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Partnership Firm Dissolution on Death of Partner
«17-Jul-2025
Source: Supreme Court
Why in News?
Recently Justices Pankaj Mithal and Ahsanuddin Amanullah of the Supreme Court observed that "a partnership firm with more than two partners does not dissolve upon the death of one partner, provided the partnership deed contains a clause allowing the firm's continuity" while dismissing an appeal by Indian Oil Corporation Limited (IOCL). The Court reiterated that Section 42 of the Indian Partnership Act, 1932 would not apply when there are more than two partners, and the partnership deed provides otherwise.
- The Supreme Court held this in the matter of Indian Oil Corporation Limited & Ors. v. M/s Shree Niwas Ramgopal & Ors.
What was the Background of Indian Oil Corporation Limited v. M/s Shree Niwas Ramgopal (2025) Case?
- The Appellant stopped the supply of kerosene to a partnership firm comprising three partners after one of the partners died.
- The partnership firm was engaged in the kerosene supply business and had a valid agreement with Appellant for procurement of kerosene.
- The partnership deed contained a specific clause stating that in the event of death of one partner, the firm would not cease to function but would continue to carry on business.
- The partnership deed further provided that surviving partners may admit any of the competent heirs of the deceased partner to reconstitute the partnership.
- Appellant argued that the partnership firm stands dissolved upon the death of the partner and therefore stopped the supply.
- The partnership firm approached the Calcutta High Court challenging Appellant 's decision to stop the supply.
- The Calcutta High Court directed Appellant to resume the supply to the firm, which was challenged by Appellant in the Supreme Court.
What were the Court's Observations?
- A bench of Justices Pankaj Mithal and Ahsanuddin Amanullah authored the judgment dismissing Appellant 's appeal.
- The Supreme Court observed that while it is correct that a partnership firm ceases to function upon the death of a partner, this rule would not apply when there exist more than two partners.
- The Court noted that "It is settled in law by virtue of Section 42 of the Indian Partnership Act, 1932 that the partnership will stand dissolved inter alia on the death of the partner but this is applicable in cases where there are only two partners constituting the partnership firm."
- The Court clarified that "The aforesaid principle would not apply where there are more than two partners in a partnership firm and the deed of partnership provides otherwise that the firm will not stand automatically dissolved on the death of one of the partners."
- The Court specifically noted that in the present case, the partnership consisted of three partners and the deed of partnership, in unequivocal terms, provided that the death of a partner shall not cause discontinuance of partnership.
- The Court held that the principle laid down under Section 42 of the Partnership Act would not be applicable and the partnership would continue despite the death of one of the partners.
- The Court observed that Appellant must not act arbitrarily to disrupt the business activities and justified the High Court's decision directing IOCL to continue the supply.
What is the Indian Partnership Act, 1932?
About:
- This Act is a comprehensive legislation that governs the formation, operation, and dissolution of partnership firms in India.
- The Act defines 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 Act provides for the rights and duties of partners, management of partnership business, and various modes of dissolution of partnership firms.
- The Act empowers partners to enter into partnership deeds that can modify the general provisions of the Act, subject to certain limitations.
Section 42 of the Act:
- Section 42 of the act deals with "Dissolution on the happening of certain contingencies" and provides various circumstances under which a partnership firm gets dissolved automatically.
- Section 42 states that "Subject to contract between the partners, a firm is dissolved" under four specific contingencies:
- The Four Contingencies under Section 42:
(a) Fixed Term Expiry: If the partnership is constituted for a fixed term, it dissolves automatically upon the expiry of that term.
(b) Completion of Adventure/Undertaking: If the partnership is constituted to carry out one or more adventures or undertakings, it dissolves upon the completion thereof.
(c) Death of a Partner: The partnership dissolves upon the death of a partner, which was the key issue in the present case.
(d) Insolvency of a Partner: The partnership dissolves upon the adjudication of a partner as an insolvent.