The Indian Partnership Act makes a distinction between dissolution of partnership and dissolution of firm
Dissolution of Partnership
Dissolution of partnership simply means a change in the relation of the partners. Such a change is usually caused when a firm is reconstituted i.e., when a new partner is admitted or when an existing partner retires, dies, becomes insolvent or is expelled. The dissolution of partnership may or may not involve the dissolution of a firm. A firm, after a change in relation of the partners, may decide to continue as a reconstituted firm. But, when a firm is dissolved, it necessarily involves the dissolution of partnership.
For example, A, B, C and D are carrying on trading business as a partnership firm. A, is declared insolvent by the court. The partnership between A, B, C and D comes to an end and a new partnership between B, C and D comes into existence. This new partnership between B, C and D shall be known as ‘reconstituted firm’. Thus, on declaration of A as insolvent, the partnership stands dissolved, but the firm continues with the remaining partners B, C and D.
Dissolution of Firm
Dissolution of a firm means the dissolution of partnership between all the partners of a firm (Section 39). It occurs when there is complete breakdown of relationship between all the partners. In such a situation, the business of the firm is completely stopped, its assets are realised, the liabilities paid off and the surplus distributed among the partners according to their share in the property of the firm. Thus, the partnership is completely discontinued.
Modes Of Dissolution of Firm
The dissolution of firm may take place either without the order of the court or by an order of the court. The circumstances under which such dissolutions take place are shown in Figure
| Dissolution of Firm | ||||||
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| Without the Order of the Court | By the Order of the Court | |||||
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| By mutual Agreement | Compulsory Dissolution | On Happening of certain Contingencies | By Notice | | | ||
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| Insanity | Permanent Incapacity | Misconduct | Persistent Breach of agreement | Transfer of Interest | Perpetual Losses | Any other just & equitable |
Dissolution without the Order of Court
Dissolution of firm without the order of the court may take place in the following
ways:
1. Dissolution by mutual agreement: You know that a firm comes into existence by mutual agreement. It can also be dissolved by mutual agreement among the existing partners.
2. Compulsory dissolution: A firm is automatically dissolved.
i) if all the partners, or all but one partner, of the firm are declared insolvent. Or
ii) if some event takes place which makes it unlawful for the business of the firm to be carried on. For example, a war breaks out and some partners of the firm are declared alien enemies. In such a situation, it becomes unlawful for the business of the firm to be carried on. Take another case where a firm is carrying on the business of trading in sugar and a law is passed by which trading in sugar is prohibited. In this case also the business of the firm becomes unlawful and so the firm will have to be compulsorily dissolved. In this connection, you should also note that where a firm is carrying on more than one business, the illegality of one or more shall not necessitate the dissolution of the firm. The firm can carry on those ventures which remain lawful.
3. Dissolution on the happening of certain contingencies: According to Section 42, in the absence of a contract to the contrary, a firm will be dissolved on the happening of the following contingencies:
i) where the firm is constituted for a fixed term, it is dissolved on the expiry of the fixed term,
ii) where the firm is constituted for completion of one or more adventures or undertakings, the firm is dissolved when those adventures or undertakings have been completed.
iii) on the death of a partner, and
iv) on the adjudication of a partner as insolvent.
4. Dissolution by notice: When a partnership is at will, the firm may be dissolved by any partner by giving notice in writing to all the other partners of his intention to dissolve the firm.
If the partners have, in his notice, mentioned some specific date for the dissolution of the firm, the firm is dissolved from that date. But if no date has been mentioned, the firm is dissolved from the date when the notice is communicated. It should be noted that a notice once given, cannot be withdrawn without the consent of all other partners.
Dissolution by an Order of Court
Section 44 of the Partnership Act deals with those situations where the court may, on receipt of a petition by a partner, order for the dissolution of the firm, provided it is satisfied that in the interest of justice, it is necessary to order for the dissolution of the firm. Under this section, the court can order even for premature dissolution when the firm is created for a fixed period. When a petition is brought before the court, the court will give other partners an opportunity to put forward their defense against passing an order for dissolution of firm. It is only after evaluating all the evidences before the court that the court shall pass an order for dissolution of the firm. Let us now study the grounds on which a petition can be presented before the court for obtaining a dissolution order. These grounds are:
1. Insanity: When a partner becomes insane, he is incapable of forming a rational judgement. Hence, it is treated as a valid ground for the dissolution of the firm. On this ground a suit may be filed either by any other partner of the firm or by the next friend of the partner who has become of unsound mind. In either case the court may order dissolution of the firm. In the case of a dormant partner, however, the court may not order dissolution because such a partner does take an active part in the conduct of firm’s business.
2. Permanent incapacity: When a partner has become permanently incapable of performing his duties as a partner, any other partner can file a petition for the dissolution of firm. However, the court will not pass an order for dissolution if the incapacity of a partner is only temporary. For example, a partner in a firm had an ‘attack of paralysis. Another partner of the firm filed a petition for dissolution of the, firm. The court refused to pass on order, according to doctors, paralysis was of a temporary nature and the patient’s condition was improving. (Whitwell v. Arthur)
3. Misconduct: When a partner, other than the partner suing, is guilty of misconduct which is likely to adversely affect the carrying on of the business, the court may dissolve the firm. In determining the gravity of misconduct to order dissolution, regard is to be had to the nature of business. For example, an immoral conduct of a partner in a firm of medical men may be considered an adequate ground for dissolution but it may not be so in case of a firm trading in Coal.
4. Persistent breach of agreement: When a partner, other than the partner suing, willfully or persistently commits breach of agreement relating to the management of the affairs of the firm or he conducts himself in such a manner or that it is not practicable for other partners to reasonably carry on the business in partnership with him. Thus, embezzlement, fraudulent breach of trust, or keeping erroneous accounts may be sufficient ground for the court to order dissolution of the firm.
5. Transfer of interest: The court, at the instance of any other partner, may dissolve the firm when a partner has in any way
i) transferred the whole of his interest in a firm to a third party, or
ii) allowed his share to be charged on account of a decree passed by a court towards payment of liabilities of that partner, or
iii) allowed his share to be sold in the recovery of arrears of land revenue.
6. Perpetual losses: When the firm is continuously suffering losses and it is apparent that in future also the business cannot be carried on except at a loss, the court may order for the dissolution of the firm at the instance of any partner.
7. Any other just and equitable ground: If on any other ground, it can be proved to the satisfaction of the court that it is just and equitable to dissolve the firm, the court may order dissolution of the firm. Examples of such ground are continued quarrelling between the partners, refusal to meet on matters of business.
