Challenges for creditors in recovering debts when all Partners pass away

The Partnership Act defines ‘Partnership’ as the relation between ‘persons’ who have agreed to share the profits of a business carried on by all or any of them acting for all. Naturally, for a partnership to exist and subsist, a minimum of two surviving partners is mandatory. As per Section 42 of the Partnership Act, in a situation where one of the two partners dies or there remains only one surviving partner the partnership firm automatically dissolves.

The fundamental principle of a partnership as encapsulated under Section 25 of the Partnership Act is that every partner is liable jointly and severally for all acts of the firm while he was/ is a partner. As a consequence, a sole surviving partner even after the dissolution of the firm upon the death of a partner, assumes unlimited liability to discharge any debt owed by the firm. This provision ensures that creditors can seek repayment from any partner for the full amount of the firm's debts, regardless of which partner was responsible for incurring the debt.

However, creditors face significant challenges in enforcing their debt in a situation where none of the partners survive. In such cases, the legal heirs of the partners are not liable for the debts of the firm, as they were never parties to the partnership agreement and thus cannot be held responsible for the obligations incurred by the firm. The principle of limited liability for heirs ensures that they are not required to pay the firm's debts from their personal assets.

In the same vein in the landmark case of SP Mishra & Ors. v. Mohd. Laiquddin Khan & Anr., the Hon’ble Supreme Court held that even a favourable decree obtained by a creditor against a partner cannot bind his/ her legal heirs, as such, the decree is not executable against them. The legal heirs of a deceased partner are not parties to the contract and such contract cannot confer rights or impose obligations arising under it on any third party, except parties to it.

In fact, the Hon’ble Supreme Court went a step further to hold that even if the partnership deed envisages that after the death of a partner his legal heirs would automatically enter the partnership, such a clause would be void ab initio as it would run contrary to the provisions of the Partnership Act and would be opposed to public policy.

Personal rights, distinct from proprietary rights, arise from contractual obligations or pertain to an individual's status. These personal rights are neither transferable nor inheritable. Correspondingly, even Section 306 of the Indian Succession Act, 1925, embodies the maxim "actio personalis moritur cum persona" (a personal right of action dies with the person), which applies to a specific class of cases where the right in question is not inheritable.

Therefore, creditors may find themselves without recourse to recover the amounts owed, as the deceased partners' estates may not have sufficient assets to cover the debts, and the heirs are protected from any personal financial liability.