Dissolution of Partnership Firm

Dissolution of Partnership

When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.” It implies the complete break down of the relation of partnership between all the partners.

Dissolution of partnership is different from the dissolution of firm. Dissolution of a partnership firm merely involves a change in the relation of partners; whereas the dissolution of firm amounts to a complete closure of the business. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm.

Dissolution of a Partnership firm may be effected in the following ways:

  • Dissolution without the intervention of the Court.
  • Dissolution by Court.

Dissolution without the intervention of Court:-

  1. By Agreement (S.40):- A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.
  2. Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes compulsory for the firm to dissolute:
    (i) Insolvency of Partners:- In case all the partners or all the partners except one become insolvent.
    (ii) Unlawful Business:- In case the firm’s business become unlawful on the happening of a subsequent event. e.g. trading with alien country
  3. Dissolution on the happening of contingent event (S.42) A firm may be dissolved on the happening of any of the following contingent event:-
    (i) Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically.
    (ii) On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist, unless there is an agreement to the contrary.
    (iii) Death of Partner:- Death of any of the partner dissolves the partnership.
    (iv) Insolvency of Partner:- in the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm.the rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular ventureand the same has yet not been completed.
    (v) Resignation of Partner:- Resignation by any of the partners dissolves the partnership
  4. Dissolution by notice (S.43):-In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners.[1] In those cases where a partner has given notice of dissolution at a time when dissolution will give him some advantage over the other partners, he may be held in the firm till the pending transactions are completed.

Dissolution by Court:-

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances.
(ii) Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner.where a partner is imprisoned for a long period of time the court may dissolve the partnership.[2]
(iii) Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm.
(iv) Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner.
(v) Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.
(vi) Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.
(vii) Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners.[3]

 


[1] Banarsidas v. Kanshi Ram A.I.R. (1963) S.C. 1165

[2] Whitwell v. Arthur 1865 beva 140

[3] Havidatt singh v. Mukhe Singh  A.I.R. 1973, J&K , 46

 

(This article is written by Nandita Bajpai, a student of Amity Law School, Lucknow)

By Nandita Bajpai on March 23, 2011 · Posted in Mercantile Law

18 Comments | Post Comment

prashant says:

Hi!
i read ur article it is nice contribution
thank’s

Posted on June 15th, 2011

nandita says:

hey Prashant,
Thanks..

Posted on June 16th, 2011

Aravind says:

Hi Nandita,

Read ur article… it was really helpful..

I have few more clarifications. Hope you would help me.

My dad run’s a partnership firm and has been incurring losses continuously for the last few years & now the business is totally down.

I have a proposal of winding up the business as it has been under loss and liability has been summed up huge.

Dad’s partner is also ok in winding up the business.

How do we handle the liability outstanding and the payments that havent received.

Mail me incase if you require any further details.

Thank you very much in Advance.

Aravind.R

Posted on September 10th, 2011

Chuff Daniella says:

Hi,your article was really nice and I appreciate it’s assistance.
Kindly please advice me on how to make a partnership a corporation.

Posted on October 24th, 2011

ashwini says:

hi nandita i read ur article…it was nice n very helpful tanq

Posted on November 2nd, 2011

neetu says:

hi nandita i read ur article its realy nice .

Posted on January 10th, 2012

jenny says:

Read your article, helped me a bit with an assignment I was doing.
Thanks.

Posted on February 27th, 2012

vijay kumar says:

it is clear and perfect explanation between the dissolution of firm and dissolution of partnership, very good articles, it will use for all law students
thanks,

vijaykumar advocate chennai high court

Posted on March 9th, 2012

ozal says:

hi Nandita
Very good article.
Please clarify me on dissolution of partnership firm,how is the land divided among partners?do we have to register the division of land?
also is some partner has taken advance without consent of others for sale of firms land,what will be repercursion on the firm

Posted on March 14th, 2012

UKS Chauhan says:

Hi, it is nice and very informative. However, kindly intimate whether notice to end partnership in a partnership deed at will is mandatory as the said deed was not registered with RoF. thanks

Posted on April 11th, 2012

Ashok Kumar Panday, Advocate says:

Nandita Jee,
having gone through your article “Dissolution of partnership firm” and found that it is a good approach to all.
you have tried to explain the said article in a simple and precise way.
So thanks to you
A.K.Panday
Advocate.

Posted on April 20th, 2012

Fiza says:

Your article is best

Posted on August 4th, 2012

MOSMAS says:

Hai nandita,

Read through you article and found it absolutely helpful in my Business Law Assignment.

Posted on September 20th, 2012

Yash Paul says:

Hi nandita,

I was looking for explainations on “dissolution of partnership” and i came across your article. You have mentioned that dissolution of partnership is different from dissolution of firm, I was a bit curious, if partners of a firm can execute a partition deed and share the property of the partnership firm and still remain in that partnership firm or it will be deemed as dissolution of partnership firm. Please quote the legal provisions also.

regards

Yash

Posted on October 31st, 2012

farha says:

nice way of explanation…….

Posted on December 1st, 2012

padma priya says:

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Posted on February 25th, 2013

priyankaa says:

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Posted on February 25th, 2013

Harsh says:

Thanks for help in my A/c project.

Posted on September 17th, 2013