Comment on the statement that dissolution involves a change in the relation of partners but does not end partnership.

The Statutory Distinction: Section 39

Section 39 defines the dissolution of a firm as the dissolution of partnership between all the partners of the firm. This definition is deliberately precise, because it distinguishes dissolution of the firm from what may be called a mere change in the partners constituting the firm, a distinction of considerable practical importance since the two situations attract entirely different legal consequences. Where the firm itself is dissolved, its business comes to an end, its assets are liquidated, its debts are settled, and each partner's connection with the business terminates altogether. Where, on the other hand, there is merely a change in the relation of partners, such as when one partner retires or dies, or when a new partner is admitted, the firm as a business entity continues, only its composition has altered; this is more accurately described as reconstitution of the firm rather than its dissolution.

Events Causing Change Without Ending the Firm

Retirement of a partner. Section 32 permits a partner to retire with the consent of all the other partners, in accordance with an express agreement among the partners, or, where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. Retirement changes the relation of the remaining partners toward the retiring partner and among themselves, but the firm's business ordinarily continues among the remaining partners, and the firm is not thereby dissolved.

Admission of a new partner. Section 31 provides that a new partner may be introduced into a firm with the consent of all the existing partners, subject to a contract between the partners or to the provisions relating to a minor's admission to the benefits of partnership under Section 30. The introduction of a new partner alters the mutual rights and obligations among the partners and reconstitutes the firm, but again, the firm's business and identity continue uninterrupted.

Death or insolvency of a partner where the firm continues. Although Section 42 lists the death of a partner and the insolvency of a partner as events causing dissolution, this default rule operates only in the absence of a contract to the contrary. Partnership deeds very commonly, and validly, provide that the firm shall not stand dissolved on the death or insolvency of a partner, but shall continue among the surviving or solvent partners, perhaps with the deceased partner's legal representative being paid out his share. In such a case, what occurs is a change in the relation of the partners inter se, not a dissolution of the firm itself.

Events That Do End the Partnership Altogether

By contrast, true dissolution, as governed by Sections 40 to 44, brings the partnership relation among all the partners to a complete close. This occurs by agreement under Section 40, compulsorily on the insolvency of all partners but one or on the business becoming unlawful under Section 41, on the happening of contingencies such as expiry of a fixed term or completion of an undertaking under Section 42 where no contrary agreement exists, by notice in a partnership at will under Section 43, or by order of court under Section 44. In each of these situations, the firm as a business ceases to exist, its accounts must be settled under the rules laid down in Sections 46 to 55 governing the winding up of its affairs, and the mutual rights and obligations of the partners crystallise finally rather than continuing in altered form.

Illustration

Suppose A, B, and C carry on a partnership business, and their partnership deed provides that on the death of any partner, the firm shall continue among the survivors with the deceased partner's share being paid out to his legal heirs. If A dies, this event changes the relation of the partners, since B and C now continue the business between themselves alone rather than as a three-partner firm, and A's heirs receive his due share, but the firm itself is not dissolved and its business, contracts, and goodwill continue without interruption. If, on the other hand, the partnership deed had contained no such contrary agreement, A's death would, under Section 42, result in the dissolution of the firm altogether, requiring the winding up of its affairs and the settlement of accounts among all partners under Sections 46 to 55, since the partnership relation among all of them would come to an end.

Concluding Observations

The statement is accurate only when understood as referring to a change in the constitution of the firm, such as retirement, admission, or death where the partnership deed provides for continuance, since these events alter the mutual relations of the partners without dissolving the firm's business. Where, however, dissolution occurs in the sense contemplated by Section 39, that is, dissolution of partnership among all the partners, the partnership does not merely change but comes to a definitive end, its business is wound up, and its affairs are finally settled. The apparent tension in the statement dissolves once the crucial distinction between reconstitution of a firm and dissolution of a firm is kept clearly in view, a distinction the Act itself is careful to preserve through the specific language of Section 39.