India: Safeguard Against Dissolution Of Partnership Upon Death Of A Partner

"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. In other words, two or more persons coming together to form a business and divide the profits in an agreed ratio, form a Partnership Firm. The intent of such persons to, in fact work together, remains the underlying requirement for any such partnership firm to meaningfully strive. This reasoning is further strengthened by the general duties of the partners. Partners are bound to carry on the business of the firm to greatest common advantage, i.e., to be just and faithful to each other. Moreover, the duties of partners even transcends to the heirs or legal representatives of their deceased erstwhile partner.¹

Once a partnership firm is in existence, the introduction of a new partner into the firm cannot be done without the consent of all the existing partners.² At the same time, under the provisions of the Partnership Act, 1932 (hereinafter the 'Act'), a partnership firm would dissolve on happening of certain contingencies, as provided under Section(s) 42(c) and (d) of the Act. One of such contingency is on the death of a partner.³ However, the mandates in the aforesaid provisions are subject to the contract between the partners, and therefore, can be varied.

Being subject to contract between the partners, a partnership deed can provide for a safeguard against the dissolution of the partnership on the happening of the said contingency. A clause in the partnership deed categorically stating that the death or insolvency shall not result the firm into dissolution, would provide for a safeguard against the dissolution of the partnership firm. However, it may be noted that this clause would not save the partnerships wherein there are only two partners.⁴

Such understanding between the partners to save the partnership firm from dissolution upon death of a partner can be further qualified by choosing a nominated successor or the heirs or legal representatives of the deceased partner. However, a logical fallacy develops in the interplay between Sections 31(1) and 42(c) of the Act, wherein a new partner cannot be introduced to the partnership without the consent of all the existing partners, and dissolution caused by the death of a partner is safeguarded by nomination of an incoming partner in the partnership deed itself.

It is a juxtaposition that Section 31 of the Act provides one mode of reconstitution of a firm, namely, by the introduction of a new partner with the consent of the existing partners unless there is a contract between the partners to the contrary as a result of which a new partner may be added without the consent of all the existing partners. To the extent of a contract between the partners safeguarding the dissolution of the partnership against the death of a partner, Section 31 of the Act, falls in line with Section 42 thereof, as the said Section 31 only recognizes the validity of a contract between the partners to introduce a third party without the consent of all the existing partners, since it presupposes the subsistence of a partnership.⁵

In line with the aforesaid nomination of a partner, the deceased partner can also exercise his right to devolve his partnership share and interest by testamentary succession, therefore, by nominating a successor. The power to appoint a partner in the firm requires a specific direction in that behalf, either in express terms or, at any rate, by a specific disposal of the deceased partner's interest in the firm.⁶ Pertinently, in cases wherein the partnership deed provides for a safeguard against dissolution on the death of a partner by providing for induction of the heir or legal representative of the deceased partner, the same would be a specific direction in express terms. Moreover, a testamentary instrument executed by the deceased partner would also specifically dispose his interests/ share in the partnership. Notably, this specific bequest by testamentary disposition can be distinguished from the transfer of partnership interest under Section 29 of the Act, as the transfer of partnership interest ('either absolute or by mortgage, or, by the creation of a charge on such interest'), is made during the lifetime of such transferor.

Despite there being clear indication towards the sustenance of a partnership in terms of the partnership deed safeguarding against the dissolution under Section 42(c) of the Act, and any bequest or nomination of a successor by the deceased partner in certain cases, the underlying requirement of any partnership to function remains, i.e., the willingness of partners to work together. Here is when, the law finds itself in disagreement with the pragmatic enforceability. The argument would subsist that the surviving partners would not want to work with the nominated or incoming succeeding partner. It is the willingness of the partners to work with the nominated partner and adhere to the partnership deed, the basis of any such safeguard against dissolution under Section 42. The prerequisite consent of the partners given in the form of such safeguards, seldom seems to achieve the intended result, as the enforceability of such covenants has to be done by the partners first. Therefore, despite the Courts stepping in, meaningful enforceability of the rights of incoming succeeding partners remain.

Similar situation arose in M.E. Narasimhan v. Messrs. Sri Balaji Chit and Financiers and Ors.⁷, wherein the Hon'ble Madras High Court directed the defendant to include the plaintiff as a partner in Sri Balaji Chit & Financiers within three months in the place of the deceased partner. However, the said judgement is pending further consideration before the Hon'ble Supreme Court of India in SLP(C) No. 20761 of 2019.

In view of the above, the safeguards against dissolution of a partnership firm on death of a partner are yet to be conclusively examined by the Courts on the anvil of enforceability, so that such rights do not result into meaningful futility.

Footnotes

1. S. 9, The Partnership Act, 1932.

2. S. 31(1), The Partnership Act, 1932.

3. S. 42, The Partnership Act, 1932.

4. CIT v. Seth Govindram Sugar Mills (1965) 57 ITR 510' (SC).

5. supra

6. Bachubai and Ors. v. Shamji Jadowji, ILR1885 9 Bom 536 | Beamish v. Bean ish Ir. R 4 Eq. 120.

7. S.A.No.1783 of 2001, pronounced on 22.10.2018.

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