Partnership Firm

Safeguard Against Dissolution of Partnership upon Death of a Partner

A partnership is described as a relationship between two or more people who have agreed to split the profits from a business operated by all of them working jointly or by any of them acting on their behalf. In order to ensure that each partner receives their fair share and is released from all legal obligations when a partnership firm dissolves, it is crucial to absorb the future of all contingencies that belonged to the firm.
When a partnership is formed through the mutual consent of the parties involved, the business is anticipated to be successful and last for a long time. However, partnerships frequently end for a variety of reasons, including a change in the profit-sharing formula, the admission of a new partner, the retirement or death of an existing partner, the insolvency of a partner, and others.

Indian Partnership Act, 1932

The Indian Partnership Act of 1932^[1] describes the prerequisites for forming a partnership and the procedures for dissolving it. It defines a partnership as a relationship between two or more people who have agreed to share the earnings of a business operated by all or by any of them acting for all.

Dissolution of Firm

Dissolution of the firm is the process through which all of the firm’s partners’ relationship ends. In accordance with Section 39 of the Indian Partnership Act, “the dissolution of the partnership between all partners of a firm is called the dissolution of a firm.” It suggests that every partnership relationship between the parties has completely broken down.

Understanding the distinction between “dissolution of partnership” and “dissolution of the firm” is crucial. While “dissolution of partnership” involves reconstructing the firm, “dissolution of the firm” refers to the firm’s eventual disappearance.

Safeguarding against Dissolution of Partnership upon Death of a Partner

A firm under the partnership is created when two or more people join together to start a business and divide the profits in accordance with a predetermined ratio. The fundamental prerequisite for any such partnership firm to endeavour meaningfully is the intention to operate together. Partners must do business for the company’s benefit, which means they must act sincerely towards one another. Additionally, a partner’s obligations extend to the heirs or any legal representatives of a deceased ex-partner.

​​Once a partnership business is established, adding a new partner is not permitted without the approval of all existing partners. In addition, as stated in Sections 42(c) of the Partnership Act of 1932, a partnership firm would dissolve upon the occurrence of specific situations. One such possibility is the death of the partner. However, the mandates under the aforementioned clauses are governed by the contract between the parties and are susceptible to change.

A partnership deed, which is subject to agreement between the partners, may include a provision to prevent the dissolution of the partnership in the event of the aforementioned contingency. The partnership firm would be protected against dissolution by a provision in the partnership deed that expressly states that death or insolvency will not cause the firm to dissolve. However, it should be highlighted that this condition would not protect partnerships with only two partners.

Choosing a designated successor or the heirs or legal representatives of the deceased partner might further qualify this agreement between the partners to prevent the partnership firm from dissolving upon the death of a partner. The interaction of Sections 31(1) and 42(c) of the Companies Act, however, leads to a logical fallacy whereby a new partner cannot be added to the partnership without the approval of all the current partners and dissolution brought on by a partner’s death is protected by the nomination of an incoming partner in the partnership deed itself.

A new partner must be added to a firm with the consent of the existing partners unless there is a contract between the partners to the contrary, in which case a new partner may be added without the consent of all the existing partners. It is an exciting contrast provided by section 31 of the Act. Since section 31 of the Act only recognises the validity of a contract between the partners to introduce a third party without the consent of all the existing partners, it is consistent with section 42 of the Act insofar as a contract between the partners protecting the dissolution of the partnership firm against the death of a partner.

In addition to the nomination, as mentioned above, of a partner, the deceased partner may also exercise his right to devolve his partnership interest and share through testamentary succession by designating a successor. The ability to name a partner in the company requires a particular directive in that direction, either in plain terms or, at any rate, by a precise disposition of the deceased partner’s stake in the company. 

Relevantly, the same would be an express directive in circumstances where the partnership deed allows for the induction of the heir or legal representative of the dead partner as a safeguard against dissolution upon the death of a partner. Additionally, a testamentary document signed by the late partner would expressly dispose of his interests or participation in the partnership. 

Although there are clear indications towards the sustenance of a partnership in terms of the partnership deed protecting against the dissolution as per Section 42(c) of the Act and nomination of a successor or any bequest by the deceased partner in certain circumstances, the fundamental requirement for any partnership to function remains the partners’ willingness to cooperate.The law now finds itself in conflict with practical enforceability. The surviving partners would maintain that they would not wish to collaborate with the proposed or incoming succeeding partner. Any defence against dissolution under Section 42 is based on the partners’ desire to cooperate with the designated partner and uphold the partnership agreement. 

The prerequisite permission of the partners expressed in the form of such protections rarely accomplishes the desired outcome because the partners must first make the covenants enforceable. Because of this, the rights of new succeeding partners are nonetheless meaningfully enforceable despite the Courts’ intervention.

Case Laws

According to a plain interpretation of Section 42 (c) of the Indian Partnership Act, 1932, a firm is dissolved by the death of a partner, barring any contract to the contrary. Even if there is a contract to the contrary, if there are only two partners in the firm, a partner’s death causes the dissolution of the partnership. In Mohd Laiquiddin v. Kamala Devi Misra (dead), represented by LRs[2], the Supreme Court made the observation that when there are only two partners in a firm, the firm is presumed to be dissolved upon the death of one partner regardless of the existence of any clause which states otherwise. 

The original plaintiff’s legal representatives cannot be asked to maintain the partnership if they are not interested in doing so or creating a new business. They are not required to do so since, as Section 5 of the Act makes clear, a partnership is only a question of contract and not of a heritable status. As a result, the death of one of the partners caused the firm to collapse.

The Hon’ble Madras High Court ordered the defendant to add the plaintiff as a partner in Sri Balaji Chit & Financiers in the place of the deceased partner within three months in M.E. Narasimhan v. Messrs. Sri Balaji Chit and Financiers and Ors.7, which had a similar situation. The Hon. Supreme Court of India is still debating the decision as mentioned above in SLP(C) No. 20761 of 2019.

In view of the above, the courts have not yet thoroughly investigated the safeguards against the dissolution of a partnership business upon the death of a partner on the fulcrum of enforceability, ensuring that such rights do not lead to meaningful futility.

Conclusion

According to established legal precedent, section 42 of the Indian Partnership Act typically causes the partnership firm to dissolve itself upon the death of a partner. The sole exception is if the partnership agreement states that the business will not dissolve upon the death of a partner. When a partnership firm dissolves, there are many issues that must be resolved, including the division of assets, the partners’ post-dissolution rights, and the partners’ obligations. All of these are covered by the Indian Partnership Act of 1932. 

Read our Article: Dissolution of Partnership Firm as per Companies Act, 2013