A full Bench of the Supreme Court headed by Justice N. V. Ramana and also comprising Justices Sanjiv Khanna and Krishna Murari had in the matter of Guru Nanak Industries, Faridabad and Ors. V. Amar Singh (Dead) Through LRs has held that the retirement of one of the partners in a partnership firm amounts to an automatic dissolution of the partnership firm. Judgment to this effect was delivered on May 26, 2020.
Background of the case:
Four persons, including two brothers, Swaran Singh and Amar Singh, both of whom had died and were represented by their legal representatives, had constituted a partnership firm – Guru Nanak Industries, on May 02, 1978. On May 06, 1981, a fresh partnership deed was executed between Swaran Singh and Amar Singh as the other two partners had resigned. The partnership
firm was primarily in the business of manufacture and sale of print machinery for the paper, polythene, etc. Initially, profits and losses were to be divided in the ratio of 69:31 between Swaran Singh and Amar Singh. However, with effect from April 01, 1983, profit and loss sharing ratio was altered between Swaran Singh and Amar Singh to 60:40 respectively.
On March 29, 1989, Guru Nanak Industries and Swaran Singh had filed a civil suit against Amar Singh claiming that the latter had retired from a partnership with effect from August 24, 1988, and had voluntarily accepted payment of his share capital of Rs. 89,277.11 In addition to that, he had been an advanced loan from the funds of the partnership firm on the same date. Amar Singh had agreed that he would not be entitled to the profits and liabilities of the firm. Further, Amar Singh, after retirement, had floated a proprietorship concern, namely, Guru Nanak Mechanical Industries with effect from September 14, 1988, and was manufacturing and selling the same machinery.
Amar Singh had contested the suit and on April 29, 1989 and filed a suit for dissolution of partnership and rendition of accounts. The plea and contention of Amar Singh were that he had never resigned.
The trial court had dismissed the suit filed by Amar Singh and partly decreed the suit filed by Guru Nanak Industries and Swaran Singh. Relying on the Official records in the Sales Tax Department and Income Tax Department, the first appellate Court had supported the case of Amar Singh that the partnership firm was not dissolved on August 24, 1988. Accordingly, Amar Singh was held to be entitled to the prayer for the partition of movable and immovable property wherein 40% belonged to Amar Singh and 60% belonged to Swaran Singh.
The Decision of the Court:
The Court relying on Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others, [(2003) 3 SCC 445] held that,
“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 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”
Applying above said ratio to the present case, the Court concluded that,
“there are 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”