While dealing with a civil dispute pertaining to the issue of dissolution of a partnership firm at will, the Supreme Court has held that the reconstituted firm has no right whatsoever to utilise the assets of the dissolved firm unless all the partners of the dissolved firm reach an agreement to settle the accounts and to pay the outgoing partner his share in the value of the assets.

The Apex Court was considering an appeal challenging the judgment passed by the Andhra Pradesh High Court involving the issue of share of the first respondent in the assets of the partnership firm on its dissolution.

The Division Bench of Justice Ujjal Bhuyan and Justice Vipul M. Pancholi held, “With the dissolution of the partnership firm, all its assets have to be necessarily liquidated unless any one or more partners of the dissolved firm come forward to pay the market value of the share of the remaining partners/all partners in lieu of liquidation with the consent of the remaining partner or partners. The reconstituted firm has no right whatsoever to utilize the assets of the dissolved firm unless all the partners of the dissolved firm reach an agreement to settle the accounts and to pay the outgoing partner his share in the value of the assets. However, if such an agreement is not reached, there is no option other than liquidation of the assets and distribution of the value realized from such liquidation in proportion to their shares amongst all partners.”

AOR Ananga Bhattacharyya represented the Appellant while AOR Krishna Dev Jagarlamudi represented the Respondent.

Factual Background

In the year 1964, Kasireddy Lakshmi Narayana Reddy, Vallappareddy Sundara Ram Reddy, Vardhireddy Mohan Krishna Reddy, Vallappareddy Kodanda Ram Reddy, and Vallappareddy Sumitra Reddy constituted a partnership firm under the name and style of M/s Viraj Constructions. The principal business of the partnership firm was carrying on construction works with the Railways. The partnership was at will. A new partner, Vardhireddy Dashrat Rami Reddy, was admitted to the partnership firm in 1968 with the consent of all the partners. In the course of its business, a land was acquired in the name of the partnership firm. Some of the partners mooted a proposal that if Kasireddy Lakshmi Narayana Reddy retired from the partnership firm, a promissory note for a sum of Rs. 22,500.00 towards his share would be executed. They also assured settlement of accounts as and when required. Kasireddy Lakshmi Narayana Reddy instituted a civil suit for recovery of a sum of Rs 30,457.50 being the amount due under the promissory note. A suit was dismissed, and the partnership firm continued to remain in existence, and Kasireddy Lakshmi Narayana Reddy did not retire from the partnership firm.

In the year 1983, Kasireddy Lakshmi Narayana Reddy sent a legal notice to all the remaining partners of the partnership firm stating that he was unable to continue in the said partnership firm and called upon them to dissolve the partnership firm. As he did not receive any response, he filed a Suit in the Court of Additional Judge, City Civil Court, Hyderabad, against the remaining partners of the partnership firm and Andhra Bank. Before the institution of the suit, one of the partners, Vallapareddy Sundara Ram Reddy, passed away. Consequently, his legal representatives were added as defendants in the suit. During the pendency of the suit, another partner, Vardhireddy Dashrat Rami Reddy died, following which his wife and son, were brought on record as defendants in the suit.

The Trial Court passed a preliminary decree and held the plaintiff entitled to 0.25 ps. share out of 100 ps. capital amount of the partnership firm. Original plaintiff Kasireddy Lakshmi Narayana Reddy thereafter filed an interlocutory application for passing final decree by appointment of a Commissioner. The defendants filed an application for review of the order. The High Court allowed the plaintiff’s interlocutory application by holding that unless the parties mutually agree to settle their shares and file a joint memo before the Trial Court, the Advocate Commissioner would sell the assets of the dissolved firm i.e. the land in question, through public auction. Assailing the impugned judgment, the appellants (defendants) filed the related special leave petition, and the Apex Court directed a stay of sale of the property.

Reasoning

Considering that the partnership in question was a partnership at will, the Bench stated that on receipt of notice of dissolution issued by the plaintiff, the partnership firm stood dissolved on and from October 18, 1983. “The remaining partners may have continued to retain the assets of the erstwhile partnership by constituting a fresh partnership. But that is not permissible”, it stated.

Taking note of the fact that the properties, i.e. the land in question, belonged to the erstwhile partnership M/s Viraj Constructions, the Bench held that a new partnership could have retained the said land in question only by purchasing it from the erstwhile partnership, which had not been done. “Therefore, retention of the land in question by the new partnership is illegal. That apart, if the same has to be sold today at the value which prevailed as on 18.10.1983, it will cause serious prejudice to the plaintiff and would be grossly unfair to him, besides being a wholly impractical proposition. On the dissolution of the partnership firm, all the partners are entitled to their share of profits rateably”, it noted.

The Bench further clarified that the defendants were having the option to purchase the land in question at auction, whereafter the sale proceeds from such auction sale could be distributed amongst the erstwhile partners as per their share. “But this is an option for the defendants to explore and not for this Court to suggest”, it added.

Thus, finding no error in the impugned judgment, the Bench dismissed the civil appeal. “All interim stay orders passed in the related special leave petition would stand vacated. The parties as well as the advocate Commissioner shall now comply with the directions of the High Court in the manner prescribed”, it ordered.

Cause Title: V. Sumitra Reddy & Anr. v. K. Ranganadha Reddy & Ors. (Neutral Citation: 2026 INSC 979)

Appearance

Appellant: AOR Ananga Bhattacharyya, Advocates Devahuti Tamuli, Krishanu Barua

Respondent: AOR Krishna Dev Jagarlamudi, Advocates Vishnu Kant Mundada, Arpit Kumar Mishra, Shrey Nautiyal, AOR Ashutosh Dubey, Advocates Rajshri Dubey, Abhishek Chauhan, Amit P Shahi, Anjan Datta, Rahul Sethi, Rajendra Anbhule, Govind Kashyap, Anirban Tripathi, Rekha Chaudhary, Sona Khan, Lokesh Raghav, Om Prakash Yadav, Chand Trikha

Click here to read/download Judgment


Justice Ujjal BhuyanJustice Vipul M. Pancholi

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.