Lecture-47

Law of Contracts-II
(Law of Partnership)

Consequences
of
Dissolution of Firm

Date: 01/10/2013 Slide-1

 Lecture-47
Law of Contracts-II
(Law of Partnership)
Public Notice and Liability for Acts of Partners done after
Dissolution (S. 45)
(1) Notwithstanding the dissolution of a firm, the partners continue
to be liable as such to third parties for any act done by any of them
which would have been an act of the firm, if done before the
dissolution, until public notice is given of the dissolution:
Where public notice not necessary: Provided that
the estate of a partner who dies, or who is adjudicated an
insolvent, or of a partner who, not having been known to the
person dealing with the firm to be a partner, retires from the firm,
is not liable under this section for acts done after the date on
which he ceases to be a partner.
(2) Notices under sub-section (1) may be given by any partner.

Date: 01/10/2013 Slide-2

 Lecture-47
Law of Contracts-II
(Law of Partnership)

Right of Partners to have Business Wound Up after

Dissolution (S. 46)

• Partner’s general lien over the surplus assets of the firm

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 rights.
Date: 01/10/2013 Slide-3
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Continuing Authority of Partners for Purposes of Winding Up
(S. 47)
After the dissolution of a firm, the authority of each partner to bind
the firm, and the other mutual rights and obligations of the partners,
continue notwithstanding the dissolution, so far as may be necessary
– to wind up the affairs of the firm and
– to complete transactions begun but unfinished at the time of
the dissolution, but not otherwise:
Provided that the firm is in no case bound by the acts of a partner
who had been adjudicated insolvent, but this proviso does not affect
the liability of any person who has after the adjudication represented
himself or knowingly permitted himself to be represented as a
partner of the insolvent.
 Butchart v Dresser 102 RR 269.
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Mode of Settlement of Accounts Between Partners (S. 48)
• In settling the accounts of a firm after dissolution, the following rules
shall, subject to agreement by the partners, be observed:
– (a) Losses, including deficiencies of capital, shall be 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;
– (b) the assets of the firm, including any sums contributed by the partners
to make up deficiencies of capital, shall be applied in the following manner
and order :
o (i) in paying the debts of the firm to third parties;
o (ii) in paying to each partner rateably what is due to him from the firm for
advances as distinguished from capital;
o (iii) in paying to each partner rateably what is due to him on account of
capital; and
o (iv) the residue, if any, shall be divided among the partners in the
proportions in which they were entitled to share profits.
 Lecture-47
Law of Contracts-II
(Law of Partnership)

Payment of Firm’s Debts And of Separate Debts (S. 49)

Where there are joint debts due from the firm, and also
separate debts due from any partner,
• the property of the firm shall be applied, in the first
instance, in payment of the debts of the firm, and, if
there is any surplus, then the share of each partner shall
be applied in payment of his separate debts or paid to
him.
• The separate property of any partner shall he applied
first in the payment of his separate debts, and the
surplus (if any) in payment of the debts of the firm.
Date: 01/10/2013 Slide-6
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Personal Profits Earned After Dissolution (S. 50)
Subject to contract between the partners, the
provisions of clause (a) of section 16 shall apply to
transactions by any surviving partner or by the
representatives of deceased partner, undertaken after
the firm is dissolved on account of the death of a
partner and before its affairs have been completely
wound up:

Provided that where any partner or his representative

has bought the good will of the firm, nothing in the
section shall affect his right to use the firm-name.
Date: 01/10/2013 Slide-7
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Return of Premium on Premature Dissolution (S. 51)
Where a partner has paid a premium on entering into
partnership for a 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, regard being had to the terms upon which
he became a partner, and to the length of time during
which he was a partner, unless –
(a) the dissolution is mainly due to his own misconduct, or
(b) the dissolution is in pursuance of an agreement containing
no provision for the return of the premium or any part of it.

Date: 01/10/2013 Slide-8

 Lecture-47
Law of Contracts-II
(Law of Partnership)
Rights Where Partnership Contract is Rescinded for Fraud or
Misrepresentation (S. 52)
Where a contract creating partnership is rescinded on the
ground of fraud or misrepresentation of any of the parties
thereto, the party entitled to rescind is, without prejudice to
any other right, entitle –
(a) to a lien on, or right of retention of, the surplus of 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
any 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 or partners guilty of fraud or
misrepresentation against all the debts of the firm.
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Right to Restrain from Use of Firm-name or Firm-
property (S. 53)
After a firm is dissolved, every partner or his representative may,
in the absence of a contract between the partners to the
contrary, restrain any other partner or his representative
• from carrying on a similar business in the firm-name, until the
affairs of the firm have been completely wound up or
• from using any of the property of the firm for his own benefit,
until the affairs of the firm have been completely wound up

Provided that where any partner or his representative has bought

the goodwill of the firm, nothing in this section shall affect his
right to use the firm-name.
Date: 01/10/2013 Slide-10
 Lecture-47
Law of Contracts-II
(Law of Partnership)

Agreements in Restraint of Trade (S. 54)

Partners may, upon or in anticipation of the dissolution
of the firm, make an agreement that some or all of
them will not carry on a business similar to that of the
firm within a specified period or within specified local
limits and notwithstanding anything contained in
section 27 of the Indian Contract Act 1872, such
agreement shall be valid if the restrictions imposed are
reasonable.

Date: 01/10/2013 Slide-11

 Lecture-47
Law of Contracts-II
(Law of Partnership)
Sale of Goodwill after Dissolution (S. 55)
(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to
contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.
(2) RIGHTS OF BUYER AND SELLER OF GOODWILL: Where the goodwill of a firm is sold
after dissolution, a partner may carry on a business competing with that of the buyer
and he may advertise such business, but, subject to agreement between him and the
buyer, he may not
(a) use the firm-name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its
dissolution.
(3) AGREEMENTS IN RESTRAINT OF TRADE: Any partner may, upon the sale of the
goodwill of a firm, make an agreement with the buyer that such partner will not carry
on any business similar to that of the firm within a specified period or within specified
local limits, and, notwithstanding anything contained in section 27 of the Indian
Contract Act 1872 such agreement shall be valid if the restrictions are reasonable.

Date: 01/10/2013 Slide-12

 Lecture-47
Law of Contracts-II
(Law of Partnership)
Advantages of Partnership Firm
• Easy to form: Like sole proprietorships, partnership businesses can be formed
easily without any compulsory legal formalities. It is not necessary to get the firm
registered. A simple agreement or partnership deed, either oral or in writing, is
sufficient to create a partnership.
• Availability of large resources: Since two or more partners join hands to start a
partnership business, it may be possible to pool together more resources as
compared to a sole proprietorship. The partners can contribute more capital,
more effort and more time for the business.
• Better decisions: The partners are the owners of the business. Each of them has
equal right to participate in the management of the business. In case of any
conflict, they can sit together to solve the problem. Since all partners participate
in the decision-making process, there is less scope for reckless and hasty
decisions.
• Flexibility in operations: A partnership firm is a flexible organization. At any time,
the partners can decide to change the size or nature of the business or area of its
operation. There is no need to follow any legal procedure. Only the consent of all
the partners is required.
Date: 01/10/2013 Slide-13
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Advantages of Partnership Firm
• Protection of interest of each partner: In a partnership firm, every
partner has an equal say in decision making and the management of
the business. If any decision goes against the interest of any partner, he
can prevent the decision from being taken. In extreme cases, an
unsatisfied partner may withdraw from the business and can dissolve it.
• Sharing risks: In a partnership firm, all the partners “share” the
business risks. Because of this, the partners may be encouraged to take
up more risk and hence expand their business more.
• Benefits of specialization: Since all the partners are owners of the
business, they can actively participate in every aspect of business as per
their specialization, knowledge and experience. If we want to start a
firm to provide legal consultancy to people, then one partner may deal
with civil cases, one in criminal cases, and another in labour cases and
so on as per the individual specialization. Similarly, two or more doctors
of different specialization may start a clinic in partnership.
Date: 01/10/2013 Slide-14
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Disadvantages of Partnership Firm
• Unlimited liability: All the partners are jointly liable for the debt of the firm. They can share
the liability among themselves or any one can be asked to pay all the debts even from his
personal properties depending on the arrangement made between the partners.
• Uncertain life: The partnership firm has no legal existence separate from its partners. It
comes to an end with death, insolvency, incapacity of a partner. Further, any unsatisfied or
discontented partner can also give notice at any time for the dissolution of the partnership.
• No transferability of share: If you are a partner in any firm, you cannot transfer your share
or part of the company to outsiders, without the consent of other partners. This creates
inconvenience for the partner who wants to leave the firm or sell part of his share to
others.
• Lack of harmony: In a partnership firm every partner has an equal right to participate in the
management. Also, every partner can place his or her opinion or viewpoint before the
management regarding any matter at any time. Because of this, sometimes there is a
possibility of friction and discontent among the partners. Difference of opinion may lead to
the end of the partnership and the business.
• Limited capital: Since the total number of partners cannot exceed 20, the capital to be
raised is always limited. It may not be possible to start a very large business in partnership
form.
 Lecture-47
Law of Contracts-II
(Law of Partnership)

Partnership Deed
• A partnership is formed by an agreement. This
agreement may be in writing or oral. Though the law
does not expressly require that the partnership
agreement should be in writing, it is desirable to have it
in writing in order to avoid any dispute with regard to
the terms of the partnership. The document which
contains the term of a partnership as agreed among the
partners is called “partnership deed”.
• The partnership Deed is to be duly stamped as per the
Indian Stamp Act, and duly signed by all the partners.
Date: 01/10/2013 Slide-16
 Lecture-47
Law of Contracts-II
(Law of Partnership)
Contents of a Partnership Deed
A partnership deed may contain any matter relating to the
regulation of partnership but all provisions in the deed should be
within the limits of Indian Partnership Act, 1932. However, a
Partnership Deed should contain the following clause:
– Nature of business
– Duration of partnership
– Name of the firm
– Capital
– Share of partners in profits and losses
– Bank Account firm
– Books of account
– Powers of partners
– Retirement and expulsion of partners
– Death of partner
– Dissolution of firm
– Settlement of disputes
Date: 01/10/2013 Slide-17