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Court rules on automatic dissolution of partnership on death of one partner - International Law Office

International Law Office

Litigation - India

Court rules on automatic dissolution of partnership on death of one partner

February 01 2011

Introduction
Facts
Key issues
Decision
Comment


Introduction

In a landmark judgment, in Mohd Laiquiddin v Kamala Devi Misra (deceased) by LRs,(1) the Supreme Court has ruled that on the death of a partner of a firm comprised of only two partners, the firm is dissolved automatically; this is notwithstanding any clause to the contrary in the partnership deed. The court found that Section 4 of the 1932 Partnership Act defines a 'partnership' as a contract between more than one person (since it uses the term 'persons'). Therefore, if in a firm comprised of only two persons as partners one dies, the contract comes to an end. There cannot be any contract unilaterally without acceptance by the other partner.

Facts

In the present case, land belonging to the respondent (Kamala Devi Misra, the original plaintiff) was agreed to be used by Shri Jai Narayan Mishra (the original defendant, since deceased). The land was to be used for the construction of a cinema. This arrangement was entered into by the execution of a partnership deed on June 26 1977. In the partnership deed it was agreed that the original plaintiff's share would be two annas of every rupee in profit and a guaranteed minimum profit of Rs2,000 per month. The partnership was to continue for a period of 42 years and could be extended for a further 20 years at the option of the original defendant. Moreover, a clause in the partnership deed specifically provided that the death of any of the partners would not result in dissolution of the partnership.

A civil suit was filed, wherein the plaintiff alleged that the defendant had mismanaged the business of the firm and manipulated the accounts. There was mutual irretrievable distrust between the plaintiff and the defendant. This distrust reached such proportions that the plaintiff did not want to continue as a partner in the firm. The defendant filed objections and insisted on the continuation of the partnership. Meanwhile, on May 17 1996 the original plaintiff died.

The trial court held that the partnership firm was deemed to be dissolved due to the death of the original plaintiff. The first appellate court held that since there were only two partners in the firm, and one of the partners had died, there was no scope and possibility to continue the firm. In the second appeal, the High Court of Hyderabad considered a series of issues.

Wtih regard to whether the partnership firm stood dissolved by virtue of Section 42(c) of the act(2) on account of the death of the plaintiff, the High Court relied on the decisions in CIT v Suraj Bhan Omprakash,(3) and Parvathammal v CIT,(4) and held that the firm stood dissolved on the death of one of the partners, in spite of an agreement for its continuance for 42 years notwithstanding the death of either partner.

On the death of the original plaintiff and the original defendant, the legal representatives approached the court under Article 136 of the Indian Constitution.

Key issues

The key issues before the Supreme Court were:

  • whether the death of a partner resulted in the dissolution of the firm when agreement to the contrary exists under the provisions of Section 42(c) of the act;(5) and
  • whether the termination of the partnership contract would mean that the legal representatives would be under a duty to continue the same or enter into a fresh partnership.

Decision

Section 4 of the act defines 'partnership' as: "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."

Dissolution of a partnership firm on account of death of one of the partners is subject to the contract entered into by the parties.

The clause of the partnership deed clearly stated that the death of any partner would not have the effect of dissolving the firm. However, in the facts and circumstances of this case, it was held that to give absolute effect to the same was not possible.

Thus, the legal representative of the deceased partner would be under no duty to enter into a fresh deed of partnership; nor was it precluded from claiming benefits if it denied entering into a fresh partnership agreement.

The court relied on its earlier ruling (Parvathammal v CIT)(6) that in a firm consisting of two partners, upon the death of one of the partners, the firm automatically dissolved. It observed that:

"A partnership normally dissolves on the death of the partner unless there was an agreement in the original partnership deed. Even assuming that there was such an agreement in a partnership consisting of two partners on the death of one of them the partnership automatically comes to an end and there is no partnership which survives and into which a third party can be introduced. Partnership was not a matter of heritable status but purely one of contract."

The Supreme Court observed that when there are only two partners in a firm, on the death of one the firm is deemed to be dissolved despite the existence of any clause which says otherwise. A partnership is a contract between the partners; there cannot be any contract unilaterally without acceptance by the other partner. If the legal representatives of the original plaintiff are not interested in continuing the firm or in constituting a new firm, they cannot be asked to continue the partnership. There is no legal obligation on them to do so, as a partnership is not a matter of heritable status, but purely one of contract, which is also clear from the provision of Section 5 of the act.(7) Therefore, the firm dissolved by virtue of the death of one of the partners.

Comment

This decision confirms that, although the intention of the legislature was to confine matters pertaining to the constitution of a partnership to the contract or deed entered into between the parties, no provision or clause of a partnership deed can override and/or contravene the act.

Clause 22 of the partnership deed between the original plaintiff and original defendant stated that: "the partnership shall be in force for a period of 42 years certain from this date and the death of any partner shall not have the effect of dissolving the firm." However, in the facts and circumstances of the case, it was not possible to give absolute effect to this clause. For absolute effect, the clause would have had to have included a corollary stating that in the event of the death of any partner, the old partnership deed would stand dissolved and a new partnership would be entered into between nominated legal representatives of the deceased partner and the surviving partner, and the new deed would continue on the terms and conditions laid down in the former/original deed.(8)

Another possible way out of such a quagmire is to have at least three partners in a partnership. This way, the parties can continue the partnership without any risk of dissolution on account of a single partner's death.

The final word is that a partnership firm comprised of two partners will automatically dissolve on the death of one of them, notwithstanding any contract to the contrary. If the courts were to enforce strictly the terms of the partnership deed between the parties in the present case, one may assume an implied contract, during the execution of the partnership deed. According to the law, this will create a legal fiction, since this will lead to an assumption that the legal representative of a deceased partner automatically becomes a partner. In any event, this judgment is logical, as one cannot press legal heirs to become partners in a firm, since the very basis of a valid contract is free consent.

For further information on this topic please contact Bishwajit Dubey or Anushree Tripathi at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (bishwajit.dubey@amarchand.com or anushree.tripathi@amarchand.com).

Endnotes

(1) (2010) 2 SCC 407.

(2) Section 42 of the act provides as follows:

"Dissolution on the happening of certain contingencies.
Subject to contract between the partners a firm is dissolved:

  • if constituted for a fixed term, by the expiry of the term;
  • if constituted to carry out one or more adventures or undertakings, by the completion thereof;
  • by the death of a partner; and
  • by the adjudication of a partner as an insolvent."

(3) 1986 ITR 833.

(4) 1987 ITR 161.

(5) Vide supra note (2).

(6) 1987 ITR 161 (paras 10, 11, 12).

(7) Section 5 - Partnership not created by status - the relation of partnership arises from contract and not from status.

(8) Reference may be had to CIT, MP v Seth Govindram Sugar Mills [1965] 3 SCR 488 wherein it has been observed by the Supreme Court that:

"Section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of the firm dies, the firm automatically comes to an end and, there-after there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying Clause (c) of S. 42 to such a situation. It may be that pursuant to the wishes or the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership."


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