Valid deed or not ?

Mr.Viren Shah,

When a partner dies, subject to any contract to the contrary, partnership is dissolved. Section 42 of the Indian Partnership Act, 1932 (“Act”) provides for dissolution of partnership on occurrence of certain contingencies which includes ‘death of the partner’ as one of those contingencies. Plain reading of the Section 42 would show that, subject to the contract between the partners, a firm stands dissolved by death of a partner. However, in cases where the terms of the partnership deed are silent on continuation of partnership’s business, a contract to continue the partnership after the death of a partner may be implied from the conduct of the parties. This means that where it is evident that such an intention was present, the nominee or legal representative of the deceased partner can take the place of deceased partner and business of the firm can be continued with the presumption that the partnership was never dissolved on the death of that partner. The above legal position is based on two assumptions- (a) there are more than two partners in the firm, and (b) the legal representatives are interested in taking forward the business of the firm.

Where there are only Two Partners in the Firm

It is trite that Section 42 of the Act does not apply where there are only two partners, since there cannot be a contract between the partners that on the death of one of them, the partnership will not be dissolved. One leading case on this point is CIT vs. Seth Govindram Sugar Mills[1], in which the firm consisted of two partners who represented their joint families. In the partnership deed, there was a provision for an heir or nominee taking the place of the deceased partner. One partner out of the two died leaving his widow and minor sons. The issue was whether the firm which consisted of two partners was dissolved after the death of one of the partners. The Supreme Court held as under:

“Section 42(c) of the Partnership Act can appropriately be applied to a’ partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying cl. (c) of s. 42 to such a situation. It may be that pursuant to the wishes of the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light s. 31 of the Partnership Act falls in line with s. 42 thereof. That section only recognizes the validity of a contract between the partners to introduce a third party without the consent of all the existing partners: it presupposes the subsistence of a partnership; it does not apply to a partnership of two partners which is dissolved by the death of one of them, for in that event there is no partnership at all for any new partner to be inducted into it without the consent of others.”

Similarly, in Smt. S. Parvathammal v. CIT[2] it was held that in a firm consisting of two partners on account of death of one of the partners, the firm automatically dissolved and observed as follows:

“A partnership normally dissolves on the death of the partner unless there was an agreement in the original partnership deed. Even assuming that there was such an agreement in a partnership consisting of two partners on the death of one of them the partnership automatically comes to an end and there is no partnership which survives and into which a third party can be introduced. Hence on the death of S, the original partnership was dissolved. The subsequent taking in of the assessee as a partner was only as a result of entering into of a new partnership between R and the assessee. Partnership was not a matter of heritable status but purely one of contract.”

In Mohd. Laiquiddin and Anr. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors.[3] it was held by Supreme Court at para 26 that-

“…when there are only two partners constituting the partnership firm, on the death of one of them, the firm is deemed to be dissolved despite the existence of a clause which says otherwise. A partnership is a contract between the partners. There cannot be any contract unilaterally without the acceptance by the other partner. The Appellants, the legal representatives of original plaintiff (since deceased) was not at all interested in continuing the firm or constitute a fresh firm and they cannot be asked to continue the partnership, as there is no legal obligation upon them to do so as partnership is not a matter of heritable status but purely one of contract, which is also clear from the definition of partnership under Section 4.”

Therefore, the saving clause of Section 42 is not applicable in the case of partnership firm consisting of only two partners when one of them has died.[4] If there are only two partners, there must necessarily be dissolution on the death of any one of them and upon such dissolution; a new firm can be constituted with surviving partner and legal representative of deceased partner.