SC clarifies when partnership firm can be dissolved

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Partnership act agreement India

In a recent judgment titled Guru Nanak Industries and Anr v Amar Singh (deceased) 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.

In this case, Swaran Singh and Amar Singh entered into a partnership agreement in 1981, establishing a firm named Guru Nanak Industries, which was involved in the business of the manufacturing and sale of print machinery for paper and polythenes. The profit-sharing ratio between the two partners was 60:40.

In 1989, the company and Swaran Singh filed a civil suit against Amar Singh, claiming that the latter had retired from the partnership with effect from 24 August 1988, and he had voluntarily accepted payment of his share capital. In 1989, Amar Singh filed a suit for dissolution of the partnership and rendition of accounts, arguing that he never resigned from the partnership.

The suit filed by Amar Singh was dismissed by a trial court in Faridabad, and the suit filed by the company and Swaran Singh was partly decreed. However, on an appeal filed by Amar Singh, the first Appellate Court overruled the trial court’s judgment and held that Amar Singh is entitled to his share in the partnership, and this has been affirmed by the Punjab and Haryana High Court.

The appellants approached the Supreme Court with the primary submission that Amar Singh had resigned as partner from the firm, and thus, as per clause 10 of the partnership agreement, he would be entitled to only the capital standing in his credit in the books of accounts.

The Supreme Court observed that there is a clear distinction between retirement of a partner and dissolution of a partnership firm. On retirement of the partner, the reconstituted firm continues and the retiring partner is to be paid his dues in terms of section 37 of the Partnership Act, 1932. In case of dissolution, accounts have to be settled and distributed as per the mode prescribed in section 48 of the Partnership Act.

When the partners agree to dissolve a partnership, it is a case of dissolution and not retirement. In the present case, there being only two partners, the partnership firm could not have continued to carry on business as the firm. A partnership firm must have at least two partners. When there are only two partners and one has agreed to retire, then the retirement amounts to dissolution of the firm.

Therefore, while dismissing the appeal, the Supreme Court (except modifying the date of dissolution of the company) upheld the judgment of the Punjab and Haryana High Court, and sustained the judgment and decree passed by the additional district judge in Faridabad.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.