Rights of partners on the dissolution of a firm
Definition of dissolution of a firm —
The term “dissolution of the firm” has been defined in section 39 of the Partnership act. It say that “the dissolution of partnership between all the partners of a firm is called the “dissolution of the firm.”
Dissolution of the firm has been defined as the breaking up or extinction of the relationship which subsisted between all the partners of the firm [Santdas v. Sheodayal, AIR 1971 Bom 237]. The significant words to be noted in the definition are “between all partners.”
Here the emphasis is laid upon the point that firm is said to be dissolved when all and every one of the members of the firm cease to carry on business in partnership. Thus, where one or more members ceased to be partners in the firm while others remain, the firm is not set to be dissolved.
Where some of the partners make an agreement between themselves of carrying on a partnership on the dissolution of the old firm, the firm so constituted will be new and do not a reconstitution of the old firm.
The other notable point is that simply because the partners have ceased to carry on business it does not necessarily follow that there has been a dissolution of the firm because the partnership can be continued for the purposes of realising the assets of the firm, the business of which has ceased and that until the assets are realised there cannot be the final devolution of that partnership.
Modes of dissolution —
There are five different modes of the dissolution of a firm, viz,
(i).Dissolution by agreement (section 40)
(ii)Compulsory dissolution(section 41)
(iii)Dissolution on the happening of certain contingencies(section 42)
(iv)Dissolution by notice of a partnership at will and(section 43)
(v)Dissolution by court.(section 44)
Rights of partners on the dissolution of a firm-
1. Right to have business wound up —
On the dissolution of a firm every partner has right 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 right.
2. Right for winding up —
After the dissolution of a firm the right of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution for the purpose of the winding up the firm.
3. Right to return of premium —
When a partner has paid a premium to the firm for fixed period and the firm is dissolved before that, he has the right to repayment of the premium or a reasonable part of it. There are certain exceptions to this rule.
4. Right where partnership contract is rescinded for fraud or misrepresentation —
The aggrieved partner entitled : —
(a). A lien over the assets of the firm after payment of debts.
(b). Rank as creditor for payments made by him towords the debts of the firm
(c). Be indemnified against all the debts of the firm by the partner guilty of fraud, etc.
5. Right to restrain any partner from using firm name or firm property —
In Rajendra Kumar Sharma v. Brijendra Kumar Sharma, AIR 1994 Alld. 62, following observation was made — “In absence of contract to the contrary between the partners subsequent to the dissolution of partnership firm but before the completion of winding up does not confer a right on the partners to use the property for his own benefit without the consent of the other partner.”
6. Right to carry on competing business —
Where the good-will 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?
Liabilities of partner on the dissolution of the firm
1. Liability for acts after dissolution —
The partners continue to be liable as such to third partners 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. To this general rule there are following exceptions :—
(a). A partner who dies,
(b). A partner who is adjudicated insolvent,
(c). A partner who retires retires provided he is not known to others as partner.
2. Liability for personal profit —
If a partner after the dissolution of a firm and before its winding up derives any profit for himself from any transaction of the firm, or from the use of the property or business connections of the firm or the firm name he is bound to account for that profit and pay it to the firm.
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