Dissolution of Partnership firm refers to a situation when the Partnership of the firm comes to an end. The Indian Partnership Act deals with the law relating to the dissolution of a Partnership firm. The dissolution of a partnership firm is the complete breakdown of the relationship of partners.
Dissolution of Partnership is different from the dissolution of partnership firm
Dissolution of a partnership firm only comprises a variation in the relation of partners; whereas the dissolution of the firm amounts to a complete closure of the business. When any of the partners dies, retires, or becomes insolvent. Still, if the outstanding partners agree to remain in the business of the partnership firm, then it is termed as dissolution of Partnership, not the dissolution of the firm. Dissolution of Partnership comprehensively changes the shared relations of the partners. However, in case of dissolution of the firm, all the connections and the business of the firm come to an end. On dissolution of the firm, the business of the firm concludes its business by selling the assets and paying the liabilities, and satisfying the entitlements of the partners. The dissolution of Partnership among all firm partners is called dissolution of partnership firm.
The Dissolution of a Partnership firm may be affected in the following ways:
- Dissolution without the intervention of the Court
- Dissolution by the intervention of the Court.
Dissolution of Partnership Firm without the intervention of Court
- By Agreement :
A partnership firm can be dissolved at any time by the consent of all the partners. A partnership can be dissolved in agreement with the terms and conditions of the Partnership Deed or by a separate agreement.
- Compulsory Dissolution :
There is a compulsory dissolution of partnership firm in the following circumstances:
(i) In the case where all the partners or all the partners except one have become insolvent.
(ii) In the case where the firm is involved in more than one business that may have become unlawful, the dissolution will take the place of the illegal business, whereas others will remain valid.
- A firm may be dissolved on the happening of any of the following contingent events:
- Expiry of Fixed Period
Sometimes a partnership firm is made for a fixed period of time. This time period is decided by the partners of the firm, and they agree on the same by doing a partnership deed. The firm cannot be dissolved before the expiry of the mentioned period.
- On achievement of a specific task
A partnership is sometimes made to carry out specific contracts with specified persons for a particular season, which would be dissolved once the contract is completed. On the completion of the specified task, the dissolution of the partnership firm takes place.
- Death of Partner
The death of a partner would lead to the dissolution of the partnership firm. However, if it is mutually decided by the partners that the death of any of the partners would not lead to the dissolution of the partnership firm, it would not be dissolved.
- Insolvency of Partner
The insolvency of any of the partners can be a valid ground for the dissolution of partnership firm. This shall be applicable even though the Partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for a particular venture, and the same has not been completed.
- Resignation of Partner
Resignation by any of the partners leads to the dissolution of the partnership firm.
- Dissolution by notice
A partner can dissolve the partnership firm by giving written notice of dissolution to other partners duly signed by him, and this is termed as Partnership at will. However, the notice must be very clear and certain. By the consent of other partners, a notice can be withdrawn.
- Expiry of Fixed Period
Dissolution by Court
The Court can also order for the dissolution of partnership firm on the following grounds:
- Insanity of Partner : The Court may order for the dissolution of partnership firm if a partner has become of an unsound mind if an application is given by any of the partners. The insanity of a partner does not by itself lead to the dissolution of a partnership firm. However, the same is a valid ground for dissolution. The insanity doesn’t need to be permanent.
- Incapacity of Partner : If a partner has become perpetually incapable of satisfying his responsibilities and duties, then the Court may order for the dissolution of the partnership firm on the application of any of the partners.
- Misconduct of Partner: The Court may order the dissolution of a partnership firm if any partner other than the partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business.
- Constant breach of the agreement by partner: If the partner, other than the partner filing the suit, is found guilty for continuous breach of agreement regarding the manner of business or the management of the affairs of the firm and it becomes unbearable to continue the business with such partner, the Court may order the dissolution of a partnership firm.
- Continuous Losses: If the firm is continuously suffering losses and there is no more capital available for the future growth of the firm, the Court may order for the dissolution of a partnership firm.
- Just and Equitable: The Court may order for dissolution of partnership firm on any other ground which the Court thinks is just, fair, and equitable.
The dissolution of a partnership firm can take place in the aforementioned ways. The dissolution is dealt with in accordance with the Indian Partnership Act. One must consult an expert to have in-depth knowledge about dissolution. Right legal advice is always important.