Background:

The case involves a dispute over a kerosene dealership held by a three-person partnership firm after the death of its majority partner in 2009. The surviving partners sought to reconstitute the firm, but Indian Oil Corporation Ltd. (IOCL) stopped supplying kerosene, demanding no-objection certificates from all legal heirs. The Calcutta High Court ordered IOCL to continue supply until the firm was properly reconstituted or the dealership ended. IOCL challenged this decision in the Supreme Court in 2025. The main legal issue is whether the firm automatically dissolved upon the partner’s death and if IOCL’s demand for NOCs was justified under the dealership and partnership laws.

Issues

1. Whether the partnership firm stood dissolved upon the death of one partner, despite a clause in the partnership deed allowing for continuation?

2. Whether IOCL was justified in refusing to reconstitute the dealership and halt supply solely because not all legal heirs of the deceased partner had joined or given consent?

3. Whether IOCL’s action was arbitrary and violated Article 14 of the Constitution, considering its status as a public sector undertaking?

Observations:

The following observations were made by the court:

• • The Court held that the partnership did not dissolve upon the death of a partner, as the partnership deed contained a clause (Clause 18) explicitly allowing for its continuation. Thus, Section 42(c) of the Indian Partnership Act, 1932, did not apply in this case.
• • The Court clarified that IOCL’s insistence on the inclusion or consent of all legal heirs of the deceased partner for reconstitution was unwarranted. It emphasized that there is no legal or contractual requirement that all heirs must join the firm or provide no-objection certificates (NOCs).
• • The Court criticized IOCL’s refusal to reconstitute the dealership and its stoppage of kerosene supply as arbitrary, unreasonable, and bureaucratic. It stressed that as a public sector undertaking, IOCL is bound by the principles of fairness, reasonableness, and non-arbitrariness under Article 14 of the Constitution.
• • IOCL had the contractual option to either continue with the existing firm, reconstitute it, or terminate the dealership. However, the company did none of these explicitly and instead created unnecessary hurdles, which the Court found unjustified.
• • The Court reiterated that state-owned enterprises must not act in a hyper-technical or rigid manner, especially when their decisions affect ongoing livelihoods and business continuity.

Decision:

The Supreme Court dismissed the Special Leave Petition (SLP) on merits. The Court upheld the Calcutta High Court's direction to Indian Oil Corporation Ltd. (IOCL) to continue kerosene supply to the firm until the dealership is either validly reconstituted or formally terminated.

• • IOCL’s conduct was held to be unjustified, arbitrary, and contrary to law.
• • The Court reaffirmed that the firm had not been dissolved, and IOCL’s insistence on NOCs from all legal heirs was not legally sustainable.

Why this case matters:

• • The judgment reinforces that a partnership does not automatically dissolve on a partner’s death if the partnership deed allows for continuation.
• • It sends a strong message to public sector undertakings (like IOCL) that their actions must be fair, reasonable, and non-arbitrary, especially in commercial dealings. State entities are not above constitutional principles.
• • It clarified that not all legal heirs need to join or give NOCs for reconstituting a firm- only the willing heirs or partners may continue, streamlining reconstitution processes.
• • The decision underscores that contractual terms and partnership deeds must be respected, and arbitrary interpretations by powerful corporations can be challenged and corrected by the judiciary.

Laws related thereto:

Under Indian Partnership Act, 1932:

Section 42(c): Deals with dissolution of a firm on the death of a partner, unless there is a contract to the contrary. In this case, the partnership deed had a clause allowing continuation, so Section 42(c) did not apply.

Under Constitution:

Article 14: Guarantees equality before the law and prohibits arbitrary action by the State or its instrumentalities. The Court held that IOCL, being a public sector undertaking, acted arbitrarily by stopping supply and imposing unreasonable conditions, thus violating Article 14.

Judicial Precedents:

• Wazid Ali Abid Ali v. Commissioner of Income Tax (1958): Held that a partnership does not dissolve automatically on the death of a partner if the partnership deed provides for continuity. Applied to support the view that the firm in question continued lawfully after the death of one partner.

• Commissioner of Income Tax v. Suraj Bhan Om Prakash (1991): Reaffirmed that clauses in a partnership deed allowing continuation override the default rule of dissolution under Section 42(c), Partnership Act.

• Shrikant D. Marathe v. State of Maharashtra (2006): Emphasized that state instrumentalities must act fairly and reasonably in commercial dealings. Cited to support the principle that IOCL, being a PSU, is subject to Article 14 constraints.

• A.P. Pollution Control Board v. Prof. M.V. Nayudu (1999): Highlighted the doctrine that technical regulations must be interpreted fairly, especially by public bodies.

Referenced to underscore IOCL’s overly rigid and bureaucratic approach as legally unsound.