entitled to rescind is entitled toi. A right of lien or retention of the surplus of assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him; ii. To rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and iii. To be indemnified by the partner or partners guilty of fraud or misrepresentation against all the debts of the firm. 7. Right to restrain partners from use of firm name or property :- (sec.53) After the firm is dissolved, every partner or his representative may restrain any other partner or his representative from carrying on a similar business in the firm name or 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 restriction does not apply – (a) When there is a contract between the partners to the contrary, or (b) When a partner has bought goodwill of the firm.

LIABILITIES OF A PARTNER ON DISSOLUTION 1. Liability for acts of partners done after dissolution :- (sec.45) In order to absolve partners of the liability for any act done after the dissolution of the firm, a pubic notice must be given of the dissolution. If this is not done, the partners continue to be liable as such to third parties for any act done before the dissolution. The following, however, are not liable for the acts done after the dissolution of the firm, and no notice of dissolution need be given :i. The estate of a deceased partner, ii. The insolvent partner, and iii. The sleeping or dormant partner who retires. 2. After dissolution of the firm, the authority of each partner to bind the firm continues in two cases :- (sec.47) i. to wind up the affairs of the firm; and

ii.

to complete the transactions begun but unfinished at the time of dissolution. A partner adjudicated insolvent cannot bind the firm in any case. However, if a person represents himself or knowingly permits himself to be represented as a partner of the insolvent, he will be liable for the acts of the insolvent. As an insolvent partner ceases to be a partner on the date of the order of adjudication, all acts done by him upto the date of the order of adjudication are binding on the firm. 3. If any partner earns any profit from any transaction connected with the firm after its dissolution, he must share it with the other partners and the legal representatives of the deceased partner.

SETTLEMENT OF ACCOUNTS The mode of settlement of accounts between partners after the dissolution of a firm is determined by the partnership agreement. In the absence of any specific agreement between them in this regard, provisions of sec. 48, 49 and 55 apply. 1. Sale of goodwill :- [sec.55(1)] In settling the accounts of a firm after dissolution, the goodwill shall be included in the assets and it may be sold either separately or along with other property of the firm. 2. Sharing of deficiency :- [sec.48(a)] If the assets of the firm are insufficient to discharge the debts and liabilities of the firm, the partners shall bear deficiency in the proportion in which they were entitled to share profits. Thus losses, including deficiencies of capital, shall be paidi. first out of profits, ii. next out of capital, and iii. lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. 3. Application of assets :- [sec.48(b)] The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order : i. in paying the debts of the firm to the third parties,

ii. iii. iv.

in paying to each partner rateably what is due to him from the firm for advances distinguished from capital, in paying to each partner rateably what is due to him on account of capital, and the residue, if any, shall be divided among the partners in the proportion in which they were entitled to share profits.

If the assets are sufficient to pay (1) and (2) above, but insufficient to repay each partner his full capital, the deficiency in the capital shall be borne by the partners in the proportion in which they are entitled to share profits. The following is the proforma of the form required to be filled in by the partners at the time of dissolution: FORM `E' INDIAN PARTNERSHIP ACT, 1932 Notice of change of Constitution or Dissolution of Firm (See rule 4) FIRM REGN. NO. and DATE Firm Name.................................... Registered Address............................ Partners in the above named firm We, being agents of a partner in the abovementioned firm persons specially authorised by a partner in the above mentioned firm to give notice in this behalf hereby give notice that (a) the constitution of the firm has changed as follows :(1) Mr./Messrs......................of.......................has/have joined the firm as new partner/partners on

(2) Mr./Messrs......................of.......................has/have partner/partners of the firm with effect from .................

retired

as

...................................... (b) the said firm has been dissolved on ....................... I/We.......................the abovenamed..................solemnly affirm that what is stated in paragraphs.................is true to my/our knowledge, and that what is stated in the remaining paragraphs..........is stated on information and belief, and I/We believe the same to be true. I/We declare on solemn affirmation that up to the date of submission of this application there has not been any change in any of the particulars previously intimated save and except the change notified above. Solemnly affirmed at : Dated this.............day of...........19......... Name and Signatures (1) (2) (3) Certified that the person who has signed this notice has signed it in my presence and he has solemnly affirmed that the particulars furnished therein are true. In the case of person not conversant with the English language, the contents of the above particulars have been explained to him in a language familiar to him and he has affirmed the truth thereof. Signature. Note 1. - Please strike out item (a) or (b) whichever is not applicable. Note 2. - Please give dates according to the English calendar.

Note 3. - In case there is only one person left then the firm should be considered as dissolved and the form should be filled in accordingly. Note 4. - This notice must be signed by every partner or his agent specially authorised in this behalf on solemn affirmation before a Magistrate or other Officer duly empowered to administer Oaths. (Price Re. 1) Note: In the above form part (a) would be striked out since it is meant for change of constitution of firm whereas part (b) is meant for dissolution of the firm.

CASE-STUDY NO.1. Mohrilal V/s Shri Ballabh A.I.R. 1967, Rajasthan.

This is a civil regular second appeal by the defendant Mohrilal in a suit for dissolution of partnership rendition of accounts, which was dismissed by the trial court but on appeal, that decision was reversed and the case was remanded back. The plaintiff Shri Ballabh carried on business with his name and style whereas the defendant Mohrilal also carried on business with his name and style in the same town. On 13th May, 1950 the plaintiff and the defendant entered into partnership agreement by which they agreed to carry on the business of sale and purchase of gur, sugar, potatoes, tobacco, etc. The partnership business consisted of the sale and purchase of tobacco among the other products and that business was conducted in the

name of partnership which was agreed to be styled as ‘Ramavatar Company.’ Both had agreed between themselves that the work of sale and purchase of various commodities was to be conducted by the defendant and that they would maintain the day to day accounts Kachhi Rokar from which the same will be entered every evening in Pakki Rokar to be maintained by the plaintiff. But in this case plaintiff didn’t have license to carry on tobacco business but defendant had it under Central Excises and Salt Act. Such a business couldn’t be done unless one was a license holder. The whole of tobacco business, according to the plaintiff, belonging to partnership was unlawful. It is admitted by the plaintiff that partnership accounts between the parties with reference to other products had been settled except for tobacco. This forced the plaintiff to file a suit out of which the appeal arises for dissolution. The defendant on the other hand admitted that he had entered into partnership with plaintiff by means of agreement. Both courts below held that tobacco business was a part and parcel of partnership business. The learned judge felt persuaded to come to the conclusion that tobacco business was not conducted jointly by partnership. It seems to have been entended that plaintiff appellant and defendant respondents were acting within the limits of authority. The real effect of partnership was nothing more and less than pooling the profits and losses of the said business and sharing it between the parties. JUDGEMENT :- The suit for dissolution of partnership and rendition of accounts couldn’t be maintained in any court of law.

CASE STUDY NO.2 Vali Venkaraswami V/s Gannabathula Venkataswami A.I.R. 1954, Madras

Under the deed of partnership dated 24/01/1948, the plaintiff and the defendants entered into partnership to erect, establish and run a cinema on site. They decided to share profits as follows: Plaintiff - 4 anna Defendant 1 - 4 anna Defendant 2 - 3 anna Defendant 3 - 4 anna

Defendant 4 - 4 anna Defendant 5 - 1 anna Defendant 1 was the managing partner of the firm who was to look after the construction and running of the cinema. The main charges against him were as follow: i. ii.

iii.

He retained in his hands more cash than he was allowed under the partnership deed. No meeting of partners was ever held after the execution of the deed. In spite of repeated requests of the plaintiff, managing partner refused to show him accounts of the firm.

As against the appeal, the defendants contended that as the business was to be carried on for a fixed period of 10 years, the plaintiff was not entitled to claim dissolution. It was also found that there were several acts of malfeasance and misfeasance since the institution of suit. All the partners acted contrary to the partnership deed. There was confusion as to what should be the ground for dissolution. Finally the court concluded that dissolution of firm is justified on the evidence that the confidence between partners i.e. plaintiff and defendants had been lost. The only contention which required consideration was the clause 22 of the partnership deed which provided that the partner not willing to continue in the firm can either sell his share of capital to all partners or to some of them or any one of them but not to the outsiders. The question is where it is open to partners to contract out of the rights conferred in sec.44. However it was held that the rights under sec.44 cannot be taken away by a contract between the partners. The right to seek dissolution through court is not based on contract but it is based on statute. Thus the contention of the defendants cannot be accepted. The subordinate judge directed the receiver to sell the superstructure only between the partners. However the defendants claimed that running of the cinema should be allowed until the sale of superstructure by the receiver. According to the learned advocate of the receiver, the receiver should carry out the sale immediately so that the defendants cannot run the business for a longer period.

JUDGEMENT :- Dissolution of partnership held justified. The appeal was dismissed with costs.

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CASE STUDY NO.3 V. H. Patel and Company V/s Hirubhai Himabhai Patel 2000 SOL case no.262, SCC A partnership firm, M\s V.H. Patel & Company, was constituted consisting of four brothers, namely, Jamnadas Patel, Vallabhbhai Patel, Gordhandas Patel and Hirubhai Patel. On the death of Jamnadas Patel the partnership was reconstituted with Gordhandas Patel, Vallabhbhai Patel, Hirubhai Patel, Parmanand Jamnadas Patel and, Jatin Parmanand Patel and Akashya Parmanand Patel, sons of Parmanand Jamnadas Patel.

On August 1, 1987 a Deed of Retirement was executed by all the partners of the firm providing for retirement of respondent No. 1 as partner thereof on certain terms and conditions. On September 14, 1989 another suit was filed by the petitioners under the Trade and Merchandise Marks Act, 1958 for injunction against respondent No. 1 Hirubhai Patel and his two sons Praveen Patel and Dinesh Patel and their partnership firm not to use and exploit the trade marks of the firm under the name of M\s. H.H. Patel & Company and for other incidental reliefs. According to the consent terms the parties agreed to have their dispute resolved through sole arbitration of Mr. Justice D.M. Rege (Retd.) of Bombay High Court. The arbitrator will file the award in the Bombay High Court in accordance with the provisions of the Arbitration Act. Thus the disputes between the parties which arose in the suit stood referred to sole arbitration of Justice D.M. Rege. Claims were preferred before the sole arbitrator by all parties. The arbitrator did not entertain the counter claim of the respondents seeking for dissolution of the firm M\s V.H. Patel & Company on the ground that it was beyond the scope of reference. The award was filed in the Bombay High Court. The learned counsel submitted that the principal question is whether the arbitrator was competent to entertain the counter claim filed by respondent No. 1 for dissolution of the firm M\s V.H. Patel & Company and falls within the scope of the terms of reference made by this Court on February 15, 1991; that the counter claim made by the respondent for dissolution of the firm was not within the terms of reference either expressly or impliedly and the parties referred to the arbitrator specific disputes relating to the rights and obligations of the parties arising out of (i) the agreement dated July 3, 1987, (ii) retirement deed dated August 1, 1987, (iii) to the user of the trade marks in question, and (iv) to the determination of the rights of respondent No. 1 as a partner of the firm as per the pleadings of the parties in the pending suits; that the pleadings of the parties in the suits did not include any claim by any partner for dissolution of the firm M\s V.H. Patel & Company, that there is no scope for raising a new plea by way of an amendment as to dissolution of the firm, and, that the arbitrator is bound strictly by the terms of the arbitration and cannot travel beyond it. "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)(e). The High Court is conscious of the question that the relief for dissolution of the firm was not one of the matters on which there was a dispute which was referred to arbitrator. However, the High Court is of the view that though in the plaint there is no prayer for dissolution of firm it was possible for the respondent to claim that relief in the civil suit. Even if he had not retired pursuant to the terms of the agreement entered into between the parties, it is certainly permissible for him when disputes had arisen between the parties to ask for dissolution of the partnership and when that was not possible by mutual consent a dispute could certainly arise thereto and such a dispute could have been referred to arbitration as provided in the Partnership Deed. If that was permissible, such a contention could be raised in the suit filed by the parties. Power of the arbitrator will primarily depend upon the arbitration clause and the reference made by the Court to it. If under the terms of the reference all disputes and difference arising between the parties have been referred to arbitration, the arbitrator will, in general, be able to deal with all matters, including dissolution. JUDGEMENT :- If there has been a breach of agreement and the conduct of the partners is destructive of mutual confidence such that the business cannot be conducted at the advantage of either party, it gives rise to a ground for dissolution of partnership.

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