The Supreme Court has clarified that in a partnership at will, dissolved under Section 43 of the Indian Partnership Act, 1932, the date of dissolution governs only the ascertainment of profits and losses, while the valuation of immovable assets for distribution must reflect the value on the date of actual assessment by the Commissioner. The Court said that a partnership at will stands dissolved from the date mentioned in the written notice of dissolution, or where no date is specified, from the date of communication of the notice, and the reconstituted firm has no right to retain the assets of the dissolved firm unless it purchases them from the erstwhile partnership.
The Court also clarified that the date of dissolution specified in the preliminary decree is relevant only for ascertaining the profits and losses of the firm up to that date and has no bearing on the right of the partners to receive the value of their share in the residue of the assets after liquidation.
Essentially, the Apex Court ruled that upon dissolution, every partner is entitled under Section 46 read with Section 48 of the Indian Partnership Act, 1932, to have the property of the firm applied in payment of debts and liabilities, and the surplus distributed among the partners in their profit-sharing ratio after the assets are converted into money. Accordingly, restricting the outgoing partner’s share to the value of the immovable property prevailing as on the date of dissolution would be inequitable, grossly unfair, and wholly impractical, particularly where the reconstituted firm has continued to retain and use the partnership assets without purchasing them from the dissolved firm.
A Two-Judge Bench comprising Justice Ujjal Bhuyan and Justice Vipul M. Pancholi noted that the partnership was at will under Section 7 of the Indian Partnership Act, 1932, since no provision was made for its duration or determination. Under Section 43, a partnership at will can be dissolved by any partner giving written notice of his intention to dissolve the firm, and the firm stands dissolved from the date mentioned in the notice or, if no date is mentioned, from the date of communication of the notice. Accordingly, the firm stood dissolved on Oct 18, 1983, upon receipt of the plaintiff’s notice.
The Court examined Sections 46, 47 and 48 of the Partnership Act. Section 46 provides that on dissolution, every partner is entitled to have the property of the firm applied in payment of the firm’s debts and liabilities, and the surplus distributed among the partners according to their rights. Section 48 prescribes the mode of settlement of accounts, including payment of debts to third parties, repayment of advances and capital, and division of the residue among partners in their profit-sharing ratio. The Court emphasised that a partnership firm is not a separate legal entity, and the partnership property belongs to all the partners in proportion to their shares.
The Court held that the date Oct 18, 1983, mentioned in the modified preliminary decree was relevant only for ascertaining the profits and losses of the firm up to the date of dissolution and had no relevance to the right of the partners to receive the value of their share in the residue of the assets. The right of each partner on dissolution is twofold: first, to settle accounts as on the date of dissolution, and second, to share the residue in the assets of the partnership following liquidation after satisfying the liabilities under Section 48. Liquidation of the assets is a necessary step towards payment of the shares of each partner.
The Court further observed that the reconstituted firm had no right to retain the assets of the dissolved firm unless all partners agreed to settle accounts and pay the outgoing partner his share in the value of the assets. The new partnership could have retained the land only by purchasing it from the erstwhile partnership, which was not done. Therefore, retention of the land by the new partnership was illegal. If the property were to be sold today at the value prevailing as on Oct 18, 1983, it would cause serious prejudice to the plaintiff and would be grossly unfair and wholly impractical.
Briefly, in 1964, five persons came together to form a partnership firm called M/s Viraj Constructions, which carried out construction work for the Railways. The partnership was at will, meaning there was no fixed duration. In 1968, a new partner was admitted, and a fresh partnership deed was executed, fixing the profit-sharing ratio between the six partners. Kasireddy Lakshmi Narayana Reddy, father of the first respondent, held a 25% share in the firm.
In 1970, Kasireddy Lakshmi Narayana Reddy retired from the firm and a promissory note for Rs. 22,500 was executed in his favour towards his share. When payment was not made, he filed a suit on the promissory note in 1975, but the same was dismissed in 1979 on the ground that the firm had not been dissolved and he continued as a partner. The first appeal against this dismissal was withdrawn in 1983.
On Oct 15, 1983, Kasireddy Lakshmi Narayana Reddy sent a legal notice to all partners expressing his inability to continue and calling for dissolution of the firm. He then sought rendition of accounts and his share in the profits and properties of the firm. The trial court passed a preliminary decree on Nov 06, 1995, holding that the plaintiff was entitled to a 25% share and directing the defendants to render accounts up to March 31, 1970. In appeal, the High Court modified the decree on March 28, 2001, to extend the rendition of accounts up to Oct 18, 1983, the date of dissolution.
Thereafter, the plaintiff sought appointment of a commissioner to take possession of the partnership assets, including a land parcel at Begumpet, Hyderabad. The trial court initially appointed a commissioner in 2002, but on a review, application recalled the order in 2004 holding that the plaintiff was only entitled to his share in profits and not in the property. The High Court set aside the review order on Jan 30, 2009, and held that the plaintiff was entitled to 25% of the value of the immovable property after deducting liabilities, and that the property could be sold if the other partners did not pay the plaintiff’s share.
When the defendants did not comply, the plaintiff filed an application for sale of the property, which was dismissed by the trial court on April 28, 2010, holding that the plaintiff was only entitled to the value of the assets as on Oct 18, 1983. The original plaintiff died during the proceedings, and his legal representative, the first respondent, filed a civil revision before the High Court. By the impugned judgment dated April 09, 2012, the High Court allowed the revision and directed that the Commissioner sell the property through public auction and deposit the sale proceeds before the trial court, with the plaintiff receiving 25% of the sale proceeds after discharging the firm’s liabilities.
