Facts: The firm had two partners; one of them (appellant) alleged that the other partner (respondent) had agreed to retire and received certain amounts in full settlement of his claims. Appellant and the firm had filed a suit for recovery of amount lent to respondent on the date of retirement. The respondent denied allegation of his retirement and also filed a civil suit for ‘dissolution of the firm’ and rendition of its accounts. The Trial Court dismissed the suit filed by Respondent and partly decreed the suit filed by appellant. Appeal filed by Respondent was accepted by the First Appellate Court. Appellant’s appeal was rejected by the Hon’ble High Court. 

Issue: Whether it was the case of “dissolution of a partnership firm” or “retirement of a partner”, as the same had a direct bearing on the rights of the parties as to settlement of the accounts.

Views: Appellant contended that since it was the case of ‘retirement of a partner’ and hence the (respondent) was to be paid only to the extent of the amount outstanding in his capital account, as per clause(10) of the Partnership Deed. The respondent contended that being the case of ‘dissolution of firm’ he was entailed to the extent of his share in the entire assets of the firm as per section 48.

Held: Considering the findings of the lower courts and evidences on record it was observed by the hon’ble Supreme court that the appellant had forged evidences to show the mutual arrangement amongst the partners for ‘part settlement’ as ‘full settlement’.

The Supreme Court held that respondent had not ‘resigned as a partner’ but there was a mutual understanding and agreement which shows that there was ‘dissolution of firm’.

Referring to the decision rendered in case of Pamuru Vishnu Vinodh Reddy vs. Chillakuru Chandrasekhara Reddy and Others, (2003) 3 SCC 445 it was interalia held that there is a clear distinction between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. On 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.

The Hon’ble Court reiterated the well-established principles laid down in Erach F.D. Mehta v. Minoo F.D. Mehta, (1970) 2 SCC 724 that, there being only two partners, the partnership firm could not have continued to carry on business as firm on retirement of any one of the partners. A partnership firm must have at least two partners. Retirement of one of the partner, when a firm consists of only two partners, amounts to dissolution of the firm.

Editorial: Concept of partnership and its assets explained.

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