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Business Laws

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PROJECT REPORT
ON



INCOMING & OUTGOING PARTNERS

MODES OF DISSOLUTION

EFFECTS OF NON-REGISTERATION

LLP vis--vis TRADITIONAL PARTNERSHIP



SUBMITTED TO: SUBIMTTED BY:
Dr. Nancy Sharma Harkiran Singh Brar
87/10
VII
th
Semester
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ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the
writing of this project.
My deepest thanks to my Business Law Lecturer, Dr. Nancy Sharma, the Guide of the project
for guiding me and correcting various documents of mine with attention and care. She has
taken pain to go through the project and make necessary corrections as and when needed.
I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.

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Table of Contents

Incoming and Outgoing Partners ............................................................................................................ 4
Incoming Partner ................................................................................................................................ 4
Mode of Admission ......................................................................................................................... 4
Liability of new partner [S. 31(2)] .................................................................................................. 4
Outgoing Partner ................................................................................................................................ 5
Modes of Retirement ....................................................................................................................... 6
Liability of retired partner ............................................................................................................... 9
Rights of outgoing partner ............................................................................................................ 10
Revocation of Continuing Guarantee [S. 38] .................................................................................... 13
Dissolution ............................................................................................................................................ 14
Modes of Dissolution ........................................................................................................................ 14
By Consent [S. 40] ........................................................................................................................ 14
By Agreement [S. 40] ................................................................................................................... 14
Compulsory Dissolution [S. 41] .................................................................................................... 15
Contingent Dissolution [S. 42] ...................................................................................................... 17
By Notice [S. 43] .......................................................................................................................... 18
Dissolution by Court [S. 44] ......................................................................................................... 20
Effects of Non-Registration [S.69] ....................................................................................................... 24
Suits between partners and firm [sub-s(1)] ...................................................................................... 25
Suits between Firm and Third Parties [S. 69(2)] ............................................................................... 26
LLP vis--vis Traditional Partnership ................................................................................................... 31
Bibliography ......................................................................................................................................... 34



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Incoming and Outgoing Partners

Incoming Partner
Mode of Admission
A new partner can be admitted into a firm with the consent of all the partners. The relations
of partners being those of trust and confidence, only such person can be admitted in whom all
the partners have confidence. This is, however, subject to a contrary arrangement between the
partners. For there is nothing to prevent the partners from giving power to one or more of
them of nominating a partner in the firm. Where a person so nominated is not acceptable to
the other partners, the Court cannot force them to enter into partnership with him, because
the foundation of partnership is mutual confidence, which the Court cannot supply where it
does not exist. However, the rights arising out of a partnership deed are enforceable. The
articles of a partnership between two persons contained a clause that one would have the right
to bring his son into the partnership on his attaining 21 years of age. The other partner refused
to accept the son. But it was held that he could not do so, the partnership articles being a
contract. Where under the partnership articles a partner was entitled to nominate by his will a
person to succeed him in the partnership, it was held that the person so nominated could not
enforce the nomination because he was not a party to the partnership agreement.
Section 31 INTRODUCTION OF A PARTNER:
(1) Subject to contract between the partners and to the provisions of section 30, no person
shall be introduced as a partner into a firm without the consent of all the existing partners.
(2) Subject to the provisions of section 80, a person who is introduced as a partner into a firm
does not thereby become liable for any act of the firm done before he became a partner.
Liability of new partner [S. 31(2)]
Sub-section (2) of Section 31 declares that a person who is introduced as a partner into a
firm does not thereby become liable for any act of the firm done before he became a partner.
Thus the liability of the new partner commences from the date of admission. He is not liable
for the pre-existing debts.
He may, however, agree with his partners to be liable for the debts incurred up to the date of
his admission. But such an agreement is binding only in between the partners and does not
give the right to any creditor to sue the new partner for past debts. In order to make the new
partner liable to the creditors for debts incurred prior to his admission, a complete novation
must be proved and this requires two things. First, the new partner or the new firm as
constituted after his admission should have assumed liability for the past debts. Secondly, the
creditors should be informed of the new arrangement and then the new partner becomes liable
to those of the creditors who expressly or impliedly accept the new agreement. An implied
agreement is inferred from the fact that a creditor, after he has knowledge of the change,
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continues to deal with the new firm, or has brought an action against the new firm. An
example of implied acceptance of the liability of the new partner is to be found in B.M.
Devaiah v Canara Bank
1
:
The documents on record in this case showed that the new partner had acknowledged pre-
existing liability and was also trying to clear the existing dues. The bank, which was
informed of the entry of the new partner, did not withdraw the cash-credit facilities of the
newly-constituted firm. The Court stated the principle to be this that a new partner can be
held liable if he has assumed liability and the creditors have accepted him as a debtor.
Applying this principle to the facts, the Court said that the conduct of the bank in maintaining
dealings with the firm after notice of admission showed that the bank accepted the liability of
the new firm and the new partner. The new partner accordingly became liable to pay the pre-
existing debts. The fact that the new partnership deed did not provide for assumption of such
liability was immaterial because the other documents showed the intention of the partners.
An implied rejection of the new arrangement occurs when a creditor, after knowledge of the
admission, continues to deal with old partner alone. This happened in British Home
Assurance Corpn v Paterson
2
:
The plaintiff corporation appointed B their solicitor and instructed him to act for them in a
mortgage transaction. While the business was pending, B took the defendant P into
partnership and gave the plaintiffs notice in writing. The plaintiffs paid no attention to the
notice, continued to correspond with B in his own name and finally sent the money to
advance on the mortgage by cheque made payable to his order and accepted his receipt in his
own name. B paid the money into his own account and misappropriated it. The plaintiffs sued
the new partner. It was held that the plaintiffs had by their conduct declined to accept the
liability of the new partner. They had elected to deal with old partner alone and could not
afterwards hold the new partner liable.
Outgoing Partner
An outgoing partner means a partner who has retired from a firm and the business is
continued by the remaining partners.
Section 32 - RETIREMENT OF A PARTNER:
(1) A partner may retire
(a) with the consent of all the otter partners,
(b) in accordance with an express agreement by the partners, or

1 2003 AIR Kant 143.
2 (1902) 2 Ch 404.

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(c) where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.
(2) A retiring partner may be discharged from any liability to any third party for acts of the
firm done before his retirement by an agreement made by him with such third party and the
partners of the reconstituted firm, and such agreement may be implied by a course of dealing
between such third party and the reconstituted firm after he had knowledge of the retirement.
(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to
be liable as partners to third parties for any act done by any of them which would have been
an act of the firm if done before the retirement, until public notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with the firm without
knowing that he was a party.
(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.
Modes of Retirement
A partner may retire from the firm in any of the following ways:
By Consent [S. 32(1)(a)]
A partner may retire at any time with the consent of his partners.
By Agreement [S. 32(1)(b)]
Where there is an agreement between the partners about retirement, a partner may retire in
accordance with the terms of that agreement. The Supreme Court regarded an agreement to
be valid which permitted a partner to retire by one months notice.
By Notice [S. 32(1)(c)]
Where the partnership is at will, a partner may retire by giving to his partners a notice of his
intention to retire. A partnership at will, as defined by Section 7, means a partnership where
no contract has been made between the partners for its duration or determination. The
duration if the firm is left uncertain and it survives as long as each and every partner is
willing.
A partner can retire by notice only when the firm is at will as so defined. A clause held that
a partner who wants to retire should give 6 months notice will prevent the firm from being
regarded as a frim at will, particularly where the firm has only two partners and the
retirement of one will mean inevitable dissolution. An agreement of partnership provided that
the death or retirement of a partner would not terminate the firm and a partner guilty of such
conduct as would justify dissolution by Court would stand retired. It was held that the firm
was not at will, for it could be dissolved only by the Court or by some other event.
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Notice should be in writing, signed by the partner and should be served upon all the partners.
As between the partners, the retirement becomes effective from the date mentioned in the
notice or, if no date is mentioned, from the date of service.
By Insolvency [S. 34]
Section 34 - INSOLVENCY OF A PARTNER:
(1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date
on which the order of adjudication is made, whether or not the firm is thereby dissolved.
(2) Where under a contract between the partners the firm is not dissolved by the adjudication
of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of
the firm and the firm is not liable for any act of the insolvent, done after the date on which the
order of adjudication is made.
Two points are made out by the section. The first is that a partner ceases to be a partner from
the date on which he is adjudicated an insolvent. This effect will follow whether the firm is
dissolved or not. Secondly, where the firm is not dissolved, and consequently, therefore, it
remains in business, the insolvent partners estate is not liable for any act of the insolvent
partner. This provision has been inserted to terminate the liability either way without the need
of any public notice.
By Death [S. 35]
Section 35 - LIABILITY OF ESTATE OF DECEASED PARTNER:
Where under a contract between the partners the firm is not dissolved by the death of a
partner, the estate of a deceased partner is not liable for any act of the firm done after his
death.
When a partner dies, he, of course, ceases to be a partner. The firm may or may not thereby
be dissolved. The estate of the deceased deserves to be protected from any further liability in
liability in respect of any act of the firm done after the time of his death. The section is
designed only to provide that protection. The section accordingly says that where by virtue of
a contract between the partners, the firm is not dissolved by the death of the partner, the
estate of the deceased partner is not liable for any act of the firm done after his death. No
public notice is necessary to terminate the liability of the deceased partner. Death is also a
notice by itself. Thus in Bagel v Miller
3
, the estate of a deceased partner was held to be not
liable in an action for the price of goods sold and delivered where the order for goods was
given in the lifetime of the deceased partner, but delivery did not take place till after his
death.


3 (1903) 2 KB 212.
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By Expulsion [S. 33]
Section 33 - EXPULSION OF A PARTNER:
(1) A partner may not be expelled from a firm by any majority of the partners, save in the
exercise in good faith or powers conferred by contract between the partners.
(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled
partner as if he were a retired partner.
Power of Expulsion to be Provided
A partner cannot be expelled from a firm by any majority of partners. But Section 33
provided that a partner may be expelled in the exercise in good faith of the power of
expulsion, if any, given to the partners by their mutual agreement. Thus expulsion is
justifiable only when it is authorised by an agreement between the partners. The power of
expulsion must be exercised strictly on the grounds on which it is exercisable and also in
absolute good faith in the interest of the firm. The courts strictly construe this power because
of the possibility of abuse inherent to it. Thus, where in the exercise of their power conferred
in most unfettered terms, majority of the partners expelled a partner on the ground that he had
opposed the appointment of one of the partners son as manager, the Court held the expulsion
to be unwarranted and an abuse of power.
But the Court does not interfere where the power seems to have been exercised in good faith
and for proper purposes. Thus, where a clause is a partnership deed empowered the partners
to expel a partner who was guilty of flagrant breach of duties, the Court refused to interfere
when it found on evidence that that kind of breach of duties was established.
The Calcutta High Court approved the expulsion of a partner who paralysed the business of
the firm by giving notice to the firms bankers not to pay the firms cheques and offered no
explanation for his conduct even when full opportunity was given to him.
The power of expulsion can be exercised by a majority and not by a single partner. Where, of
the 3 partners, 2 were guilty of misconduct and the 3
rd
proceeded to expel them, the Court
held that if this expulsion were allowed it would reverse the meaning of the Section which
contemplated expulsion by the majority of a minority and not vice versa. In such cases the
better choice is dissolution.
A partner who is properly expelled is in the same position as that of a retired partner. Where
the expulsion is not proper, it is of no effect. The expelled partner is entitled to be reinstated
in his position. He is, however, not entitled to damages for wrongful expulsion, unless the
expulsion was given maliciously publicity or was otherwise maliciously harmful.
Limitation for Instituting Proceedings
Where the plaintiff- partner was expelled from the firm and kept out of its business and was
also denied his share of profits, etc., it was held that the cause of Action for questioning the
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validity of the ousting and for reinstatement as partner or for seeking dissolution arose at the
time of expulsion and, therefore, the proceedings instituted four years thereafter were barred
by time.
Liability of retired partner
Liability for Acts done before Retirement [S. 32(2)]
A retired partner remains liable to the creditors for the acts of the firm done before and up to
the date of his retirement. However, Section 32(2) suggests a way out.
The continuing partners may agree to release him from such debts. But, notwithstanding any
arrangement between the partners, the retired partner remains liable to the creditors. To
obtain a release from the creditors also, a complete novation has to be proved and this
requires 2 things: First, the remaining partners must have agreed with the retired partner to
release him from the existing debts and liabilities. Secondly, the creditors should be informed
of the retirement and the new arrangement and then the retired partner will be discharged
from his liability to a creditor who has expressly or impliedly agreed to release the retired
partner and to accept the reconstituted firm as his debtor. An implied agreement arises when a
creditor continues a deal with the reconstituted firm after he has knowledge of the retirement.
A partner who has committed a tort or an infringement of a trademark remains liable to the
injured party even though he had retired before the suit was filed.
Liability for Acts done after Retirement [S. 32(3)]
A public notice on the retirement should be given. The notice may be given either by the
retired partner or by any partner of the reconstituted firm. It is in the interest of both. The
consequences default in giving public notice are twofold, namely, holding out of the retired
partner and estoppel against the firm.
The retired partner shall continue to be liable by holding out for any act of the remaining
partners which would have been the act of the firm if done before retirement. Such liability
continues up to the date of public notice but is confined only to customers who dealt with the
firm under the assumption that the retired partner was still a partner. It also does not extend to
torts committed by the remaining partners after the retirement nor to acts of insolvency
committed by the continuing partners. In two successive cases before the Madras High Court,
long after a partners retirement without public notice, other partners committed acts of
insolvency, for which the retired partner was also sought to be declared as an insolvent. The
court rejected the plea in both the cases.
No public notice is, however, necessary in the case of a deceased partner, insolvent partner
and a dormant partner. The proviso to Sub-section (3) of Section 32 clearly says that a a
retired partner is not liable to any third party who deals with the firm without knowing that he
was a partner. In a case before the Bombay High Court, a partner retired and some 3 years
later the continuing partners incurred liability on a bill of exchange, the retired partner was
held not liable for the same because the party suing him did not know that he ever was a
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partner in the firm. It was not material that no notice of retirement was given either to the
Registrar of Firms or through publication. Retirement of an unknown partner requires no
publicity.
The significance of the expression estoppel of the firm is that if the retired partner takes
credit from a customer of the firm representing that he is still a partner of the firm, the firm
would be liable if the act of the retired partner would have been an act of the firm if done by
him before retirement.
Rights of outgoing partner
Right to Compete [S. 36]
Section 36 - RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING
BUSINESS:
(1) An outgoing partner may carry on a business competing with that of the firm and he may
advertise such business, but subject, to contract to the contrary, 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 he ceased to be a
partner.
(2) AGREEMENT IN RESTRAINT OF TRADE: A partner may make an agreement with his
partners that on ceasing to be a partner he 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 imposed are reasonable.
The retired partner has the right to carry on any business competing with that of the firm. He
may set up his new business at a place next door to the firm or anywhere else. He may
advertise his business and attract customers. This is necessary to assure freedom of trade to
every individual.
But the interest of the firm which he has left also deserves protection. The Act, therefore,
tries to assure that the partner should do nothing to injure the interest of the firm. To this end
the following restrictions have been imposed upon his trade liberty [S. 36 (1)]:
He cannot use the name of the firm. He may establish his new business under any other
name, but not in the name if the firm which he has left.
He should not represent that he is carrying on the business of the firm
He should not solicit the custom of persons who were dealing with the firm before he ceased
to be a partner. He does not have the right to break away the customers of the firm. Thus in
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Trego v Hunt
4
the retiring partner was restrained from drawing a list of the firms customers.
Similarly, in Boorne v Wicker
5
, a deceased partners executor was restrained from attempting
to solicit the customers of the former partnership.
Any of these rights can be given to the retired partner only by an agreement between him and
the continuing partners.
If the partners think that the above statutory restrictions are not sufficient to safeguard the
interest of the firm, they may agree that any partner on ceasing to be a partner will not carry
on any business similar to that of the firm. This enables the continuing partners to deprive the
retired partner of his right to compete. Such an agreement is in restraint of trade and is
ordinarily void under Section 27 of the Contract Act. But Section 36(2) of the Partnership Act
introduces this special exception and protects the validity of the agreement if the following
conditions are satisfied:
The agreement should specify either the period or the local limits of restraint.
The restriction imposed should be reasonable.
Thus the section allows restrictions on the trade liberty of the retired partner for a specified
period or specified local limits and requires that the restriction should be reasonable. A
restriction is reasonable if it is not greater than will afford adequate protection to the late
partners having regard to the nature and extent of the partnership business. A restraint upon
a doctor retiring from a firm of doctors not to practice within ten miles and for a period of 21
years has been held to be reasonable.
Two persons entered into an agreement to run an estate agency in partnership. There was a
covenant restraining one of them from practising as an estate agent on his own account, or
with any other person or company, within 2 miles of the partnership premises and also within
2 years of the termination of the partnership. He left the partnership and commenced practice
as an estate agent with another agent within the time period and within the given area.
The Court enforced the covenant. The Court said the goodwill of the partnership was a
legitimate interest which the other partner was entitled to have protected. The restrictive
covenant could not be described as a covenant against competition. The covenant was no
more than was adequate to protect the goodwill of the partnership.
Right to Share Subsequent Profit [S. 37]
Section 37 - RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE
SUBSEQUENT PROFITS:
Where any member of a firm has died or otherwise ceased to be a partner, and the surviving
or continuing partners carry on the business of the firm with the property of the firm without

4 1896 AC 7 (HL).
5 (1927) 1 Ch 667.

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any final settlement of accounts as between them and the outgoing partner or his estate, then,
in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the
option of himself or his representatives to such share of the profits made since he ceased to be
a partner as may be attributable to the use of his share of the property of the firm or to interest
at the rate of six per cent. per annum on the amount of his share in the property of the firm:
Provided that where by contract between the partners an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner, and that option
is duly exercised, the estate of the deceased partner, or the outgoing partner of his estate, as
the case may be, is not entitled to any further or other share of profits, but if any partner
assuming to act in exercise of the option does not in all material respects comply with the
terms thereof, he is liable to account under the foregoing provisions of this section.
When a partner retires from a firm for any reason whatever, it is the duty of the remaining
partners to pay out the share of property and profits to the retired partner or to his
representatives. But sometimes the continuing partners do not do so either because they are
waiting for a more opportune moment or because they have obtained consent of the party
entitled to the share. Either way the capital which should have been paid out remains in the
business with its earning potential. What are the rights of the party entitled to the share? He
has an option. He may receive interest at the rate of 6% p.a. on the amount of his share in the
property of the firm. A partnership was dissolved by consent and it was agreed that the assets
of the firm would be sold by auction. Even then one of the partners continued the business on
the partnership premises and also with the capital and assets of the firm. It was held that he
must account to the other partner for the profit which was earned by the use of his share in
the property. This right exists even when only a part of the retired partners share of assets is
used in business, although in that case comparatively less profit would be attributable to his
share.
The concept of share of partnership assets has been explained as:
share of the partnership assets means the outgoing partners share in the proprietary
ownership of assets belonging to the partnership. What has been stated is the partners
interest in net assets or the surplus of partnership assets after satisfying partnership liabilities.
The amount of profit attributable to the use of such share belongs to the outgoing partner.
The continuing partners may show, if they can, that the profits have been earned wholly or
partially by means other than utilisation of the partnership assets, for example, exclusively
by application of the continuing partners skill or by reason of the firms goodwill in which
the retired partner had no share. Those profits so far as earned by sources outside the
partnership assets, are not profits in which the executors of the deceased partnership could be
entitled to any share. The continuing partners would also be entitled to any allowance
reasonably sufficient to compensate them for the use of skill and trouble.
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Where the representative of a deceased partner opted for interest, it was held that the estate of
the deceased partner was not thereby deprived of its normal right to benefit from an
increasing value of the assets pending realisation.
Where, however, the continuing partners, having been given the option to purchase the retired
partners share, have exercised it, the right to share subsequent profits is lost. But the right
will revive if the purchasing partners do not in all material respects comply with the terms of
the purchase.
The estate of a deceased partner is entitled to the benefits of any increase in the value of the
partnership assets taking place after his death but before the final realisation. The rights of a
retired partner cannot be confined to the date of his suit for dissolution and accounts. He has a
continuing interest in the assets until they are realised or their value is taken. Section 37 does
not entitle the sole remaining partner of a dissolved firm to prevent the former partner from
obstructing his business.
The retiring partnership does not require any independent interest in the property of the firm
till the firm is dissolved and the accounts settled. He has a right to demand settlement but no
right to interfere in matters of business.
Revocation of Continuing Guarantee [S. 38]
A continuing guarantee given to a firm or to a third person in respect of the transactions of
the firm is revoked as to future transactions from the date of any change in the constitution of
the firm. This rule operates when there is no agreement to the contrary and the surety has not
given his assent to the change. The rule is undoubtedly intended to protect the suretys
interest. A change in the constitution of the firm might expose him to new kinds of risk. The
simplest illustration is the decision of the Calcutta High Court in Neel Comul Mukherjee v
Bipro Dass Mookerjee
6
. Here the conduct of a firms cashier was guaranteed. Subsequently
the constitution of the firm was altered and its name changed from N. C. Mookerjee to N.
Mookerjee & Son. The surety was held not liable for the misconduct of the cashier after the
change.
Similarly, a guarantee was not permitted to be enforced in respect of a liability arising after
one of the partners had withdrawn from the partnership.
The operation of the section is confined only to continuing guarantees which is a sort of a
running guarantee. Whether a particular guarantee is of a running variety or not depends upon
whether it satisfies the requirements of its definition in Section 129 of the Contract Act. In
Chorley and Tucker the concept of a continuing guarantee is thus explained.
A specific guarantee provides for securing a specific advance of or advances up to a fixed
sum, and ceases to be effective on the repayment thereof, while a continuing guarantee covers

6 ILR (1901) 29 Cal 597.
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a fluctuating account such as an ordinary current account at a bank, and secures the balance
owing at any time within the limits of the guarantee.
Dissolution

Section 39 - DISSOLUTION OF A FIRM:
The dissolution of a partnership between all the partners of a firm is called the "dissolution of
the firm".
Thus dissolution is something different from the retirement of a partner, because in retirement
the business is continued by one or more of the partners. Where immediately after
dissolution, the firm is reconstituted and the business resumed by some of the partners, even
if in the same name and place, that remains a dissolution. Where, on the other hand, on the
death of a partner, his legal heirs joined the firm in accordance with the provisions of the
partnership deed, the firm would not stand dissolved, although its constitutional documents
would have to be altered.
One out of 4 partners unilaterally dissolved the firm and instructed the bank to freeze the
account. He was holding minority interest of 29%. The remaining partners holding 71%
decided to continue the business of the firm. As per the agreement the bank account could be
operated by any two partners. It was held that the 29% holder could not have dissolved the
firm unilaterally nor the bank could freeze the account at his instance.
Modes of Dissolution
By Consent [S. 40]
Section 40 - DISSOLUTION BY AGREEMENT:
A firm may be dissolved with the consent of all the partners or in accordance with a contract
between the partners.
A firm may be dissolved at any time with the consent of all the partners. This applies to all
cases whether the firm is for a fixed period or at will. A dissolution was held to have taken
place in the case of a partnership at will when the partners decided not to carry on the
business of the firm from an agreed date. The period of limitation for filing a care for
rendition of accounts commenced from the date and was not permitted to be prolonged by a
partner subsequently giving a notice of dissolution.
By Agreement [S. 40]
A firm may be dissolved in accordance with a contract between the partners. The contract
providing for dissolution may be contained in the partnership deed itself or in a separate
agreement.
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Both the above kinds of dissolution, namely, by consent and by agreement, are provided in
the same section. But they are different. Partners can consent to a dissolution regardless of
what their previous agreements are. But in dissolution by contract they have to follow their
subsisting agreement, whether all the partners give their consent or not.
Reconstitution after Dissolution
A dissolution is, in the opinion of the Supreme Court, something different a continuation of
the firm after reconstituting it. It will be a question of fact in each case whether the intention
was to dissolve or to continue. Where the partnership was for a fixed period, after the expiry
of which it was stated to have been dissolved by mutual consent of the partners and some of
the partners continued the business in the name and style of the firm, it was held on facts that
the assesse firm was entitled to relief under Section 25 (4) of the Income Tax Act, 1922. The
court said:
Dissolution and reconstitution are two distinct legal concepts, for, a dissolution brings the
partnership to an end while a reconstitution means a continuation of the partnership under
altered circumstances but in law there would be no difficulty in a dissolution of a firm being
followed by the constitution of a new firm by some of the erstwhile partners who may take
over the assets and liabilities of the dissolved firm. It is not possible to accept the contention
of the appellant that upon a dissolution of a firm succession to the old business by another
person would only arise if a solitary partner takes over assets and liabilities and carries on the
business as a sole proprietor thereof or if some of the erstwhile partners along with some
strangers take over the assets and liabilities of the old firm and carry on the business. It is
quite conceivable that in cases of dissolution of the firm brought about by a notice under
Section 43 or by an order of the court under Section 44, some of the erstwhile partners may
take over the assets and liabilities and carry on the same business by constituting a new firm
and even such cases would be cases of succession to the old business within the meaning of
Section 25(4) of the said Act.
In another case before the Supreme Court, one of the three partners stepped out of the
business because of old age foregoing his right to a share in the goodwill of the firm. The
remaining two partners with their sons constituted a new firm and continued the same
business at the same place and with the same registration number. A partner subsequently
died. A suit was filed by the partners of the new firm for dissolution and rendition of accounts
against the retired partner. The court said that the old firm was dissolved by mutual
agreement. The new partnership came into existence in place of the old one. The retired
partner was not a partner in the new firm. Nor he was being paid anything whatsoever by the
new firm. Hence, he could not be sued for rendition of accounts.


Compulsory Dissolution [S. 41]
Section 41 - COMPULSORY DISSOLUTION:
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A firm is dissolved
(a) by the adjudication of all the partners or of all the partners but one as insolvent, or
(b) by the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership:
Provided that, where more than one separate adventure or undertaking is carried on by the
firm, the illegality of one or more shall not of itself cause the dissolution of the firm in
respect of its lawful adventures and undertakings.
The two events mentioned in the section, namely, the insolvency of all, or all but one,
partners, or illegality of business, are known as grounds of compulsory dissolution because
they operate to bring about such necessary dissolution that there can be no agreement to the
contrary. No amount of clauses in the partnership agreement can prevent the operation of
clauses of Section 41. The 2 clauses of dissolution of compulsory nature mentioned in the
section are as follows:
a. Insolvency
Where all the partners of the firm have been adjudicated as insolvents, the partnership
inevitably ends. This is so because partnership is a contract and insolvents, till they are not
discharged, cannot contract either among themselves or with those dealing with the firm. The
same result follows where only one partner remains solvent and all others have been
adjudicated as insolvents. A single person cannot make a partnership end and, therefore, the
matter is over.
b. Illegality of Business
Where the business of the firm is illegal but from the very beginning, the agreement of
partnership by itself is unlawful under Section 23 of the Contract Act. Such a case does not
fall within the scope of Section 41. The section applies when the business is lawful in the
beginning but subsequently, on account of some change in law or outbreak of hostilities, the
business becomes unlawful. Section 56 of the Contract Act says that when the performance
of a contract becomes unlawful, the contract becomes void. Section 41 (b) of the Partnership
Act says that when the business of a firm becomes unlawful, the firm is, by force of law,
dissolved. The clause contemplates two kinds of possibilities. Either the business itself
becomes unlawful, e.g., on the introduction of prohibition, wine business becomes unlawful,
or the remaining lawful, but carrying it on it partnership becomes unlawful, as, for example,
where there is no prohibition, there may still be prohibition on partnership running liquor
licences. In such cases the business is lawful, but it is lawfully allowed only to individuals
and not to organisations of individuals. Many licences are, for example, issued only to
individuals and not to partnerships. A partnership for such business becomes an unlawful
organisation though the business itself is lawful. In either case, the effect upon the firm is the
same, i. e., the firm stands dissolved by a compulsory provision of law.
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The proviso to the section deals with cases in which the firm is carrying on not one business,
but more than one type of business. In such cases if atleast one type of activity remains
lawful, the partnership escapes compulsory dissolution. It survives for the business which
remains lawful, though its other business operation being now unlawful, would have to be
abandoned.
Contingent Dissolution [S. 42]
Section 42 - DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES:
Subject to contract between the partners a firm is dissolved
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the completion
thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
A firm is dissolved on the happening of any of the following contingencies provided that
there is no agreement to the contrary:
a. If the firm is constituted for a fixed period, by the expiry of that term.
b. If the firm is constituted to carry out one or more adventures or undertakings, when
they are completed.
c. By the death of a partner.
d. By the adjudication of a partner as an insolvent.
Expiry of Term
Where a firm is constituted for a fixed term, it becomes dissolved on the expiry of that term,
unless the dissolution is prevented by an agreement between the partners. The Supreme Court
held on the facts of a case before it that, in the absence of an agreement to the contrary, there
was no question of the survival of a firm after the expiry of its term and the fact that the
partners, subsequent to the expiry of the term, consented to refer their disputes to arbitration
did not amount to an agreement to the contrary.
Completion of Business
A partnership is dissolved by operation of law when the business for which it was formed has
been completed. The section says that where a firm is constituted to carry out one or more
adventures or undertakings, it is dissolved by the completion thereof. Where, in a case before
the Patna High Court, a partnership firm was working a salt licence and the control on salt
having been lifted and the licence becoming inoperative, the question arose whether the firm
had come into being only for working the licences or to carry on salt business whether with
or without control and licence, Ramaswami, J said:
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It is manifest that the object of the partnership was to exploit the salt licence and the salt
agency and that the salt agency was the substratum or the underlying basis of the contract of
partnership. It is clear that the intention of the parties was that the partnership should continue
so long as the agency of salt continued or till separate agencies were obtained by the parties
in their respective names.
If this interpretation is right there was dissolution of the partnership under the provisions of
Section 42(b) as soon as salt control was lifted and the agency and licence granted to the firm
came to an end.
Where a firm is constituted for a particular term or venture, and a partner dies earlier, it
would end as from the date of death irrespective of the fact that neither the term has expired
nor business completed. The Madras High Court refused to agree that wherever there is an
adventure that itself amounts to a contract to the contrary. It is not necessary that a contract to
the contrary should always be expressed.
Death of Partner
The effect of clause (c) of Section 42 is that in the absence of a contract to the contrary, a
partnership is dissolved by the death of a partner. Death of a partner means the dissolution of
the partnership. In a case before the Rajasthan High Court, it was contended against a firm
that it should not be permitted to sue because one of the partners died and the firm becomes
dissolved; if the business was continued, it should have been registered anew and that not
have been done it was not competent to sue. The Court allowed the section.
The business in this case was continued by surviving partners along with the heirs of the
deceased partner.
There was held to be an automatic dissolution where one of the two partners died. There was
a clause in the partnership deed that the firm would be continued for a certain number of
years despite the death of one of the two partners. The court said that the clause did not save
the firm from dissolution because the legal heirs of the deceased partner had expressed their
unwillingness to the continuation of the firm.
Insolvency of Partner
A partnership is dissolved by the adjudication of a partner as an insolvent. Thus the
insolvency even of a single partner operates as a dissolution. This being also subject to an
agreement to the contrary, the partners can agree that the insolvency of a partner will not
have the dissolving effect. Such an agreement will be subject to the provisions of the Act
relating to compulsory dissolution, namely, that on the insolvency of all the partners or all but
one the firm would stand compulsorily dissolved.
By Notice [S. 43]
Section 43 - DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL:
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(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in
writing to all the other partners of his intention to dissolve the firm.
(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution
or, if no date is so mentioned, as from the date of the communication of the notice.
Dissolution of Firm at Will
When the partnership is at will, which means partnership the duration of which has not been
fixed, it may be dissolved at any time by any partner by giving notice of his intention to
dissolve it and should be served upon all the partners. The notice must not be ambiguous or
vague. It must be factual, explicit and final. A notice that accounts should be rendered and
that a certain work must not be proceeded with was held to be not a notice of dissolution. A
majority resolution to dissolve the firm was also held to be not a notice of dissolution. But
where the partners stopped the work some three years before a suit was filed by one of the
partners for accounts, it was held that the firm stood dissolved from that time by implied
agreement and, therefore, the suit for accounts was time-barred. He could not save himself
from the bar of time by subsequently giving a notice of dissolution. The firm is dissolved as
from the date mentioned in the notice or, if no date is mentioned, as from the date of
communication of notice. Where a letter was addressed by a partner to his own lawyer
appointing him as an arbitrator in the dispute between him and the other partners and asking
him to consider the matter of the dissolution of the firm, it was held that this was neither a
notice of dissolution, nor it had the effect of dissolving the firm. But where a partner gives
notice at an importune moment or at a time when dissolution will give him some advantage
over the other partners, the court may hold him in the firm till at least pending transactions
are completed and liabilities paid out. Thus, where a partner was guilty of an act of fraud and
admitted it and while the other partners was guilty of an act of fraud and admitted it and
while the other partners expelled him from the firm, he claimed that he had given a notice of
dissolution even before that end, it was held that as had served notice of dissolution to
conceal his own fraud, the notice was invalid. The other partners were entitled to expel him.
A partnership which is not at will cannot be determined by notice. Thus in Moss v Elphick
7
:
A deed, constituting a partnership of two persons for an undefined time, provided that the
firm could be terminated by mutual agreement only.
It was held that the notice of dissolution given by one of the partners was invalid as the
operation of Section 43 was excluded by agreement to the contrary.
Where there was a clear provision in the deed that the partnership could continue as long as
there were atleast two partners, the Supreme Court held that the partnership and its
continuance was not dependent upon the will of the partners and, therefore, no partner had
the right to dissolve it by notice. Where the existence of a partnership was exclusively

7 (1910) 1 KB 846.
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dependent upon the fact whether a licence to run a cinema hall was granted or not, it was held
to be a frim at will.
The Supreme Court has expressed the opinion that in a partnership consisting of two partners
only, if there is any provision regulating the mode of retirement, it will in essence be an
agreement as to dissolution. The firm will not be at will and the provision relating to
retirement will have to be followed for dissolution also. In ignorance of this decision the
Calcutta High Court had held that in a partnership consisting of two persons only, a provision
that a partner will retire by six months notice only will not prevent the operation of Section
43 and a partner could dissolve the firm by notice, though for retirement he would need to
wait for six months. In such cases retirement and dissolution becomes indistinguishable. The
Bombay High Court has held that a provision in a deed of partnership that any partner could
retire by two months notice did not amount to a provision for the dissolution of the firm and,
therefore, the firm was at will. The firm consisted of more than two partners. A firm at will
can be dissolved with the consent of all the partners.
Where all the partners but one retire, this may involve a dissolution, but not a necessary
dissolution; the single partner may take in some other partners and the firm shall be deemed
to have been continued.
Where a partner sent a notice of dissolution to his only other partner and died before the other
received the notice, it was held that the firm because dissolved by the death of a partner and
not by notice.
Dissolution by Court [S. 44]
Section 44 - DISSOLUTION BY THE COURT:
At the suit of a partner, the Court may dissolve a firm on any of the following grounds,
namely:
(a) that a partner has become of unsound mind, in which case the suit may be brought as well
by the next friend of the partner who has become of unsound mind as by any other partner;
(b) that a partner, other than the partner suing, has become in any way permanently incapable
of performing his duties as partner;
(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business regard being had to the nature of the business;
(d) that a partner, other than the partner suing, wilfully or persistently commits breach of
agreements relating to the management of the affairs of the firm of the conduct of its
business; or otherwise so conducts himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on the business in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole of his
interest in the firm to a third party, or has allowed his share to be charged under the
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provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure,
1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues
recoverable as arrears of land revenue due by the partner;
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.
Grounds of Dissolution by Court
By Section 44 the court is empowered to order the dissolution of a firm at the suit of a partner
in the following cases:
Insanity
When one of the partners had become a person of unsound mind, any partner, including the
insane, may apply for dissolution. Insanity renders the partner incapable of performing his
duties as a partner and is, therefore, a good ground for putting an end to the firm. Dissolution
may be necessary both to protect the interest of the insane and the other partners.
Permanent Incapacity
Where any partner, other than the partner suing, has become permanently incapable of
performing his duties as a partner, any partner may apply for dissolution. The incapacity may
be due to illness, mental or physical, but it should be of a permanent nature. In Whitwell v
Arthur
8
a partner suffered from an attack of paralysis and that would have been a good
ground for dissolution but for the fact that the medical evidence showed that the attack was
only temporary and he was already improving.
Misconduct
When a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the business of the firm the court may order dissolution. It is not necessary that
the misconduct should be connected with the business of the firm. Its only connection with
the firm need be that it will damage the business prospects of the firm. Thus, conviction for
travelling without ticket, or for breach of trust is sufficient, but misconduct in personal life
may not be so. In Snow v Milford
9
:
A partner of a firm of bankers committed adultery with several women in the city where the
business the business was carried on and his wife had left him. The other partners applied for
dissolution on this ground. The court rejected the action.
Persistent Breach of Agreement

8 (1865) 147 RR 73.
9 (1868) 18 LT 142.

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When a partner, other than the partner suing, persistently commits breach of agreements
relating to the management of the firm or otherwise so conducts himself in matters relating to
the business that it is not reasonably practicable for the other partners to carry on the business
in partnership with him, the court may order dissolution. Any conduct which is destructive of
mutual confidence between the partners is sufficient. Breach of agreement and conduct
destructive of mutual confidence give rise to a ground for dissolution of the firm. Keeping
erroneous accounts and not keeping receipts, a refusal to meet on matters of business,
continued quarrelling, and such a state of animosity as precludes all reasonable hope of
reconciliation and friendly cooperation, have been held sufficient to justify a dissolution. A
fathers treatment of his partner-son (opening his private letters, and like some parents,
failing to realise that his son is now a grown-up man) have been held to justify a dissolution.
Transfer of Interest
When a partner, other than the partner suing, has transferred the whole of his interest in the
firm to a third party, or as allowed his interest to be charged, or has allowed it to be sold in,
the recovery of arrears of land revenue, or of any dues recoverable as arrears of land revenue,
the court may order dissolution.
Perpetual Losses
When the business of the firm cannot be carried on save at a loss the court may dissolve it.
The whole object of partnership is to make profits and if that object cannot be attained, it is
needless for the firm to continue. Thus where the whole of the capital contributed by the
partners had already been spent and there were no business prospects unless they contributed
further capital which they refused to do, the court granted dissolution.
Just and Equitable
Dissolution may be ordered when on any other ground the court thinks is just and equitable
that the firm should be dissolved. The expression, just and equitable gives the court a very
wide discretionary power, which is not to be fettered by any rules, to order dissolution
whenever in the circumstances it seems to be desirable. Where the terms of a partnership
deed provided to a partner the facility of withdrawing from the firm by transferring his
interest to others, the court said that this would keep the right to seek dissolution in abeyance
unless a crisis is created by others by refusing to pay him out. The court equally concerns
itself with the interest of the other partners. Where the managing partner supplied to the firm
from his personal business certain material for which he overcharged, this was held to be a
breach of faith entitling other partners to demand dissolution. It was not necessary that a
notice of dissolution under Section 43 should have been given. The court has to take into
account all the facts and circumstances and mould relief according to the exigencies of the
case. Where dissolution was prayed for, the court provided the relief of retirement.
Mismanagement of affairs has also been held to be a good ground for ordering dissolution.
The firm was running a cinema theatre. The plaintiff partner was entitled to receive a
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minimum guaranteed sum as his share of profit on monthly basis and the same was not being
paid to him. No explanation was given for the same. Copies of accounts and of income tax
returns were also not given to him. The accounts submitted for income tax purposes also did
not seem to be correct. All this showed that the defendant partner was mismanaging the
affairs. The court ordered dissolution.
Whether Right to Apply for Dissolution can be Excluded
The right of a partner to ask for dissolution on any of the grounds cannot be excluded by any
agreement to the contrary. Where no other mode of dissolution is available, Section 44 being
the lender of last resort, its operation cannot be allowed to be nullified. The Allahabad High
Court has, however, held differently. In a case before it, a partnership deed provided that a
partner could withdraw by selling his interest to his co-partners or, in the event of their failure
to buy it, by selling his it to others and dissolving the firm. The other partners failed to buy
and, therefore, dissolution was prayed for, but was not granted, the court saying that the
provisions had taken away a partners right to cause dissolution. This view is however, no
longer tenable. Following a Privy Council decision, the J & K High Court stated that it can
be safely said that Section 44 confers an absolute and independent right and it is not open to
the partners to take away that right by means of an agreement between them. The court
accordingly held that the requirement of the partnership agreement that there should be one
months notice and reference of every dispute to arbitration must give way to the clear
provisions of Section 44. Though the power of the court under Section 44 should be invoked
only where other modes of dissolution are unavailing, yet this does not mitigate against the
discretionary power of the court under the section.
Suits for Accounts without seeking Dissolution
The Bombay High Court has expressed the following opinion:
Generally the suits like the present one are suits for accounts and dissolution. Even if the suit
is only for accounts, the court would (order) dissolution. It is also open for the courts,
irrespective of the parties pleadings, to call upon the plaintiff to amend his plaint suitably so
as to include the prayer for accounts and dissolution. This naturally follows from the fact that
without seeking dissolution, accounts ordinarily cannot be demanded. The present case is
titled only a suit for accounts, but it would virtually be a suit for dissolution.
But there has been decision of the Privy Council pronounced in 1922 that where the suit is by
one partner against another for recovery of a sum of money and the relief is capable of being
granted without taking general account, it should be allowed though it may arise out of
partnership business or be connected with it.


Suit for Partition without Dissolution
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24

A suit for partition of the assets of the firm without dissolution is not possible. An agreement
to create a partnership need not be express. It can arise out of mutual understanding
evidenced by a consistent course of conduct. The intention of parties in purchasing property
was for the common pool of business. Existence of partnership could be inferred. Accounts
were daily looked into. There was no finalisation of accounts between them. A suit for
partition of property without there being dissolution was held to be not maintainable.
Property Situate out of Territorial Jurisdiction of Court
A suit for dissolution is not to be barred on the ground that certain immovable properties of
the firm were situated beyond the territorial jurisdiction of the court. The primary object of a
dissolution suit is not relief in respect of some immovable property. A suit was filed for
declaration of the dissolution of a partnership firm. The theatres of the firm which were a part
of its property were situate beyond the jurisdiction of the High Court. The head office of the
firm was within jurisdiction. The notice of dissolution was issued and received within
jurisdiction. It was held that the High Court had jurisdiction to entertain the suit.
Effects of Non-Registration [S.69]

Section 69 - EFFECT OF NON-REGISTRATION:
(1) No suit to enforce a right arising from a contract or conferred by this Act shall be
instituted in any Court by or on a behalf of any persons suing as a partner in a firm against the
firm or any person alleged to be or to have been a partner in the firm unless the firm is
registered and the person suing is or has been shown in the Register of Firms as a partner in
the firm : Provided that the requirement of registration of firm under this sub-section shall not
apply to the suits or proceedings instituted by the heirs or legal representatives of the
deceased partner of a firm for accounts of the firm or to realise the property of the firm.
(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on
behalf of a firm against any third party unless the firm is registered and the persons suing are
or have been shown in the Register of Firms as partners in the firm.
(2A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved
firm or any right or power to realise the property of a dissolved firm shall be instituted in any
Court by or on behalf of any person suing as a partner in a firm against the firm or any person
alleged to be or have been a partner in the firm, unless the firm is registered and the person
suing is or has been shown in the Register of Firms as a partner in the firm :
Provided that the requirement of registration of firm under this sub-section shall not apply to
the suits or proceedings instituted by the heirs or legal representatives of the deceased partner
of a firm for accounts of a dissolved firm or to realise the property of a dissolved firm.
(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or
other proceedings to enforce a right arising from a contract but shall not affect
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(a) the firms constituted for a duration upto six months or with a capital upto two thousand
rupees; or;
(b) the powers of an official assigned, receiver or Court under the Presidency Towns
Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an
insolvent partner.
(4) This section shall not apply
(a) to firms or partners in firm which have no place of business in the territories to which this
Act extends, or whose places of business in the said territories are situated in areas to which,
by notification under section 56 this Chapter does not apply, or
(b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the
presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause
Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second
Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution
or other proceeding incidental to or arising from any such suit or claim.
Registration Optional
Registration of firms is not compulsory. It is optional and there is no penalty for non-
registration. The English Law provides for compulsory registration. But that was not
followed here. It would have been too drastic and creative of difficulties. Yet registration
becomes necessary at one time or the other, because Section 69 seriously cuts short the
capacity of an unregistered firm and its partners to sue. The firm cannot, for example, sue any
person for the price of goods supplied by it. This disability is too great a compelling force to
bring the firm to the Register. Section 69 is mandatory in character. Its effect is to render a
suit by a partner in respect of a right vested in him or acquired under a contract when he
entered into as a partner to be not maintainable.
Registration provides protection to third parties against false denials of partnership and
evasion of liability. Registration constitutes a conclusive proof against persons shown as
partners and of the composition of the firm.
The burden of proving that the firm is registered as required under the Act is on the firm or
the partner suing.
Effects of non-registration
Suits between partners and firm [sub-s(1)]
A partner of an unregistered firm cannot sue the firm or his present or past co-partners for the
enforcement of any right arising from a contract or conferred by the Partnership Act. Only a
partner of a registered firm whose name appears in registration can sue for the enforcement of
such rights.
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This difficulty may be overcome by getting the firm registered before an action is brought.
But once a dispute between the partners has arisen, all of them may not sign the application
form, and consequently the firm may remain unregistered. It is, therefore, advisable to have
the firm registered as soon as it is constituted. In a case before the Andhra Pradesh High
Court, on the death of a partner, his interest developed upon his sons who became partners.
But this change was not registered with the Registrar and, therefore, for purposes of suits the
firm became an unregistered firm. The sons attempted to enforce the partnership agreement
but the suit was not allowed. Their contention that they should be permitted to sue as the co-
owners of the property was also not accepted. Thus the only chance was dissolution and then
to realise the assets of a dissolved firm.
When a suit is filed without registration, it is liable to be dismissed and cannot be rectified by
subsequent registration. The Andhra Pradesh High Court has suggested a way out of wasting
of partys filing expenses by rejecting his suit by holding that the same suit can be treated as a
valid suit from the date of the registration of the firm taking the period of limitation from the
date of registration. This point was also considered by the Supreme Court in Raptakos Brett v
Ganesh Property
10
, namely, whether registration during pendency of the suit could revive the
suit or make the same competent at least from the date of registration, but no conclusive
opinion was given.
Where a partnership was reconstituted but was not registered whereas the original partnership
was registered, the court finding that the dispute related to the original partnership, allowed
the case about it to be filed.
Suits between Firm and Third Parties [S. 69(2)]
An unregistered firm cannot sue any third party for the enforcement of any right arising from
contract. A suit can be brought only by or on behalf of a registered firm and that also by
persons whose names appear as partners in the register of firms. In Ruby General I nsurance
Co Ltd v Pearey Lal Kumar
11
the words arising from a contract were held to be akin to the
words arising out of the contract and were construed widely in the context of arbitration
clause. But even so these words would not apply to statutory or common law rights because
such rights do not have their roots in contract. This view was expressed by the Supreme
Court in Raptakos Brett v Ganesh Property
12
. It was held that the right to evict a tenant was
not a right arising from a contract but was a statutory right under the Transfer of Property
Act. The eviction proceeding was, therefore, not barred. The Supreme Court followed this
ruling in Haldiram Bhujiawala v Anand Kumar Deepak Kumar
13
and held that a suit to
prevent infringement of a trade mark is not barred by the section whether the firm is
registered or not. The Court said that it is well settled that a passing off action is a common

10 AIR 1998 SC 3085.
11 AIR 1952 SC 119.
12 Supra Note 10.
13 AIR 2000 SC 1287.

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27

law action based on tort. This sub-section also does not affect the right to apply for an interim
relief under Section 9 of the Arbitration and Conciliation Act, 1996. Where a partner forcibly
broke upon the shop of the firm and removed certain articles and surrendered the godown of
the firm with an ulterior motive, it was held that such acts of misconduct did not fall within
the scope of Section 69. Hence, the suit was for recovery of damages and was maintainable
even if the firm was not registered.
A suit was filed on behalf of a registered firm for recovery of a loan. The names of the two
suing partners were not appearing in the registration of the firm. The court said that the suit
was not maintainable.
This difficulty once again can be overcome by getting the firm registered before an action is
brought. The action of an unregistered firm is, however, liable to be dismissed and it cannot
be rectified by subsequent registration. A fresh suit will have to be filed after registration
provided that it is still within the period of limitation. The names of those filing a suit must
appear in the registration. Thus the Supreme Court laid down that where on account of the
admission of some new partners and of some minors into the benefit of the firm, there was a
discrepancy between the names on the register and the names included in the suit, the suit
was not maintainable.
This disability was not allowed to be overcome by convincing the action by amendment of
the plaint and substituting the names of individual partners as claimants in place of the firm
while the whole tenor of the body of the plaint showed the firm as the claimant and there was
nothing to show how and in what capacity the money was owed by the third party to the
partners. The court held that the action must fail.
Set-off and other Proceedings
The above two disabilities also apply to a claim set-off or other proceedings to enforce a right
arising from a contract. A claim of set-off mean that if, for example, an unregistered firm is
sued by a third party to recover a sum of money the firm cannot say that the money owing by
that third party to the firm should be set-off against the claim. The words other proceedings
had created some difficulty as to their import, particularly in reference to the question
whether they included arbitration proceedings. The Supreme Court has now by its decision
in J agdish Chandra Gupta v Kajaria Traders (I ndia) Ltd
14
, settled the controversy.
A clause in a deed of partnership provided that in case of dispute between the partners, the
matter will be referred to arbitration. A dispute having arisen, one partner appointed an
arbitrator to which the other party gave no response. An action was then commenced to
enforce the arbitration clause of the agreement.
The other partner contended that the firm was not registered and, therefore, the suit should be
dismissed. The Supreme Court held that the suit was not maintainable. It is impossible to

14 AIR 1964 SC 1882.
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28

think that the right to proceed to arbitration is not one of the rights which are founded on the
agreement of the parties. The words of Section 69(3) or other proceedings to enforce a right
arising from a contract, are sufficient to cover the present matter. This is a welcome
decision. If arbitration proceedings were allowed, unregistered firm would, by providing for
arbitration in the partnership deed, escape the disability contained in the section.
Where a dispute between an unregistered firm and the other party was referred to arbitration
at the instance of the other party and the arbitrator have submitted his award which went in
favour of the firm, the question arose whether the firm had the right to get the award
converted into a court decree and then enforce it. The Madhya Pradesh High Court allowed
the enforcement of the award and the Supreme Court affirmed the decision. The court was of
the view that Section 69(3) was not attracted. Enforcement of an arbitration agreement is
barred. But when the other party activated the arbitration clause against the unregistered firm,
and the arbitrator firm, and the arbitrator gave his award, the matter went beyond the scope of
the agreement. It was then an award which was sought to be enforced and not a clause in the
agreement.
Where a reference to arbitration was possible without recourse to the court, it was held that
an unregistered firm could do so.
Exceptions
The section, however, admits of the following exception:
Actions for dissolution and accounts:
First, an unregistered firm and its partners can bring an action for the dissolution of the firm
or for accounts of a dissolved firm. They can also enforce any right or power to realise the
property of a dissolved firm. Thus the disability to sue disappears with the dissolution of the
firm. It seems that the intention of the Legislature was to inflict disability for non-
registration only during the subsistence of the partnership.
A and B purchased a taxi to ply it in partnership. They had done business for about a year
when A, without the consent of B, disposed of the taxi. B brought an action to recover his
share in the sale proceeds. As only defence was that the firm was not registered.
The court held that the business having been closed on the sale of the taxi, the action was for
the realisation of the assets of a dissolved firm and, therefore, maintainable.
The right to go to the court for dissolution and accounts continues to enjoy full respect in
spite of the fact that the firm was not registered and there was an arbitration clause which was
not enforceable because of non-registration. In an earlier decision to the same effect the court
did not accept the proposition that arbitration having the effect of preventing the party from
going to a court would mean that the party is without a remedy. Such result must not have
been intended by Parliament and, therefore, the remedy by way of dissolution and accounts
was allowed. Such cases have to be distinguished from cases for accounts only and not for
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29

dissolution and accounts. Thus, the Kerala High Court did not permit a suit to be entertained
in which the partners of a unregistered firm applied for a declaration as to the shares to which
each partner was entitled and for rendition of accounts on that basis by evolving a scheme for
any consequential reliefs. The court concluded:
So the legal position is that a suit by a partner/partners of an unregistered firm against the
firm or fellow partners for accounts without a prayer for dissolution of the firm is not
maintainable.
Similarly, it has been held by the Bombay High Court that a suit for damages for misconduct
can be brought by one partner against another even if the firm is not registered, because
enforcing the claims of a firm is a realisation of its assets. Where the debts of an unregistered
firm, being in dissolution, were allotted to a partner, he was allowed to sue. It was not a suit
by the firm, and even if it was, it was one for realisation of assets.
In spite of the exception stated in Sub-section (3) it has been found as an effect of the totality
of the provisions that a partner cannot seek reference to arbitration of a dispute regarding the
right itself to dissolve the firm. But by operation of the exclusionary expression but shall not
effect in Section 69(3) the effect is that the disability is not to apply to the exceptional
situations enumerated in the provision and one of them is the enforcement of any right arising
from the dissolution of a firm or right for accounts of a dissolved firm or any right or power
to realise the property of a dissolved firm. Accordingly, where the partnership is already
dissolved by consent (or even otherwise), a partner can seek reference to arbitration in the
terms of the arbitration clause in the contract of any dispute arising from the dissolution.
An application for enforcement of the arbitration clause in a deed of partnership is
maintainable for seeking dissolution of the partnership whether the partnership is registered
or not. A partnership deed provided for settlement of partnership disputes by arbitration. But
some of the partners gave a good-bye to the arbitration clause and instituted legal proceedings
for settlement of their disputes. The other set of partners raised objections and insisted that
the matter should go in for arbitration. The first set dissolved the firm. They faced the further
allegation that they were wasting the partnership resources over litigation. Looking at the
state of complications, the court refused to stay the legal proceedings. Where the partners
went on retiring from the firm one after the other so that only one partner was left and the
firm for that reason became automatically dissolved, it was held that the suit filed by the sole
remaining partner to recover dues to the firm from the defendant was maintainable.
A partner of an unregistered firm had filed a suit against his co- partners claiming declaration
of shares, proper administration of firm and rendition of accounts. The suit was dismissed
under Section 69(1). Subsequently the same partner filed another suit praying for dissolution
of the firm. This suit was held to be maintainable under Section 69(3)(a). The court said that
the subsequent suit was not barred by the doctrine of res judicata because the cause of action
was different in the two suits.

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30

Recovery of insolvents share
Secondly, the official assignee, receiver or court acting for an insolvent partner may bring an
action for realisation of the insolvents share, whether the firm was registered or not.
Value of suit Rs. 100
Thirdly, an unregistered firm or its partners may sue or claim a set-off where the subject-
matter of the suit does not exceed Rs. 100 in value. [S. 69(4)(b)].
Statutory and non-contractual rights
Fourthly, statutory and non-contractual rights are outside the scope of the disability inflicted
by the section. If a person damages the property of the firm, he can be sued whether the firm
is registered or not. An unregistered firm has been allowed to sue to enforce the payment of a
cheque in its capacity as a payee, it being a statutory right under the Negotiable Instruments
Act. A similar firm has been allowed to sue a carrier for loss of goods which the firm was the
bailee, it being a statutory right under Section 180 of the Contract Act. Railways have been
held liable for damages for loss of the consignment of an unregistered firm. A claim for such
liability is under the Tort law against a common carrier. An unregistered firm has been
allowed to sue for a permanent injunction to prevent passing off or infringement of its trade
mark. The suit of the heir of a deceased partner for a declaration that he is entitled to be
admitted into the firm was allowed to proceed although the firm was not registered. Statutory
tenancy rights are enforceable whether the firm which is holding the tenancy is registered or
not. The partners of an unregistered firm were allowed to recover possession of their property
to which they succeeded by taking over a firm in which some of them were partners. Where
all the partners of a firm had gone out and the business of the firm was not registered. Section
69 does not stand in the way of an unregistered firm defending proceedings filed against it. It
only precludes initiation of proceedings by such a firm. An unregistered firm has been
allowed to exercise its property rights are protected by the Transfer of Property Act to evict a
tenant.
In a curious decision the Patna High Court did not allow an unregistered firm to enforce its
insurance claim in respect of its motor vehicles. An insurance claim is not so much a claim
under a contract as an action to collect the property of the firm and also very much like
collecting the payment of a cheque and should have been allowed by bringing it in that
category. The insurer should have been paid in good grace.
Interim relief
An application before the court for interim relief under Section 9 of the Arbitration and
Conciliation Act, 1996 has been held to be maintainable whether the firm is registered or not.


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31

Suits by third parties
Lastly, third parties can always sue a firm whether registered or not. The disability is that of
the firm and not of persons outside it.
Criminal proceedings
A criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881 for the
dishonour of a cheque is not in the nature of a civil suit and, therefore, the bar of Section 69
would not prevent an unregistered firm from launching such a proceeding.
Non- partnership matters
Where there is no evidence of a partnership, e.g. a lender to take a share in the profits and
losses of a business, a proceeding for the recovery of the loan would not attract the provisions
of Section 69. Where the partners of a dissolved firm became co-owners of the property of
the erstwhile partnership firm by mutual acceptance of shares as co-owners, and a suit having
been brought by one of them complaining of disproportion in shares, it was held that the suit
was an individual suit and not a proceeding by a partnership. Section 69 was not attracted.
LLP vis--vis Traditional Partnership

Distinctions
No. Traditional Partnership Limited Liability Partnership
1. Unlimited personal liability of each
partner for dues of the partnership firm.
Personal property of each partner also
liable.
No personal liability of partner, except in
case of fraud.
2. Written agreement not essential. Incorporation document essential.
3. Partnership can be registered under
Partnership Act. Registration is not
mandatory.
LLP is incorporated under LLP Act.
Incorporation is mandatory.
4. Not a legal entity separate from its
partners
It is a legal entity separate from its
partners, having perpetual succession
5. Property cannot be held in name of
partnership firm.
Property can be held in name of LLP.
6. Partnership deed/agreement is executed.
Even verbal agreement is valid.
'Incorporation Document' is required to be
executed. In addition, LLP Agreement is
required in almost all cases, though such
LLP agreement is not mandatory.
7. Documents are required to be filed with
Registrar of Firms (of respective State)
Registrar of Companies (ROC) is the
administrating authority.
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32

8. Death of partner dissolves a firm, in
absence of agreement
Death of partner does not dissolve LLP.
9. Minimum two and maximum twenty
partners
Minimum two partners. No limit on
maximum number of partners
10. Each partner can take part in business of
firm.
Each partner can take part in business of
firm, but LLP Agreement can provide to
the contrary.
11. All partners are liable for statutory
compliances under Partnership Act
Only designated partners are liable for
statutory compliances as are required
under LLP Act (not necessarily in respect
of other Acts).
12. Partner cannot enter into business with
firm, though he can give loan to firm.
Partner of LLP can enter into business with
LLP. He can also give loans to LLP.
13. Every partner of firm is agent of firm
and also of other partners. He can bind
partnership firm as well as other
partners by his acts.
Every partner of LLP is agent of LLP but
not of other partners. Thus, he can bind
LLP by his acts but not other partners.
However, LLP agreement can restrict
powers of individual partner.
14. Filing of accounts, statement of
solvency and annual return not required.
Filing of accounts, statement of solvency
and annual return not required.
15. Partnership can be 'at will' i.e. any
partner can resign or dissolve firm
Individual partner can resign but cannot
dissolve the LLP.
16. Death of partner dissolves partnership
unless there is contract to contrary
Death of partner does not dissolve LLP.
17. Public notice is required for retirement
of a partner.
Filing of return of retirement of partner
with ROC is required, but no provision for
public notice of retirement of partner.
18. Partnership firm can be dissolved. LLP can be would up.
19. No specific provision to enter into
compromise, arrangement,
amalgamation, reconstruction etc. This
can be done only under civil laws.
LLP can enter into compromise,
arrangement, amalgamation, reconstruction
etc.
20. Minor can be admitted to benefit of
partnership.
There is no specific provision to admit
minor to benefit of partnership. It is
doubtful if this can be done.
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Similarities
1. Partner is not employee of firm Partner is not employee of LLP.
2. Liability of a person for 'holding out',
i.e. representing himself as partner,
though he is not
Liability of a person for 'holding out' i.e.
representing himself as partner, though he
is not [clause 29 of LLP Bill, 2008]
3. Partner of firm entitled to remuneration
only if partnership agreement so
provides
Partner of LLP entitled to remuneration
only if LLP agreement so provides
4. New partner can be introduced only
with consent of all existing partners
New partner can be introduced only with
consent of all existing partners, unless LLP
Agreement provides otherwise.
5. Insolvent person cannot continue as
partner of firm.
Insolvent person cannot continue as
partner of LLP.
6. Rights of partnership can be assigned. Rights of partnership can be assigned.
7. Partner liable to firm for any personal
profits made by him by use of property,
name or business connection of firm.
Partner liable to LLP for any personal
profits made by him by use of property,
name or business connection of LLP
8. Partner cannot undertake competing
business without consent of other
partners
Partner cannot undertake competing
business without consent of LLP.
Otherwise, liable to account for and pay
profits to LLP
9. Partner liable to firm if he commits
fraud.
Partner liable to LLP if he commits fraud.





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34

Bibliography


BOOKS
SINGH, AVTAR, Introduction to Law of Partnership, 10
th
Edition. Lucknow: Eastern
Book Company. 2011

WEBSITES
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