Dissolution of Partnership by Order of Court

Introduction

A formal agreement between two or more people to manage and operate a firm is called a partnership. A partnership firm is created when two or more people band together and pool resources to launch a business. Partnership businesses’ main goal is to make a profit. The Indian Partnership Act of 1932 defines the laws that apply to partnership businesses in our country.

What is Dissolution?

The dissolution of a firm is the result of all the partners in the business breaking up. When a business’s partnership dissolves, the firm ceases to exist. There are different types of dissolution, such as dissolution by the court, dissolution by notice, or mandatory dissolution.

Definition under the act: “The dissolution of a partnership amongst all the partners of a business is called the dissolution of the firm,” according to the Partnership Act of 1932. This distinguishes between the dissolution of a corporation and that of a partnership.

Dissolution by Court

Section 44 allows a partner to go for dissolution by the court to dissolve a partnership that is not bound by a contract between the partners. However, if there is a provision in the contract that the dispute will be resolved through arbitration rather than dissolution by the court, it is valid under the exception to Section 28 of the Indian Contract Act.

As a result, any partner can file a suit for the dissolution by the court on any of the grounds listed in Section 44, and the court is bound to order the dissolution if the conditions are met. The court, on the other hand, has discretion in granting the order of dissolution by the court since the authority must consider the interests of the business rather than the interests of the individual.

Grounds of Dissolution by Court

1)  If a partner has become of unsound mind, the court may order the firm’s dissolution on the application of any of the partners. The insanity of one member does not dissolve the partnership, but it might be used to dissolve the relationship at the request of the remaining partners.

 It is not required for the insanity to be permanent. Except in exceptional circumstances, the court may not decree the dissolution of a dormant partner on the grounds of permanent insanity.

2. Incapacity of Partner: On the application of any of the partners, the court may order the dissolution of the partnership if a partner has become permanently incapable of executing his duties and obligations. When one of the partners is imprisoned for an extended length of time, the court has the authority to dissolve the partnership.

3. Misconduct of Partner: If any partner is accountable for any damage to the firm, which amounts to misconduct and jeopardizes the firm’s ability to continue the business, then the partners may go for dissolution by the court.

4. Continuous breach of the agreement by partner: If a partner is found guilty of a constant breach of agreement regarding the conduct of business or the management of the firm’s affairs and it becomes impossible to continue doing business with such a partner, then they can go for dissolution by the court.

5. Loss of business: When the partnership’s operations can only be carried on at a loss, the partners can seek dissolution by the court.

6. Transfer of Interest: A partner may transfer all of his stake in the company to a third party or enable the court to charge or sell his participation in the recovery of land revenue arrears. If the other partners bring a lawsuit against him in court, dissolution by the court can be done.

7. Just and equitable reasons: The dissolution by the court may require additional reasonable and equitable grounds for the firm’s dissolution. Some of these factors include:

• management deadlock;

• partners not speaking with one another; 

• loss of substratum; and

• a partner gambling on the stock exchange.

Case laws for Dissolution by Court

In Yenidje Tobacco Co., a dissolution by the court was tried and ordered the partnership because the relationship between the two partners became so strained that they stopped speaking to each other. The court was of the opinion that a state of mutual hostility or hatred is incompatible with running a partnership business.

In Whitwell vs. Arthur, one partner suffered from a paralytic attack. It was found from the medical evidence that incapacity was not likely to be permanent as the defendant’s health was improving. The partners opted for dissolution by the court, but the court did not grant a dissolution of the firm as the condition had improved, and the partner could get back into the business.

In Harrison vs. Tenant, the partners went for dissolution by the court, and it was held that “no party is entitled to act improperly and then to say that the conduct of the partners and their feelings towards each other are such that the partnership can no longer be continued, and certainly this court would not allow any person so as to act and thus to take advantage of his own wrong.”

In Snow vs. Milford, A partner of the firm named Milford was guilty of living in adultery with several women, and as a result of this, his wife deserted him. Other partners filed a suit for dissolution by the court on the ground of the said bad conduct of Milford. The court ruled that a customer’s money is not at risk if one of the partners is guilty of adultery.

In the case of Havidatt Singh vs. Mukhe Singh, Four of the nine partners wanted the firm to be dissolved, and their stake in the company was 7/9. There was no collaboration or mutual trust between the partners. There were numerous long-running disagreements among them. Dissolution by the court opted on the grounds that it would be reasonable and equitable. The court may decree dissolution on any other grounds that it deems just, fair, and equitable.

Conclusion

Section 44 applies to all kinds of partnerships. The practical usage is more applicable and appropriate to a fixed-term relationship. This does not preclude the other partnership from seeking the firm’s dissolution by the court. The final option for resolving matters is involuntary dissolution. When everything else fails, a court will order a transfer of ownership from one partner to another or the sale of the entire corporation. To have a thorough understanding of dissolution, it is necessary to consult an online lawyer for proper legal advice, as it is essential and crucial.