File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Dissolution of Partnership

Partnership is defined as the relation between two or more than two persons who have agreed to share the profits of a business carried on by all or any of them acting for all. When a partnership firm comes to an end, it becomes important to assimilate the future of all contingencies belonging to the firm in order to ascertain that all partners get their due share and can thus be free of any legal liabilities. The purpose of this research paper is to study in detail the procedure of dissolution of partnership, encompassing factors such as distribution of assets and liabilities.

The findings of the research laid down the various methods through which factors relating to dissolution of partnership are dealt with as per different sections under the provision of Indian Partnership Act, 1932. The paper uses secondary data and lies on qualitative research for reaching conclusions. The uniqueness of the paper lies in the fact that it focuses on dissolution of partnership specifically, making the research more precise.

Whenever a partnership arises as a result of mutual agreement between parties involved, it is expected that the venture will be profitable and thus continue to exist for a long period of time; however this is not always the case as more often than not partnerships come to an end due to various reasons such as change in existing profit sharing ratio, admission of a new partner, retirement or death of an existing partner, insolvency of a partner etc., this ending of the partnership agreement is known as dissolution of a partnership firm.

The Indian Partnership Act enacted in the Year 1932, defines partnership as the relation between two or more than two persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

It is important to understand that 'Dissolution of partnership' is different from 'dissolution of firm' as 'Dissolution of partnership' is only reconstruction of firm, while 'dissolution of firm' means the firm no more exists after dissolution. [1]

When a partnership firm comes to an end, it becomes important to assimilate the future of all contingencies belonging to the firm in order to ascertain that all partners get their due share and can thus be free of any legal liabilities. The deed of dissolution in this matter is not liable to be stamped as a bond and that it is having been stamped as a deed for dissolution is sufficient as per B.K. Kapoor & Anr. Vs Mrs. Tajinder Kapoor & Anr.[2]

The Act clearly states that at the time of dissolution, any profit or loss is distributed to the partners in accordance with their agreed-upon profit-sharing ratio in the partnership agreement. The process of dissolution includes disposing of the assets and the liabilities are paid off [3].

There are various commodities in a firm such as tangible assets, intangible assets such as goodwill and many liabilities which are distributed and borne by partners in a systematic manner through procedures directed by the Indian Partnership Act. However, India has changed significantly since the inception of The Indian Partnership Act, 1932 which raises a question of whether all provisions under the act are still relevant.

Distribution Of Assets After Dissolution & Rights Of Partners

The dissolution of a partnership firm can occur due to various reasons as illustrated by the table given below. No matter whichever way the way the act occurred, the question of what will happen with the assets of the business still exists.

It is important to distribute how the assets and liabilities of the firm, existing at the time at which dissolution takes place, shall be distributed among the partners. It is widely agreed that any such distribution shall be made according to the terms of the partnership agreement agreed upon at the conception of the venture altogether.

The court has said that the property belongs to all partners and as such a single partner cannot make decisions regarding it in the case of Narendra Bahadur Singh vs Chief Inspector of Stamps. In spite of this, there are a few rules which govern such transactions. These rules are stated as below:
  1. Losses, including losses and capital deficits, must be covered first from profits, then from capital, then, if required, by each partner individually in the amount of earnings that they were entitled to.
  2. The firm's assets, including any funds donated by the partners to cover losses or capital shortfalls, will be used in the following order:
    1. When paying the firm's debts and liabilities to parties that are not partners in the business.
    2. When paying each partner in proportion to what is owed to him by the firm for loans as opposed to capital.
    3. In paying each partner in proportion to what is owed to him in capital by the firm.
    4. If there is any remaining money, it will be distributed among the partners in the same proportion as profits are divided.

Alongside such distribution of assets and liabilities of the firm, there are also certain rights given to partners at the time of dissolution in order to keep their best interests at heart and make sure that they get what they owe. Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners after dissolution. Such as:
  • Right to an equitable lien:
    On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, 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 according to their right. [4]
  • Right to return of premium:
    Each partner pays a sum as a premium when the partnership is created, and each partner receives that premium back in accordance with the portion specified in the agreement when the partnership is dissolved.
  • Rights where partnership contract is revoked for fraud or for other reasons:
    A partner has the authority to revoke the partnership agreement if he discovers that the other partners obtained his or her consent to join a company through fraud or deceit.
  • Right to restrain the use of the firm's name or property:
    After the firm is dissolved, one of the partners may prevent the other partner from using the firm's name for any other business.
  • The right to earn personal profit by using the firm's name:
    The partner has the right to continue using the company name in the event of dissolution since he purchases the goodwill of the company and stands to profit from it.

Distribution Of Goodwill After Dissolution

Goodwill is an intangible asset that a company acquires via good business practices and performance[5]. The goodwill must be included in the assets, subject to an agreement between the partners, and it may be sold individually or combined with other firm assets.

The basic ideology during the distribution of goodwill is based on the benefit of the buyer and as such it is an exception to restrain of trade. A partner may operate a business that competes with the buyer when the goodwill of a firm is sold after dissolution, and he may advertise such business, but, subject to an agreement between him and the buyer, he may not:
  1. Use the name of the firm
  2. Present himself as carrying on the business of the firm [6]
  3. Enlist the support of those who did business with the enterprise before it closed. Agreements in restraint of trade (3) Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not conduct any business similar to that of the firm within a specified local limit. Such an agreement shall be valid if the restrictions imposed are reasonable.

It was held in the case of Commissioner of Income Tax vs B.B Srinivasa Shetty[7] that goodwill is affected by everything related to the business, including the owners' personalities. The business' type and character, name and reputation, location, impact on the current market, and socioeconomic ecology at play, has an impact on goodwill.

When a partnership dissolves with the requirement that the assets go to a specific partner but without mentioning goodwill, it is assumed that the partner receiving the other assets also receives the goodwill. Therefore, it is evident that goodwill is a crucial component of the assets. On the insistence of a partner, the goodwill may be sold as an asset if there is no express or implied agreement to that effect. It is quite clear that goodwill is the most important asset.

The most relevant judgement on this matter is the case of Khushal Khemgar Shah & Ors. Vs M/s Khorshed Banu Dadiba [8]which says that legal representatives of partners are also entitled to share in goodwill in case of partners death.

Liabilities Of Partners After Dissolution

Section 45 of the Indian Partnership Act, 1932 provides liabilities for an act of the partners after the dissolution of the firm. When a firm decides to dissolve, the first step it takes is to come forward with a public notice announcing the dissolution of the firm. This act can be done by the firm or any partner and is essential as it is important to publicly detach from any actions associated with the business.

Unless they publicly announce the firm's dissolution, the firm's partners are each responsible for any act they commit on behalf of a third party[9]. Additionally, it adds that this clause does not apply to partners who pass away, try again, become bankrupt, or belong to someone who a third party is unaware is a partner of the firm.

Simply put, it safeguards a third party who is unaware of the firm's demise. After the dissolution of the partnership, the partner is liable to pay his debt and to wind up the affairs regarding the partnership[10]. After the dissolution, partners are liable to share the profit which they have decided in agreement or accordingly[11].

It is however important to understand that this occurs in case of dissolution and not retirement of a partner. The Supreme Court used the case of Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others[12] to clarify the distinction between "retirement of a partner" and "dissolution of a partnership firm" and to underline the established concept of partnership law once more.

In a recent judgment titled Guru Nanak Industries and Anr v Amar Singh [13]through legal representatives, the Supreme Court held that the retirement of a partner of the partnership firm consisting of only two partners will lead to the dissolution of the partnership firm.

When one of the partners leaves, the business is recreated, and all payments owed to him must be made in accordance with the conditions outlined in Section 37 of the Indian Partnership Act. The Indian Partnership Act also contains another clause, Section 48, which deals alone and particularly with the dissolution of partnerships.

The dissolution of a partnership firm, which is a very lengthy process, involves a lot of legal frameworks right from the firm giving out a public notice of dissolution to finishing up of all aspects including distribution of assets and liabilities. When a partnership firm comes to an end, it becomes important to assimilate the future of all contingencies belonging to the firm in order to ascertain that all partners get their due share and can thus be free of any legal liabilities.

According to the regulations outlined in the Indian Partnership Act, 1932, both retiring and current partners have specific rights and obligations that can be asserted upon the dissolution of the partnership. The statute explicitly lays out the grounds for dissolution of the partnership making it impossible for anyone to profit from the same.

There are various aspects that need to be dealt with when dissolution of a partnership firm takes place such as distribution of assets, rights remaining with partners after dissolution and liabilities of the partners. These are all dealt with under the preview of Indian Partnership Act, 1932. There is a distinction between dissolution of firm and retirement of partner, this paper focuses solely on dissolution of a partnership firm.

  1. B�heim, R., & Ermisch, J. (1999). Breaking up-Financial surprises and partnership dissolution. Insitute for Social and Economic Research, Working Paper. Colchester: University of Essex, 1999-9.
  2. Cramton, P., Gibbons, R., & Klemperer, P. (1987). Dissolving a Partnership Efficiently. Econometrica, 55(3), 615.
  3. Dissolution of a partnership firm discussed-Dissolution The first part of section 4 of the Indian. (n.d.). StuDocu. Retrieved September 19, 2022, from
  4. Gould, W. M., & Greene, J. A. (n.d.). The Dissolution of a Partnership by the Death of a Partner. 103.
  5. Li, J., & Wolfstetter, E. (2010). Partnership dissolution, complementarity, and investment incentives. Oxford Economic Papers, 62(3), 529-552.
  6. Mersky, R. M. (1962). The Literature of Partnership Law. Vanderbilt Law Review, 16, 389.
  7. Moldovanu, B. (n.d.). How to Dissolve a Partnership. 14.
  8. The Indian partnership act 1932. (n.d.). 44.
  9. Vaidya, N., & Raghuvanshi, R. S. (2010). Dissolution of Indian Firms-Various Modes. SSRN Electronic Journal.
  10. Giuliani, M., & Br�nnstr�m, D. (2011). Defining goodwill: A practice perspective. Journal of Financial Reporting and Accounting, 9(2), 161-175.

  1. Nidhi Vaidya & Raghvendra Singh Raghuvanshi, Dissolution of Indian firms - various modes SSRN (2010), (last visited Sep 20, 2022).
  2. 2008 (57) CCC (P&H)
  3. tasleem90, Dissolution of a partnership firm and settlement of accounts on dissolution TaxGuru (2020), (last visited Sep 24, 2022).
  4. The Partnership Act,1932
  5. legal Service India, Sale of goodwill after dissolution of a partnership firm Legal Service India, (last visited Sep 19, 2022).
  6. Ibid
  7. 1981 AIR 972
  8. 1970 AIR 1147
  9. Supra no. 5
  10. Diganth Raj Sehgal, Dissolution of a partnership iPleaders (2022), (last visited Oct 28, 2022).
  11. Ibid
  12. 2003 3 SCC 445
  13. AIR 2020 SC 2484

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly