Dissolution of a Partnership Firm

Chapter VI of Partnership Act, 1932 talks about dissolution of a partnership firm.

Dissolution of a Firm: Section 39

The dissolution of partnership relation between all partners is the dissolution of the firm. It is the ending of partnership relations among partners that ultimately leads to the dissolution of a firm.

Dissolution by Agreement: Section 40

Partners can, at any time with everyone’s consent, may make an agreement in order to dissolve the firm. This applies to all cases whether the firm is for a fixed period or at will.

The provision for dissolution can be in partnership deed also or in a separate agreement.

Compulsory Dissolution: Section 41

Compulsory dissolution is not subjected to any contract or does not depend upon the consent of the partners.

a. Clause (a) omitted by Act 31 of 2016.

b. Illegality of Business – Where the business of the firm from the very beginning is illegal, then it is void under section 23 of the Indian Contract Act. This section applies when the business, in the beginning, was lawful, but due to a change in law or any subsequent impossibility, the business became unlawful. In this way, the firm by operation of law gets dissolved.

Dissolution on happening of certain contingencies: Section 42

Subject to contract, the firm is dissolved:-
I. If constituted for fixed-term, then by the expiry of the term.
II. If constituted for one or more adventures, by its completion thereof.
III. By the death of the partner.
IV. When partner becomes insolvent.

Dissolution by notice of partnership at will: Section 43

Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners.

The firm will get dissolved from the date of dissolution mentioned in the notice or, if not mentioned, then from the date when communication of notice is completed.

Dissolution by the court: Section 44

1. If a partner has become of unsound mind.

Insanity means that partner becomes incapable of performing duties as a partner. Either insane partner or any other partner may apply to the court for dissolution.

2. Permanent incapacity of a partner.

If a partner has become permanently incapable, then any remaining partner may apply for dissolution. The incapacity may be due to illness, mental or physical.

3. Partner guilty of misconduct.

When a partner’s misconduct is likely to affect the business of the firm, then any remaining partner of the firm may apply for dissolution. Basically, the nature of misconduct should be such which will damage the business prospects of the firm.

4. Persistent breach of the agreement.

If a partner conducts himself in the business which is not reasonably practicable for other partners to carry on partnership business with him.

5. Transfer of interest.

When a partner has transferred the whole of his interest in the firm to a third party or has allowed his interest to be charged, for recovery of arrears under land revenue. (under Order XXI, Rule 49 of Civil Procedure Code)

6. Perpetual Losses.

When the business of the firm is meeting continuous loss.

7. Just and equitable.

It gives the court discretionary power to dissolve the firm. Where ever there is a mismanagement of the firm, it gives good ground to court for ordering dissolution.

Liability for acts of partners done after dissolution: Section 45

(Consequences of dissolution)

The first step in the process of dissolution is to give public notice of it. This is necessary in order to prevent the partners’ liability by holding out and by estoppel. If public notice is not given, then the liability of the partners remains continued.

Note: Notice can be given by any partner.