Dissolution of partnership means to stop or end the business of the partnership firm by all partners of the partnership firm. Dissolution of partnership and dissolution of partnership firm are two different situations. When a partner takes retirement or leaves the partnership, the business of partnership remains continues with other partners of the firm. But in the case of dissolution of partnership firm, all the partners of the firm discontinue the business of the firm and settle their account by sharing profit and loss.
The process of dissolution of partnership firm includes disposing of the assets of the firm and settlement of the accounts and liabilities of the partnership. Dissolution of partnership firm is the end of partnership deed which was binding all partners in the relationship of partnership. After the dissolution of partnership firm, the partners are free from the relationship with another partner of the firm. The partners are no more liable for the actions of other partners.
Dissolution of partnership firm
Section 39 of the Indian partnership act 1932 gives the definition of dissolution of partnership firm. The section says that “The dissolution of the partnership firm means to stop all the activities of the partnership firm.” It is the complete breakdown of the relationship between all the partners of the partnership firm.
Reasons for the dissolution of partnership
As we discussed above, the dissolution of partnership firm and dissolution of partnership are two different conditions. The dissolution of partnership is the situation where only one or more partner leaves the firm by giving notice. The other partners remain to continue to run the firm’s business. Only the partners who are leaving the firm has to clear their rights and liabilities towards the firm before going to leave. There are the following reasons on which a partner can leave the firm;
- Changes in the profit and sharing ratio which was decided at the time of the formation of the firm.
- Adding new partners in the partnership firm.
- Death of the existing partner of the firm.
- Retirement of the partner.
- The partner has lost his capacity to contract– insolvent, unsound mind etc.
- On the expiry of the period of partnership deed.
- On completion of the objective for which he was added.
These are the main reasons that the dissolution of a partnership is done. There can be more other reasons for the dissolution of a partnership according to the rules made by the firm at the time of its formation.
Types of dissolution of partnership firm
The dissolution is the end of the partnership firm and it can be done in the following two ways:
- Dissolution of firm without the intervention of the court
- Dissolution of firm by court
These are the two ways by which the dissolution of the partnership firm can be done. Let us discuss each type of dissolution of the firm in detail.
Dissolution of partnership firm without court
There are many reasons where the partners can take the action to do the dissolution of the firm. In these ways, the partners do not need the intervention of the court. They can do this mutually. The main following are conditions for the dissolution of partnership firm without court:
Dissolution by agreement
Section 40 of the Indian partnership act 1932 deals with the dissolution of partnership firm by agreement. The dissolution of the firm can be done if all the partners of the partnership firm are mutually agreed to the dissolution of the firm. It can be done by forming a written contract (partnership deed) between all the partners by taking their free consent for the dissolution of the firm. The partners can add dates and necessary conditions for the dissolution of the firm while the formation of a contract between partners.
Dissolution by agreement is the easiest way to dissolute the firm. The partners can dissolve any type of partnership whether it is the partnership at will or for a fixed duration with the help of a contract between partners.
Section 41 of the Indian Partnership Act deals with compulsory dissolution. There are different conditions for compulsory dissolution.
- Insolvency of partners in the firm
When all the partners of the firm or all partners except one partner declared insolvent. Insolvency makes the person incompetent to contract.
- The firm’s business become unlawful
If a partnership firm engaged in a business that becomes unlawful due to some event. Let us take the example of war. As per the law, it is unlawful to do trade or business with any country that is in the war with India. It means if you are doing business with a country for three years and now that country comes into war with India, your business will become unlawful and it will be the reason for the dissolution of partnership firm.
Dissolution depends upon certain events
While making the partnership firm, the partners may make the contract on which they mention the certain event on which they will be agreed for the dissolution of firm. Section 42 of the Indian partnership act. These events can be:
- Expiry of the term: the partnership firm will get dissolved after the expiry of the fixed term mentioned in the partnership deed.
- Completion of the object of the firm: The firm will be dissolved after the completion of the object of the partnership firm for which it was made by the partners.
- Death of the partner: If there are only two partners in the partnership firm and one die before the expiry of the term, the firm will be dissolved automatically. Also, if there are more than two partners in the firm, they may add the clause in the partnership deed that at the death of anyone partner, the partnership firm will dissolve. But, if they have not mentioned any such close, then even after the death of one partner, the other partners of the firm can continue the business.
- Insolvency of the partner: If one or two partners become insolvent, the other partners can agree to the dissolution of the firm. The partners can also add such terms and conditions in the partnership deed. Insolvency removes the capacity of the person to make the contract. The capacity to contract is the main essential to remain in the partnership firm.
- Resignation of the partner: Resignation by any partner of the partnership firm can also be the reason for the dissolution.
Dissolution by notice of partnership at will
Section 43 of the Indian partnership act defines that the dissolution of partnership firm at will can be done with the help of a written notice by one partner of the firm. Any of the partners can serve this written notice to other partners that he is willing to dissolve the partnership firm.
Dissolution of partnership firm by Court
Section 44 of the Indian partnership act 1932 deals with the dissolution of firm by the court. The court may order the dissolution of firm on the following grounds:
The partner becomes unsound mind
The court has the capacity to give the order for the dissolution of partnership firm if, any of the partners of partnership firm gives the application in the court that a partner has become unsound mind. Although, it is not necessary for the sleeping partner,, in some special circumstances, the lunacy or unsound mind is the ground for the dissolution of firm.
Incapacity of the partner
If any of the partners become incapable to be the partner in the partnership, the court may order the dissolution by taking the application from other partners.
For example, if a partner of the firm is punished for 5 years in case of abatement, the court may pass the order to dissolve the partnership.
Due to misconduct
The main cause of the dissolution of the partnership firm by the court is the misconduct of the partner. When the partner or partners not accept the rules of the firm and doing misbehave with other partners of the firm, the aggrieved party can use the partnership deed as documentary evidence to file litigation in the court for the dissolution of the partnership firm.
The Partnership deed is a legal document that binds the partners to work according to the rules written in the deed. If any other partner is not accepting this rule, the other partner has the right to move the application in court to dissolute the firm.
Constant breach of partnership deed
The partnership deed includes some terms and conditions for the firm. But, if any of the partners is constantly breaching the rules of the deed, The other partner can ask the court for the dissolution of firm.
Transfer of Interest to third party
The partner of the firm cannot transfer his full rights and liabilities to any other third party. If a partner does so, the other partner has the right to give the application in court for the dissolution of the firm.
Firm taking continue losses
If a firm suffering from continued losses and there is no more capital left for the growth of the partnership firm, in that condition, the court may pass the orders for the dissolution of the partnership firm.
Any other equitable ground
The court has the right to order the dissolution of the firm if the court found any other reason which is just and equitable for the dissolution of the firm. The total loss of confidence between the partners was considered as the fair reason for dissolution in the case of Havidatt Singh v. Mukhe Singh.
Winding up of business after the dissolution
The winding-up of the firm is almost the same as the winding up of a company. Section 46 of the Indian partnership act deal with the rights of the partner to have business wound up after dissolution. The property of the firm will be sold to pay the debts of the firm and the rest amount will be shared between partners as per the percentage written in the partnership deed.
Modes of settlement of accounts
There are many consequences of the dissolution of the partnership firm. Normally, the partners of the partnership firm made the rule for the settlement of accounts after the dissolution of the partnership firm. But, in case, if there is no agreement between the partners for the settlement of accounts, the given provisions of the Indian partnership act 1932 shall apply:
All the losses including the deficiency of the capital of the firm is paid by:
Firstly– From the profits of the firm,
Secondly– from the partner’s capital
Thirdly– By partners individually in the same ratio which was used for profit sharing.
After selling the assets of the firm, this money will be used:
Firstly– For paying the debt taken by the third party
Secondly– paying any loans or advance money by any partner
Thirdly– for paying back the capital given by every partner
After paying these three, the left money will be distributed to all partners according to the profit-sharing ratio.
Difference between the dissolution of partnership and dissolution of partnership firm
|S. No||Dissolution of Partnership||Dissolution of Partnership Firm|
|1||The business of the partnership firm remains to continue.||It is the end of the business of the firm.|
|2||Only the account of one partner (who is leaving the partnership) is settled.||All the partners account settled after the dissolution of the partnership firm by fulfilling the liabilities against the firm.|
|3||It can be done by mutual consent of all the partners. There is no need for the intervention of the court.||There may or may not be the intervention of the court for the dissolution of the firm.|
|4||Only one partner will be free from his relationship with the firm.||All the partners will be free from their relationship. There will be no more liability remaining for the act done by another partner.|
|5||The partnership deed will remain in force for other partners of the firm.||The partnership deed will come to the end and it will lose its binding force.|
The Indian partnership act 1932 provides the rules for the dissolution of a partnership firm. The dissolution of the firm is the end of the business of the firm. It releases the partners from the relations between other partners. The process of dissolution can be done with the help of the court or without the help of the court. The act helps the partners for the settlement of the accounts by providing rules to settle the account.