Position of a Minor admitted as a partner to the Benefits of Partnership
Table of Contents
We have seen earlier that partnership results from a contract. Consequently, a minor cannot enter into a contract of partnership as an agreement by a minor is void. It follows that a minor cannot become a partner, nor can a partnership be created with a minor as a partner.
But if all the partners agree a minor may be admitted to the benefits of an already existing partnership firm. It should be remembered that even after such admission the minor does not become one of the group of persons called the firm.
Section 30 of the Partnership Act lays down the rights and liabilities of a minor admitted to the benefits of a partnership as follows :
- The minor has a right to such share of the property and of the profits of the firm as may be agreed upon by the
- The minor has access to and inspect and copy any of the accounts of the
- The minor is not personally liable for the debts and obligations of the firm although his share in the profits and of the assets of the firm will be liable for trie
- So long as the minor continues to be in the firm, he cannot file a suit against the other partners for an account or for the payment of his share of the property or profits of the firm. He can file such a suit only when he wants to severe his connection with the firm.
- At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, the minor has to elect either to become or not to become a partner in the firm. Such election may be made by a public notice. If he gives no notice to this effect he shall become a partner in the firm on the expiry of the said six
- A minor who thus becomes a partner will become personally liable for all debts and obligations of the firm incurred since the date of his admission to the benefits of
- Where the minor elects not to become a partner the following rules will apply:
- His rights and liabilities continue to be those of a minor upto the date on which he gives public notice to not to become its
- His share will not be liable for any act of the firm done after the date of the notice.
- He can sue the partners for his share of the property and profits of the
Classes of Partners
Business Low Notes
A person who deals with a firm would like to know who are the partners, arid to what extent they are liable to him for his claim against the firm. The position of different classes of partners may be examined as follows :
Actual Partner: A person who has by agreement become a partner and Vvho takes actual part in the conduct of partnership business is an actual and working partner He is the agent of other partners for the purposes of the business. All his acts in the ordinary course of the business bind him and the other partners to third parties.
Partner by Holding Out: A person may, under certain circumstances, be liable for the debt of the firm although he is not a partner.
If a person by words spoken or written, or by conduct represents himself or knowingly permits to be represented, to be a partner in a firm, he is liable as a partner in that firm to anyone who has, on the faith of such representation, given credit to the firm (Sec. 28), So, where a person conducts himself as to lend another to believe that he is a partner, although really he is not, and on that belief the other person gives credit to the firm, he is deemed to be a partner by holding out.
- A, B and C carry on a business for profit. C contributes neither labour nor money, and does not receive any share of the profits, but his name is used as a partner in the firm. He is liable to every outsider who gives credit relying on his being there as
- Suresh carried on business in the name of the business as Ram Saran and , employed a person named Ram Saran to act as manager of the business. Ram Saran was regarded as partner by holding out or estoppel.
The posifion of a partner by holding out is peculiar. He is liable to make good the loss which the person giving credit to the firm may suffer, but he has no claim upon the firm. A partner who has retired from the firm but allows the use of his name to continue with the firm may become liable to third parties by the principal of holding out
Example: P retired from a firm consisting of PX and R as its partners. He failed to give notice of his retirement. After his retirement S joined the firm and the firm continued its business under the old name. One creditor filed a suit for the recovery of his debt after the retirement of
- It was held the creditor could make P and his co-partners and R liable for his debt on the principle of estoppel. But he can not file a suit against P, X. R and S, all of them together.
Dormant or Sleeping Partner: A person who is in reality a partner but whose name does not appear in any way as partner, nor does he take part in the management of the business, and is not, therefore, known to outsiders as partner in the firm, is called a dormant or sleeping partner.
Such a partner is liable to third parties who gave credit to the firm even without knowing of his being partner but subsequently discovering the fact. A sleeping partner’s liability rests on his being in the position of an undisclosed principal.
One important distinction exists between a sleeping and active partner with regard to liability towards third parties. A sleeping partner is responsible for the debts of the firm taken during the tenure of his partnership like an active partner. But his .liability ceases immediately on retirement and he is not supposed to give a notice on his retirement like other active partners.
Partners in Profits only: A partner may stipulate with his co-partners that he will be entitled to a certain share of the profits without being liable for losses. But he will be liable to outsiders for all debts and obligations of.the firm.
Sub-partner : Where a member of a firm agrees to share the profit derived by him from the firm with a stranger, there arises a sub-partnership between him and the stranger. Such stranger is said to be a sub-partner, although he is in no way a partner in the original firm, has no rights against it, nor he is liable for its debts.
Incoming Partner: A person who is admitted as a partner into an already existing firm with the consent of all the partners is called an incoming or new partner. The incoming partner does not become liable for any act of the firm done before he becomes partner, unless he agrees to be so liable. His liability commences from the date of admission as a partner.
Retired or Outgoing Partner: A partner who goes out of a firm in which the remaining partners continue to carry on the business is called retired or outgoing partner: A retired partner continues to be liable for all debts and obligations of the firm incurred before his retirement.
A, B and C are partners and D is the creditor of the firm. A retires from the firm. A remains liable to D. Two years after A’s retirement the firm becomes insolvent. A will be liable for the debts existing at the time of his retirement.
A retired partner will be liable for all debts incurred after his retirement if he fails to give proper notice of his retirement. In that case he is deemed to be a partner by holding out. A retiring partner will also be liable to third parties for all transactions of the firm began but unfinished at the time of his retirement, even though notice of his retirement is given to third party.
A retiring partner may, however, be discharged from the liability by the consent of the creditors. The remaining partners will be liable in such a case. This rule is the application of the general rule of the law of contract known as “Novation”.
Right after retirement to share profits or interest -(Sec. 37)
Where a member of a firm ceases to be the partner of the firm and the continuing partner carry on the business with the property of the firm without any final settlement of accounts,
i.e., without the share of the assets of the outgoing partner being paid over, or without his interest being purchased by the remaining partners, the estate of the partner is entitled to share in the profit earned with the aid of the assets of such outgoing partner, or interest at 6% per annum at the option of the out going partner.
The option to claim a share of the profits or interest can be exercised only when the accounts of the subsequent business are made. But a claim both for share of the subsequent profits as well as interest will not be allowed. Also, once the outgoing partner has decided, then he will not be allowed to go back on it, nor he be permitted to claim profits for part of the period and interest for remaining period.
Nominal Partner: If a person’s name is used as a member of the firm, although he is not a real member and not entitled to the share of profits of the firm, is known a nominal partner. Such a person is a necessary party only in cases of negotiable instruments.
Business Low Relation of Partners Notes
Relation of Partners to One Another
The relation of partnership comes into existence by an agreement between the partners and such an agreement usually provides for the mutual rights and duties of partners.
The Deed of Partnership usually contains the clauses with regard to the conduct and management of the business, the contribution of capital by each partner, the proportion in which profits are to be shared, and the rights and duties of the partners in the business.
If there is no written partnership agreement, their relations, will be governed by the course of dealing among themselves. Where partners fail to provide for their relations the rules laid down in the Partnership Act will apply.
It should be remembered that the partners, relations whether governed by written articles of partnership or defined by the Partnership Act can be changed by the consent of all the partners.
The Partnership Act lays down the rights and duties of partners as follows :
Business Low Notes Rights
- Subject to any contract to the contrary, every partner has a right to take part in the management of the
- Every partner has a right to be consulted and heard in all matters affecting the business of the firm. In all matters of importance and those affecting the policy and nature of the business or any change in the constitution of the firm, all the partners must agree, mere majority will not be sufficient. But in ordinary routine matters the majority rule may
- Every partner, active or dormant, has a right of free access to all records, books and accounts of the business and also to examine and copy
- Every partner is entitled to equal share in the profits, unless different proportions are
- A partner who has contributed more than his share of the capital for the purposes of the business is entitled to interest at a rate agreed upon and where no rate is agreed upon, at 6 per cent per annum. But a partner is not entitled to any interest on the capital subscribed by him unless there is an agreement or a trade custom to that effect
- Subject to a contract to the contrary, a partner is entitled to be indemnified by the firm for all acts done by him in the course of the partnership business, for all payments made by him to discharge the debts and liabilities of the firm and for expenses made by him in an
- Every partner is joint owner of the partnership property and is entitled to have the property used exclusively for the purposes of the
- A partner has power to act in emergency for protecting the firm form
- Every partner is entitled to prevent the introduction of a new partner into the firm without his consent. .
- An incoming partner is not liable for any debts and obligations of the firm incurred before he joined it, excepting by his own
- Every partner has a right to retire from the
- Every partner has a right to continue in the partnership and not to be expelled from it unless power of expulsion is provided in the partnership
- Every outgoing partner has a right to carry on competing business, but without using the firm’s name and without soliciting the customers. He may, however, agree not to do so for a specified period and within specified local
- Where a partner dies or otherwise ceases to be a partner because of his retirement, expulsion, insolvency, insanity, and the other partners carry on the business with the property of the firm without any final settlement of accounts, the estate of the deceased partner, or the partner himself, as the case may be, is entitled to share in the profit earned with the aid of the assets of the outgoing partner, or interest at 6 per cent per annum, if so desired by the legal representatives of the deceased partner, or by the partner himself.
Duties of Partners
Business Low Notes
The relation of partners is based on mutual confidence and the law required that a partner must act towards the other partners with the utmost good faith. In particular, the Partnership Act provides for the following duties :
- Every partner must carry on the business of the firm to the greatest common
- Every partner must be just and faithful to the other
- A partner .s bound to keep and render true, proper and correct account of the He must permit the other partners to inspect such accounts and take copies of them. All money of the firm that may come to his hand must be handed over to the firm.
- Every partner is an agent of the other partners and as such is bound to communicate full information relating to the business of the firm to the other
- Every partner is bound to indemnify the firm for any loss caused by his fraud in conduct of business. Also, if a partner commits a fraud on his co-partner, he must indemnify him for any loss caused to
- Every partner who is guilty of wilful neglect in the conduct of the business and the firm suffers loss in consequence, is bound to make compensation to the firm and other partners.
- Subject to a contract to the contrary, every partner is bound to share losses equally with the
- Every partner is bound to attend diligently to the business of the firm and in the absence of an agreement to the contrary, he is not entitled for any remuneration; whether in the form of salary, commission, or otherwise, on account of his own trouble in conducting the business of the
- In the absence of an agreement to the contrary, every partner is bound to hold and use the partnership property for the
- A partner cannot make private gain by reason of his membership with the firm. Thus, where a partner in the course of the business has received an information and uses it for his personal gain as against the interest of the firm, he must pay over any benefits he may have obtained by the use of this information. He cannot bargain for a private gain from the customers of the
- No partner can carry on any business which is likely to compete with the business of the partnership except with the consent of the other partners. If he does so, he shall have to account for the profits of such business to the firm, and also to compensate the firm for any loss sustained by his carrying-on such- competing
- Every partner is bound to act within the scope of the actual authority conferred upon him. If he exceeds his authority, he shall have to compensate the other partners for any ensuing loss, unless they ratify his
- No partner can assign or transfer his partnership interest to any other person so as to make him a partner in the business. But a partner may assign his share in the profits and assets of the firm. The assignee or transferee will have no right to ask for the accounts or to interfere in the management of the business. He can only share the actual profits. On dissolution he can ask for the share of the assets and also the accounts since the date of d-ssolution.
Use of property of the firm exclusively for the firm. According to Se-.. 15, subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the firm’s business.
Personal profits earned. Subject to contract between the partners if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or firm name, he shall account for that profit and pay it to the firm.
Secondly, if a partner carries on any business of the same nature as and competing with that of the firm, then he shall account for and pay to the firm, all profits made by him in that business.
It is open to partners to determine by agreement amongst them as to what shall be the property of the firm and what shall be the separate property of one or more of the partners. Subject to a contract amongst the partners, the property of the firm includes :
- all property and rights and interests in property acquired by purchase or otherwise, by or for the firm;
- all property and rights and interests in property originally brought into the common stock of the firm;
- all property and rights and interests in property acquired for the purpose, and in the course of the business of the firm;
- goodwill of the business of the
SELF CHECK TEST
Business Low Notes
- A partner without the knowledge of his co-partners obtains for his own benefit the renewal of the lease of the business promises of the firm. Will he be able to enjoy the lease?
- B and C were partners, and C was employed to buy sugar for the firm.C with B’s knowledge, sold his own sugar to the firm at the market price and made a considerable profit. Advise
- Partnership Deed, signed by Band C, gave B power to introduce into the partnership any of his son on their attaining the age of 21, B’s son D attained 21 and B proposed to make him a partner. C refused to consent. Could C prevent D from being a partner?
- A was a common partner is two firms publishing newspapers. He communicated information and news of one firm to the Can he be prevented from doing so?
- A, B and C were partners in a firm By his wilful neglect and misconduct B caused serious loss to the business of the firm. After several warnings to B, A and C passed a resolution expelling B from the firm. B objects to his expulsion. Is he legally entitled to do so?
- No, the lease so renewed was partnership property,
- C must account for to the firm for the profit made,
- No, C could not prevent D from being introduced as a partner, as the partnership deed signed by him and B operated as a consent by both
- Yes, A can be prevented by Injunction from doing so. He may also be required to compensate the firm for any loss caused to it by his
- No, B cannot object to his expulsion by the other partners. He has misconducted and caused serious loss to the firm and, in spite of several warnings, has not mended his
( BBA 1st Semester Business Low Notes )
RELATION OF PARTNERS TO THIRD PARTIES
Business Low Notes :-
Power of partner to bind the firm: Every partner is the agent of the firm and his copartners for the purposes of the business of the firm. When two or more persons agree to carry on a partnership business and share its profits, each is a principal and each is an agent for the others.
Each is bound by the other’s contract in carrying on the business, just as a single principal would be bound by the acts of an agent. The principal of agency governs the relationship between the partners. It is because of this that the law of partnership is said to be a branch of the law of agency.
The authority of a partner to act on behalf of the firm may either be express or implied. Any authority which is expressly given to a partner by agreement of partnership is called Express Authority. The firm is bound by all acts done by a partner by virtue of any express authority given to him. Implied Authority means the authority to bind the firm which arises by implication of law-from the fact of partnership.
IMPLIED AUTHORITY OF A PARTNER
Section 19(1) and 22 read together provide that the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm, provided that the act is done in the firm name or in any manner expressing or implying an intention to bind the firm.
Such an authority of a partner to bind the firm is called the implied Authority of a partner.
Therefore the test, to judge whether a transaction entered into by a partner comes within his implied authority is quite simple. For successful application of this test the following three conditions must be fulfilled. Absence of even one condition will vitiate the transaction and wll not come under the ambit of implied authority of a partner. These conditions are :
- The nature of the transaction—Is to carry on business of the kind carried on by the firm?
- The manner in which the transaction has been transacted—Is it done in the usual way?
- In whose name the transaction has been done-ls it done in the name of the firm ? Or is the intention to bind the firm clear?
Every partner has an implied authority to bind the firm by the following acts :
- He may sell the goods of the
- He may purchase on the firm’s behalf goods of the kind usually employed in the firm’s
- He may receive payment of the firm’s debts and give receipt for
- He may engage servants for the partnership
- Accept, make and issue negotiable instrument (cheques, bills of exchange, promissory notes) in the firm’s
- Borrow money on the firm’s credit and pledge the firm’s goods to effect that
- Buy goods on credit for the
- Engage and instruct an advocate in a suit by or against the firm for a trade debt. (A trading firm is one which carries on the business of buying and selling of goods).
- A, the partner of a firm of confectioner, buys sugar on credit in the firm name. The firm is bound to pay for the
- A, the partner of a firm of bankers, accepts a bill of exchange on behalf of the firm does not inform the firm of this receipt and afterwards the money is appropriated by A for his own The firm is liable to make good the payment.
- A and B are partners. A, with the intention of cheating B, purchases on behalf of the The goods were of the type used by the firm. He uses the goods for his personaluse. The firm is liable to pay for the price of the goods.
If a partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary business the firm is not bound unless he was specially authorised by other partners. The partner is personally liable, although his act may subsequently be ratified by the firm.
- A, the partner of a firm of confectioners, buys a horse on credit in the firm’s The firm is not bound to pay the price of the horse, as this act does not fall within the scope of a confectioner’s business.
- B, the partner of a firm’ of solicitors, accepts a bill of exchange on behalf of the firm. The firm is not bound to pay the bill, as it is no part of ordinary business of a solicitor to draw, accept or endorse bills of
Limitations of Implied Authority of a Partner: Section 19 (2) of the Partnership Act expressly provides that in the absence of usage or custom of trade to the contrary the implied authority of a partner does not empower him to :
- submit a dispute relating to the business of the firm to arbitration;
- open a banking account on behalf of the firm in his own name;
- compromise or relinquish any claim or portion of a claim by the firm;
- withdraw a suit or proceeding filed on behalf of the firm;
- admit any liability in a suit or proceeding against the firm;
- acquire immovable property on behalf of the firm; or
- transfer immovable property on behalf of the firm; (h) enter into partnership on behalf of the
According to S.20 of the Partnership Act, it is open to the partners by express agreement to extend or limit the implied authority. The third parties will be bound by express limitation
.only when they have notice of such limitation or curtailment of the implied authority.
According to sec. 21 a partner has authority to do all such acts during emergency which are necessary to protect the firm from loss. In such a case, the firm would be liable even for the unauthorised acts of a partner.
Liability of Partner for Acts of the firm: Section 25 of the Act lays down the general rule that every partner is liable for all acts of the firni done while he is a partner and that the liability is joint and several.
An act of the Firm is an act or commission by all the partners or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm.
It follows that all partners are liable jointly or severally for all acts or commissions binding on the firm. In order that an act done may be an act of the firm and, therefore binding on all and every partner, it is necessary that the partner or agent doing the act on behalf of the firm must have done that act in the name of and on behalf of the firm and not in his personal capacity, and the act must have been done in the ordinary course of the business of the firm.
- A, the partner of a firm of cloth merchants, buys cloth from a mill on credit. This is an act of the firm and all partners are liable to pay the price jointly as well as
- A, the partner in the above mentioned firm, orders on credit 5 cases of Kashmir apples on his own initiative, but sends the order on the firm’s letterhead and in the firm’s name. The firm is not liable to pay for the apples, as the order is not for the purpose of the business of the firm of cloth A is personally liable to pay.
Liability for Wrongful Acts of Partner: Every partner is liable for the negligence and fraud of the other partners in tin. course of the management of the business. Examples :
- A, the partner of a firm, bribed the clerk of a rival firm and obtained certain confidential The firm was held liable for the wrongful act of A.
- A, the partner of a firm of taxi drivers, injures P by his negligent driving. The firm was held liable to pay damages to
- A, the partner of a firm of jewellers, misappropriates 10,000 which P had deposited with him for buying gold and making ornaments. The firm is liable.
( BBA 1st Semester Business Low Notes )
Dissolution of Partnership OR
Reconstitution of the Firm
When there is a change in the relations of partners and the firm continues as a new firm, then it is called dissolution of the partnership or reconstitution of the firm. Reconstitution of the firm may take place in various ways, namely;
(1) by admission of a partner, (2) by retirement of a partner (3) by expulsion of a partner, (4) by insolvency of a partner, (5) by death of a partner and (6) by transfer of a partner’s share.
- Admission of a partner (31)
A new partner can be introduced in a firm with, consent of all the existing partners of the firm. This is because the relations of partners are based on mutual trust and confidence, as such, only that person can be admitted as a new partner who enjoys the confidence of all the partners. A new partner can also be introduced in the firm if there is a contract between the partners in this regard. Therefore, it means that a new partner can be admitted either with the consent of all the partners or in accordance with the contract. A new partner is also called incoming partner. Liability of a new partner according to Sec. 31 (2), “Subject to provisions of Sec. 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner.” This means the liability of a new partner starts from the date of his admission. However, the new partner may agree with his partners to be liable for the liability of the firm incurred by the firm before the date of his admission. .But such an agreement is finding only between the new partner and existing partners, and does not give any right to the creditor to sue the new partner for part debts of the firm. But a new partner may be made liable to the creditors of the firm for the past debts of the firm only, if,
- The new partners or the reconstituted firm should have assumed the libility of the past
- The creditors should be informed of the new arrangement. The new partner becomes liable to those of the creditors who expressly or impliedly accept the new
- Retiring partner
The retirement of a partner from a firm takes place w ien he leaves the firm. When a partner retire or with draws from the firm and the remaining partners continue with the firm, reconstitution of the firm takes place. A partner may retire from the firm —
- where all the partners give their consent to
- where it is a partnership agreement that a partner might retire without seeking the dissolution of the
- where partnership is at will, by giving notice to all other partners of his intention to retire.
Liability of a retiring partner. This may be discussed under two heads—
(i) Liability for the acts of the firm done before retirement. Accoring to sec. 32 (2), a retiring partner remains liable to the creditors of the firm for all the acts of the firm done by the firm done before the date of retirement. In addition, he will also be liable for all the transactions of the firm begun but remain unfinished at the date of retirement.
However, a retiring partner be discharged from such liabilities if there is an agreement in this connection between the retiring partner, the remaining partners and the creditors of the firm. This agreement is called ‘novation’. But in order to discharge him from the creditors by novation two things must be fulfilled—
- The remaining partners must have agreed with the retiring partner to release him from existing debts and
- The creditors must be informed of the retirement and the new arrangement. After this the retiring partner will be released from liability to the creditors who have expressely or impliedly agreed to release the retired partner and to accept the reconstituted firm
as their debtor. An implied agreement arises when a creditor continues to deal with reconstituted firm after notice.
- Liability for the Acts of the firm done after retirement (sec. 32 (3)—The retiring partner remains liable to third parties for the acts of the firm done after his retirement until a public notice of his retirement given. This liability of the retiring partner is based on the principle of holding out. But the act should be within the scope of the authority of the partner doing it. But the retiring partner is liable only to those persons who deal with the firm under the assumption that the retiring partner was still a partner. But he is not liable to the third parties who have no knowledge that he was a partner. However, a public notice is not required in case of a: sleeping partner and he will not be liable for the acts of the firm done after his retirement. This is because such a partner is not known to the third
- Explusion of a partner (sec. 33)
Ordinarily a partner cannot be expelled from the firm by any majority of the partners. But the authority of expulsion can be given to the majority only by an express provision in the partnership agreement. But this power of expulsion can be exercised if three conditions are satisfied. These conditions are :
- the right of expulsion should be given to the partners by an express contract,
- the power of explusion should be exercised by a majority of partners,
- the power should be exercised in good faith. The test of good faith is that, first, the expulsion must be in the interest of the firm, two, that the partner to be expelled is served a notice and three, that he is given an apportunity to explain his
Where the expulsion of a partner takes place without satisfying any of the conditions mentioned above, the expulsion is irregular. In such a case, the expelled partner may either claim re-instatement as a partner, or sue for the refund of his share of capital and profits in the firm.
An irregular expulsion is ineffective and inoperative and the expelled partner does not cease to be a partner. But while expelling a partner it must be ensured that all the three conditions have been satisfied to make it a proper and regular expulsion. Then the rights and liabilities of an expelled partner are the same as those of a retired partner.
- Insolvency of a Partner (sec. 34)
Where a partner in a firm is declared insolment, he remains no more a partner on the date on which the order of declaring him insolvent is made, whether the firm is thereby dissolved or not. The other effects resulting from the insolvency of a partner are :
- The firm is dissolved on the date of order of insolvency but the partners may specifically provide that on such an event the firm shall not be
- The estate’ of the insolvent partner shall not be liable for the acts of the firm done after the date of the order. A public notice of the order of adjudicating insolvent is not required.
- the firm is not liable for the acts of the insolvent partner after the date of
- Death of a partner (sec 35 and 42 (c).
A firm is dissolved, subject to contract between the partners, by the death of a partner. However, when under a contract between the partners the firm is not dissolved, the estate of the deceased partner is not liable for any act of the firm done after his death. Further, no public notice is required of the death of a partner.
- Transfer of a partner’s Interest (sec. 29).
A partner may transfer his interest in firm by sale, mortgage or charge. But the transfree is not entitled to interfree in the conduct,of the business of the firm, to require accounts of the firm and to inspect the books of the firm. When the partner transfers the share, the transferee only becomes entitled to receive the share of profit of the partner who has transfered his share. But he has to accept the account of profits provided by the partners. [Sec. 29 (1)]
If the firm is dissolved or if the transfering partner ceases to be a partner, the transferee is entitled to receive the transfering partner’s share in the assets of the firm. For knowing that share, he is entiled to an account from the date of dissolution, [sec. 29 (2)]
DISSOLUTION OF FIRM
Business Low Notes
Dissolution of a firm: Dissolution of a firm means the end of a firm by the break up of the relation of partnership between all the partners But where the relation between only some partner is broker it is called dissolution of partnership.
For example, where A, B and C were partners in a firm and A died or retired or was adjudged insolvent, the partnership firm would come to an end.
But if the partners had agreed that death, retirement or insolvency of a partner would not dissolve the firm, then on the happening of any of these contingencies the “partnership” would certainly come to an end, but the firm might continue under the same name. It would be a “reconstituted firm”; for where A had gone out of the firm on account of any reason; the relationship between A, B and C is broken up and a new relationship between B and C is created.
Therefore, “dissolution of partnership” involves a change in the relation of the partners, but it does not mean the end of the partnership firm.
A firm may be dissolved on any of the following grounds :
- By Agreement: A firm may be dissolved with the consent of ail the partners of the firm, partnership is created by It can be terminated by contract (S. 40).
- By Notice: 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. The dissolution takes place from the date mentioned in the notice, or, if no date is mentioned then from the date of communication of the notice to the other partners (S. 43).
- On the happening of certain contingencies: (S.42) : Subject to contract between the partners to continue the business in spite of the contingency, firm is dissolved
- if formed for a fixed -term, by the expiry of that term;
- if formed to carry out one or more adventures or undertaking, by the completion thereof;
- by the death of partner; and
- by the insolvency of a
- Compulsory Dissolution: According to Section 41 the dissolution of a firm is automatic under the following circumstances :
- If all the partners of a firm or if all the partners except one become insolvent, there must necessarily be dissolution of the firm. When a partner is declared insolvent, then he ceases to be a partner from the date of such declaration, since, there must be at least two partners in a firm, if all partners or all the partners except one become insolvent then the firm is
- By business becoming illegal : A firm is in every case dissolved if the business of the partnership is prohibited by law, e., the object for which the partnership was formed is unlawful, or becomes illegal as a result of some subsequent events. This is by operation of law. But if the firm is carrying on more than one business, if one business becomes illegal the firm is not dissolved.
- Dissolution through the Court (S.44): At the suit of a partner, the Court may dissolve a firm on anyone of the following grounds :
- If a partner becomes of unsound mind. The suit for dissolution may be filed by the next in kin of the insane partner or by any other
- If a partner becomes permanently incapable, of performing his duties as a partner, g., he becomes blind, or paralytic, etc., The suit will be filed by a partner other than the partner who has become incapable.
- If a partner is guilty of misconduct which is likely to prejudice the business of the firm, the court may dissolve the firm at the instance1 of the other partners. The Court will order dissolution if the act complained of is likely to affect the credit and customers of the partnership business. Gambling by the partner, misapplication of clients money by a solicitor are the examples of
- If a partner wilfully and persistently commits breach’of the partnership agreement regarding management, and the other partners find it impossible to carry on the partnership business, the Court may order dissoluti9n of the firm.at the instance of any of the other partners. For example, constant refusal to perform duties, or continuous, quarrels, or erroneous accounts by a partner are good grounds for
- If a partner has transferred the whole of his interest in the firm to an outsider or has allowed his interest to be sold in execution of a decree, the other partners may sue for dissolution.
- If the business of the firm cannot be carried on except at a loss, the court may order
- Where the court considers it just and equitable to dissolve trie firm. It may do so at the instance of any partner. Dissolution has been granted under this clause in the following cases: deadlock in the management; complete destruction of confidence between the partners that they are not even on speaking terjns any more; the substance of the business gone,
Dissolution of partnership and Dissolution of Firm
It is said that dissolution of partnership does not necessarily lead to dissolution of firm, whereas dissolution of firm does lead to dissolution of partnership. It is because :
- Dissolution of firm means the complete break down of partnership Dissolution of partnership simply means a change in the relation or constitution of partners. Even after dissolution of partnership, the partners may agree among themselves to continue the business.
- Dissolution of a firm means closing down the business of the firm. But in dissolution of partnership, the business continues as before except the firm is re-constituted,
- In case of dissolution of partnership, a partner retires, dies or becomes insolvent but in case of a dissolution of firm, there is complete termination of relation between partners.
- When the firm is dissolved, its assets are realised and distributed among partners. While in case of dissolution of partnership, only thing to be done is the ascertainment of the share of the outgoing partner, because the business continues as
Consequences of Dissolution
- On the dissolution of a firm, it comes to an end and its affairs have to be wound up according to the rules laid down in the Act. The assets of the firm to be collected and applied in payment of the debt and liabilities. The deficit, if any is to be distributed among the partners according to their rights. The deficit, if any, is to be paid by the partners according to the terms of the agreement of partnership. These proceedings are called “winding up”.
- Until public notice is given of the dissolution, the partners continue to be liable to third parties for all acts done in connection with the affairs of the
- Notwithstanding the dissolution, the authority of each partner to bind the firm continues(i) so far as may be necessary to wind up the affairs of the firm, and (ii) to complete transactions begun but unfinished at the time of
- If any partner makes 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
- Where a partner has paid premium on entering into partnership for fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, according to the terms of admission and the unexpired period of the term. But he will not get anything if the dissolution is due to his misconduct or it is in pursuance of an agreement containing no provision for the return for the premium or any part of
- Where a contract creating partnership is rescinded on the ground of the fraud of any of the parties thereto, the party entitled to rescind it is entitled (a) to a lien on the 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 the capital contributed by him; (b) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and (c) to be indemnified by the partner guilty of the fraud against all the debts of the firm (S.52).
- After a firm is dissolved, every partner or his representative may, in the absence or a contract between the partners to the contrary, restrain any other partner from carrying
on a similar business in the firm name or from using any of the property of the firm for his own benefits, until the affairs of the firm have been completely wound up. But a partner who has purchased the goodwill of the firm, cannot be restrained from using the firm name (S. 53).
- Partners may, upon or in anticipation of the dissolution of a firm, make an agreement that some or all of them will not carryon a business similar to that of the firm within a specified period or within specified local limits. Such an agreement will not be void on the ground of restraint of trade (S. 54).
Partner’s lien -Section 46 provides to the same effect and lays down the rule that on dissolution of a firm, for the discharge of the liabilities, each partner or his representatives has a right to have the property of the firm applied in payment of the debts of the firm.
If there is any surplus asset, a partner has a right to have the accounts adjusted and the net assets divided among the partners according to their rights. Or, he has a right to have whatever may be due from co-partners deducted from what would be otherwise payable to them in respect of their shares. This right of a partner is often called a partner’s lien.
Goodwill -It is an important item in a partnership. It may be sold either separately or along with the other property of the firm. Its valuation will depend upon the facts and circumstances of each case. In case of Page vs. Ratliffe (1896), 75 L T. 173, it was observed that the value of the goodwill could be determined and taken equal to the total of three years’ net profits. It is up to a partner to decide to purchase the goodwill of the firm and carry oil the business under the firm.