DISSOLUTION OF PARTNERSHIP FIRM

The first and easy way to dissolve the firm is dissolution by the agreement. A firm can be dissolved with the consent of all the partners. All Partners can give a mutual consent for closing the partnership firm or may enter into an agreement for the dissolve.

• (1) By the adjudication of all the partners or not of all the partners but insolvency of any one, or

• (2) By the occurrence of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership:

  Provided that, when more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more should not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

A firm can be dissolved—

(1) If formed for a fixed term, a partnership will be dissolved by the expiry of that term;

(2) If constituted to carry out one or more adventures or undertakings, or a partnership is formed for a certain task or objective, by the completion of thereof;

(3) By the death of a partner; if one of the partners dies and there are only two partners the partnership firm will automatically dissolve. If there are more than two partners, then the other partners may continue to operate the firm.In such case, only the partnership will get dissolved, and other partners can enter into a new agreement.

(4) By the adjudication of a partner as an insolvent.

(1) When the partnership is at will, the firm may be dissolved by any partner giving advance notice in writing to all the other partners of his intention to dissolve the firm.

(2) The dissolution of firm will be effective as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

At the litigation of a partner, the court may dissolve the firm on any of the following grounds:—

(a) That a partner has become of mentally unstable in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) If a partner has become in any way permanently incapable of performing his duties as partner;

(c) If a partner is guilty of any misconduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

(d) If a partner doesn’t abide by the clauses of the agreement or willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not suitable or reasonably practicable for the other partners to carry on the business in partnership with him as a partner;

(e) If a partner, other than the partner suing, has transferred the whole of his interest in the firm to a third party, 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 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;

(f) That the business of the firm cannot be carried on at a loss; or

(g) On any other ground which renders it just and sensible that the firm should be dissolved.

But a court can dissolve the firm only if it is registered with the Registrar of Firms. Therefore an unregistered partnership firm can’t be dissolved by the court.

The partners continue to be liable towards the third parties for any act done by any of them on behalf of the firm which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution. The estate of a partner who dies, or who is declared as an insolvent, or of a partner who, have not been known to the person dealing with the firm to be a partner, a retired partner from the firm, is not liable under this section for acts done after the date on which he discontinue to be a partner. Notice of the effect can be given by any of the partner.

On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm used for the payment of all the debts and liabilities of the firm, and to distribute the surplus among the partners or their representatives according to their rights.

After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continued so far as may be necessary to wind up the affairs of the firm and to complete transactions which were started but unfinished at the time of dissolution. The firm is in no case are bound by the acts of a partner who has been declared insolvent; but this does not affect the liability of any person who has after the declaration, represented himself deliberately to be represented as a partner of the insolvent.

For the settlement of the accounts of a firm after dissolution the following rules will be applied:—

(a) Losses, including deficiencies of capital will be paid out of profits, then out of capital, and, lastly, if necessary, by the partners individually in the proportions of their profit sharing ratio.

(b) The assets of the firm, including any sums contributed by the partners to make up the deficiencies of capital will be used in the following manner and order:—

(i) For paying the debts of the firm to third parties;

(ii) For paying to each partner, in proportion, which is due to him from the firm for advances as distinguish from capital,

(iii) For paying to each partner in their proportion, whatever is due to him on account of capital; and

(iv) Any surplus left will be divided among the partners, in the proportions in which they were entitled to share profits.

Where there are joint debts due from the ends of firm, and also separate debts due from any partner, the property of the firm will be used in the payment of the debts of the firm, and, if there is any surplus, then the share of each partner will be used for payment of his separate debts or paid to him. The separate property of any partner will be used first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.

Subject to contract between the partners, the provisions of clause mentioned in the agreement should apply to transactions by any existing partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up.

Where a partner has paid a premium at the time of entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he will be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless—

(a) The dissolution is occur due to his own misconduct, or

(b) The dissolution is in the execution of an agreement containing no provision for the return of the premium or any part of it.