Supreme Court Rules Retirement of One Partner in Two-Partner Firm Amounts to Dissolution of Partnership

In landmark judgment, SC clarifies distinction between retirement and dissolution under Partnership Act, 1932; orders final settlement and mediation in Guru Nanak Industries dispute

The Supreme Court of India, in its judgment dated May 26, 2020, delivered by a bench comprising Justices N.V. Ramana, Sanjiv Khanna, and Krishna Murari, has elucidated the crucial distinction between the retirement of a partner and the dissolution of a partnership firm, particularly in the context of a two-partner firm. This ruling came in the civil appeals filed by Guru Nanak Industries, Faridabad and another against Amar Singh (deceased) through his legal representatives.

The dispute originated from a partnership formed in 1978 by four persons, including two brothers Swaran Singh and Amar Singh. By 1981, only these two brothers remained partners in Guru Nanak Industries, engaged in the manufacture and sale of printing machinery. Profit-sharing was initially 69:31 in favor of Swaran Singh, later revised to 60:40.

In 1989, Guru Nanak Industries and Swaran Singh initiated a suit claiming Amar Singh had retired from the partnership on August 24, 1988, having accepted payment of his share capital. Amar Singh contested, asserting that he never resigned but that the partnership had dissolved. He also filed a suit for dissolution and rendition of accounts, alleging manipulation of documents by the other side.

The trial court initially dismissed Amar Singh’s suit but accepted the firm’s claim, relying on a disputed receipt and letters suggesting retirement. However, the first appellate court and later the Punjab and Haryana High Court reversed this, finding that the receipt was manipulated and official tax records indicated the firm was not dissolved on the asserted retirement date.

The Supreme Court upheld the appellate courts’ findings and clarified the legal position: under Section 37 and Section 48 of the Partnership Act, 1932, retirement of a partner and dissolution of a partnership are distinct. Retirement means the firm continues with remaining partners, who pay dues to the retiring partner. Dissolution entails settlement and distribution of accounts. Critically, since a partnership requires at least two partners, in a two-partner firm, one partner’s retirement effectively dissolves the firm.

The Court ruled that the partnership was dissolved on August 24, 1988, the date mutually agreed upon by the parties, not March 31, 1989, as previously considered. Amar Singh was entitled to a share of the partnership’s movable and immovable properties (40%), with Swaran Singh holding 60%. The accounts were to be settled as of the date of dissolution, with Amar Singh entitled to interest at 9% per annum.

Given the prolonged litigation and the death of both original partners, the Supreme Court directed the parties to attempt settlement through the Supreme Court Mediation and Conciliation Centre within three months. Failing settlement, the matter will proceed to the trial court for final decree.

This ruling is a significant precedent for partnership law in India, emphasizing that in two-partner firms, the retirement of one partner cannot be treated as mere retirement but amounts to dissolution, requiring full accounting and settlement under the Partnership Act.

Statutory provisions

Partnership Act, 1932 Sections 37, 48

Guru Nanak Industries, Faridabad v. Amar Singh (Dead) Through Lrs (SC) : Law Finder Doc Id # 1719269