Section 55 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 55 deals with the goodwill of a dissolved firm. In three sub-sections it says that goodwill is an asset in settling accounts and may be sold, that a partner who sells it may still compete but not use the old name or approach the old customers, and that a partner may agree with the buyer not to carry on a similar business. If you are dealing with goodwill in a dissolution, our legal consultation service can help.
In settling the accounts of a firm after dissolution, goodwill is, subject to contract between the partners, included in the assets, and may be sold separately or with other property (55(1)). Where goodwill is sold, a partner may carry on a competing business and advertise it, but subject to agreement between him and the buyer he may not use the firm name, represent himself as carrying on the firm's business, or solicit the custom of persons who dealt with the firm before dissolution (55(2)). A partner may agree with the buyer not to carry on a similar business within a specified period or local limits; such an agreement is valid if reasonable (55(3)).
Section 55(1): goodwill is an asset
In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and may be sold either separately or along with other property of the firm.
| Point | Text |
|---|---|
| When | In settling accounts after dissolution |
| Treatment | Goodwill is included in the assets |
| Sale | Separately or with other property of the firm |
| Contract | Subject to contract between the partners |
Goodwill therefore counts when the assets are valued and applied under section 48. The text does not define goodwill, set a method of valuation, or say who may buy. The deed can provide otherwise, for instance that goodwill belongs to one named partner, or is valued by a stated formula. For more on goodwill when a partner leaves, see rights of an outgoing partner.
The source copy has a "Short Note" under section 55 with a case citation; it is the compiler's note and is not used here.
Example. A dissolved firm, Anand Traders, has stock and receivables worth Rs 12 lakh and a recognised name in its market. The deed is silent about goodwill. Under 55(1), the goodwill is counted among the assets, and may be sold together with the stock or on its own, with the sale price going into the accounts.
Section 55(2): seller and buyer
Where the goodwill is sold after dissolution, a partner may carry on a business competing with that of the buyer and may advertise such business, but, subject to agreement between him and the buyer, he may not:
| Prohibited unless agreed otherwise | Text |
|---|---|
| (a) | Use the firm name |
| (b) | Represent himself as carrying on the business of the firm |
| (c) | Solicit the custom of persons who were dealing with the firm before its dissolution |
This mirrors section 36(1), which gives similar rules for an outgoing partner while the firm continues; see sections 35 and 36. The differences matter:
- Here the protected party is the buyer of the goodwill. The agreement that can displace the rule is between the seller-partner and the buyer, not among the partners generally.
- The solicitation clause refers to persons dealing with the firm before its dissolution.
- The seller may compete and advertise. Without more, selling goodwill does not stop him opening a rival business.
Example. Anand Traders' goodwill is sold to Mr Bhatia for Rs 3 lakh. A selling partner, Suresh, opens a new shop nearby and advertises it. Under 55(2), that is allowed. But he may not call it "Anand Traders", say he is carrying on the old firm's business, or approach the customers who dealt with Anand Traders, unless Suresh and Mr Bhatia have agreed otherwise.
Section 55(3): agreement in restraint of trade
Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that he will not carry on any business similar to that of the firm within a specified period or specified local limits. Notwithstanding section 27 of the Indian Contract Act, 1872, such an agreement is valid if the restrictions imposed are reasonable.
| Element | Text |
|---|---|
| Timing | Upon the sale of the goodwill |
| Parties | Any partner and the buyer |
| Content | No similar business within a specified period or specified local limits |
| Validity | Valid if reasonable, despite section 27 of the Contract Act |
This is the buyer's main protection. Without such an agreement, 55(2) lets the seller compete, subject to its three limits. With one, the buyer has a contractual bar for the period and area agreed. The Act gives no maximum duration or distance; "reasonable" is the only test. For the parallel provisions on restraint, see sections 53 and 54.
Sub-sections at a glance
| Sub-section | Rule | Can it be varied? |
|---|---|---|
| 55(1) | Goodwill included in assets and may be sold | Yes, subject to contract between the partners |
| 55(2) | Seller may compete and advertise; may not use name, hold out or solicit, unless agreed | Yes, subject to agreement between him and the buyer |
| 55(3) | Restraint agreement with buyer valid if reasonable | It is itself an agreement |
Practical points
- Say in the deed who owns goodwill on dissolution and how it is valued.
- For a sale, put the restraint in writing with period and area.
- Settle the name in the sale agreement: can the seller use any part of it?
- Record the price in the dissolution accounts. For tax effects of the sale, see our income-tax guides, for instance partnership firm taxation under ITA 2025.
Need help with selling or valuing goodwill?
Goodwill is often the largest asset of a small firm and the least clearly documented. Our legal consultation service can help you decide how it is dealt with in the deed or sale agreement, and how the restraint on the seller should be worded. Bring your deed and the last accounts.
Key takeaways
- Goodwill is included in the assets in settling accounts after dissolution, subject to contract between the partners, and may be sold separately or with other property (55(1)).
- After a sale, a partner may compete and advertise, but, unless agreed with the buyer, may not use the firm name, hold himself out as carrying on the firm's business, or solicit its earlier customers (55(2)).
- A partner may agree with the buyer not to carry on a similar business within a specified period or area, valid if reasonable (55(3)).
Read next
- Sections 53 and 54: restraining use of firm name and restraint of trade
- Section 48: settlement of accounts between partners
- Sections 56 and 57: exemption from the registration chapter and Registrar of Firms
- Rights of an outgoing partner: goodwill and share
Disclaimer: Based on the text of the Indian Partnership Act, 1932 as consulted on 1 October 2026. Several States have amended the registration chapter and make their own rules, forms and fees for the Registrar of Firms. This article is general information, not legal advice; check the official text and your State's rules before acting.