Dissolution and registration of firms

1. Dissolution of partnership and of the firm

Section 39 says the dissolution of partnership between all the partners of a firm is the dissolution of the firm. Where only one partner leaves and the rest carry on, the partnership between him and the others ends but the firm continues in reconstituted form (sections 31 to 38).

2. Modes of dissolution

• By agreement (section 40). A firm may be dissolved with the consent of all the partners or in accordance with a contract between them.
• Compulsory dissolution (section 41). A firm is dissolved (a) by the adjudication of all the partners, or of all but one, as insolvent; or (b) by the happening of any event which makes it unlawful for the business to be carried on or for the partners to carry it on in partnership. Where the firm carries on more than one undertaking, the illegality of one does not by itself dissolve the firm as to the others. No contract can exclude section 41.
• On contingencies (section 42). Subject to contract, a firm is dissolved (a) if constituted for a fixed term, by its expiry; (b) if constituted for one or more adventures, by their completion; (c) by the death of a partner; and (d) by the adjudication of a partner as insolvent.
• By notice (section 43). Where the partnership is at will, any partner may dissolve the firm by giving notice in writing to all the other partners. The firm is dissolved from the date mentioned in the notice or, if none, from the date of communication.
• By the court (section 44). On a suit by a partner, on the grounds below.

3. Dissolution by the court: section 44

The court may dissolve a firm on the suit of a partner on any of these grounds:

• (a) that a partner has become of unsound mind (the suit may be brought by his next friend or by any other partner);
• (b) that a partner, other than the suing partner, has become in any way permanently incapable of performing his duties as partner;
• (c) that a partner, other than the suing partner, is guilty of conduct likely to affect prejudicially the carrying on of the business, regard being had to its nature;
• (d) that a partner, other than the suing partner, wilfully or persistently commits breach of agreements relating to management of the firm, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on in partnership with him;
• (e) that a partner, other than the suing partner, has transferred the whole of his interest to a third party, or allowed his share to be charged or sold in recovery of arrears of land revenue;
• (f) that the business cannot be carried on save at a loss; or
• (g) on any other ground which renders it just and equitable that the firm be dissolved, for example complete deadlock or loss of mutual confidence.

4. Consequences of dissolution

• Liability until public notice (section 45). Partners continue to be liable to third parties for acts done after dissolution until public notice of it is given. The estate of a deceased or insolvent partner, or a retired partner not known as a partner, is not liable.
• Winding up (sections 46 and 47). Each partner may insist that the property of the firm be applied to pay its debts and the surplus distributed. The authority of each partner continues so far as necessary to wind up the affairs and complete unfinished transactions.
• Firm debts and separate debts (section 49). Firm property goes first to firm debts, and each partner's separate property first to his separate debts; any surplus of either is then available to the other class of creditors.
• Return of premium (section 51) where a partnership for a fixed term is dissolved early otherwise than by death, and rescission for fraud (section 52), which gives the deceived partner a lien on the surplus and a right of indemnity.

5. Settlement of accounts: section 48

Subject to agreement:

• Losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
• Assets, including sums contributed by partners to make up deficiencies of capital, are applied in this order: (i) debts of the firm to third parties; (ii) rateably to each partner what is due to him for advances as distinguished from capital; (iii) rateably to each partner what is due to him on account of capital; and (iv) the residue among the partners in their profit-sharing proportions.

6. Goodwill: section 55

In settling accounts after dissolution, the goodwill is, subject to contract, included in the assets and may be sold separately or along with other property. After a sale of goodwill, a partner may carry on a competing business and advertise it, but may not use the firm name, represent himself as carrying on the business of the firm, or solicit the custom of persons who dealt with the firm before dissolution (section 55(2)). Section 55(3) validates an agreement by a partner with the buyer not to carry on a similar business within a specified period or local limits, if reasonable. Section 53 lets any partner restrain another from carrying on a similar business in the firm name until the affairs are wound up.

7. Registration: sections 56 to 68

Registration is not compulsory and a firm may be registered at any time. The steps are:

• a statement in the prescribed form, with fee, sent to the Registrar of the area where any place of business is situated, stating the firm name, the principal place of business, other places of business, the date when each partner joined, the names and permanent addresses of the partners, and the duration of the firm, signed and verified by all partners or their agents (section 58);
• on being satisfied, the Registrar records an entry in the Register of Firms and files the statement, and the firm is then registered (section 59);
• later changes in the firm name and place of business, branches, partners' names and addresses, constitution and dissolution, and a minor's election, are to be notified (sections 60 to 63).

The statement is conclusive proof of the facts stated against any person who signed it (section 68). The States have power to amend these procedural provisions, and several have.

8. Effect of non-registration: section 69

• Section 69(1). No suit to enforce a right arising from a contract or conferred by the Act can be filed by a partner against the firm or any other partner, unless the firm is registered and the person suing is or has been shown in the Register as a partner.
• Section 69(2). No suit to enforce a right arising from a contract can be filed by or on behalf of a firm against any third party, unless the firm is registered and the persons suing are or have been shown in the Register as partners.
• Section 69(3). The bar extends to a claim of set-off or other proceeding to enforce a right arising from a contract.

Exceptions. Section 69 does not affect: (a) a suit for dissolution of a firm, for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm; (b) the powers of an official assignee or receiver to realise the property of an insolvent partner; (c) firms with no place of business in the territories to which the Act extends, or whose places of business are in areas exempted by notification under section 56; and (d) any suit or claim of set-off not exceeding one hundred rupees in value. The unregistered firm can still be sued, and third parties can enforce their rights against it.

Cases.

• Jagdish Chander Gupta v. Kajaria Traders (India) Ltd., 1964 INSC 140, AIR 1964 SC 1882. An application by a partner of an unregistered firm to appoint an arbitrator is an “other proceeding” under section 69(3) and is barred.
• Shreeram Finance Corporation v. Yasin Khan, 1989 INSC 209, (1989) 3 SCC 476. The firm must be registered, and the persons suing shown in the Register as partners, on the date the suit is filed.
• Haldiram Bhujiawala v. Anand Kumar Deepak Kumar, 2000 INSC 109, (2000) 3 SCC 250. Section 69(2) bars only suits to enforce rights arising from a contract made by the firm with a third party in the course of its business. A suit for passing off, which enforces a common law right, is not barred.
• V. Subramaniam v. Rajesh Raghuvandra Rao, 2009 INSC 383, (2009) 5 SCC 608. Maharashtra had inserted section 69(2A), which barred even a suit for dissolution and accounts by a partner of an unregistered firm. The Supreme Court struck it down as violating Articles 14, 19(1)(g) and 300A: it left a partner of an unregistered firm with no means of recovering his share.

9. Problem

X & Co., an unregistered firm, supplied goods worth Rs 4 lakh to Y, who has not paid. The firm sues Y. Y objects under section 69. Meanwhile partner A sues B, his co-partner, for dissolution and accounts.

Issue. Whether either suit is maintainable.

Law. Section 69(2) bars a suit by an unregistered firm against a third party to enforce a contractual right; section 69(3)(a) saves a suit for dissolution and accounts. Shreeram Finance; Haldiram.

Application. The claim for price arises from a contract of sale made by the firm with Y in the course of business. Registration after filing will not save the suit. A's suit is for dissolution and accounts.

Conclusion. The suit against Y must be dismissed (the firm may register and file a fresh suit within limitation). A's suit is maintainable.

How this is examined

Essays: “Discuss the modes of dissolution of a firm”, “When may the court dissolve a firm?”, and “Explain the effects of non-registration of a firm.” Short notes: section 48, goodwill, procedure for registration. The unregistered-firm problem appears in most years and is answered as above.