The Indian Partnership Act of 1932 ("the Act"), defined partnerships as the relation between two or more persons, who have agreed to share the profits of a business, carried on by all or any of them, acting on behalf of all. While laying down the provisions with respect to rights and duties of the partners, the Act also explains the consequences of circumstances like the retirement of a partner, and dissolution of a partnership firm.

The Supreme Court, in a recent decision passed on 26th May, 2020, distinguished between retirement of a partner and dissolution of a partnership firm. In the same judgment, it also held that a partnership firm will be dissolved in case there are only two partners to a partnership firm, and one of them retires.

The same dispute arose in the case of Guru Nanak Industries and Anr. V. Amar Singh (Dead) through LRs, wherein, a partnership firm was constituted in 1978, between four people- Swaran Singh (the second appellant herein), Amar Singh and two others. Upon the retirement of the other two partners, Swaran Singh and Amar Singh, in 1981, executed a new partnership agreement between themselves.

Then, in 1989, Guru Nanak Industries and Swaran Singh , together filed a suit against Amar Singh. In the suit, the appellants claimed that, effective 24th August, 1988,  Amar Singh had taken a retirement from the partnership, and had voluntarily accepted the payment of his capital. They further stated that Amar Singh had taken a loan from the firm's funds, and had agreed that he would not be entitled to any profits or liabilities of the firm thenceforth. The main claim of the suit was that, since Amar Singh had resigned as a partner, he only qualified as a holder to the capital that stood in his credit in the accounts book in terms of the clause of the partnership deed. The respondent, Amar Singh, contested the claim. He counter-claimed that he had never retired from the firm. He argued that the evidence filed by the appellants, which included a letter and a receipt, had been manipulated and some statements in them were added later on. He further claimed that the receipt filed by the appellants clearly confirmed that he was paid only partly in terms of the settlement between him and Swaran Singh. Also, it was stated in the receipt that this amount was being received by Amar Singh with respect to the dissolution of the firm. The last line of the receipt, claiming that his total amount had been settled and that nothing is due to him from the appellants, was forged. Being aggrieved, Amar Singh also filed a suit for partition and rendition of accounts of the firm.

In the judgment, the Supreme Court noted the manipulations made on the letter and receipt, and hence rejected the appellants' arguments. It held that there were only two partners to the firm in this case and the evidence on record supported the respondent’s claim that he had not retired from the firm. The Court further held that the decision to dissolve the firm was based on mutual understanding and agreement between the parties.

Hence, while dismissing the plea, the Supreme Court made a clear differentiation between the concepts of ‘retirement of a partner’ and ‘dissolution of a partnership firm’. It stated, in the judgment that, upon retirement of a partner, the reconstituted firm would continue. Further, under Section 37 of the Act, the retiring partner would be paid his dues. While in the case of dissolution of a partnership firm, under Section 48 of the Act, the accounts would have to be settled and distributed between the partners. Relying on the decision made in the case of Pamuru Vishnu Vinodh Reddy V. Chillakuru Chandrasekhara Reddy and Ors., the Supreme Court held that when the partners to a firm agree to dissolve their partnership, it becomes a case of dissolution and not retirement. However, in the present case, the partnership only had two partners. Therefore, it was held that the partnership firm could not continue to carry on the business of the firm upon retirement of one partner. The Court also reiterated that a partnership firm must have at least two partners. Moreover, the Court also shed light on the case of Erach F.D. Mehta v. Minoo F.D. Mehta, wherein it was held that when there are only two partners in a firm and one agrees to retire, the retirement would thus amount to the dissolution of the firm.

Therefore, through this judgment, the Supreme Court reiterated the stand that, for a partnership firm to survive, there must be more than one partner. Under the Act, the definition of partnership states that it is a ‘relation between persons‘, thus implying that a partnership must consist of two or more persons. Conclusively, as is held in the present case, where a partnership firm comprises of only two persons, when one person retires, the firm automatically dissolves and the provisions for dissolution of a partnership firm under the Act apply.