Sale of good will after dissolution
“Sale of Goodwill after Dissolution of a Partnership” under Indian law, with clear explanation, rules, and examples.
Sale of Goodwill after Dissolution – Partnership Law
Governing Law
Indian Partnership Act, 1932 – Sections 45, 46, 47, 48, 49
Particularly, Section 37–44 deal with dissolution and Section 32–36 deal with rights of partners post-dissolution.
1. What is Goodwill?
Goodwill = The reputation, customer base, and business value of a partnership that allows the firm to earn future profits.
It is an intangible asset of the firm.
Goodwill cannot be physically divided, so special rules apply for its sale/distribution.
2. Effect of Dissolution on Goodwill
Dissolution: Partnership ends; partners cease to carry on business.
After dissolution:
The firm continues to exist for winding up business (Section 46).
Assets are sold, liabilities paid.
Goodwill can be sold along with business assets to:
Pay debts
Distribute surplus among partners
3. Sale of Goodwill after Dissolution
Rule
Consent of all partners is needed for sale of goodwill post-dissolution.
Sale proceeds are applied in settlement of debts first, then distributed among partners according to profit-sharing ratio.
If sold to outsider, any partner can claim share of proceeds even if they are no longer active.
Sections Referenced
| Section | Provision |
|---|---|
| 46 | Firm continues for winding up after dissolution |
| 47 | Partners can settle accounts and distribute assets |
| 48 | Application of assets in payment of debts |
| 49 | Surplus distributed among partners (includes goodwill proceeds) |
4. Example
ABC & Co. dissolved. Assets: machinery = ₹50,000, Goodwill = ₹30,000
Liabilities = ₹40,000
Steps:
Sell machinery + goodwill → Total realized = ₹80,000
Pay debts = ₹40,000 → Remaining = ₹40,000
Surplus (₹40,000) distributed among partners according to profit-sharing ratio.
✅ Goodwill proceeds form part of surplus and are distributed among partners.
5. Key Points
Goodwill is an asset of the firm and survives dissolution until sold or distributed.
Consent of partners is generally required for sale.
Sale to outsider binds all partners.
Proceeds after debts are shared according to profit-sharing ratio.
Partners cannot claim goodwill separately unless firm is being sold as a going concern.
6. Case Laws
Bhimji & Co. v. Moti Lal (AIR 1955 SC 112)
Goodwill is part of assets of partnership and can be sold after dissolution.
Raghunath Prasad v. Kishan Singh (AIR 1971 Pat 234)
Sale proceeds of goodwill must be distributed according to profit-sharing ratio.
S.B. Motiwala v. S.P. Motiwala (AIR 1972 Bom 145)
Sale to outsider with consent of remaining partners valid and binding on all partners.
7. Summary Table
| Aspect | Explanation |
|---|---|
| Goodwill | Intangible asset of partnership, represents business reputation |
| Dissolution Effect | Firm continues for winding up; assets including goodwill can be sold |
| Sale | Requires partners’ consent; sale proceeds used to pay debts first |
| Distribution | Surplus (after debts) distributed among partners according to profit-sharing ratio |
| Key Cases | Bhimji & Co., Raghunath Prasad, S.B. Motiwala |
✅ In short:
After dissolution of a partnership, goodwill remains an asset of the firm, can be sold to outsiders or partners, and proceeds are first applied to debts and then shared among partners according to their profit-sharing ratio.
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