Chapter: 1.4 Dissolution of Firm of the Indian Partnership Act

Dissolution of Firm

In this unit Sections .39, 40, 43, 44, 53, 54 & 55 are relevant

Section 39 - dissolution of a firm

As per Section.39 "Dissolution of firm" means the dissolution of the partnership between all the partners of a firm.

Section 40 - Dissolution by agreement

As per Section 40, a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

Section 43 - Dissolution by notice, of partnership at will.

As per this section
(1) Where the partnership is at will, the firm may be dissolved by ally 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 mentioned, as from the date of the communication of the notice.

Section 44 - Dissolution by the court

At the suit of the partner, the Court may dissolve a firm of any of the following grounds, namely:
(a) That a partner has become of unsound mind, in which 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 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 partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or 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 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 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 the 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.

Section 53 - Right to restrain from use of firm name or firm property

After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on similar business in the firm name or from using any property of the firm for his own benefit, until the affairs of the firm have been completely wound up:

Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.

Section 54 - Agreements in restrain of trade

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within the 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.

Whether the restrictions are reasonable will depend on the facts of each case. The restrictions should afford a fair protection to the interest. of the party concerned and not be so large as to interface with the interest of the public.

Restriction may be with respect to time or place. The degree of protection may vary in different cases depending upon the character and nature of the business concerned.

Section 55

In this context Section 55 is reproduced as follows:

(a) Sale of goodwill after dissolution
In setting 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.

(b) Rights of buyer and seller of goodwill
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

I. Use the firm name.
II. Represent himself as carrying on the business of the firm, or
III. Solicit the custom of persons who were dealing with the firm before its dissolution.

(c) Agreements in restraint of trade

Any partner may, upon the sale of goodwill of a firm, make an agreement with 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, such agreement shall be valid if the restrictions imposed are reasonable.