Page 177 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes between him and the buyer, he may not (a) use the firm’s name; (b) represent himself as carrying
on business of the firm; or (c) solicit the custom of persons who were dealing with the firm
before its dissolution.
Any partner may, upon the sale of goodwill of a firm, make an agreement with the buyer that
such partner will not carry on any business similar to that of the firm within a specified period
or within specified local limits. Such an agreement shall be void if the restrictions imposed are
unreasonable.

Restraint of trade by buyer of goodwill. Section 54 provides that partners may, upon or in
anticipation of dissolution of the firm, make an agreement that some or all of them will not
carry on a business similar to that of the firm within a specified period or within specified local
limits. Such an agreement shall be valid if the restrictions imposed are reasonable.

Example: Illustrating the ruling in Garner v. Murray
1. A, B and C were partners, sharing profits and losses equally, with capital contribution
of ` 30,000, ` 15,000 and ` 3,000, respectively. On dissolution it is found that, after
paying the debts of the firm and advances made by the partners, the assets are
` 21,000. Thus, the deficiency comes to ` 27,000 (i.e., total capital – assets), which is to
be met by the partners equally. Now the total assets available are ` 48,000. This
amount will be distributed rateably among the partners. However, in actual practice
it will not be necessary for A and B to pay ` 9,000 each in cash but notional adjustment
may be made so that C, whose capital contribution was only ` 3,000 will have to pay
` 6,000. Now the total assets available for distribution between A and B would be
` 21,000 + 6,000 = ` 27,000, A getting ` 21,000 and B ` 6,000.
2. Sometimes it so happens that one or more of the partners is insolvent and so cannot
contribute anything towards the deficiency. Thus, in the above case if C is insolvent
and nothing can be recovered from him, the assets will be distributed as follows: A
and B will bring in their share of deficiency, increasing the assets from ` 21,000 to
` 39,000. The total assets would be distributed between A and B in their capital ratio,
i.e., 2:1. A will get ` 26,000 and B ` 13,000. Thus, A on the whole will lose ` 13,000 and
B ` 11,000. This settlement of accounts is in accordance with the rule laid down in
Garner v. Murray. From the calculations it is obvious that the remaining partners
are suffering loss in accordance with the amount of capital contributed. Thus, A
suffers more loss than B even though they are sharing profits and losses equally.
3. The principle enunciated above will also apply if C in the case mentioned in
illustration above, though not insolvent, fails to contribute his share of the deficiency.
Out of the total amount of ` 21,000, A will get ` 17,000 and B ` 4,000. The court
will pass a decree for ` 4,000 in favour of A against C and for ` 2,000 in favour of B
against C.

6.7.7 Rights and Liabilities of Partners on Dissolution

There are certain consequences of dissolution of a firm. Most of these consequences affect the
rights and liabilities of partners. Therefore, the rights and liabilities of partners are discussed
here.

Rights of a Partner on Dissolution

(i) Right to have business wound up: Section 46 provides that on a partnership being dissolved,
any partner or his representative has a right against the other partners to have (a) the

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