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Consequences of dissolution

Dissolution of a firm does not by itself bring the partnership business to a close. It is the beginning of a long process to bring the firm to an end. During the long process of winding up of firm, there will be plenty of consequences which may be discussed as under:
  • Rights of a partner after dissolution of a firm
  • Liabilities of a partner after dissolution of a firm
  • Continuing authority of a partner for the purpose of winding up
  • Modes of settlement of accounts
  • Sale of goodwill after dissolution

Rights of Partners on dissolution of a Firm

  • Right to have a business wound up after dissolution: The term ‘winding up’ may be defined as putting an end to the affairs of the firm. It includes realisation of the assets of the firm and payment of its debts and liabilities out of the assets so realised. On the dissolution of the firm, each partner is entitled to the following rights in connection with the winding up of the firm (Sec. 46)
    • He is entitled to have the property of the firm utilised in payment of its debts and liabilities
    • He is entitled to have the surplus distributed among all the partners according to their share
  • Right to earn personal profits by using the firm’s name: Sometimes, on the dissolution of a firm, a partner who buys the goodwill of the firm may use this goodwill or firm name to make personal profits during the winding up of the firm.
  • Right to have the premium returned on premature dissolution of a firm: Sometimes, at the time of joining an established firm, a partner is required to pay a sum of money to the old partners as a premium for his admission in form of goodwill. When a partner had paid such goodwill to the other partners on his admission into the firm which had been created for a fixed period and the firm dissolves before the expiry of that fixed period, such a partner will be entitled to a proportionate return of this premium.
     
    However, in the following cases, he shall not be entitled to the refund of premium
    • When the dissolution is due to the death of a partner
    • When the dissolution is mainly due to the misconduct of the partner who had paid the premium
    • When the dissolution is in pursuance of an agreement which contains a provision for the non-refund of the premium
  • Rights when the partnership contract is rescinded for fraud or misrepresentation: Sometimes, a partner is induced to join the firm by fraud or misrepresentation by other partners. In such cases, he is entitled to put an end to the partnership agreement on discovering such fraud or misrepresentation.
     
    In addition to the other rights, he is also entitled to the following rights (Sec. 52)
  • Right of lien or retention of surplus: Sometimes a surplus of the firm’s asset is left after paying its debts. In such cases, he is entitled to retain the surplus for any sum paid by him for the purchase of a share in the firm, and also for the amount of capital contributed by him.
  • Right of subrogation: Sometimes a partner makes a payment towards the debts of the firm. In such cases, he is entitled to rank as a creditor of the firm in respect of such payments. This means that if he pays off any creditor of the firm out of his own pocket, he steps into the shoes of that creditor i.e. he becomes the creditor of the firm for that amount.
  • Right to be indemnified: He is entitled to recover indemnity (i.e. compensation) from the partner who is guilty of fraud or misrepresentation. He can recover the indemnity against all the debts of the firm.
  • Right to restrain partners from the use of firm name or firm property: After the dissolution of a firm, every partner has a right to restrain the other partners from carrying on a similar business in the firm name. This provision is contained in Sec. 53 of the Indian Partnership Act.
    • According to this section, after the dissolution of a firm, every partner has a right to restrain the other partners from carrying on a similar business in the firm’s name
    • A partner can also be restrained from using the property of the firm for his own benefit
    • However, a partner cannot be restrained from using the firm name for his own benefit, if he has bought the goodwill of the firm

Liabilities of a partner after dissolution of a firm

  • Liabilities for the acts done after dissolution: A public notice is necessary to terminate the liability of the partners. Even after dissolution of the firm, if some of the partners continue to do some ordinary business acts which would have been acts of the firm before dissolution, the firm will be liable to third parties for any such acts until a public notice is given in respect to the dissolution of the firm
  • Liability to share personal profit: A partnership may be dissolved by the death of a partner. In such a case, before the affairs of the firm are finally wound up, if the surviving partners make a transaction which brings him some profit by using the firm’s name or property, the general rule is that the profit so earned will have to be handed over to the firm.

Continuing authority of partners for winding up

On dissolution of the firm, the authority of the partners for the purpose of winding up the affairs of the business is not terminated. The partners continue to have the authority and obligation to complete the unfinished transactions and also the winding up procedure. It includes disposing of property, settling with debtor and creditors etc.

Mode of settlement of account

  • Payment of losses: If the assets of the firm are insufficient to discharge the debts and liabilities of the firm including deficiencies of capital, then it is a loss and such loss shall be paid in the following order:
    • The losses shall be paid out of profits
    • If profits are not sufficient, then the balance of losses shall be paid out of capital
    • If still some balance of loss remains, then it will be paid by the partners individually in the proportion in which they are entitled to share profits.
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  • Utilisation of assets: The assets of the firm, including any sums contributed by the partners to make up the deficiencies of capital shall be utilised in following manner:
    • It will be utilized to pay the debt of the firm
    • Then, if there is any surplus, it will be utilized to pay partners’ loan and advances to the firm other than the capital, proportionally
    • Then in case of surplus, it will be paid towards capital proportionally
    • Then, if surplus remains it will be divided among the partners in proportion to their share in the profits of the firm
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  • Sale of Goodwill: The term goodwill may be defined as the value of reputation of the business of a firm and it is an intangible asset. On the dissolution of a firm, the goodwill may be sold separately or along with the other properties of the firm. The seller of goodwill i.e. partners of the dissolved firm shall have a right to carry on a business competing with that of the buyer of the goodwill and may also advertise for the same.
     
    However, the interest of the buyer of the goodwill should also be protected. To protect the buyer’s interest, the Indian Partnership Act, imposes following restrictions on the seller of goodwill:
    • He cannot use the firm name
    • He cannot represent himself as carrying on the business of the firm
    • He cannot solicit the customers who were dealing with the firm before dissolution. In other words, he cannot approach those customers for the purpose of diverting them to his new business. However, he is at liberty to deal with those customers if they come to him of their own accord.
  • Public notice: A public notice is a method of a public proclamation (announcement) by any person to bring an important fact to the knowledge of the general public who may be interested in that information. A public notice has to be given in respect of partnership under the following circumstances
    • Retirement of partner
    • Dissolution of a firm
    • Minor’s decision not to be become partner on becoming a major
However, a partner is not required to give a public notice and will not be liable to third parties even without a public notice in case of
  • Death of a partner
  • Insolvency of a partner
  • Retirement of a dormant partner
The public notice can be given by a notice to the Registrar of Firms and by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates, has its place of business.




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