Registration of Firms | Law of Contracts - CLAT PG PDF Download

 Continuing Liability for Acts of Partners Done After Dissolution (S.45) 

• This section states that, even after the dissolution of a partnership, partners remain liable to third parties for actions taken by them unless a public notice of dissolution is issued.
• The provision highlights the importance of public notice in terminating future liability in cases of dissolution, retirement, or expulsion.

Continuing Authority of Partners for Winding Up (S.47) 

• After a firm is dissolved, the authority of each partner to bind the firm and their mutual rights and obligations continue to exist as necessary for winding up the firm’s affairs and completing unfinished transactions.
• However, the firm is not bound by the actions of a partner who has been declared insolvent.
• This does not affect the liability of anyone who represents themselves as a partner of the insolvent after the adjudication.

 Mode of Settlement of Accounts Between Partners (S.48) 

• When settling accounts after the dissolution of a firm, certain rules apply unless the partners agree otherwise.
• If the assets are insufficient to repay each partner their capital in full after paying off debts to third parties and repaying advances made by partners, any deficiencies must be shared by the partners in the same proportion as profits would have been divided.
• The firm’s assets should be applied in the following order:
• Payment of joint debts to third parties.
• Repayment of advances made by each partner, distinct from capital contributions.
• Payment to each partner of what is due from the firm in respect of capital.

 Nowell v. Nowell Case 

• In the case of  Nowell v. Nowell  , partners A and B agreed to share profits and losses equally.
• Upon dissolution, it was discovered that A had contributed  Rs. 1900  more in capital than B, while the net assets amounted to only  Rs. 1400  .
• This resulted in a capital deficiency of  Rs. 500  .
• According to subsection (a), both partners must contribute to the deficiency in the same proportion as they agreed to share profits, which is equally.
• Therefore, B is required to pay A a sum of  Rs. 250  .

 Payment of Firm Debts and Separate Debts (S.49) 

• When there are joint debts owed by the firm and separate debts owed by any partner, the firm’s property should first be used to pay the firm’s debts.
• If there is any surplus, it should be applied to pay each partner’s separate debts or distributed to them.
• Each partner’s separate property should first be used to pay their separate debts, and any surplus should be used to pay the firm’s debts.

 Treatment of Loss Arising Due to Insolvency of a Partner 

 Concept of Insolvency in Partnership 

• A partner is considered insolvent when their Capital Account shows a debit balance  after all adjustments  , such as profit or loss on realization and receipts from their private estate (if any).
• The  private estate  of a partner is used first to settle their private debts. Any surplus from the private estate is then used to pay off the firm's debts.
• If an insolvent partner cannot cover the debit balance in their Capital Account with cash, the  unrecovered debit balance  is termed a loss due to the partner's insolvency.
• The key question is whether this loss should be treated as an  ordinary loss  (shared by partners according to their profit-sharing ratio) or an  extraordinary loss  .

 Decision in Garner v. Murray 

• In the case of Garner v. Murray, Justice Joyce ruled that the loss from a partner's insolvency is different from an ordinary loss (like a realization loss).
• Unless there is an agreement stating otherwise, the principle established in Garner v. Murray stipulates that:
• The solvent partners must contribute cash equivalent to their respective shares of the loss on realization.
• The solvent partners should bear the loss resulting from a partner's insolvency in proportion to their Last Agreed Capitals.

 Personal Profits Earned After Dissolution 

• According to Section 50, if a partner earns any personal profit from  firm transactions  , or from using the firm's property, business connections, or name after dissolution and before the partnership affairs are settled, they must account for the profit and share it with the surviving partner or the representative of the deceased partner.
• This section does not apply if a partner is running another business of a similar nature.
•  Proviso:  If a partner has purchased the goodwill of the firm upon dissolution, they can use the firm name even before the partnership affairs are fully settled.

 Legal Cases 

 Clements v. Hall 

• A and B are partners in a business and  hold a leasehold  for their business.
• When A dies before the  lease expires  , B renews the lease.
• The renewed property becomes  partnership property  .

 Alder v. Fouracare 

• A, B, and C are partners in a business.
• A agrees to take a lease in his own name for partnership purposes but dies before the  lease is signed  .
• A's representative cannot deal with the lease without the  consent of B and C  .

 Return of Premium on Premature Dissolution (Section 51) 

• If a partner has paid a  premium  upon joining a partnership for a fixed term and the partnership is dissolved before the term ends (not due to a partner's death), the partner is entitled to a refund of the premium or a reasonable portion of it.
• The refund amount considers the terms of the partner's entry and the duration of their partnership.
•  Exceptions  to the refund include situations where:
• The dissolution is primarily due to the partner's misconduct.
• The dissolution follows an agreement that has no provision for returning the premium.

 Airey vs. Barbam 

• A and B formed a partnership for five years, with A paying a  premium  to B.
• The partnership ended in less than two years due to mutual disagreement, primarily because A did not fulfill his commitment to the business.
• The court ruled that A was not entitled to any refund of the premium because his misconduct led to the dissolution.

 Atwood v. Maude 

• A and B entered into a partnership as solicitors for seven years, with A paying a  premium  of Rs. 500.
• B was aware of A's lack of experience and competence before the partnership began.
• After two years, B dissolved the partnership, citing A's incompetence as detrimental to the business.
• A filed a lawsuit for the repayment of a proportionate premium and was successful in his claim.

 Pease v. Hewitt 

• A and B became partners for ten years, with A paying a  premium  of Rs. 1000 to B.
• After eight years, a quarrel arose between the partners, with both being at fault.
• The court decreed the dissolution of the partnership.
• A was entitled to a return of Rs. 200 from the premium paid.

 Sale of Goodwill after Dissolution (Section 55) 

•  In settling accounts after dissolution, goodwill is included in the assets  of the firm unless otherwise agreed by the partners.
• Goodwill can be sold either  separately  or along with other property of the firm.
•  Rights of Buyer and Seller of Goodwill  When goodwill is sold after dissolution:
• A partner can  compete  with the buyer's business.
• The partner can  advertise  their competing business.
• However, unless agreed otherwise, the partner cannot:
• Use the  firm name 
• Represent themselves as carrying on the  firm's business 
• Solicit customers who dealt with the firm before its  dissolution 

 Public Notice (Section 72) 

 When a Public Notice is Required to be Given 

• A public notice is necessary in the following situations:
•  (a)  Upon the retirement or expulsion of a partner.
•  (b)  Upon the dissolution of the firm.
•  (c)  When a minor, upon reaching majority, elects to become or not to become a partner.

 When a Public Notice is Not Required to be Given 

• A public notice is not necessary in the following cases:
•  (a)  Upon the death of a partner.
•  (b)  Upon the insolvency of a partner.

 Mode of Giving Public Notice 

The method of giving public notice is outlined as follows:

 Consequences of Not Giving a Public Notice 

If a public notice is not issued when required, the following consequences will occur:

 (a) Minor's Election to Become a Partner: 

• If a minor does not give public notice when he attains majority, he is deemed to have become a partner after six months, according to Section 30(5).

 (b) Retirement of a Partner: 

• When a partner retires without giving public notice, both the retiring partner and the remaining partners remain liable to third parties for the firm's actions after the retirement, as stated in Section 32(3).

 (c) Expulsion of a Partner: 

• If a partner is expelled and public notice is not given, both the expelled partner and the remaining partners are still liable to third parties for the firm's actions after the expulsion, according to Section 33(2).

 (d) Dissolution of a Firm: 

• In the event of a firm's dissolution, if public notice is not provided, all partners remain liable to third parties for the firm's actions taken after the dissolution, as per Section 45.