Dissolution of a partnership is dealt with by the Indian Partnership Act 1932. Under section 39 of the Indian Partnership Act, dissolution of a partnership deed between all partners of a firm is referred to as “dissolution of a firm.” In addition to destroying all the relationships between the partners, it also means realizing the firm’s assets and liabilities, as well as sharing the profits and losses.
These are some of the ways in which a firm may be dissolved:
- Dissolution by agreement (Section – 40)
- Compulsory Dissolution ( Section – 41)
- Contingent Dissolution ( Section – 42)
- Dissolution by notice ( Section -43)
- Dissolution through court ( Section – 44)
Section 40 – Dissolution of Partnership
Partner-driven firms do not have separate legal entities and can be dissolved by all partners with consent. The partnership will be dissolved by necessary intimation to the Registrar of Firms if all partners agree to dissolve it or a contract has been made to dissolve the partnership.
Section 41 Compulsory Dissolution
The Registrar of firms can compel a partnership firm to dissolve for two reasons:
- All partners except one are adjudicated insolvent
- In the event that an event occurs that makes the firm’s business illegal.
A firm will not dissolve if it has more than one undertaking, as long as there is no unlawfulness in one undertaking.
Section 42 Contingent Dissolution of Firm
Upon the occurrence of certain events, a firm is dissolved. Therefore, the dissolution of a company depends on whether the following event occurs or not. Dissolutions of this type are also known as contingent dissolutions.
- Upon expiration of the period for which the firm was constituted.
- Having completed one or more of the firm’s purposes, adventures, or undertakings.
- In the event that a partner passes away
- As a result of an insolvency adjudication for one of the partners
These four events are the only ones that can cause contingent dissolution of a firm. It is not intended to be an exhaustive list. Dissolution of a firm is at the discretion of the Registrar.a
Section 43 – Dissolution by Notice
By giving notice of his intention to dissolve the firm, any partner can dissolve the partnership under this type of dissolution. In the case of a partnership at will, this type of dissolution is only possible. A partnership will dissolve on the date specified on the notice or on the date of communication of the notice to all partners, if no date is specified on the notice.
A dissolution of the firm is possible if there is no agreement between partners. The firm can also dissolve any partnership at any time, as well as extinguish any partner’s assets and liabilities.
Section 44 – Dissolution by Court
Only the court can dissolve a firm in these cases. Firms can be dissolved by a court in the following circumstances:
- There is a claim that one of the partners has become unsound of mind and his next friend has brought a lawsuit against him.
If a partner cannot handle the pressure of the business or if he or she is mentally unstable for any personal or professional reason.
- Partners are unable to perform their duties as partners during the course of business.
In these circumstances, if a partner is unable to fulfill business duties while the business proceedings are in progress. If the partner suffers from an incurable disease, or is permanently disabled, he or she cannot perform their duties.
- There is misconduct committed by a partner that is likely to have a detrimental effect on the business.
Whenever one of the partners violates a rule, regulation, or bylaw, the company is liable
The partnership firm will be dissolved if misconduct is accounted for in the firm. For example, if one partner purchases or sells any goods without the other’s permission or discloses any confidential information.
- If any partner breaches the following agreements:
- Managing the firm’s affairs.
- Conducting business.
- Conducts business in a way that makes it impossible for other partners to do the same.
- The transfer or sale of all of a partner’s interest in the firm or the charging of his share under order XXI of the first schedule to the Code of Civil Procedure 1908 or his share being sold by the firm.
After Dissolution, Who Is Responsible?
Dissolution of a partnership generally results in the partner ceasing to be a member of the partnership. A dissolution might result in a liability for an existing partner except for those who are insolvent, unsound minded, deceased, etc.