Dissolution of a Partnership Firm

This post has been written by Shivangi Khattar pursuing 2nd Year BBA LLB  from JIMS School of Law, IP University.

INTRODUCTION

Dissolution of partnership means coming to an end of the relation known as partnership, between various partners. As soon as the firm dissolves, all the partners cease to be the member of the partnership firm. The Indian Partnership act lays down different modes through the partnership firm can be dissolved.

WHAT IS DISSOLUTION OF A FIRM?

Dissolution of firm means coming to an end of partnership between various partners. When one or more partner ceases to be partners but others continue the business in partnership, there is dissolution of partnership between the outgoing partners in one hand and the remaining partners on other hand. However, the remaining partners may still continue as partners.

According to Section 39 of the Indian Partnership Act, when the dissolution of partnership firm between all the partners of the firm occurs, this is called as dissolution of the firm.

MODES OF DISSOLUTION

The modes through which a partnership firm may be dissolved are as follows: –

DISSOLUTION BY AGREEMENT: –

According to section 40 of the act, a firm may be dissolved either with the consent of all the partners or in accordance with the contract between the partners.  It is considered that as the partners can create partnership firm by making a contract between themselves, then in a similar manner they are also free to end their partnership and dissolve the firm.

COMPULSORY DISSOLUTION: –

Section 41 of the act, states certain events on the happening of which there is compulsory dissolution of the firm or in other words we can say that Section 41 lays down the two circumstances through which a firm is compulsorily dissolved. The first circumstance is when all the partners except one are adjudicated as insolvent and the second circumstance is when a firm is involved in an unlawful business.

Therefore, under any of these circumstances the firm has to be compulsorily dissolved.

DISSOLUTION ON HAPPENING OF CERTAIN CONTINGENCIES: –

According to Section 42 of the act, “ Expiration of the partnership term”, “ Completion of the adventure”, “Death of a partner” and “ Insolvency of a partner” , are the circumstances on the happening of which the firm is dissolved unless there is a contract between the partners to continue the partnership firm. This section further lays down that dissolution is not compulsory under these circumstances, if the partners agree to continue the business of the partnership firm, then in that case they are free to do so.

DISSOLUTION BY NOTICE: –

According to Section 7, when the “Partnership is at will”, then the partners are not bound to remain as partners or continues the partnership for any fixed period.  Therefore, for dissolution of such firm Section 43 provides that a firm can be dissolved by any partner giving notice in writing to all the partners in order to convey his intention to dissolve the firm[1]. However, this notice must be communicated in a language which is clear and unambiguous.

DISSOLUTION BY THE COURT: –

Section 44 lays down certain grounds on which a suit can be filed for the dissolution of a firm. A suit for dissolution for the firm, may be filed, by the innocent partners and not by the partners whose conduct is the subject matter of suit. The need of court arises for dissolving the firm when all the partners do not want the dissolution. However, the partners who want dissolution can file a suit and others may consent for the same.

The grounds provided under this section are – unsoundness of mind, permanent incapacity to perform duties, conduct injurious to the partnership business, persistent breach of partnership agreement, transfer of the whole of a partner’s interest, when the business can be carried on only at a loss, when dissolution is just and equitable. Only under these provisions, the partners can file a suit to dissolve the firm.

CONCLUSION

The Indian Partnership Act, provides the right to dissolve the partnership firm. The provisions of this act also provide the modes through which a firm can be dissolved. However, before dissolving the firm it is very essential to settle all the assets and liabilities of the partners.

[1] Tilokram Ghosh v Gita Rani A.I.R. 1989 Cal.254