No Dissolution of Firm upon Death of Partner if Deed posits Continuity: Supreme Court [Read Order]

In a pivotal judgment that defines partnership continuity after the death of a partner, the Supreme Court of India has held that a partnership firm is not automatically dissolved if the partnership deed expressly states the business should continue.

The case originated from a kerosene dealership that became a partnership firm in 1989, with Kanhaiyalal Sonthalia and his sons as partners. Sonthalia, holding a 55% interest, passed away in 2009, leading to disagreements among his heirs concerning succession and the future constitution of the firm. Indian OilCorporation Limited (IOCL), the principal dealer, pressed that all legal heirs must join the partnership or expressly refuse to do so before supporting a new partnership structure.

With IOCL threatening to suspend supplies unless all heirs participated or provided No Objection Certificates, the continuing partners sought relief in the CalcuttaHigh Court. The High Court sided with the surviving partners, directing IOCL to maintain fuel supplies and allowing the business to run pending formal reconstitution and any court findings regarding the probate of Sonthalia’s will.

IOCL appealed to the Supreme Court, maintaining that, as per its 2008 guidelines, the partnership must be reconstituted with all legal heirs of a deceased partner to continue the dealership.

The Supreme Court, led by Justice Pankaj Mithal, affirmed the High Court's stance. The bench emphasized that when a partnership deed contains a specific continuity clause, the death of a partner does not automatically dissolve the firm. The surviving partners have the authority to continue the business and admit any competent heirs without the compulsion of including all legal heirs or having them submit NOCs. The dealership agreement with IOCL did not mandate the end of business on a partner’s death, except in case of express termination.

The Court highlighted the relevant clause in the deed, which permitted the business to continue and allowed surviving partners, at their discretion, to include competent heirs. It underscored that Section 42 of the Indian Partnership Act, 1932, requiring dissolution upon a partner’s death, does not override the explicit terms of a deed when there are more than two partners and the contract provides for continuity.

The verdict also commented on the role of statutory authorities, admonishing IOCL for adopting a rigid and counterproductive approach. The Apex Court bench of Justice Pankaj Mithal and Justice Ahsanuddin Amanullah clarified that IOCL's guidelines did not oblige all heirs to join or declare unwillingness; the decision to continue rests with the terms of the original deed and the surviving partners’ judgment.

Notably, it was observed that, “guidelines nowhere stipulates that it is mandatory for all the legal heirs to join or reconstitute the partnership firm or otherwise to express their unwillingness to participate.”

The Supreme Court ultimately dismissed IOCL’s appeal as devoid of merit, insisting that statutory corporations should not undertake actions that risk disrupting ongoing businesses or consumer interests based on narrow policy interpretations[1].

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