SUPREME COURT OF INDIA CLARIFIES: PARTNERSHIP WITH TWO OR MORE PARTNERS DOES NOT DISSOLVE ON DEATH IF THE PARTNERSHIP DEED PROVIDES FOR CONTINUITY
Introduction
The Hon’ble Supreme Court of India (“SC”) in Indian Oil Corporation Limited & Ors. v. M/s Shree Niwas Ramgopal & Ors. Special Leave Petition (Civil) No. 1381 of 2025 has by its order dated 14th July 2025 declared that a partnership firm does not automatically dissolve upon the death of a partner if the partnership deed provides for its continuation, unless it is constituted by 2 (two) partners. It was held that the Indian Oil Corporation Limited (“IOCL”) cannot arbitrarily discontinue kerosene supply without formally terminating the dealership agreement, reaffirming the importance of adhering to contractual obligations.
Facts
Parties Involved:
Petitioner: Indian Oil Corporation Limited & Ors.
Respondent: M/s Shree Niwas Ramgopal & Ors.
Conflict:
The core conflict lied wherein the IOCL, a statutory corporation, exercised its powers arbitrarily and in a high-handed manner by discontinuing the supply of kerosene to M/s Shree Niwas Ramgopal (“Partnership Firm”) despite ongoing disputes among the heirs of a deceased partner regarding the Partnership Firm’s reconstitution. The Partnership Firm, originally constituted by Kanhaiyalal Sonthalia and his two sons, faced internal conflicts after Kanhaiyalal’s death, with multiple heirs claiming rights to his 55% (fifty-five percent) share. Although the Partnership Firm sought reconstitution and complied with the IOCL’s procedural requirements, the IOCL refused to renew the kerosene supply agreement beyond a specified date, prompting the Partnership Firm and others to file a writ petition. The High Court of Calcutta (“HC”) directed the IOCL to maintain supply until the Partnership Firm was duly reconstituted or the dealership agreement terminated.
Issues:
- Whether the IOCL can discontinue kerosene supply due to lack of full reconstitution of the partnership firm after the death of a major partner?
- Whether all legal heirs need to be included in the reconstituted partnership firm as per the IOCL guidelines?
- Is the IOCL’s interpretation of Clause 1.5 of the 2008 guidelines justified in this context?
Arguments
Petitioner’s Arguments:
The Petitioners, represented by learned senior counsel Smt. Madhavi Divan, argued that their actions were governed by the Revised Policy Guidelines (“Guidelines”) dated 1st December 2008, which are uniformly applied across the country. Relying on Clause 1.5 of the Guidelines, they contended that upon the death of a partner, the dealership must be reconstituted with all legal heirs of the deceased partner along with the surviving partners. Since not all legal heirs of the deceased partner, Shri Kanhaiyalal Sonthalia, had either applied for inclusion or joined the reconstituted firm, they submitted that the mandatory condition for reconstitution remained unfulfilled. It was further argued that in the absence of such compliance, the IOCL was under no obligation to recognise the alleged reconstituted partnership or to continue the supply of kerosene.
Respondent’s Arguments:
The respondents, comprising the Partnership Firm and surviving partners, argued that Clause 18 of the partnership deed dated 24th November 1989, explicitly provided that the partnership shall continue despite the death of a partner, allowing the surviving partners to admit competent heirs to reconstitute the Partnership Firm. They further contended that the dealership agreement dated 11th May 1990, does not mandate cessation of the Partnership Firm upon a partner’s death but permits continuation with the existing Partnership Firm, reconstitution with a fresh agreement, or termination. Since the dealership agreement was never terminated, the respondents asserted that the IOCL lacked authority to discontinue kerosene supplies or treat the Partnership Firm as defunct.
Held:
The SC held that, under Section 42(c) of the Indian Partnership Act, 1932, a partnership does not stand dissolved upon the death of a partner if the partnership deed contains a clause for its continuance. In Partnership Firm’s with more than 2 (two) partners where the deed provides for reconstitution, the surviving partners are entitled to carry on the business and may induct any competent heir of the deceased partner without requiring the consent of all legal heirs. The SC observed that the IOCL erred in refusing to recognise the reconstituted Partnership Firm solely on the ground that all legal heirs had not joined or consented to the reconstitution. It was held that the IOCL’s strict interpretation of its Guidelines was misplaced, as the Guidelines did not mandate the participation of all heirs for reconstitution. Furthermore, the Court affirmed that the IOCL must act in a manner conducive to business continuity and not adopt an arbitrary stance that hinders ongoing operations. Consequently, the SC upheld the directions issued by the HC mandating the IOCL to continue kerosene supply to the existing Partnership Firm until proper reconstitution as legally valid and proper, subject to any contrary orders that may be passed by a Civil Court in the event of a dispute raised by any heir.
Conclusion:
In conclusion, the SC declined to entertain the Special Leave Petition and affirmed the impugned orders of the HC. The petition was dismissed as devoid of merit, with the SC observing that the IOCL should refrain from initiating such litigations and avoid adopting a restrictive approach that interferes with the continuity of ongoing business operations.
Takeaway:
- A Partnership Firm does not automatically dissolve upon the death of a partner under Section 42(c) of the Indian Partnership Act, 1932, if the partnership deed contains a clause for continuation of the firm, particularly in firms comprising more than two partners. In such cases, the surviving partners may continue the business in accordance with the terms of the deed.
- A reconstituted partnership need not include all legal heirs of the deceased partner. Surviving partners may admit any competent heir on mutually agreed terms.