Legal Guide

How to Dissolve a Partnership Firm by a Dissolution Deed?

by Bhavya Choudhary · 3 min read

Dissolution Deed

Introduction 

  • A partnership is a grouping of two or more people who have decided to work together to manage a business and split the profits equally. 
  • Between 2 and 20 people can be partners in a business. The Indian Partnership Act of 1932 governs partnership businesses
  • According to Indian law, the Partnership Agreement Act specifies the obligations and rights of a firm’s partners. The partnership is also dissolved when the company is dissolved by a dissolution deed.

Documents Required for registration of Partnership Firm and a Dissolution Deed. 

Following are the documents required for the registration of the Partnership firm and a dissolution deed:

  • Form Number 1
  • Rental or lease contract for the site where the company is located 
  • Original copy of the partnership firm and dissolution deed 
  • A declaration of intent to become a partner in an affidavit

Dissolution: What Is It?

  • Dissolution is the termination of the contractual or legal obligations between company partners. 
  • The dissolution of a firm is defined under Section 39 of the Indian Partnership Act as “the dissolution of a partnership amongst all the partners of a business.”
  • The Act specifies when the partnership connection ends or completely dissolves. When one of the partners dies, retires, or becomes insolvent, the issue of dissolution becomes relevant. Dissolution is done by the dissolution deed. 

Dissolution between Partners vs. Dissolution between a Partnership Firm by a Dissolution Deed

  • Different from the dissolution of partners is the dissolution of a partnership firm. 
  • The partners cease all business operations when a partnership is dissolved by dissolution deed. The assets are utilized to pay off the debt when the company is dissolved by dissolution deed. 
  • All legal and contractual links between partners in a company are severed when a partnership is dissolved by a dissolution deed. 
  • When one of the partners retires while the other partners continue to manage the firm, this might occur.

Consequences of a Partnership’s Dissolution by Dissolution Deed

  • After the dissolution of the firm by dissolution deed, the parties’ relationship as partners is over.
  • It alters the dynamics of the partners’ reciprocal interactions.
  • The firm’s relationships and activities do not terminate with the demise of the partnership.
  • It may or may not result in the business continuing to operate in its current form.
  • The firm’s assets and obligations do not change even when one of the departing partners is dismissed.

When is Dissolution Permissible?

Without the need for judicial involvement, the partnership may be ended by mutual consent:

  • Dissolution by all partners with their consent (Section 40)
  • Mandatory dissolution as a result of any illegal business operations (Section 41)
  • Dissolution brought about by unforeseen circumstances, such as a partner’s passing or they are being declared bankrupt (Section 42)
  • Dissolution at will following notice of partnership (Section 43).

The court may potentially step in to dissolve the business. The Indian Partnership Act of 1932 gives the court the authority to dissolve a business in a number of situations. According to Section 44, the court may dissolve a firm under the following circumstances:

  1. A mentally unstable partner
  • If the court learns that one of the firm’s partners is mentally ill, legal action will be initiated to dissolve the partnership by dissolution deed. Otherwise, the court might start the dissolution procedure if one or more partners have been determined to be mentally ill or unstable. 
  • Mental instability, however, is not a surefire reason for the breakdown. Additionally, it is not necessarily essential for the condition of instability to be one that lasts forever.
  • As a result, it can only be carried out with the other partners’ approval. Other comparable situations, such as the type or character of the partner’s engagement, are also taken into consideration as grounds for dissolution by dissolution deed.

  2. Partner’s inability or wrongdoing

  • When a partner becomes temporarily or permanently unable to carry out his responsibilities as a partner of the company, this is known as being incapacitated.
  • The partnership may be dissolved due to professional misconduct if one of the partners violates the agreements and engages in unlawful or unethical behavior by the partnership deed
  • If the spouse behaves in an unethical or professional manner, the necessary measures will be taken. 
  • When a partner’s improper behavior causes the firm to suffer, professional misconduct charges may be brought against him as per the dissolution deed and partnership deed.

    3. Agreement violations

If a partner violates the agreements pertaining to the administration of company matters, the partnership may be dissolved by the dissolution deed. A partnership may be dissolved by the dissolution deed if one of the partners engages in any other unlawful or unethical commercial practices.

4. Shares transfer

According to Section 44 of the Indian Partnership Act, the other partners may apply for the dissolution of the company if the partner other than the one who is suing has transferred or sold his rights and interests to a third party.

5. Runs on losses of Partnership firm

Any company is vulnerable to suffering losses as a result of unplanned events. In such circumstances, the court may decide to liquidate the company that is unable to generate revenues.

6. Additional acceptable reasons

The court has the authority to make an order dissolving the partnership or the firm itself if it finds any further defensible and equitable grounds in addition to those indicated above.

Accounts Payable Upon Dissolution

The Indian Partnership Act of 1932 provides information in Section 48 on how finances are settled after such a partnership is dissolved by dissolution deed. The guidelines set forth in section 48 are as follows:

The company’s losses and shortcomings must be covered by,

  • amount of profit
  • monetary amount
  • The percentages that the partners have the right to profit-share (if necessary)

The following order must be followed when distributing the company’s assets:

  • Settling the business’s obligations to third parties
  • For making advances that may be distinguished from capital amounts and for fulfilling the firm’s obligations to each partner.
  • By giving each partner their rightful payment on the capital account.
  • The surplus assets must be divided between the partners in the same ratio as they were eligible to receive a profit-sharing payment.

Conclusion

Drafting partnership deeds and dissolution deeds can be a complex procedure. One must take legal consultation to get the deed drafted and registered. Apart from saving time, Legal consultation helps to get your work done in a more efficient way.

The making of the draft dissolution deed is critical and each clause must be done thoroughly. Consult a business lawyer during the drafting or get your Dissolution Deed drafted by a professional for best results.

Bhavya Choudhary

Written by

Bhavya Choudhary

Get Expert Legal Advice For

Dissolution Deed

Enter a valid phone number

Related Articles

Hi there 👋!

How can I help you?

whatsapp