Discuss the rights and liabilities of partners on dissolution of a firm


The rights of a partner on dissolution of a firm are as under :


(i)         Right to an equitable lien – Under Section 46 every partner is entitled to have the property of the firm applied in payment of outside debts and liabilities of the firm and to have the surplus distributed among the partners in accordance with their rights. Such a right of a partner is called as ‘equitable lien’ of partners.

(ii)        Right of partners to have the business wound up – The authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue to wind up the affairs of the firm (Section 47).

(iii)       Right to have the debts of the firm settled out of the property of the firm – When a firm is dissolved, the debts of the firm are settled out of the property of the firm, and if there is any surplus it is utilized towards the payment of the private debts of the partners. Similarly, the separate property of any partner (private estate) shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of the firm (Section 49).

(iv)       To account for personal profits after dissolution – In case of transactions by any surviving partner or by the representatives of a deceased partner undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up, he shall account for the profits he derives from such transactions and pay it to the firm. However, this rule will not apply in cases where any partner or his representative has bought the goodwill of the firm on its dissolution. [Section 16(a) and Section 50].

(v)        Right to return of premium on premature dissolution (Section 51) – Where a partner has paid a premium on entering into partnership for a fixed term and the firm is dissolved before the expiration of the term, he is entitled to repayment of the whole or part of the premium. However, no refund shall be paid to him if the dissolution –

(a) Is due to the death of a partner


(b) Is due to the misconduct of the partner who has paid the premium or


(c) Is in the pursuance of an agreement which contains no provision for the refund of the premium.

(vi)       Right where partnership contract is rescinded for fraud or misrepresentation (Section 52) – Where partnership is rescinded on the ground of fraud or misrepresentation of one of the partners, the partner entitled to rescind has the following rights –

(a) Right to lien on the surplus assets – He has a lien on the surplus assets after the debts of the firm have been paid, for any  sum paid by him for the purchase of his share in the firm and for any capital contributed by him.

(b) Right of subrogation – If a partner pays off a creditor from his pocket, he steps into the shoes of that creditor and can claim money from the firm as that creditor.

(c) Right to be indemnified – He also has a right to be indemnified by the partners or partner guilty of fraud or misrepresentation against all the debts of the firm.

(vii)      Right to restrain from use of firm name or firm property (Section 53) – After the firm is dissolved, every  partner may restrain any other partner from carrying on a similar business in the firm’s name or from using any of the property of the form for his own benefit, until the affairs of the firm have been completely wound up, unless a partner has purchased the goodwill of the firm.

The liabilities of a partner on dissolution are as under:


(i)         Liability for acts of partners done after dissolution – Until public notice of dissolution of the firm is given, partners continue to be liable to third parties for any act done by any of them. However this liability does not apply to a partner who is dead or who is adjudged as insolvent or a sleeping partner.

(ii)        Continuing authority of partners for purpose of winding up – After dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue, so far as may be necessary –

(a) to wind up the affairs of the firm and


(b) To complete transactions began but unfinished, at the time of the dissolution.

(iii)       Liability to share profits earned after dissolution – If any partner earns any profit from any transaction connected with the firm, after the dissolution, he must share it with the other partners and the legal representative of any deceased partner.


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