Indian Partnership Act
Consequences of Dissolution: Sections 45 to 55
Dissolving a firm does not end everything at once. The partners must still wind up the business: pay the debts, complete unfinished work, sell the assets, and divide what is left. Meanwhile they remain liable to outsiders until public notice is given. Sections 45 to 55 govern this closing phase: continuing liability, the right to wind up, continuing authority, the settlement of accounts, the two-estates rule, personal profits, the return of a premium, the rights on rescission for fraud, restraints, and goodwill. This note covers the chapter.
The winding-up roadmap from Section 45 to Section 55, who need not give public notice, and three further rights on dissolution
1. Continuing Liability: Section 45
§ Liability until public notice The rule. Notwithstanding the dissolution, 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. Who may give notice. Any partner may give the public notice, under Section 72. The exceptions, proviso to Section 45. 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 (a dormant partner), is not liable for acts done after the date on which he ceases to be a partner. |
2. The Right to Wind Up: Section 46
i. The rule. On the dissolution of a firm, every partner or his representative is entitled, as against all the other partners, 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.
ii. A right, not merely a process. It gives each partner a claim to insist that the winding up be done properly, so that outsiders are paid and the surplus divided.
3. Continuing Authority for Winding Up: Section 47
§ Authority survives, but only for winding up • The rule. After the dissolution, 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. • The proviso. The firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this does not affect the liability of a person who, after the adjudication, represents himself or knowingly permits himself to be represented as a partner of the insolvent. • Illustration. Selling the stock, collecting debts, paying creditors and completing a half-finished contract are within the winding-up authority; starting new business is not. |
4. Settlement of Accounts: Section 48
§ The two rules Rule (a): losses. 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. Rule (b): assets. The assets of the firm, including any sums contributed by partners to make up deficiencies of capital, shall be applied in the following manner and order: first, in paying the debts of the firm to third parties; secondly, in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; thirdly, in paying to each partner rateably what is due to him on account of capital; and lastly, the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits. Subject to agreement. The whole section applies subject to agreement by the partners; the deed may vary the order and the ratios. |
5. Firm Debts and Separate Debts: Section 49
i. The rule. 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, the share of each partner is applied in payment of his separate debts or paid to him.
ii. And conversely, the separate property of any partner is applied first in payment of his separate debts, and the surplus, if any, in payment of the debts of the firm.
iii. The principle. Firm creditors have first claim on firm property; separate creditors on separate property. The two estates are kept apart.
6. Personal Profits after Dissolution: Section 50
i. The rule. Subject to contract, the provisions of Section 13(a) as regards personal profits, and of Section 16 as regards accounting for profits, apply to transactions by any surviving partner or by the representatives of a deceased partner after the dissolution and before the affairs of the firm are completely wound up.
ii. The exception. They do not apply to any partner or his representative who has bought the goodwill of the firm; the buyer of the goodwill may use it for his own benefit.
7. Return of Premium: Section 51
§ When a premium is returned, and when not The rule. Where a partner paid a premium on entering into a partnership for a fixed term, and the firm is dissolved before the expiry of that term otherwise than by the death of a partner, he is entitled to the repayment of such part of the premium as may be reasonable, having regard to the terms on which he became a partner and to the length of time he was a partner. No return where the dissolution is: (a) mainly due to his own misconduct; or (b) in pursuance of an agreement containing no provision for the return of the premium or any part of it. Death. No return where the dissolution is caused by the death of a partner. |
8. Rescission for Fraud, and Restraints: Sections 52 to 54
Section | What it provides |
|---|---|
s. 52: rescission for fraud or misrepresentation | A partner entitled to rescind the partnership contract for fraud or misrepresentation is entitled to: (a) a LIEN on the surplus assets, after payment of the firm's debts, for any sum paid by him for a share and for capital contributed; (b) to rank as a CREDITOR of the firm for payments made in respect of the firm's debts; and (c) to be INDEMNIFIED by the partner guilty of the fraud or misrepresentation against all the debts of the firm |
s. 53: right to restrain use of name or property | After a firm is dissolved, every partner or his representative may, in the absence of a contrary contract, restrain any other partner from carrying on a similar business in the FIRM NAME, or from using any of the property of the firm for his own benefit, until the affairs of the firm are completely wound up |
s. 54: restraint of trade | Partners may, upon or in anticipation of dissolution, agree 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; notwithstanding Section 27 of the Contract Act, such an agreement is valid if the restrictions are REASONABLE |
9. Goodwill: Section 55
§ The rules on goodwill • Included in the assets, s. 55(1). In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract, be included in the assets, and it may be sold either separately or along with the other property of the firm. • The seller may compete, s. 55(2). Where the goodwill of a firm is sold, a partner may carry on a business competing with that of the buyer, and he may advertise such business, but, subject to agreement, he may not use the firm name, represent himself as carrying on the business of the firm, or solicit the custom of persons dealing with the firm before its dissolution. • Reasonable restraint on the seller, s. 55(3). A partner may agree with the buyer that he will not carry on any business similar to that of the firm within a specified period or within specified local limits; notwithstanding Section 27 of the Contract Act, that agreement is valid if the restrictions are reasonable. |
10. Frequently Asked Questions
Are partners liable after dissolution?
Yes, to third parties until public notice of the dissolution is given, under Section 45; but the estate of a deceased, insolvent or dormant partner is not so liable.
In what order are the assets of a dissolved firm applied?
Under Section 48: first outside debts, then partners' advances, then capital, and lastly the residue in the profit-sharing ratio.
Can a partner who paid a premium get it back on early dissolution?
In part, under Section 51, unless the dissolution is due to his misconduct, or the death of a partner, or the agreement makes no provision for return.
Can a partner be stopped from using the firm name after dissolution?
Yes. Under Section 53, until winding up is complete, a partner may restrain another from carrying on a similar business in the firm name or using its property.