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Supreme Court: Partnership Firm Dissolves on the Retirement of One of the Only Two Partners

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The Delhi High Court on 26th May 2020, held that when there are only two partners and one has agreed to retire, then the retirement amounts to the dissolution of the firm. The bench of Justice N.V. Ramana, Justice Sanjiv Khanna And Justice Krishna Murari heard the appeal. 

Facts of the Case

On 2nd May 1978, four persons, including two brothers, Swaran Singh and Amar Singh, had constituted a partnership firm – Guru Nanak Industries. The execution of a new partnership deed took place on 6th May 1981, between Swaran Singh and Amar Singh as the other two partners had resigned. The share of Swaran Singh and Amar Singh was 60% and 40%. 

Background of the Case

On 29th March 1989, Guru Nanak Industries and Swaran Singh filed a civil suit against Amar Singh. The suit claimed that Amar Singh had retired from the partnership with effect from 24th August 1988. To clarify the same reliability was on two documents.

  • Firstly, a letter dated 24th August 1988
  • Secondly, a receipt dated 17th October 1988. 

Amar wrote a letter dated 24th August 1988 of which Swaran Singh was also a signatory, both in the capacity of partners. Amar Singh also claims forgery of the receipt dated 17th October 1988. Furthermore, he contends that he had never resigned. On 29th April 1989, Amar Singh filed a suit for dissolution of partnership and rendition of accounts. 

The trial court dismissed the suit filed by Amar Singh and partly decreed the suit filed by Guru Nanak Industries and Swaran Singh. The trial court relied upon the two documents provided. The court observed that there is a discrepancy in the two versions given by Amar Singh. The appellate court accepted the appeal preferred by Amar Singh first.

The appellate court observed that the receipt was manipulated. The letter supported the case of Amar Singh that he had not resigned as the letter described Amar Singh as a partner. Amar Singh was held to be entitled to a partition of movable and immovable property wherein Amar Singh, and Swaran Singh got 40% and 60% of the share. 

Observation of the Court

The supreme court said that they are not inclined to interfere with the findings recorded by the first appellate court. The court observed that the letter dated 24th August 1988, stating that they were partners of Guru Nanak Industries; included signatures of both Amar Singh and Swaran Singh. The court also reiterated that the manipulation of the receipt is precise. The court said that the last sentence does not gel with the first part of the receipt.

The primary claim of the appellants is that Amar Singh had resigned as a partner. Thus, the partnership deed gives him access to only the capital standing in his credit. The court rejected this argument as in the present case; there were only two partners. There is also overwhelming evidence on record that Amar Singh had not resigned as a partner. The court noted that there were mutual understanding and agreement that the partnership firm would be dissolved. 

The court observed the there is a clear distinction between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. On the retirement of the partner, the reconstituted firm continues, and the retiring partner is to be paid his dues according to Section 37 of the Partnership Act. On dissolution, accounts have to be settled and distributed as per the mode prescribed in Section 48 of the Partnership Act. 

The court relied on the case of Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others, (2003) 3 SCC 445. The case stated that when the partners agree to dissolve a partnership, it is a case of dissolution and not retirement. In the present case, there being only two partners, the partnership firm could not have continued to carry on business as the firm. The court placed reliance on Each F.D. Mehta v. Minoo F.D. Mehta, (1970) 2 SCC 724. It stated that a partnership firm must have at least two partners. When there are only two partners, and one has agreed to retire, then the retirement amounts to the dissolution of the firm. 

Court’s Decision

The court dismissed the appeal and upheld the judgment passed by the first appellate court. The counsels for the appellant expressed their desire to settle the matter. They prayed for four weeks. The court directed the parties to appear before the Supreme Court Mediation and Conciliation Centre for settlement. The settlement should be within three months. After which the matter would proceed before the trial court for the passing of the final decree. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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