TREATMENT OF GOODWILL ON DISSOLUTION (SECTION 55)
The term goodwill is not defined in the Act. It is a commercial rather than legal term. It is well understood in business but not easy to define. The ‘Goodwill’ of a firm means the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of money. It is that species of connection in trade, which induces customers to deal with a particular firm. The goodwill of a firm can be compared to a seed which is planted on the day the firm begins its business and sprouts and grows as the firm grows in dealings, in its stature and in its reputation. It has no meaning, except in connection with a continuing business.
Section 14 of the Act includes the Goodwill of a business in the property of the firm. Clause (1) of Section 55 requires that the Goodwill of the business shall be sold like any other property of the firm when the affairs of the firm are wound up. Goodwill may be sold either along with other property or separately.
Rights of buyer and seller of goodwill
Section 55(2) states that where the goodwill of a firm is after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but subject to agreement between him and the buyer, he may not.
(a) Use the firm name;
(b) Represent himself as carrying on the business of the firm; or
(c) Solicit the old customers of take firm, i.e., the customers who were dealing with the firm before its dissolution.
in restraint of trade
Section 27 of the Contract Act lays down the rule that every agreement by which any person is restrained from exercising a lawful trade or business of any kind is, to that extent, void. That section, however, does recognize a necessary exception in the case of partnership agreements (Explanation Ito Sec. 27 of Contract Act).
Section 55 (3) provides for agreement in restraint of trade ‘being entered into, upon the sale of the go of a firm, by any partner or partners thereof, with the buyer of the goodwill. Though the general rule is that a partner may do business as he chooses in fair competition with others, he may make an agreement with the buyer that the former shall not carry on a business similar to that of the firm within a specified period or within specified limits, provided the restrictions imposed are reasonable.
Section 72 of the Partnership Act requires that in every case where the public notice of any matter in respect of partnership firm is required to be given under the Act, it must be given by publication (a) in the Official Gazette and (b) in at least one vernacular newspaper circulating in the district where the firm to which it relates, has its place or principal place of business.
In the case of registered firms, apart from the aforesaid notification, a notice is also required to be served on the registered firms under Section 63. Where the matters relate to (a) the retirement or expulsion of a partner, or (b) dissolution of the firm or c on the election to become or not be become a partner in a registered firm by a minor on his attaining majority.
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