The Indian Partnership Act

Consequences of Dissolution of a Firm

After the dissolution of firm, the partners have certain rights and liabilities. Sections 45 to 55 of the Indian Partnership Act, 1932, provides details on the consequences of the dissolution of a firm. In this article, we will look at these sections in detail.

Liability for Acts done by Partners after the Dissolution of Firm (Section 45)

According to this section, the partners of a firm are liable to a third party for any act done by any of them unless they give a public notice of the dissolution. This notice can be given by any partner. It also specifies that the estate of a partner who dies, retires from the firm, becomes insolvent, or that of a person who the third party is not aware of being a partner of the firm, is not liable under this section (from the date he ceases to be a partner).

In simple words, Section 45 endeavors to protect third parties who have no clue about the dissolution of firm and also the partners of a dissolved firm from liabilities towards third parties post-dissolution.

Partnership: Consequences of Dissolution of Firm

Wind up the Business Post-Dissolution (Section 46)

Once a firm is dissolved, every partner or his representative has a right to apply the property of the firm in payments of debts and liabilities of the firm. The surplus, if any, can be distributed among the partners according to their rights.

Also according to section 47 post-dissolution, the authority of each partner to bind the firm, along with other mutual rights and obligations, continue till such time that they can wind up the affairs of the firm.

This gives them a chance to complete the unfinished transactions at the time of dissolution. This does not include the acts of a partner who has been adjudicated insolvent.

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Settlement of Partnership Accounts (Section 48)

Section 48 lays down certain rules for settlement of partnership accounts after the dissolution of firm under the usual course of business. However, the partners can mutually agree for a different settlement mode. The rules are as follows:

  1. Any losses or deficiencies of capital will be paid out of profits. If the profits are not sufficient, then they are paid out of the capital and finally, if necessary, by the partners. The partners contribute in the proportion in which they receive their share in profits.
  2. The assets of the firm, which includes the sums contributed by the partners to make up for the deficiency in the capital, is applied in the following order:
    1. Repaying the debts of the firm to third parties
    2. Paying each partner rateably what is due to him from the capital
    3. Paying each partner rateably what is due to him on account of capital
    4. If any amount is left, then dividing it among the partners in proportions in which they receive their share in profits.

Paying Firm Debts and Separate Debts (Section 49)

If there are joint debts due from the firm and separate debts due from any partner, then:

  • The payment of firm debts is given priority. If there is any surplus, then the share of each partner is applied to his separate debts. It can also be paid to him.
  • The separate property of the partner is applied first in the payment of his separate debts. IF there is any surplus, then it is applied to the payment of firm debts.

Personal Profits Earned after Dissolution of Firm (Section 50 and 53)

A firm is dissolved by the death of a partner. If the surviving partners, either themselves or with the representative of the deceased partner carry on the business of the firm, then they have to account for any personal profits by them, before winding up the firm.

So, if a lease expires on the death of a partner and the surviving partners renew it before the firm winds up, then the profits belong to the firm.

Section 53 clearly states that in the absence of an agreement to the contrary, a partner can restrain other partners from carrying on a similar business in the name of the firm or from using the property of the firm for their own benefit, unless the winding up process is complete.

Return of Premium on the Premature Dissolution of Firm (Section 51)

If a firm dissolves earlier than the time fixed for it, then the partner paying the premium can receive a return of a reasonable part of the premium. This holds true except when the partnership is dissolved:

  • Due to the death of a partner
  • Due to the misconduct of the partner paying the premium
  • Post an agreement which has no provisions for the return of premium

Also, the partner paying the premium gets a return of a proportionate part of the premium. This holds true when the partnership is dissolved:

  • Without either partner being at fault
  • Owing to the fault of both the partners
  • Due to the fault of the partner receiving the premium
  • Due to unawareness about the insolvency of the partner receiving the premium

Contract Rescinded for Fraud or Misrepresentation (Section 52)

If the contract creating a partnership is rescinded due to fraud or misrepresentation, then the party who can rescind the contract is entitled to:

  • Lien on the assets of the firm remaining after the debts of the firm is paid. This lien is for any sum paid by him for the purchase of a share in the firm and capital contributed by him.
  • Rank as a creditor of the firm for any payment made by him towards the debts of the firm
  • An indemnity from the partners guilty of the fraud or misrepresentation against all debts of the firm.

Sale of Goodwill after the Dissolution of Firm (Section 55)

The goodwill is included in the assets during the settling of the accounts of a firm after dissolution. The goodwill can be sold separately or along with the other assets of the firm. This is subject to the contract between the partners.

Once the goodwill of the firm is sold after dissolution, a partner can carry on and advertise a business competing with that of the buyer of goodwill. However, subject to the agreement between him and the buyer, he may not:

  • Use the name of the firm
  • Represent himself as carrying on the business of the firm
  • Solicit the customs of persons dealing with the firm before the dissolution

It is also important to note that a partner can make an agreement with the buyer of goodwill that he will not carry on any business similar to that of the firm or with certain local limits. Such an agreement, notwithstanding Section 27 of the Indian Contract Act is valid if the restrictions are reasonable.

Solved Examples on Consequences of Dissolution of a Firm

Q: Peter and John run a partnership business. On December 1, 2017, they execute a deed dissolving the partnership with immediate effect. However, they fail to give a public notice regarding the same. On December 20, 2017, John borrowed Rs 50,000 from Oliver in the firm’s name. Oliver was not aware of the dissolution. Is Peter also liable for the amount borrowed by John?

Answer: Yes. According to Section 45, all partners continue to be liable for the acts of other partners unless they give a public notice of the dissolution. Since Peter and John didn’t give such a notice, Peter is liable for the amount too.

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