What is Goodwill

In Ramnik Vallabhdas Madhvani and others Versus Taraben Pravinlal Madhvani[AIR 2004 SC 1084 : (2003) 5 Suppl. SCR 230 : (2004) 1 SCC 497 ]

“goodwill”, as Lord Machaghten described ‘a thing very easy to describe, very difficult to define’, in Inland Revenue Commissioner vs. Muller and Co. (1901) AC 223).

67. The term ‘goodwill’ signifies the value of the business in the hands of a successor, so far as increased by the continuity of the undertaking being preserved in the shape of the right to use the old name and otherwise. It is something more than a mere chance of probability of old customers maintaining their connection, though this is a material part of the practical fruits. ‘goodwill’ may be the whole advantage belonging to the firm, its reputation as also connection thereof. It, thus, means that every affirmative advantage as contrasted with negative advantage that has been acquired in carrying on the business whether connected with the premises of business or its name or style everything connected with or carrying the benefit of the business.

68. In Halsbury’s Laws of England (Fourth Edition) volume 35 at page 114, the law is stated in the following terms :

“201. goodwill generally; right to use name; sale to a partner. The goodwill of the business carried on by a partnership forms part of the assets to be realised on distribution. If the goodwill is not sold, each part er may use the name of the firm, if by doing so he does not hold out the other partners as still being partners with him. If a partner agrees to retire and his partners buy his share but do not take any express assignment of the goodwill, they are not entitled to continue the use of his name as part of the firm name, and where a business is carried on under the name, solely or with any addition, of an outgoing partner who is till living and not bankrupt, a purchaser of the business including the goodwill is not entitled to use the name of the outgoing partner in such a way as to suggest that he is still connected with the business, unless the right to use the firm name is expressly assigned. On dissolution, a partner may advertise that he is no longer connected with a periodical that the firm publishes.

Where the goodwill becomes on dissolution the property of one of the partners (either by purchase in the ordinary way or pursuant to a provision in the articles), the outgoing partner or partners may not carry on a similar business in the name of the old firm, and may not solicit old customers”

69. The goodwill is generally considered to be an asset of the partnership. In the aformentioned volume of Halsbury’s Laws of England at page 116, it is further stated :

“204. When goodwill is to be treated as an asset. Although, generally, the goodwill should be included where, under the partnership articles, a general account and valuation is to be taken on the death of a partner, the value of the goodwill should not, in the absence of contrary agreement, be included in the firm’s periodical balance sheets; and, therefore, where the value of the share of a deceased partner is, by agreement, governed by the balance sheet, his estate is not entitled to treat the goodwill as an asset.

Where a surviving partner sells the partnership business, the estate of his deceased partner is entitled to a share of the purchase money representing the value, if any, of the goodwill; but, having regard to the rights of the surviving partners to carry on a similar business, this value may be infinitesimal.

It is unlawful for a medical practitioner whose name is entered on any list of medical practitioners undertaking to provide general medical services under the national health service to sell any part of the goodwill of his medical practice”

70. The goodwill has been claimed for the firm’s continuous business since 1954. The court has proceeded to calculate the amount of goodwill on the basis of the profits derived by the firm for the last five years on an average. It is not contended that such a method is unknown in commercial field. Whenever a firm is dissolved the value of the goodwill has to be worked out and divided between the partners.