What happens to a partnership firm after the death of a partner? and whether the partners can continue the business of the firm?

Partnership is defined as an organization between two or more individuals for the common purpose of generating revenue and is governed by Partnership Act, 1932 (‘the Act’). The structure of the firm changes after the death of a partner but its functioning and accounting treatment remains the same, which is primarily governed by the Partnership Agreement executed between the partners while forming the partnership firm. This article will discuss: (1) how a partnership firm can dissolve or continue to exist after the death of a partner; (2) the difference of procedural requirement in partnership with only two partners and more than two partners; (3) what elements are required to prove the continuation of a partnership firm before the court; and (4) what is the status of legal heirs of the deceased partner in terms of thier rights, liabilities and profits in the partnership firm’s assets and income.  

 

Dissolution or continuation of a Partnership Firm after the death of one of its partners:

 

Section 42 of the Act governs the aspect as to when a partnership firm can be dissolved, which is as follows:  

  • If constituted for a fixed term, by the expiry of that term; 
  • If constituted to carry out one or more adventures or undertakings, by the completion thereof. 
  • By the death of a partner; and 
  • By the adjudication of a partner as an insolvent.  

 

As per Section 42 of the Act, the partnership firm can be dissolved upon the death of one of its partners. However, if the partnership deed has a stipulation with respect to the effect of the partnership firm upon the death of a partner and/or if any new partner can be inducted, then it is to be decided whether the new partner continues with the existing partnership firm under Section 6 of the Act, which states that the relation between the parties is to be considered. In the case of Noorani Travels v Muhammad Hanif (2008 SCMR 1395) the Supreme Court held that although the death of a partner is one of the causes of dissolution of partnership firm, the partnership firm cannot be dissolved if the conduct of parties illustrates a contrary intention.  

 

Intention to continue the partnership after the death of a partner:  

There are various facts and evidences which could prove the intention of the surviving partners to continue with the partnership firm upon the death of a partner which includes, without limitations to; (1) conduct of parties such as letter and affidavit signed by the new partner and by legal heirs the deceased partner (if any) endorsing the change in the partnership; (2) payment withdrawal by the new partner; (3) sale deed in favor of all partners; (4) renewal of agency agreement; (5) agreement for “Change of Partnership” and/or confirmation by Registrar of Firms. These are the examples of the “intention to continue the partnership firm” which were accepted by the Lahore High Court in the case of Messrs Eastern Medical Technology Services v Province of Punjab and others (2019 PLD 395). The court held that even if there is no express contract showing intention to continue the partnership firm, the conduct between the parties would be sufficient evidence to carry on with the partnership firm. Filing Income Tax return and other documents showing that business is operated are also significant otherwise the new partner, usually the legal heirs, cannot prove their partnership in the business as seen in the case of Ali Muhammad and other v Faizullah and others (2017 PTD 1407). 

 

Partnership consisting of only two partners 

If a partnership firm is constituted with more than two partners, the surviving partners can directly continue the partnership firm, upon the death of a partner, if they intend.  

Where a partnership firm is constituted of only two partners, upon the death of one of the partner, the partnership firm will stand dissolved. In such case creating new partnership with the legal heir(s) of the deceased partner is advisable, as referenced from 2019 PLD 395 mentioned above. This was also stated by the Division Bench from Indian Jurisdiction in the case of Mst. Sughrs and others v Babu (AIR 1952 Allah Abad 506) that since “the partnership is not a matter of status, it is a matter of contract” it cannot be automatically imposed on the legal heirs without creating a new partnership contract.  

 

Conduct of the partnership firm’s business after the death of a partner 

  • Where the partnership firm continues after the death of a partner, the surviving partners can continue the partnership firm’s business in the same manner.  
  • If the bank or the general public is not informed about the death of a partner, the surviving partner continues the business and operated the bank account in the same manner as the legal representative of the deceased partner, in such cases the intention of the surviving partner to continue the business is clear and unambiguous (United Bank LTD v Messrs Iftikhar and Company and 6 others [PLD 1990 Lahore 111]). 
  • If the deceased partner has executed an irrevocable general power of attorney, it will be considered valid after the death of that deceased partner, provided it has not been challenged or revoked by the legal heir(s) of that deceased partner (Messrs Muhammad Muqeem Sohail Builders and Developers v Shamsher Ali and 43 others [2016 YLR 240]). 
  • It must also be noted that when the legal heir(s) step into the shoes of the deceased partner, the constitution of the partnership firm remains the same and the status of a registered firm under Income Tax Ordinance 1979 also remains registered, as confirmed by the Income Tax Tribunal Pakistan in the case reported as 2003 PTD (Trib.) 2189.  

 

Liability of estate of deceased partner 

Section 28 of the Act provides that all the partners of the partnership firm are liable to anyone giving credit to the partnership firm by relying on their representation. But if a partner dies and the partnership business continues under the same status, then use of the deceased partner’s name in the partnership firm does not make the legal heir(s) or the estate of the deceased partner liable to the partnership firm’s conduct after his death.  

Section 35 of the Act also protects the estate of the deceased partner from the acts done by the firm after the death of a partner, in the event the partnership firm is not dissolved. This can further be substantiated from the case of Mst. Rukhsana Bank and 3 others v Abdul Qadir and 2 others (2009 MLD 1465), where arbitration was referred in the partnership agreement, but the court held that since the partner had died and the dispute did not arise during the lifetime of the deceased partner, it was a personal right of legal heirs to bring a claim in the court and the previous agreement cannot be enforced on the legal heirs of the deceased partner. 

 

Personal profits by the partners 

Section 16(a) of the Act provides that partners earning personal profits in partnership firm’s name shall give account for that profit and pay it to the partnership firm.  

Furthermore, as per Section 50 of the Act, the provision of Section 16(a) of the Act shall also apply to transactions carried by the existing partners or legal representatives on account of deceased partner in the event of firm’s dissolution upon the death of the deceased partner and before its affairs have completely been wound up, provided that the right to use firm’s name will not be affected if it is for the goodwill of the firm.  

 

Right of outgoing partner in certain cases to share subsequent profits 

Section 37 of the Act provides that if a partner dies or ceases to be a partner but has a share in the property that the partnership firm is still using, the outgoing partner is entitled to the subsequent profits made with the property of the partnership firm, if final settlement of the partnership accounts have not been concluded or if the continuing partners have not purchased the share of the outgoing partner in relation to that asset/property. In the case of Muhammad Tahir Bhatti v Administrator, KMC and others (PLD 2007 Karachi 566) that Section 37 of the Act only deals with the profits accrued before the final settlement and does not extend to the property brought by a person from independent source after the partnership firm is dissolved and final settlement of account has taken place.  

 

Liability for acts of partners done after dissolution 

After the dissolution of the partnership firm, the partners remain liable to third parties if they act in the capacity of partners while the notice of for dissolution of the partnership firm is not given. The significance of this notice is highlighted by the Hon’ble Supreme Court in the case of Mst. Rubina Badar v Messrs Long Life Builders and 4 others (2012 SCMR 84). In such cases the legal heirs/estate of the deceased partner are not liable for the acts done after the date on which the said partner dies.  

 

Conclusion 

As per the provisions of the Act discussed above, the death of a partner can be one of the factors which may lead to a dissolution of the partnership firm unless the partnership agreement states otherwise. In a partnership firm with more than two partners, the surviving partners may carry on the partnership firm’s business. While in a partnership firm with only two partners, upon the death of one partner, the partnership will stand dissolved. In both cases, new partnership can be created with the legal heirs of the deceased partner and the aspect of the continuation of partnership can be stipulated in the partnership deed or proved by the conduct of the parties and the courts have readily considered the documented evidence in this regard. In other cases, the Act protects the estate of the deceased partner from any liability incurred due to the conduct of other partners after the death of the deceased partner.