Partnership Property after Dissolution of Firm

 

Author: Sachin Sreenivas, BMS College of Law, Bangalore

E-mail: - [email protected]

Introduction:

Dissolution of a partnership firm entails closure of the business of the partnership, settlement of books and accounts of the partnership and distribution of the surplus property (i.e. remaining property of the partnership after settlement of debts and liabilities of the firm) among partners as per their respective shares in the partnership firm.

The dissolution of the partnership between all the partners of a firm is called the ‘dissolution  of the firm‘.  

After this, A partnership firm cannot do any kind of business activity with anybody. It can only dispose of the assets of the firm to realize the amount, pay the liabilities of the firm, and discharge the claims of the partners.

 

Partnership Property:

According to Section 14 of The Indian Partnership Act, 1932, Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

 

The expression ‘property of the firm’, also referred to as ‘partnership property’, ‘joint stock’, ‘common stock’, or ‘joint estate’, denotes all property, rights and interests to which the firm, that is, all partners collectively, may be entitled.

 

Section 14 mentions that for the purpose of deeming an acquired property by a firm as a partnership property, such acquisition shall also include acquisition made for the purposes of goodwill of the firm’s business.

The term goodwill is not defined in the Indian Partnership Act, 1932.

Goodwill refers to the reputational value of a firm built over time, with respect to the expected future profits over and above the normal profits accrued over the conduct of the same class of business. A well established firm makes a good market name, generates trust with the customers and also has more business connections in comparison to a newly established business. Therefore, the monetary value of this advantage that a buyer is ready to pay is termed as Goodwill.

 

According to Section 15 of the Indian Partnership Act, 1932, depending upon the contract between the partners, the property of the firm shall be held and used exclusively for business purposes by the partners.

The determination of the question whether a particular property is or is not ‘property’ of the firm ultimately depends on the real intention or agreement of the partners. Thus, the mere fact that the property of a partner is being used for the purposes of the firm shall not by itself make it partnership property, unless it is intended to be treated as such. Partners may, by an agreement at any time, convert the property of any partner or partners, and such conversion, if made in good faith, would be effectual between the partners and against the creditors of the firm, or the separate property of any partner into a partnership property.

In Boda Narayana Murthy & Sons v. Valluri Venkata Suguna & Others; the partners in a partnership business purchased a property individually and not using any sort of funds from the partnership. Disputes arose when the respondents claimed that the property so purchased using every partner’s individual monetary support belongs to the partnership firm.

The High Court of Andhra Pradesh held that to become a property of the firm, such property must have been brought into the stock of the firm by the partners originally, during the formation of the firm or was subsequently acquired by purchase or any other means, in the course of business of the firm.

 Dissolution of Firm:

Chapter 6 (Sections 39 to 55) of the Indian Partnership Act, 1932 talks about the dissolution of a firm.

When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.” It implies the complete breakdown of the relation of partnership between all the partners.

In such a situation, the business of the firm is discontinued, its assets are realized, the liabilities are paid off and the surplus is distributed among the partners according to their rights.

A firm may be dissolved in the following ways:

●       By agreement (Section 40);

●   Compulsory dissolution(Section 41);

●       On happening of certain contingencies (Section 42);

●       By notice (Section 43);

●       By the court (Section 44).

According to Section 46, once the firm is dissolved, each partner or their  representative shall be entitled against the remaining partners for having the firm’s property to pay off the debts and liabilities of the firm. If there is any excess property, after the payment of debts and liabilities, then such property shall be distributed among the partners or their representatives, according to their respective rights in the firm.

According to Section 48(b)(iv), if there is any remaining assets even after applying the said assets in accordance with the provisions in clauses (i), (ii) & (iii) of Section 48(b), then such asset shall be distributed among the partners in the same proportion in which they were entitled to profit sharing.

According to Section49, Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in payment of the debts of the firm.

Section 55 talks about Sale of goodwill after dissolution. According to Section 14, the property of the firm also includes goodwill of the firm.

Clause (1) says, In settling the accounts of a firm after dissolution the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

Clause (2) talks about Right of buyer and seller of good will. It says, Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but subject to agreement between him and the buyer, he may not. a) use the firm name; b) Represent himself as carrying on the business of the firm or; c) Solicit the custom of persons who were dealing with the firm before its dissolution.

Clause (3) talks about Agreement in restraint of trade. It says, Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

 

 

Relevant Case Laws:

Addanki Narayanappa & Another v. Bhaskara Krishnappa & Ors (AIR 1959 AP 380)

The Supreme Court in the above case observed that the share of a partner in a partnership is nothing more than the partner’s proportion of the assets of the partnership after they have been turned into money and applied in the partnership’s liquidation, irrespective of the property consisting of land or otherwise. Also, upon the partnership’s dissolution, first the debts and liabilities should be met out of the property of the firm and thereafter the assets of the firm be applied in rateable payment to each partner of the firm of what is due to him on account of advances made by him as distinguished from the capital and secondly, on account of capital, the residue, if any, being divided ratably among all partners.

The Apex Court also pointed out that the Act presupposes total liquidation of the partnership’s assets before the settlement of accounts between the firm’s partners post-dissolution of the same.

Mohd. Laiquiddin & Anr. v. Kamala Devi Misra By LRs & Others (AIR 2010 SC 6933)

The Supreme Court held that under the Partnership Act, property which is brought into the partnership by partners upon formation or which may be acquired in course of firm’s business, becomes partnership property and a partner is subject to contract between partners, entitled to a share in the money representing the value in the property upon the dissolution of the firm.

 

S. V. Chandra Pandian and Ors v. S. V. Sivalinga Nadar & Ors (AIR 1993 SCC 589)

The Supreme Court held that post-dissolution of a firm each partner becomes entitled to his share in the profits of the firm post the settlement of accounts as per Section 48 of the Indian Partnership Act, 1932. The interest of the partners is in accordance with the proportion of their share in the firm.

●        The Supreme Court in such cases has further held that the entire property of the firm shall become the firm’s property and any individual partner shall only be entitled to his share of profits if any accruing to the firm from the realization of the property and post-dissolution of the firm to a share in the money representing the property’s value.

●     Clearly, the application of this principle implies that the property of a firm would be movable property, irrespective of whether it was immovable originally or otherwise, for the distribution among the partners. The same cannot be said to be an immovable property for purposes of dissolution between the respective partners.

●     Post-dissolution of the firm and dissolution of the property, the immovable property belonging to the firm before the dissolution becomes “a movable asset” in the hands of the partners inter se, who have their rights in terms of Section 48 of the Indian Partnership Act.

●     The property’s value must be assessed by a technical expert and partners are according to Sections 46 to 49, entitled for appropriate adjustment of their shares from the amount according to their share they held in the firm before the dissolution.

● Consequently, the question regarding the status of the firm property post-dissolution may be answered in the following way:

a.    Post-dissolution

b.    All properties of a partnership are to be converted into money, and

c. Therefore, any immovable property which belonged to the undissolved firm loses such ‘immovable’ character. Such properties have a status of ‘movable property’ post-dissolution, from which the respective shares of the partners must go to them.

 

Conclusion:

The partners shall have interests over the property and profits of a firm after dissolution. Provided that such interest shall only be available to them, on the remaining property, after the payment of all the debts and liabilities of the firm.

 

References:

The Partnership Act, 1932

https://indiankanoon.org

http://www.legalservicesindia.com

https://blog.ipleaders.in/