What do you mean by 'goodwill' of firm? Can goodwill of the firm be sold?

What Goodwill Means

Section 14 of the Indian Partnership Act, 1932 expressly declares that the property of the firm "includes also the goodwill of the business," placing goodwill on the same footing as the firm's tangible assets. Goodwill has been judicially understood as the whole advantage of the reputation and business connection built up by years of honest work, entitling the holder to represent himself as carrying on the business of the firm, to solicit its former customers, and to prevent others from wrongly claiming to carry on that same business. It is, in essence, an intangible but valuable asset — the probability that old customers will continue to resort to the old place of business, associated as it is with a name and reputation that outsiders recognise and trust.

In Trego v. Hunt, the English courts emphasised that goodwill attaches to the reputation of the firm as a trading entity, and any partner who improperly diverts that reputation or connection to himself, at the expense of his co-partners, can be restrained by injunction if timely action is taken. This shows that goodwill is treated exactly like other partnership assets — capable of being protected, valued, and eventually realised for the benefit of all the partners.

Goodwill as an Asset on Dissolution

Because goodwill is property of the firm under Section 14, the representatives of a deceased partner are entitled to share in its value along with the surviving partners, and surviving partners cannot simply appropriate the whole goodwill for themselves to the exclusion of the outgoing partner's interest. On dissolution, therefore, goodwill must be accounted for and valued just as any other firm asset would be, and its value forms part of what is distributed among the partners under the general scheme of settlement of accounts.

Can Goodwill Be Sold?

Goodwill can certainly be sold — it is one of the assets that may be sold in settling the accounts of a dissolved firm, and it may equally be purchased by an outgoing or continuing partner, or by a stranger, as part of the winding-up process. The Act treats the sale of goodwill as a routine incident of dissolution, and in fact Section 6 of the Act, in its Explanation 2(d), specifically contemplates such a sale: it provides that the receipt of a share of profits, or of a payment contingent on profits, by "a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof," does not by itself make the receiver a partner with those carrying on the business. This shows that Indian partnership law recognises goodwill as a distinct, saleable item of property, separate from an interest in the ongoing partnership itself — a former partner who has sold his share of the goodwill can validly receive profit-linked payments as the price of that sale without thereby becoming, or continuing to be, a partner.

Illustration

Suppose A, B and C are partners running a well-known bakery under a distinctive trade name for twenty years. On dissolution of the firm, B wishes to retire while A and C continue the business under the same name. As part of the winding-up, the goodwill of the bakery — the value of its reputation, its loyal customer base, and its established name — is valued along with the firm's other assets. A and C may purchase B's share of the goodwill, paying him its ascertained value; alternatively, the whole business, including its goodwill, could be sold to an outside buyer, with the sale proceeds distributed among A, B and C according to their shares. If B, having sold his share of the goodwill, later opens a rival bakery using the same trade name or actively solicits the old firm's customers in a manner inconsistent with the sale, he would be acting contrary to the very goodwill he sold, and the purchasers would be entitled to restrain him, consistent with the principle recognised in Trego v. Hunt.

The Underlying Rationale

The treatment of goodwill as saleable property flows naturally from the scheme of Section 14: since goodwill is expressly included within "the property of the firm," it necessarily shares the character of all other partnership assets, which are liable to be realised, valued, and distributed on dissolution under the general law of partnership accounts. At the same time, because goodwill is bound up with personal reputation and customer trust rather than physical assets, the law also permits reasonable restrictions to be placed on a selling partner's future conduct — such as restraining him from soliciting old customers or trading under a similar name — so that the very thing being sold is not immediately undermined by the seller himself. This dual character — an asset that is both transferable and personal — makes goodwill one of the more distinctive and carefully treated items of partnership property under the Act.