Code of Civil Procedure, 1908 (CPC)
Decree in a Suit for Dissolution of Partnership under Order XX Rule 15 CPC
A partnership cannot simply be declared at an end: its assets must be realised, its debts paid, and whatever remains divided among the partners according to their shares. A suit for dissolution of partnership and the taking of partnership accounts therefore requires the court to decide the rights first and do the arithmetic afterwards, and Order XX Rule 15 of the Code of Civil Procedure, 1908 prescribes the decree accordingly. These notes cover the nature of such a suit, the contents of the preliminary decree, the taking of accounts, the order in which partnership assets are applied, and the final decree.
1. The Nature of the Suit
A suit for dissolution is governed as to substance by the Indian Partnership Act, 1932, and as to procedure by the Code. Section 44 of the Partnership Act sets out the grounds on which the court may dissolve a firm, including the insanity or permanent incapacity of a partner, conduct prejudicial to the business, persistent breach of the agreement, transfer of a partner's interest, a business that can only be carried on at a loss, and any other ground rendering dissolution just and equitable. What the plaintiff asks the court for is therefore twofold: a declaration that the firm stands dissolved from a date, and the taking of accounts and winding up that dissolution makes necessary.
§ Why the decree is preliminary The shares of the partners cannot be worked out until the assets are realised and the liabilities discharged, and neither can be done before the accounts are taken. The court therefore declares the proportionate shares, fixes the date of dissolution, and orders the accounts by a preliminary decree; the final decree follows once the accounts are complete and the assets distributed. This places the suit alongside administration, partition, pre-emption and accounts between principal and agent as one of the six classes of suit in which Order XX prescribes a preliminary decree. |
2. Order XX Rule 15: The Provision
§ Order XX Rule 15, CPC 1908 Where a suit is for the dissolution of a partnership, or the taking of partnership accounts, the Court, before passing a final decree, may pass a preliminary decree declaring the proportionate shares of the parties, fixing the day on which the partnership shall stand dissolved or be deemed to have been dissolved, and directing such accounts to be taken, and other acts to be done, as it thinks fit. |
The three essential contents
i. The proportionate shares. The decree declares the share of each partner in the profits, losses and assets of the firm. In the absence of a contract to the contrary, Section 13(b) of the Partnership Act makes the partners entitled to share equally, and the decree records whatever the partnership deed or the evidence establishes.
ii. The date of dissolution. The decree fixes the day on which the partnership stands dissolved or is deemed to have been dissolved. The date matters because it marks the end of the partners' mutual agency in the ordinary business, and because Section 37 of the Partnership Act entitles an outgoing partner or the estate of a deceased partner to a share of subsequent profits or interest at six per cent on the value of his share until accounts are finally settled.
iii. Directions for accounts and other acts. The decree directs the accounts to be taken and such other acts to be done as the winding up requires: the realisation of assets, the collection of debts due to the firm, the sale of the goodwill where appropriate, and the appointment of a receiver where the assets need protection.
Order XX Rule 15 among the decrees that require accounts before the final adjustment
3. Taking the Partnership Accounts
§ What the accounts must establish The inquiry directed by the preliminary decree ordinarily covers: • The assets of the firm, including the capital contributed by each partner, stock in trade, book debts, and goodwill where it is to be valued; • The liabilities of the firm to third parties, and the debts due to it; • The advances made by any partner to the firm, as distinct from his capital; • The drawings of each partner and any sums for which he must account to the firm; • The profits or losses from the date of the last settled account to the date of dissolution, and thereafter until winding up is complete; • Any claim under Section 37 of the Partnership Act where the business was continued after dissolution with the property of the firm. |
The accounts are usually taken by a Commissioner appointed under Section 75 with Order XXVI Rule 11, which empowers the court to issue a commission to examine or adjust accounts. Order XX Rule 16 supplies the general direction that in a suit for an account the court shall pass a preliminary decree directing the accounts to be taken and giving special directions as to the mode of taking them, and that provision is applied in partnership suits alongside Rule 15. The commissioner's report is evidence, open to objection, and the court reaches its own conclusion upon it under Order XXVI Rule 10.
4. Application of Partnership Assets
Order of application | What is paid | Source |
|---|---|---|
First | The debts of the firm to third parties | Section 48(b)(i), Indian Partnership Act, 1932 |
Second | To each partner rateably, what is due to him from the firm for advances, as distinguished from capital | Section 48(b)(ii) |
Third | To each partner rateably, what is due to him on account of capital | Section 48(b)(iii) |
Last | The residue, divided among the partners in the proportions in which they were entitled to share profits | Section 48(b)(iv) |
Where assets are deficient | Losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly by the partners individually in their profit-sharing proportions | Section 48(a) |
The Code does not prescribe this order; Section 48 of the Partnership Act does, and the decree gives it effect. Stating that division of labour, substance from the Partnership Act and procedure from Order XX, is what distinguishes a complete answer on this topic.
5. The Final Decree and Related Powers
i. The final decree. Once the accounts have been taken and the assets realised, the court passes the final decree ascertaining the amount due to or from each partner and directing payment. As with every final decree, it must conform to the preliminary decree and cannot go behind it.
ii. Receiver. Under Section 51(d) and Order XL, the court may appoint a receiver of the partnership property, and in dissolution suits this is a common interim step, since the assets are often in the hands of one partner.
iii. Injunction. Under Section 94 and Order XXXIX, the court may restrain a partner from dealing with the firm's assets or from using the firm name pending the suit.
iv. Unregistered firms. Section 69 of the Partnership Act bars certain suits by or on behalf of an unregistered firm, but Section 69(3)(a) expressly saves a suit for the dissolution of a firm or for accounts of a dissolved firm, or for realising the property of a dissolved firm, so non-registration is not a bar to this class of suit.
v. More than one final decree. As in partition, there may be more than one final decree where the winding up proceeds in stages, applying the principle in Shankar Balwant Lokhande v. Chandrakant Shankar Lokhande, (1995) 3 SCC 413.
6. Landmark Points
- Order XX Rule 15. The preliminary decree declares the proportionate shares, fixes the date of dissolution, and directs the accounts and other acts necessary for winding up.
- Order XX Rule 16 with Section 75 and Order XXVI Rule 11. Accounts are directed with special directions as to the mode of taking them, ordinarily through a commissioner.
- Section 48, Indian Partnership Act, 1932. The order in which partnership assets are applied: outside debts, partners' advances, partners' capital, and then the residue in profit-sharing proportions.
- Section 37, Indian Partnership Act, 1932. Where the business is continued after dissolution with the firm's property, the outgoing partner or the estate of a deceased partner is entitled to a share of subsequent profits or interest at six per cent, at his option.
- Section 69(3)(a), Indian Partnership Act, 1932. The bar on suits by an unregistered firm does not apply to a suit for dissolution or for accounts of a dissolved firm.
7. Frequently Asked Questions
What decree is passed in a suit for dissolution of partnership?
Under Order XX Rule 15, a preliminary decree declaring the proportionate shares of the parties, fixing the day on which the partnership stands dissolved or is deemed to have been dissolved, and directing such accounts to be taken and other acts to be done as the court thinks fit, followed by a final decree after the accounts.
Why must the decree fix a date of dissolution?
Because the date marks the end of the partners' mutual agency in the ordinary business and fixes the point from which the winding up runs. It also governs the operation of Section 37 of the Partnership Act, which entitles an outgoing partner or a deceased partner's estate to subsequent profits or interest at six per cent until accounts are settled.
Who takes the partnership accounts?
Ordinarily a commissioner appointed under Section 75 with Order XXVI Rule 11, which allows the court to issue a commission to examine or adjust accounts. The report is evidence in the suit, open to objection, and the court reaches its own conclusion upon it.
In what order are partnership assets applied?
Under Section 48 of the Indian Partnership Act, 1932: first the debts of the firm to third parties; then rateably what is due to each partner for advances as distinguished from capital; then rateably what is due on account of capital; and the residue is divided among the partners in their profit-sharing proportions.
Can an unregistered firm sue for dissolution?
Yes. Although Section 69 of the Partnership Act bars certain suits by or on behalf of an unregistered firm, Section 69(3)(a) expressly saves a suit for the dissolution of a firm, for accounts of a dissolved firm, or for realising the property of a dissolved firm.
Can a receiver be appointed in a dissolution suit?
Yes. Under Section 51(d) and Order XL the court may appoint a receiver of the partnership property, which is a common interim step where the assets are in the hands of one partner, and it may restrain dealings by injunction under Section 94 and Order XXXIX.
8. Related Topics in This CPC Series
- Decree for Accounts under Order XX Rule 16
- Section 33 and Order XX: Judgment and Decree
- Decree in an Administration Suit under Order XX Rule 13
- Decree in a Pre-emption Suit under Order XX Rule 14