39. Dissolution of a firm:
The dissolution of partnership between all the partners of a firm is called the "dissolution of the firm".

This Chapter contains Sections - 39 to 55, which lay down the rules regulating the dissolution of a firm. S.39 lays down that the dissolution of partnership between all the partners of a firm is called the 'dissolution of the firm'.

The various way of dissolution of Firm- The dissolution of a firm may take place in one of the following five ways.
1. As a result of an agreement between all the partners: S.40.

2. Compulsory dissolution, i.e.,
(a) By the adjudication of all the partners, or of all the partners but one, as insolvent: S.41 (a). (b) By the business of the firm becoming unlawful: S.41(b).

3. Subject to agreement between the partners, on the happening of certain contingencies, such as-
(i) efflux of time;
(ii) completion of the adventure for which it was entered into;
(iii) death of a partner; and
(iv) insolvency of a partner: S.42.

4. By a partner giving notice of his intention to dissolve the firm, in case of a partnership at will: S.43.

5. By intervention of the Court in case of
(i) a partner becoming of unsound mind;
(ii) permanent incapacity of a partner;
(iii) misconduct of a partner affecting the business of the firm;
(iv) willful or persistent breaches of agreement by a partner;
(v) transfer or sale of the whole interest of a partner;
(vi) improbability of the business being carded on save at a loss;
(vii) the Court being satisfied on any other equitable ground that the firm should be dissolved: S.44.
The above can be summarised in a tabular form thus-

40. Dissolution by agreement:
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

A firm may be dissolved.
(a) with the consent of all the partners or
(b) in accordance with a contract between the parties.

Clause (a) is an application of the general rule of law which lays clown that a contract can be discharged by mutual agreement.

Clause (b) covers a case where dissolution occurs in pursuance of a contract previously made, the most common example being that of a clause in the partnership deed itself providing for dissolution in certain events.

Dissolution of partnership- Partnership deed containing contract for the determination of partnership. Not a partnership-at-will. Dissolution of such partnership, held, would be governed by 8.40 and provisions of S.43 will not apply. In courts opinion section-43 has no application in the case where the old partnership was not a partnership at will as defined in S.7 of the partnership Act, as there was a contract under the old deed of partnership for the determination of the partnership, though there was no contract regarding duration of the same. The Court was of the view that S.40 which provides for dissolution of partnership with the consent of all the partners, was applicable to the present case. (Eastend Agencies v Mafizuddin PLD-1970 Dacca, 155).

41. Compulsory dissolution:
A firm is dissolved -
(a) by the adjudication of all the partners or of all the partners but one as insolvent, or
(b) by the happening of any event which makes it unlawful for the business of the firm to be carded on or for the partners to carry it on in partnership:
Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

Case - A and 10 others form a partnership and carry on a particular trade later, the legislature passes an act which makes it un-lawful for more than 10 persons to carry on that trade in partnership. The partnership is dissolved.
X domiciled in England carries on business in partnership with Y. Domiciled in Germany, war breaks out between England and Germany. The partnership between A and B is dissolved. (Griswold V Waddington, (1818) Supreme Court. N.Y.15 Johns 57).

42. Dissolution on the happening of certain contingencies:
Subject to contract between the partners a firm is dissolved-
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.

Dissolution of Firm. Activities for which firm constituted coming to an end, firm can not function and stands dissolved on its own death. Contention that it would be very harsh if a firm having run for many years could be dissolved without even formality of notice held, without merit - Hussain Bhai V Muhammad Iqbal and 2 others. PLD 1976 Quetta 9.

Time limit for suit after dissolution. Suit for accounts and share of profits of the dissolved partnership. Whether should be brought within three years of the date of dissolution. Held, Yes.- (Zainab Bai V Ibrahim (1981) 43 Tax 26 (H.C. Kar)).

43. Dissolution by notice of partnership at will:
(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

Dissolution deed stated a particular partner not to share profits, partnership came to an end. The mere fact that two persons decide or undertake to share the losses of a business would not convert them into partners or their association into a firm. Conversely if they agree to share profits but not the losses, the firm would nonetheless have been formed. The question of profits is a matter interse the partners. In the present case in the dissolution deed it was categorically stated that a particular partner would not be entitled to any profits. The partnership, therefore came to an end. (Muhammad Afzal Khan V Manzoor Ellahi - PLD- 1975 Lah 1276).

Receipt of Notice presumed. Dissolution of partnership at will, Retirement of partner can be effected by written notice to all other partners of intention to retire. Not necessary to send notice by registered post A.D., or to obtain receipt. Dissolution simpliciter of partnership also takes effect by notice in writing. All partners signatories to dissolution deed and such deed acknowledging receipt of notice. Notice presumed - PLD. 1975 Lah 1276).

Personality of original firm changed, even if business of firm continued. Whenever the constitution of a firm changes by the addition of new members as partners, there is a break in the identity of the firm whether or not the name continues to be the same. After a change in the constitution of the firm by the addition of new partners what formerly was the property of the old firm does not continue to be the property of the old firm. Such a new firm is an entirely different assessable entity, and as such not entitled to avail of the unabsorbed depreciation of the previous year which accrued to a different person - (Rivoli theatres V Commissioner of I.T.- 1971 SCMR 621).

44. Dissolution by the Court:
At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:-
(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by an other partner;
(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner.
(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;
(d) that a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provision of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, V of 1908 or has allowed it to be sold in the recovery of arrears of land-revenue or of any dues recoverable as arrears of land-revenue due by the partner,
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.

Section - 44 lays down the seven Important cases in which the Court can order dissolution of a firm, in consequence of a suit filed by a partner to this effect.

(a) under this clause a suit for dissolution becomes necessary to protect the interest both of the insane as well as the other partners.

(b) the incapacity mentioned in this clause may be due to illness, mental or physical. However, such illness should be of permanent nature. Thus, in one English case, it was held that the paralysis of a partner was not a ground of for dissolution of the firm, as the medical evidence showed that the attack of paralysis was only temporary (whitwell V Arthur, 35 Bear. 140)

(c) under this clause, moral turpitude of a partner would be a sufficient ground. Professional mis-conduct would also suffice. Thus, misapplication by a solicitor and adultery by a doctor have been held to be sufficient grounds.

Although it is no necessary that such misconduct should be connected with the business of the firm, it should be of such a nature that it would damage the business prospects of the firm. Thus, a Court conviction for travelling without a ticket. (Carmichael V Evans, (1904) 90 LT 573), or breach of trust (Essel V Hayward (1860 30 Beav. 130) have been held to be sufficient grounds.

However, mis-conduct in one’s private life may not be a sufficient ground. in Snow V Milford (1868 18 LT 142), a partner of a firm of bankers had committed adultery with several women in the city where the banking business was carried on, and his wife had also left him. When the other partners applied for dissolution on this ground, the Court dismissed the suit, Lord Romilly observing as follows-

"I am of the opinion that however much court may reprove the conduct of a man who is guilty of adultery, that is no reason for turning him out of a common trading partnership. In the case of bankers, how can the court say that a man's money is less safe because one of the partners commits adultery.

(d) under this clause it has been held that destroying old accounts books, preparing false balance sheets, and making false entries in books are sufficient grounds.

(f) the reason for the ground erisaged in this clause is that the motive of every partnership is the acquisition of gain if, therefore, the business can be continued only at a loss, it would be a good ground for the Court to dissolve such a partnership.

(g) under this clause all such grounds are covered as are rendering it just and equitable to dissolve any form.

Thus, if the substratum of the partnership is gone, or if there is a deadlock between the partners, the court may wind up the partnership on the ground that it is just and equitable to do so.

As regards the just and equitable clause, Lord Lindley has rightly remarked that the court ought not to fetter itself by any rigid rules in this regard. This clause can not be construed to be ejusdem generis (i.e. of the same type as) with the other six which precede it. In fact, an application of the ejusdem generis rule of construction would not leave any room for the clause to operate. However, the word "just and equitable" connote something more than mare inconvenient. A mere opinion of a judge that dissolution of a firm would, on the whole, be the best course for that firm, would not be enough.

The exercise of the power by the court under this clause is discretionary. However, this discretion is judicial discretion, and must be exercised with due regard to the circumstances and exigencies of the case. On the other hand, this discretion ought not to be crystallized by decisions laying down definite rules on the point. Rather, the court should have untrammeled discretion of deciding each case on its own merits.

45. Liability for acts of partners done after dissolution:
(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution:
Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done alter the date on which he ceases to be a partner.

(2) Notices under sub-section (1) may be given by any partner.

Sections 45 to 55 of the Act lays down the liabilities and rights of partners after dissolution of firm. They lays down the rules for the guidance of the partners.

Section - 45 speaks of a liability of a partner after dissolution. The principle on which this provision is based is that after dissolution of a firm, persons dealing with its partners are entitled to assume that they continue to be each others agents, until public notice is given of the dissolution. It is only fair and equitable that a secret dissolution should not be allowed to prejudice the rights of third parties who have continued to deal with the firm in ignorance of the dissolution, and upon the assumption that the relationship of partnership has continued.

Ex-parte Robinson (1883) 3 Dea & Ch 376.- A and B partners in trade agree to dissolve the partnership and execute a deed for that purpose, declaring the partnership dissolved as from January 1st, but do not discontinue the business of the firm or give notice of the dissolution. On February 1st. A endorses bill in the partnership name to C. Is the firm liable on this bill yes, the firm is liable v/s 45(1).

But the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner retires from the firm is not liable under this section for acts done after the date on which he ceases to be a partner.

Thus there are three cases where no notice of dissolution need be given, namely:-
(i) where a partner dies
(ii) where a partner is adjudicated insolvent
(iii) where a dormant partner (a partner who was not known to the third party to be a partner) retires.

Liability of partners for acts done after dissolution - A person dealing with firm notified of dissolution of partnership cannot take protection under S.45, unless objection taken there and then on receipt of notice. (Muhammad Afzal Khan V Manzoor Elahi - PLD 1975 Lah - 1276).

46. Right of partners to have business wound up after dissolution:
On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.

On the dissolution of a firm every partner is entitled to have the property of the firm and to have the surplus distributed among the partners (or their representatives) according to their rights.

Equitable lien of a partner.- In order to discharge himself from the responsibility to which a partner is subject, every partner has a right to have the property of the firm applied first in payment of the debts and liabilities of the firm, and in order to secure his proper share of the assets of the firm among the partners or their representatives, according to their rights. This right is called an equitable lien of a partner. Although it exists during the partnership, it is not so much in evidence during the continuance of a firm, but it comes into full play in the event of its dissolution.
Pollock defines equitable lien as a partner's "right to have a specific portion of property dealt with in particular way for the satisfaction of specific claims." It is thus distinct from a "possessory lien", which is a mere right to hold the goods of another man until he makes a certain payment, and which does not carry with it the right of dealing with the goods.

47. Continuing authority of partners for purposes of winding up:
After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:
Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.

Partnership subsists for winding up.- Dissolution of partnership on death of partner. Notwithstanding dissolution, surviving partner can withdraw deposit for purpose of winding up affairs of firm. Partnership, however, would subsist merely for purpose of winding up its business and adjusting rights of partners interse. Surviving partner seeking withdrawal of deposit from a Bank, not for winding up affairs of company but for his own sole proprietary use. Bank in circumstances, held, was justified in withholding payment till succession certificate was produced - (Abdul Rashid V Bank of Tokyo Ltd., PLD- 1974 Kar-411).

A partner is an agent of the firm for the purposes of the business of the firm. (S. 18). The general rule is that the agency of a partner is terminated by dissolution of the firm. But even after dissolution of the firm, it is necessary that someone should have authority to wind up the affairs of the firm. Hence S.47 provides that after the dissolution of a firm, the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary-

(1) to wind up the affairs of the firm, and
(2) to complete the transactions begun but unfinished at the time of dissolution, but not otherwise. Thus, after the dissolution of the firm, a partner has no authority to acknowledge a debt or to make a part payment, because it is not necessary for the winding- up.

It is to be noted however, that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent. But a person, who represents himself for knowingly suffers himself to be represented as the partner of an insolvent will be liable for the latter's act. (Proviso to S.47).

Woodbridge V Swann (1833) 4B & Ad. 633 - A and B are partners. A becomes bankrupt. B continues to carry on the trade of the firm and pays partnership money into a bank to current bills of the firm. A's trustee in Bankruptcy claims these moneys from the Banks. Here, the Bank is entitled to these moneys as against A's trustee in Bankruptcy.

48. Mode of steelement of accounts between partners:
In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:-

(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:-
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner ratably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner ratably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Mode of settling accounts and division of profits and lossess- Illustrations- 1. A and B were partners, the agreement between them being that the profits and losses of the business were to be shared equally. A died and on an account of the partnership being taken, it is found that he contributed pound 1929 to the total capital of the firm, and B contributed only pound 29. The assets amount to pound 1400. The loss to the firm - total capital pound 1929 + pound 29 = pound 1958 -pound 1400 = pound 558- loss to each partners = pound 279 B's contribution being only pound 29 will have to pay pound 250 - thus A will get pound 1400 + pound 250 = pound 1650.

2. A and B carry on business in partnership. The firm holds lease holds for the purposes of the business. A dies. Before file affairs of the firm are completely wound up the lease expires, and B renews it. Is the renewed lease a partnership property?

Ans.- A lease renewed by a surviving partner in the interval between dissolution and actual winding up ensures to the benefit of the partnership. Therefore, in the given problem, the renewed lease is partnership property (Clements V Hall (1857) 2 De to & J 173).

3. A, B and C were partners under an agreement under which they were to share equally in the profits and losses of the firm. In a suit between them for dissolution and accounts, it is ascertained that the contributions of A, B and C to the capital of the firm were Rs. 10,000/-, Rs. 5000/- and Rs. 1000/- respectively. The assets of the firm, after paying debts of the firm and advances made by the partners as distinguished from their contributions to the capital of the firm, are Rs.7000/- The deficiency of capital (which must be regarded as losses) being Rs.9000/- each partner has to contribute to the assets an equal share of the deficiency i.e. Rs.3000/- each. After this is done, the assets then available, viz., Rs.7000 + Rs.9000 = Rs.16000 will be distributed between the partners with the result that each partner will have suffered a loss of Rs.3,000/- In actual practice, it will not be necessary for A and B to pay Rs.3,000 each actually in cash, but the matter will be worked out on the basis of notional contributions so that C, whose contribution was Rs.l,000 only will have to pay Rs.2000 and out of the amount of Rs.7000 + Rs.2000 = Rs.9000, A will take Rs.7,000 and B Rs.2000.

4. Difficulty, however arises when the assets are insufficient to pay the partners, because a partner has become insolvent and nothing is recoverable from him. Thus in the above case, if the C is insolvent, and nothing is recoverable from him, the assets will be distributed as follows - A and B will have in the first place to contribute their shares of deficiency of capital i.e. Rs.3000 each. The assets then available Rs.7,000/- + Rs.3,000 + Rs.3,000 = Rs.13,000 will be distributed between A and Bin the proportion of their contribution to the capital i.e. in the proportion of 2 to 1. The ultimate result will be that A on the whole will have lost Rs.4,333-1/3 and Rs.3,666-2/3 and B Rs.3,666-2/3.

Advances made by partners beyond amount of capital.- Partners entitled to interest on advances made at rate prescribed by law and entitled to be reimbursed in that regard from the assets of the firm. Petitioners being creditors in respect of advances made by them, held, entitled to be re-imbursed in respect of them with usual interest. (Rustom F. Cowasjee and 5 others V Government of Pakistan, through Secretary, Ministry of Communication and another. PLD 1981 Lah. 1).

Determination of profits of partnership. Profits of a period of six years before filing of suit were determined from statement of accounts on record and profits which .had accrued during pendency of suit were also taken into account, till business of partnership was sealed. Capital of firm having been subscribed equally by predecessors of plaintiffs and defendant. Entitlement of profits would also be equal as between descendants of both the partners.- (1988 CLC 1882).

49. Payment of firm's debts and of separate debts:
Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.

When the partnership assets are not sufficient to pay of the joint debts of the firm, the creditors of the firm can have recourse to the partner's separate property only after his separate creditors have been paid. A partner is not entitled to insist that a creditor of the firm should proceed against the assets of the firm before proceeding against the partners individually. in order to discharge the joint debts of the firm after its dissolution, each partner has a lien over the partnership property.

A, B and C carrying on business in partnership, enter into a contract with D for the sale of 500 bales of cotton. By reason of their failure to perform the contract, they become liable to pay to D. Rs. 9000 as damages for the breach. Soon thereafter, A dies, and in consequence the partnership is dissolved. D, thereafter accepts Rs. 2000 from B and agrees not to hold him liable for the balance. Consider whether the estate of A and whether, C are liable to D and if so to what extent and whether there is any liability whatever outstanding so far as B is concerned.

Partnership debts are to be paid first out of profits, next out of capital and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. Therefore on the dissolution of the partnership, Rs. 9000 which is a partnership debt, ought to be paid according to the rules stated above. if there is no profit and also if them is no capital out of which the debt may be paid, then the partners, A, B and C become personally liable. On the death of a partner, his estate continues to be liable. The separate property of any partner is to be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm. Under Sec. 43 of the Contract Act, joint liability is considered as joint and several and the promisee may hold all or anyone of joint promisors liable. S. 44 of the said Act provides that a release of one of the joint promisors by the promisee does not discharge the other joint promisors. Therefore release of B of the balance does not discharge A's estate and C. Thus D may recover the balance of Rs. 7,000/= from any of them or both. As regards the liabilities of the partners inter-se sec. 13(2) of the Act provides that subject to Contract between the partners they shall contribute equally to the losses sustained by the firm, so B & C are separately liable to Rs. 3,000/-- each into A's estate. Again, release by D does not discharge B from liability (to contribute) to A's estate and C, who might have paid mere of their shares of loss. Thus B is liable to the extent of Rs. 1,000/=.

50. Personal profits earned after dissolution:
Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up:

Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.

Where a partner after dissolution and before the affairs of partnership are wound-up, derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay his share to the surviving partner or the representatives of the deceased partner. But if a partner carried on another business of a similar nature, this section would not apply.

Illustration.-
(1) A and B carry on business in partnership. The firm holds leasehold for the purposes of the business. A dies, Before the affairs of the firm are completely would up, the lease expires and B renews it. The renewed lease is partnership property. (Clements V Hall (1857) 2 De G & J. 173 = 119 R.R. 74 = 44 E.R. 954.
(2) A, B and C are partners. A agrees to take lease in his own name, but in fact for partnership purposes, and dies before the lease is executed. The representatives of A can not deal with the lease without the consent of B and C:- (Alder V Fouracre (1919) 3 Swanst. 489 = 19 R.R. 256 = 36 E.R. 947).

51. Return of premium on premature dissolution:
Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless -
(a) the dissolution is mainly due to his own misconduct, or
(b) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

Illustration.-
(1) A and B entered into partnership as solicitors for a term of seven years, A paying a premium of Pound 8001- to B, who, before entering into the partnership, knew that A was inexperienced and incompetent. After the expiration of two years, B complained that A's incompetence was injurious to the business, and called upon him to dissolve the partnership. A= thereupon files a suit praying for a dissolution and for a return of a proportionate part of the premium. A is entitled to the return of a part of premium proportionate to the un-expired portion of the term: (Atwood V Mande (1868) 3 ch. 369).

(2) A and B become partner for ten years. A paying B a premium of pound 1000. A quarrel occurs at !he end of the eight years, both parties being in wrong, and a dissolution is decreed. A is entitled to a return of pound 200 of the premium from B. (Peas V Hewitt (1862) 31 beav. 22).

52. Rights where partnership contract is rescinded for fraud or misrepresentation:
Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled -

(a) to a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him;
(b) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and
(c) to be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.

Partnership Contracts. A partnership contract is one which requires the utmost good faith and this duty extends to parsons negotiating for a partnership, but between whom no partnership as yet exist.

Where a partner has been induced to enter into a partnership by reason of fraud or mis-representation, such a contract is voidable at his option under Sec. 19 of the contract Act Rescission of a contract will not be refused even though the firm has been adjudged insolvent [(Adam V Newbigging, 13 A C 308 (322)].

53. Right to restrain from use of firm name or firm property:
Alter a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up:
Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.

Restraining use of firm name. Under This Section, The Prohibition is to the carrying on of a similar business in the firm name and not to the carrying on of a similar business by a partner in his own name. (AIR 1955 Mad 442).

54. Agreements in restraint of trade:
Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27 of the Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

Reasonable restrictions.- Whether the restrictions are reasonable will depend upon the facts of each case. The restrictions should afford a fair protection to the interest of the party concerned and not be so large as to interfer with the interest of the public.

Restrictions may be with-regard to lime and place. The degree of protection may vary in different cases depending upon the character and nature of business concerned.

A firm consisting of two partners was the selling agent of a mill. It is agreed that on the termination of the partnership neither partner is to take up the agency of the mill. Such a clause is in restraint of trade and the restriction un-exforceable. (Dera Shana v Laxminarian-a R. (1956).

55. Sale of goodwill after dissolution:
(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

(2) Rights of buyer and seller of goodwill: Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.

(3) Agreements in restraint of trade: Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, and, notwithstanding anything contained in section 27 of the Contract Act, 1872, IX of 1872 such agreement shall be valid if the restrictions imposed are reasonable.

This section lays down certain rules for settling accounts so far as the good will of the firm is concerned.

What is "Good will". Good will" is the benefit arising from a firm a firms business connection. It is defined by lord Eldon in Cruttwell V Lye, (1810 17 Ves 335) as "the probability that old customers will resort to the old place". But this definition is not complete. What "goodwill" means must depend on the character and nature of business to which it is attached. Goodwill is a commercial term signifying the value of business in the hands of a successor. It is something more than the mere chance or probability of old customers maintaining their connection, though this is material. It may be summed up as "Whole advantage, whatever it may be of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of many". Very often, it is the very life and sap of a business. In valuing the goodwill, the court should set such a value upon it as is existing on the day of the dissolution.

It has rightly been said that "Goodwill" is "a thing very easy to describe, but very difficult to define". The term "goodwill" is not defined in the Act. It may be described as the advantage which is acquired by a business, beyond the mere value of the capital, stock, fund or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers.

According to the Bombay High Court, the goodwill of a business is an intangible asset, being the whole advantage of the reputation and connections formed with the customers, together with the circumstances which make the connection durable. It is that component of the total value of that undertaking which is attributable to the ability of the concern to earn profit over course of years because of its reputation in location and other features.

What goodwill means must depend on the character and nature of the business to which it is attached it is composed of a variety of elements and is bound to differ in its composition in different trades and in different business in the same trade. One element may preponderate in one business and another in another business.

Goodwill may be personal or local. "Personal goodwill" is the advantage of the recommendation of the owner of a business and of the use of his name; "Local Goodwill" is merely the advantage which is attached to the premises and must be taken into account in calculating the value of such premises.

In C.I.T.V. BC Srinivasa Setty (1981) 128 ITR 294), the Supreme Court of India held that no business Commenced for the first time possesses any goodwill from the start. Goodwill is generated as the business is carried on and may be augmented by the passage of time. Explaining the term goodwill, the court observed as follows.

"Goodwill denotes the benefits arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different business in the same trade and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another, depending on changes in the reputation of the business. It is affected by every thing related to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on. the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition".

The goodwill of the business of a firm forms part of the property of the firm (Vide Section, 14) and therefore, section-55 lays down that subject to contract between the partners, in settling the accounts of a firm after dissolution, the goodwill is to be included in the assets of the firm, and it may be sold, either separately or along with other property of the firm.

Rights of the buyer of Goodwill. The purchaser of the goodwill of a partnership business has the following three rights.
1. He can use the firm name.
2. He can claim the benefit of any covenant by a partner not to carry on any competing business.
3. He can trade as his vendor's successor.