Death of one of two partners automatically dissolves the firm; heirs do not become partners.

M/s. Shiva Steel Supplies instituted Com.O.S. No. 34 of 2020 before the Principal District and Sessions Judge, Davanagere, seeking recovery of ₹18,90,730 with interest from M/s. New Praveen Trailers.

During the pendency of the suit, one of the two partners of the defendant firm died on 16 May 2021.

The plaintiff filed a memo stating that, since the defendant was a registered partnership firm, the deceased partner’s legal representatives need not be impleaded and that any subsequently inducted partner could be brought on record.

The Commercial Court allowed the memo but directed the plaintiff to take steps to bring the legal heirs of the deceased partner on record.

The defendant challenged that order under Article 227 of the Constitution, contending that the death of one of two partners automatically dissolved the firm and that the proceedings could not continue against the dissolved firm or be reserved for impleadment of a future partner.

Whether the death of one of the two partners of a partnership firm automatically dissolves the firm under the Indian Partnership Act, 1932, notwithstanding a clause in the partnership deed providing for continuation of the firm.

Whether the legal heirs of the deceased partner could be impleaded in the pending recovery proceedings, or whether the plaintiff could reserve liberty to implead a person subsequently inducted as a partner.

The Court applied Sections 4 and 5 of the Indian Partnership Act, 1932, under which partnership arises from contract and not status; Section 31, which concerns the introduction of a new partner with the consent contemplated by law; and Section 42(c), under which a firm is dissolved by the death of a partner, subject to a contract between the partners.

Relying on Commissioner of Income Tax, Madhya Pradesh v. Seth Govindram Sugar Mills Ltd., AIR 1966 SC 24, Mohammad Laikuddin v. Kamala Devi Misra, (2010) 2 SCC 407, and S.P. Misra v. Mohd. Laiquddin Khan, (2019) 10 SCC 329, the Court held that where a firm consists of only two partners, the death of one partner automatically terminates the partnership; a clause providing for continuation cannot automatically make the deceased partner’s legal heirs partners, as partnership is contractual and cannot be imposed unilaterally on third parties.

The provisions concerning execution against firms under Order XXI Rule 50 and Order XXX Rules 6 and 7 CPC, relied upon by the respondent, did not alter this substantive rule.

The partnership firm admittedly consisted of only two partners. Applying Section 42(c) and the Supreme Court authorities, the Court held that the death of one partner left no subsisting partnership into which the deceased partner’s legal heirs or a future partner could automatically be inducted.

Clause 20 of the partnership deed, which stated that the firm would continue with the surviving partners and the deceased partner’s legal heirs, could not create automatic partnership rights or liabilities because the heirs were not parties to the original contract and their consent was required.

Any continuation of the business by the surviving partner with the legal representatives would constitute a fresh partnership, not continuation of the original firm.

Consequently, the Commercial Court erred in permitting the plaintiff to proceed on the basis that the legal heirs could be brought on record or that a future inducted partner could replace the deceased partner.

The writ petition was allowed; the Commercial Court’s order dated 5 January 2022 in Com.O.S. No. 34 of 2020 was set aside, the plaintiff’s memo dated 7 August 2021/3 September 2021 was rejected, and no order as to costs was made.