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All you need to know about dissolution of a partnership firm

All you need to know about dissolution of a partnership firm

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  Posted on August 7, 2021

All you need to know about dissolution of a partnership firm

In a partnership firm, more persons are there. There should be minimum of 2 persons and maximum of 10 persons in the banking business and 20 in non-banking business to form a partnership firm.

Profit and loss in a partnership firm are shared between all the partners. There is an agreement by which profit and loss are decided between the partners. A Partnership agreement can be of two types. It can be an oral agreement or written agreement among the partners. In a partnership firm, consent of all the partners is required and one can not transfer his own shares to the third person without the consent of other partners. Partnership business solely depends on trust and good faith among the partners.

Advantages of Partnership firm

  • Partnership business can be easily formed as it is a contractual agreement between the partners. Legal formalities are not that much and it can be easily formed through registration.
  • Management in a partnership firm is well managed. As all the partners take interests in the affairs of the business because of earning the profit.
  • The Risk in a partnership firm is minimum as it is shared by every partner of the firm. Every partner bear risk individually.
  • Due to more number of persons in a business, there is a large number of resources for the business

Dissolution of partnership firm

Section 39 of the Indian Partnership Act, 1932 defines dissolution of partnership firm. It defines the dissolution of partnership between all the partners of a firm is called the dissolution of the firm.

Dissolution of partnership firm is different from the dissolution of partners. Dissolution of the firm means to discontinue all the business activities within the firm. When the activities are stopped and the assets are used to pay off the debt it amounts to the dissolution of the firm. When a partner agrees to continue the same firm even after the retirement of a partner then it is called dissolution of partners and not firm. As the firm is still in process by the partner but the partnership between the partner is finished.

Dissolution of firm leads to the dissolution of partnership too. There is a contractual relationship among the partners which works with the firm. If the firm is dissolved then the partnership is also dissolved.

The Indian Partnership Act, 1932 defines dissolution in different ways. Section 40 to 44 states dissolution of partnership firm.

Dissolution of a partnership firm can be done in 2 ways:

  • Dissolution without the intervention of the court(section 40-43)
  • Dissolution by the Court (Section 44)

Related Topics

Procedure To Register a Partnership Firm In India

Section 42 – Dissolution on the happening of certain contingencies

This section focuses on the dissolution of the firm on happening of certain events. Dissolution of the firm can take place if the following events take place:

  • Expiry of fixed term: If the contract of a partnership firm is on a fixed term. Then, dissolution of that firm will take place on the expiry of that contract. when the contract expires dissolution will take place.
  • If the firm was formed for a certain number of task. Then on completion of that task, the firm ceases to exist. If the firm is constituted for a particular task then on completion of that task firm will dissolve, unless there is a contract or agreement.
  • Dissolution can also take place with the death of a partner. Dissolution of the firm can take place only when the other partner chooses too. If he wants to continue the firm even after the death of a partner then there will be no dissolution of the firm. Only the partnership will be dissolved.
  • When one of the partners or all the partners is insolvent then dissolution can take place. Even the insolvency of one partner can dissolve the firm.
  • Dissolution can also take place if any one of the partners resigns. If one partner thinks not to continue further then he/she can resign but this will also dissolve the firm.

Section 43 – Dissolution by notice of partnership at will

Partner in a partnership firm can dissolve it by giving notice of dissolution to other partners. The notice should be communicated to the other partners as mentioned in the agreement and if not mentioned then a mode of communication should be reasonable. The notice of dissolution should not be in between any transaction and is a partner give notice of dissolution in between the transaction his notice should be held until the time the transaction is completed. The notice should be clear and should not be confusing in any sense. It should be properly communicated to the other partners.

Section 44 – Dissolution By the court

Dissolution of a firm can be done by suing the other partner and bringing the case before the court. The court may dissolve a firm on any of the following grounds:

  • When one of the partners becomes of unsound mind and is unable to continue further than in this case a suit may be brought up by the other partner to dissolve the firm. Unsoundness of a partner does not automatically dissolve the firm but it can be a ground for dissolution. It is not necessary that the unsoundness should be permanent.
  • If a partner has become permanently incapable of performing his duties as a partner then another partner can sue for dissolution of the firm. The Court may order for dissolution of the firm. Incapable to perform his duties can be due to any reason like going abroad for long time or imprisonment of a partner for a long time. As a partner won’t be able to perform his duties, the court will order for dissolution of the firm.
  • If there is any misconduct by a partner other than the suing partner due to which firm has suffered loss, then the court may order the dissolution of the firm. Misconduct or guilty of conduct which is likely to affect prejudicially the carrying on of the business. Then the other partner can sue the partner for misconduct which is the ground for dissolution of the firm.
  • Agreements are the most important document that all the partners must follow. If any partner breaches the agreement regarding the conduct of business then the other partner can sue him for breach of an agreement which is a ground of dissolution. The court may order for dissolution of a firm if a partner is found guilty of constant breach of the agreement and it becomes impossible to continue the business.
  • When a partner transfers whole of his share/interests to the third party for permanently then it can be a ground for dissolution of firm or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner.
  • If the firm is suffering from continuous loss, then the court may order for dissolution if there is no capital available for further growth.

Related Topics

What is Partnership – Advantages and Disadvantages

Section 45 – Liability of partners after dissolution

Section 45 defines liability for acts of partners done after dissolution. The partner, in this case, continue to be liable as such to the third parties for any act done before the dissolution. Liability of a partner does not finish automatically, the liability of a partner finishes when all the event are finished that has been taken up before the dissolution of the firm until public notice is given of the dissolution. A Partner who dies or who is adjudicated an insolvent or a partner who retires from the firm is not liable under this section for acts done after the date on which he ceases to be a partner. Notice of dissolution can be given by any partner.

Section 46 – Rights of partners to have business wound up after dissolution

After the dissolution of the firm, every partner is entitled to equal rights or according to the contract. All the partners are entitled to the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives according to their rights. These rights are given when winding up of the firm is taking place.

Section 47 – Continuing Authority of partners for purposes of winding up

After the dissolution of the firm the authority of each partner to bind the firm continues so far as for being necessary to wind up the affairs of the firm and to complete the transactions begun but unfinished at the time of dissolution. This section focuses on the transactions that are unfinished until the time of dissolution. Partners have to finish all the transactions that are related to a 3rd party for the purpose of winding up the business. It also states that firm is not bound by the acts of a partner who has been adjudicated insolvent but this provision does not affect the liability of any person who has after the adjudication represented himself as a partner of the insolvent.

Section 48 – Mode of settlement of accounts between partners

This section defines all the modes in which the accounts can be settled among partners after dissolution.

The following rules shall be observed subject to agreement by the partners:

  • All the losses of the company including deficiencies of capital shall be paid out of profits first, then out of the capital and lastly if necessary by the partners individually in proportions to which they are entitled to share profits.
  • All the assets of the company including all the sums contributed by the partners shall be applied in the following manner:
  • In paying all the debts of the firm to the third parties
  • in paying each partner rateable what is due to him from the firm for advances as distinguished from capital
  • in paying to each partner rateable what is due to him on account of capital
  • The residue shall be divided among the partners in the proportions in which they were entitled to share profits.
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