Dissolution of Firm

Unit IV

Dissolution
 Firm

ceases to exist  Dissolution of Firm

Complete breakdown of relationship among partners

 Dissolution
 

of Partnership

Business of firm continues Change in relationship between partners

 Dissolution

of Partnership may or may not include dissolution of firm

Mode of Dissolution of Firm
 Dissolution

by Agreement Sec. 40  Compulsory Dissolution Sec. 41  On the happening of certain contingencies Sec. 42  Dissolution by Notice Sec. 43  Dissolution by the Court Sec. 44

Dissolution by Agreement
 Created

by Contract; Can be terminated by Contract.  Dissolved at any time with the consent of all partners  Contract of dissolution may be express or implied

Compulsory Dissolution
 Insolvency
 

One partner insolvent, reconstitution of firm. All partners or all but one partner are insolvent : Dissolution of firm

 Business

of firm is unlawful

One out of several undertakings of the firm is unlawful, only that business is closed. Dissolution of firm not caused.

Dissolution on the happening of certain contingencies
Contract between partners is dissolved  If constituted for fixed term, by expiry of the term  If constituted to carry out one or more adventures or undertakings, by the completion thereof.  By Death of a partner  By Adjudication of a partner as an insolvent.

Dissolution by Notice
 Partnership

at Will : Any Partner giving notice in writing to all other partners of his intention to dissolve the firm  Dissolved on the date mentioned, if no date is mentioned then on the date of communication of notice the firm is dissolved

Dissolution by the Court
Partner may file a suit for dissolution of the firm on following grounds:  Insanity of a Partner Sec. 44 (i)  Permanent Incapacity of a Partner Sec. 44 (ii)  Misconduct of a Partner Sec. 44 (iii)  Persistent breach of contract Sec. 44 (iv)  Transfer of Interest Sec. 44 (v)  Continuous Loss Sec. 44 (vi)  Just and Equitable Sec. 44 (vii)

Dissolution by the Court
 Insanity

of Partner

Suit can be filed by any partner other than the partner who is insane. Insanity does not itself dissolve the firm.

 Permanent

Incapacity of a Partner

Permanently incapable of performing the duties as a partner If incapacity is temporary, court will not grant dissolution.

Dissolution by the Court
 Misconduct

of a Partner

If acted with intent to defraud, dissolution is granted.

 Persistent

breach of Agreement

If done willfully and persistently and is not reasonably practicable for the other partners to carry on business with him, the court will order so. Suit can be brought by a partner other than the guilty one.

Dissolution by the Court
 Transfer
 

of Interest

Transfer of Interest by itself does not dissolve the firm. Other Partners has to bring that issue to court.

 Continuous

Loss

Firm cannot be carried on except at loss, the court may allow dissolution of firm.

 Just

and Equitable

If court finds any other group to be just and equitable for dissolution, it may order so. Eg. Mismanagement, quarrels, partners not on speaking terms, etc.

Consequences of Dissolution : Rights of Partners on Dissolution
 Right

of Partners to enforce winding up (Sec.

46)

Each partner can have the property sold and proceeds applied to repay outside debts and distribute the surplus in accordance to their rights.

 Right

to have the debts of the firm settled out of the property of the firm (Sec. 49)
Joint Debts : Joint property and then surplus is shared Separate Debts : Separate property

Consequences of Dissolution : Rights of Partners on Dissolution
 Rights

to earn personal profit by using firm’s name (Sec. 50)
If goodwill is bought, can use firm’s name and earn personal profits.

 Return

of Premium on Premature dissolution (Sec. 51)
If premium is paid on entering for fixed term and dissolution is before expiry of term, repay rateable amount of premium Except in case of death, misconduct of the partner, mutual agreement of all partners

Consequences of Dissolution : Rights of Partners on Dissolution
 Rights
  

where Partnership contract is rescinded for fraud (Sec. 52)
Right on surplus of assets of firm Entitled to rank as creditor for payment made for clearance of debts of the firm Right to claim indemnity from the partners guilty of fraud against all debts of the firm caused.

 Right
 

to restrain from use of firm name or property (Sec. 53)
Till the affairs of the firm is completely wound up Partner who purchased goodwill cannot be restrained.

Consequences of Dissolution : Liabilities of Partners on Dissolution
 Liability
 

for acts of partners done after dissolution (Sec. 45)
After dissolution public notice is necessary Otherwise partners held responsible for the acts till public notice is given. Deceased partner, Insolvent partner and Retiring partner not held responsible for acts even if public notice is not given.

Consequences of Dissolution : Liabilities of Partners on Dissolution
 Continuing

authority of partners for the purpose of winding up (Sec. 47)
Authority only for winding up the affairs (disposing property, realizing amount due from debtors, payment to creditors) & complete transactions left unfinished (taking delivery of goods ordered and pay) Insolvent cannot bind the firm

Mode of Settlement of Accounts
 Given

by Agreement  If not, then Sec. 48 applies.  Sharing Deficiency
   

Losses of the firm shall be paid from (Sec. 48 a) First : Profits Next : Capital Last : Partners Individually based on sharing ratio

Application of Assets (Sec. 48b)
 Assets

include any sum contributed by partner for loss or deficiency of capital  First : Payment of debts to third parties  Second : Payment to partner for advances  Third : Payment rateably for capital  Last : Surplus divided in profit sharing ratio

Sale of Goodwill (Sec. 55)
 Be

included in the assets and sold separately or with other property of the firm  Partners to make agreement with the buyer (agreement valid if restrictions are reasonable)  Subject to agreement between him and the buyer he may not use the firm’s name, represent himself as carrying business, solicit the custom of persons who were dealing with the firm before dissolution.

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