Introduction
Dissolution of a Partnership under The Indian Partnership Act, 1932, “Partnership Act” can have far-reaching consequences, affecting not only the erstwhile partners but also related third parties. The process of dissolution involves activities such as settling of accounts, concluding of on-going business matters, discharging the Partnership firm’s liabilities and finally, distributing any remaining assets among the partners basis their respective shares. The Limitation Act, 1963 provides a period of three years from the date of dissolution within which the parties can agitate their claims arising from the dissolution and winding up of the firm[1]. The period of limitation rests on the notion that the date of dissolution marks the conclusion of the firm’s winding-up process and settling of the rights and liabilities of the affected parties. However, is dissolution synonymous with winding up of the firm? Can erstwhile partners not have a right to agitate their claims post the period of three years if the process of winding-up could not be completed within the timeframe? Pertinently, through this blog, we aim to analyse whether any claims surviving the period of three years, which have been left unadjudicated are deadwood or can be brought under the period of limitation and give rise to a continuing cause of action.
Dissolution of partnership firm
Dissolution of a partnership signifies the end of the contractual relationship between the partners. It can occur due to varied reasons, and similarly, dissolution of the partnership firm can be done in various ways[2]:
- Dissolution by mutual agreement
- Compulsory dissolution
- Dissolution on happening of certain contingencies
- Dissolution by notice of partnership at will
- Dissolution by the court
For the purpose of this blog, we aim to focus on dissolution of partnership at will and its consequences.
Firstly, a Partnership at will is where there is no provision made in the contract for the duration of the partnership or for the determination of their partnership.[3] The jurisprudence on determining whether or not a partnership is to be considered at will has evolved through various pronouncements. These rulings establish that even when the partnership deed implied its duration or determination for termination, it will not be considered as ‘Partnership at Will’.[4] Further, even when there is an explicit mention of the partnership to be at will, the rest of the clauses, the implied intention and conduct of the partners have to be considered to determine the nature of the partnership.[5]
Moreover, when a partnership is not considered to be at will, it remains intact since serving a notice under Section 43 is deemed insufficient to result in dissolution. , t.[6]
Secondly, in the case of Partnership at will, the partnership can be dissolved by a partner issuing a notice to all the other partners of the partnership under Section 43 of the Partnership Act. The essentials of this notice are:
- Clarity in the intention to dissolve the firm
- The firm is considered to be dissolved on the date so mentioned in the notice, or, if no date is mentioned then the date of the notice is considered to be the date of dissolution.
A notice for dissolution of the firm is a statutory notice and must fulfill all the provisions of the statute as embodied in Section 43 of the Partnership Act, failing which, it will not be considered a valid notice and dissolution of the firm will not be triggered.[7]
Consequences of dissolution
From the discussion above, it follows that a firm is considered dissolved if the partnership is considered to be at will and the notice issued under Section 43 is considered to be proper. The important considerations remaining even after the dissolution of the partnership for the erstwhile partners are (i) rights of partners after dissolution (Sections 46 and 47), (ii) method of settling partnership accounts (Section 48), (iii) discharge of partnership debts (Section 39), and (iv) rules as regards sale of goodwill (Section 55). It is well settled in law that after dissolution of a partnership firm, the partners cannot exercise their rights with respect of the partnership firm except for the purposes of winding-up of the business of the partnership firm.[8]
Therefore, even if a partnership firm is dissolved at a certain date, this circumstance makes no difference as the erstwhile Section 263 of the Indian Contract Act states:
“After a dissolution of partnership, the rights and obligations of the partners continue in all things necessary for winding up the business of the partnership.”[9]
It can be deduced that no new rights accrue to the partners on dissolution as the word “continue” clearly, shows for it implies that the rights previously possessed remain in existence. Far from enlarging, the Section limits those powers, as the authority of the partners continues “in all things necessary for winding up the business of the partnership”, in other words, only so far as may be necessary to wind up its affairs. (refer Section 47 of the Partnership Act.)[10]
Therefore, in the event of dissolution of a partnership firm, several disputes may still arise between the partners and in their continuing authority in the partnership deed. A dissolution can only be considered complete when all the accounts/properties of the partnership firm as well as rights and obligations of the partners are completely settled/wound up.
Question of limitation and Continuing cause of action
The period of limitation provided for filing of a suit or any other adjudication for an account and a share of the profits of a dissolved partnership is three years from the date of dissolution[11]. Provided there is a clause for arbitration in the partnership deed, no mention of a period of limitation can be found under Section 11 of the Arbitration Act. The courts have taken recourse to the position that the limitation period would be governed by Article 137, which provides a period of three years from the date when the ‘right to apply’ accrues. [12]
Several High Courts have passed judgments to the effect that parties to the dissolved partnership firm cannot initiate an action under the arbitration clause which once formed part of the partnership deed. Despite this, it is an established principle that the arbitration clause is an independent agreement and ‘self-contained’ distinct from the substantive contract.[13]
Next pertinent question to answer in such cases is from when does the period of limitation begin? The Limitation Act stipulates three years from the date of dissolution, however, with the conjoint reading of Sections 45 to 48, it can be understood that the firm, even though dissolved, continues to function in order to complete its ongoing business and discharge its liabilities for the purpose of winding up. Similarly, the Partners are not discharged from their rights and liabilities upon mere communication of dissolution. The rights and liabilities of the partners in respect of the partnership would be discharged only when the firm is finally woundup and the properties of the firm are distributed.
The Hon’ble Supreme Court in its judgment Shreedhar Govind Kamerkar v Yesahwant Govind Kamerkar & Anr (2006) 13 SCC 481 has held that, “Mere execution of deed of dissolution did not discharge the parties thereto from their rights and liabilities. The rights and liabilities of the partners in respect of the partnership property would be discharged only when the firm is finally wound up and the properties of the firms are distributed.”
In the said case, the Supreme Court held that even violation of the deed of dissolution would give rise to a continuing cause of action beyond the period of three years for filing of a suit and thus will not be barred by limitation. It has thus been established that mere date of dissolution is not relevant for computing the period of limitation, rather when the business of the firm is finally wound up i.e., when the obligations accruing from Sections 45-55 are completely discharged is when the firm is considered to be dissolved/wound up. However, this shall have to be nuanced by the peculiar facts of each case.
Even in the case of dissolution, when the partners adjust their accounts arising out of their partnership relations albeit post the date of dissolution, it implies a promise to pay on the said date of adjustment of accounts, and resultantly, will give rise to a fresh cause of action and a fresh start to limitation.[14]
However, it has also been held that the period of limitation for commencing an arbitration runs from the date on which the ‘cause of arbitration’ accrued. If an infringement of a right happens at a particular time, the whole cause of action will be said to have arisen then and there. Mere negotiations will not postpone the cause of action, but what is important for the Court is to find out the “Breaking Point” [15], a question of fact, at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration. Therefore, a tangible right must accrue to a party to be able to file for adjudication in an appropriate forum and not allow their claim to be extinguished by lapse of time.
Conclusion
Therefore, it can be concluded that the question of limitation is indeed a mixed question of fact and law. Mere dissolution of the firm cannot render the right of the erstwhile partners to agitate their rights arising from the partnership deed infructuous and inadmissible. Since the process of dissolution or winding-up of the firm can take longer than three years, and each act undertaken by the partners in pursuance of the dissolution of the firm can potentially jeopardize the rights of the other partners, it is only fair and equitable that each act gives rise to a fresh cause of action and a ‘right to apply’.
For further information, please contact:
Juvraj Singh, Partner, Cyril Amarchand Mangaldas
juvraj.singh@cyrilshroff.com
[1] Section 46 of the Partnership Act.
[2] Sections 39 to 44 of the Partnership Act.
[3] Section 7 of the Partnership Act.
[4] from Karumuthu Thingarajan Chettiar v. E.M. Muthappa Chettiar, AIR 1961 SC 1225
[5] Suresh Kumar Snaghi v Amrit Kumar Sanghi AIR 1982 Del 131 (Paras 14,15,23,25) and Meenu Korah v. Raju Korah Abraham 2022 SCC OnLine Ker 4054 (Paras 10,11,12)
[6] Anant Purushottam Athavale v Govind Purrshottam Athavale AIR 2005 Bom 301 (Paras 9 and 10)
[7] Tilokram Ghosh v. Gita Rani Sadhukhan, 1988 SCC OnLine Cal 114
[8] Perin Hoshang Davierwalla v. Kobad Dorabji Davierwalla, 2014 SCC OnLine Bom 534
[9] Rep. by s. 73 and the Second Schedule, Although, the said section stands repealed, the intent survives in Sections 47 of the Indian Partnership Act.
[10] Mudenur Nagappa v. Firm of Bhagavanji Rasaji, 1936 SCC OnLine Mad 56 (Pg. 1041)
[11] Entry-5 of the Schedule to the Limitation Act, 1963
[12] BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738
[13] Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813
[14] Sefatullah Bepari v Sadhu Molla 1927 SCC OnLine Cal 10
[15] B & T AG v. Ministry of Defence, 2023 SCC OnLine SC 657
