Retirement of a Partner and Dissolution of a Firm 

Partnership

1. Section 4 of the Partnership Act, 1932[1] (“the Act”) defines ‘partnership’ as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It further goes on to explain that the persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’, and the name under which their business is carried on is called the ‘firm name’.

2. The essence of the above definition is that a partnership is an agreement to share profits of a business, and the business should be carried on by all or any one of them acting for all.

3. The essential features of a partnership are:

  • partnership is the result of an agreement;
  • it is organised to carry on a business;
  • persons concerned agree to share the profits of the business; and
  • business is to be carried on by all or any one of them acting for all.

4. The Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. K. Kelukutty[2], has elucidated the essentials of a partnership as:

“11. The  Partnership Act, 1932 has, by Section 4, defined a “partnership” as “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”. The section declares further that the persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”. The components of the definition of “partnership”, and therefore of “a firm” consist of (a) persons, (b) a business carried on by all of them or any of them q acting for all and (c) an agreement between those persons to carry on such business and to share its profits. It is the relationship between those persons which constitutes the partnership. The relation is founded in the agreement between them. The foundation of a partnership and, therefore, of a firm is a partnership agreement. A partnership agreement is the source of a partnership; it also gives expression to the other ingredients defining the partnership, specifying the business agreed to be carried on, the persons who will actually carry on the business, the shares in which the profits will be divided, and the several other considerations which constitute such an organic relationship. It is permissible to say that a partnership agreement creates and defines the relation of partnership and therefore identifies the firm.”

5. Section 6 of the Act states that while determining whether a group of persons is a firm or not, or whether a person is a partner in the firm or not, regard shall be given to the real relation between the parties, as shown by all the relevant facts taken together. In Laxmibai Roshan Lal[3],  the Rajasthan High Court held that a contract merely to take a share of profits, or giving a loan to a person engaged in any trade, upon a contract with such person that the latter shall receive interest along with share of the profits does not necessarily lead to an inference of partnership.

Therefore, as a general principle in determining the existence of a partnership, one must not merely see that the conditions of Section 4 are satisfied, but also whether in substance or in essence a partnership was intended.

Retirement of a Partner

6. Section 32 of the Act deals with the retirement of a partner as under:

“(1) A partner may retire,

  • with the consent of all the other partners,
  • in accordance with an express agreement by the partners, or
  • where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement:

Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.”

The word ‘retire’ in the said section is confined to cases where a partner withdraws from the firm and the remaining partners continue to carry on the business without dissolution as between them. It does not cover a case where a partner withdraws from the firm by dissolution and not by retirement.

Sub-section (2) of the said section states that a partner may be discharged from any liability to any third party for acts of the firm, before his retirement, by an agreement made by him with such third party and partners of reconstituted firm, and such agreement may be implied by course of dealing between such third party and reconstituted firm after he had knowledge of retirement. Further, sub-section (3) lays down that notwithstanding retirement of a partner, he and the other partners continue to be liable to third parties for any acts done by any of them which would have been act of the firm if done before retirement until public notice of the retirement is given. However, the retired partner shall not be liable to third party who deals with the firm without knowledge that he was a partner.

Dissolution of a Firm

7. Section 39 of the Act defines dissolution as the dissolution of partnership between all the partners of a firm. As per the said definition, a firm is said to be dissolved only when all and every one of the members of the firm cease to carry on its business in partnership with each other.

8. The question whether there has been a dissolution of the firm and or upon such dissolution a new firm has succeeded to the business of the old firm, is a question which can be ascertained from the facts and circumstances and documents available. The Supreme Court in Commissioner of Income Tax, West Bengal-III v. Pigot Champan & Company[4], has held that the question whether there has been a dissolution of the firm and upon such dissolution a new firm has succeeded to the business of the old firm is a question which depends upon the intention of the parties to be gathered from the document or documents, if any, executed by and between the partners and other facts and surrounding circumstances of the case.

Retirement and Dissolution

9. Retirement of a partner from a firm is not equivalent to dissolution of the firm, though if one partner retires in a partnership consisting of two partners, it shall amount to dissolution of the firm. But when a partner retires from a partnership consisting of more than two partners, the partnership is not automatically dissolved. It shall depend upon terms of partnership governing the parties.

  • The Supreme Court in Commissioner of Income Tax, West Bengal v. A.W. Figgies & Co.[5] has explained the provisions of retirement of a partner as:

“9. It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm’s name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English common law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognises the firm as a distinct person or quasi corporation.”

 So, the retirement of a partner from a firm does not dissolve the firm, but merely severs the partnership between retiring partners and continuing partners, leaving the partnership among continuing partners unaffected.

  • The distinction between retirement and dissolution has also been highlighted by the Calcutta High Court in Sohanlal Pachisia & Co. v. Bilasray Khemani[6] as:

“31. But it is clear from Section 32 of the Partnership Act read with the relevant sections in Chapter VI of the said Act that by mere retirement of a partner, a firm is not dissolved but the retiring partner must give notice of his intention to dissolve the firm in order to bring about a dissolution…”

  •  The above distinction has been further elucidated by the Supreme Court in Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy[7], as under:

“Use of the word ‘retire’ in Section 32 of the Act is confined to cases where a partner withdraws from a firm and the remaining partners continue to carry on the business of the firm without dissolution of partnership as between them. Where a partner withdraws from a firm by dissolving it, it shall be dissolution and not the retirement. Retirement of a partner from a firm does not dissolve it, in other words it does not determine partnership inter se between all the partners. It only severs the partnership between the retiring partner and continuing partners, leaving the partnership amongst latter unaffected and the firm continues with the changed constitution comprising of the continuing partners. Section 32 provides for retirement of a partner but there is no express provision in the Act for the separation of his share and the intention appears to be that it would be determined by agreement between the parties…”

  •  Most recently, the Supreme Court in Guru Nanak Industries, Faridabad Amar Singh[8], also explained the distinction between ‘retirement of partner’ and ‘dissolution of partnership firm’, observing as under:

“13. There is a clear distinction between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. On retirement of the partner, the reconstituted firm continues and the retiring partner is to be paid his dues in terms of Section 37 of the Partnership Act. In case of dissolution, accounts have to be settled and distributed as per the mode prescribed in Section 48 of the Partnership Act. 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. 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 dissolution of the firm.”


*Advocate and a qualified Chartered Accountant.  Author  is currently a Senior Associate in the Dispute Resolution Practice at L&L Partners Law Offices, New Delhi. Author’s views are personal.

[1] Partnership Act, 1932

[2] (1985) 4 SCC 35

[3] 1971 SCC OnLine Raj 38

[4] (1982) 2 SCC 330

[5] 1954 SCR 171 

[6]  1953 SCC OnLine Cal 98

[7] (2003) 3 SCC 445

[8] 2020 SCC OnLine SC 469

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