Two Partners Partnership Firm dissolves upon retirement of one Partner

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The Full Bench of the Hon’ble Supreme Court comprising of Justice N.V. Ramana, Justice Sanjiv Khanna and Justice Krishna Murari in its judgment dated 26th May, 2020 in the matter of Guru Nanak Industries and Another vs. Amar Singh (Dead) through LRs observed that the retirement of a Partner of the Partnership Firm consisting of only two partners will lead to the dissolution of the Partnership Firm.
Sawaran Singh and Amar Singh entered into a Partnership Agreement dated 6th May, 1981 and established a firm named Guru Nanak Industries (“Firm”). The Firm is involved in the business of the manufacturing and sale of print machinery for paper, polythene etc. The profit-sharing ratio between two partners was 60:40. On 29th March 1989, the Firm and Swaran Singh filed a civil suit against Amar Singh claiming that the Amar Singh had retired from partnership with effect from 24th August 1988 and he had voluntarily accepted payment of his share capital. On 29th April, 1989 Amar Singh filed a suit for dissolution of partnership and rendition of accounts. Amar Singh argued that he never resigned from the partnership. The suit filed by Amar Singh was dismissed by trial court and the suit filed by the Firm and Swaran Singh was partly decreed. However, upon appeal filed by Amar Singh the first Appellate Court overruled the trial court’s judgment and held that Amar Singh is entitled for his share in the partnership and the same has been affirmed by the Punjab and Haryana High Court.
The Appellants approached the Supreme Court with the primary submission that Amar Singh had resigned as partner from the firm and thus as per the clause 10 of the partnership agreement dated 6th May, 1981, he would be entitled to only the capital standing in his credit in the books of accounts. After perusing all documents on record the Hon’ble Supreme Court rejected the Appellant’s argument. Thus, the appeals filed by the Appellant were dismissed and High Court’s judgment was upheld.
While deciding the question in hand the Hon’ble Supreme Court discussed two important concepts which were ‘retirement of a partner’ and ‘dissolution of a partnership firm’. The Hon’ble Supreme Court observed that the upon retirement of the partner, the firm continues to exist with remaining partners and retiring partner will be entitled for his dues as per Section 37 of the partnership act. Whereas in case of the dissolution of the partnership the accounts are settled and distributed as per Section 48 of the partnership act, 1932. By referring to Erach F.D. Mehata vs. Minoo F.D Mehta the Hon’ble Supreme Court observed that when there are only two partners and one partner retires then the retirement amounts to dissolution of the firm because there must be at least two partners in the firm.


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