Chapter VI - Dissolution of a Firm
Section 55
Section 55: Sale of goodwill and rights after dissolution
Section 55 covers goodwill as a dissolution asset, the parties' competitive rights after its sale and reasonable agreements with the buyer.
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Need advice on Section 55?
This article is for general information. Refer to the Indian Partnership Act, 1932 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.
(2) Where the goodwill of a firm is sold 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 custom of persons who were dealing with the firm before its dissolution.
(3) Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
Central rule and applicability
Subject to contract between partners, goodwill is included in dissolution assets and may be sold separately or with other property. A partner may compete with the buyer and advertise, but subject to their agreement may not use the firm name, claim to carry on its business or solicit pre-dissolution customers. A reasonable agreement restricting similar business within the specified period or local limits is recognized by subsection (3).
Limits and related provisions
Selling goodwill is not automatically a total ban on competition, and the right to advertise is not unrestricted permission to use the sold name or solicit old custom. Distinguish the partners' asset-treatment contract from the partner-buyer agreement. Reasonableness, sale terms and relevant state law require review.
Hypothetical business example
Hypothetical: A dissolved firm's goodwill is sold to a buyer. A former partner proposes a new competing shop. The adviser separates general competition from use of the old name, claims of business continuity and customer solicitation, and checks any reasonable sale-related restraint.
Practical decision flow
Identify goodwill, the partnership contract and whether it is sold separately or with other assets.
Record the buyer and selling partners' agreed name, customer and competition terms.
Assess any subsection (3) restriction's specified scope and reasonableness before relying on it.
Check the applicable state law
This guide explains the central Section 55 baseline. State amendments, notifications and rules can affect its application. Confirm the law applicable to the firm's location and the relevant partnership agreement before acting.
Practical checklist
Do
- Identify goodwill, the partnership contract and whether it is sold separately or with other assets.
- Record the buyer and selling partners' agreed name, customer and competition terms.
- Assess any subsection (3) restriction's specified scope and reasonableness before relying on it.
Avoid
- Selling goodwill is not automatically a total ban on competition, and the right to advertise is not unrestricted permission to use the sold name or solicit old custom. Distinguish the partners' asset-treatment contract from the partner-buyer agreement. Reasonableness, sale terms and relevant state law require review.
Glossary
- Goodwill
- The business goodwill included in assets under the stated default.
- Sale-related restraint
- A reasonable restriction agreed with the goodwill buyer under subsection (3).
Frequently asked questions
Can goodwill be sold separately?
Yes. The section permits a separate sale or a sale with other firm property.
Is all competition automatically forbidden after the sale?
No. The statute permits competition and advertising subject to the specified limits and agreements.
Does the buyer automatically receive every possible non-compete protection?
No. An agreed restraint under subsection (3) must meet its conditions, including reasonableness.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026