Retirement of One Partner in a Two Partner Partnership causes Dissolution of Firm

Shaunak Choudhury | SVKM’s NMIMS Kirit P. Mehta School of Law | 4^th June 2020

Guru Nanak Industries v. Amar Singh

Facts

This case arises from a conflict in a partnership firm that had 4 partners and was constituted on 2^nd May 1978. On 6^thMay 1981, a new partnership deed was executed between two of the four partners on account of the other two resigning. The two partners shared the profits in the ratio of 6:4. One of the partners, Swaran Singh and, the firm, sued the other partner, Amar Singh (the former’s brother). claiming that Amar had retired from the partnership from 24^th August 1988 and had accepted a payment for the same. The Appellants also claimed that the Respondent had agreed that he would not be entitled to any profits or liable for any losses. The Appellants relied upon a letter sent by the Respondent to the Bank of India and the pay orders he had received for which he executed receipt on 17^th October 1988. The Respondent had challenged the suit and claimed that he had never resigned. He also argued that the receipt dated 17^th October 1988 was forged. The Trial Court dismissed the Respondent’s appeal, but the first appellant court accepted that the receipt was forged. The case went to the High Court of Punjab and Haryana, which held the same position. Hence Guru Nanak Industries and the legal representatives of Swaran Singh (deceased) appealed to the Supreme Court. The Respondent (deceased) was also represented through his legal heirs.

Issues

1. Whether the receipt dated 17^th October 1988 was forged.
2. Whether the partnership was dissolved or not.

Judgement

1. The Court observed that the receipt in its language was self-contradictory. The first part of the receipt said that with the sum received, the part payment as per the settlement between the partners for the dissolution of the firm was confirmed. But last line of the document stated that the Respondent’s accounts were settled and was no longer a partner in the firm. The manipulation was also seen in the photocopy of the receipt where the words “retiring partners” was typed later on. Thus, the Court held the receipt was forged. 
2. The Appellants had claimed that the Respondent had retired from the firm and thus would be entitled only to the capital he provided. But the Court opined that that cannot stand. The partnership comprised of only two partners and there was overwhelming evidence to suggest that Amar Singh had not resigned as a partner. The intention of the partners was clear from the receipts and settlements made amongst themselves. The receipt referred to dissolution of the firm by 24^th August 1988. 

There is a difference between retirement and dissolution of partnership. On the occasion of a retirement, the retiring partner is owed his dues as per section 37 of the  Partnership Act 1932. When the partnership is dissolved, the accounts have to be settled and the funds, assets and liabilities must be distributed as per section 48 of the Act. When the partnership has only two partners, and one of them retires, as per Erach F.D. Mehta v. Minoo F.D. Mehta((1970) 2 SCC 724), the said retirement would amount to the dissolution of the firm. Hence, even if the Respondent had retired, it would have led to the same conclusion, that, the firm was to be dissolved.

Thus, the appeals were dismissed and the decision of the Additional District Judge of Faridabad which was sustained by the High Court of Punjab and Haryana, was upheld. The accounts were to be settled and the partition of property of the partnership was to be done in the profit-sharing ratio (6:4). The only thing that the Supreme Court changed was the date of dissolution from 31^st March 1989 to 24^th August 1988 so that it is in line with what the partners had originally decided.