Module 4: Dissolution of a Partnership

Firm
Dissolution – to dissolve, to come to an end

1. Dissolution of the Firm –

Sec. 39 - Dissolution of partnership between all the partners of the firm is called as dissolution of
the firm.

E.g.: when in a firm consisting of A, B and C – all of them cease to be partners with one another;
it amounts to dissolution of the firm.

2. Modes of Dissolution of Firm-

A firm may be dissolved in the following ways:

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 Compulsory
Agreement Dissolution. Contingencies.
(S. 40) (S. 42)
(S. 41)

Notice (S. 43) Court (S. 44)

1) Dissolution by agreement (S.40)

S.40 - A firm may be dissolved –

a) with the consent of all the partners, or

b) in accordance with a contract between the partners.

 Partnership can be created by a contract between the parties.

 Similarly, it can also be dissolved by their mutual consent.
 If there is a contract indicating when and how a firm can be dissolved, a firm can be
dissolved in accordance with such a contract.

2. Compulsory dissolution. (S.41)

A firm is dissolved-

a) By the adjudication of all the partners or of all partners but one as insolvent or,

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b) By the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership.

Provided that : Where more than one separate adventure or undertaking is carried on by the
firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of
its lawful adventures and undertakings.

 If all partners except one are adjudicated insolvent, there is no question of persons
remaining partners with one another and, therefore, there has to be dissolution of the
firm.
 If the business of the firm though lawful when the firm came into existence, subsequently
becomes unlawful, there has to be dissolution of the firm.
 E.g.: P, Q, R join together as partners to sell liquor in a certain area. Subsequently, the
Govt. imposes prohibition in that area and the sale of liquor is banned.
 If the firm was carrying on more than one adventures, the illegality of one of them, shall
not in itself result into dissolution of the firm.

3. On happening of certain contingencies. (S.42)

Subject to contract between the partners a firm is dissolved –

a) If constituted for a fixed term, by the expiry of that term

b) If constituted to carry out one or more adventures or undertakings by the completion thereof.

c) by the death of a partner.

d) by the adjudication of a partner as an insolvent.

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 . • Expiry of Term
. • Completion of Purpose
. • Death of Partner
. • Insolvency of Partner

 Dissolution under S.42 is not compulsory.

 Even on the happening of the contingencies, the partners may agree that the firm will not
be dissolved, but the business of the firm may be carried on as before.

a) If constituted for a fixed term, by the expiry of that term-

 When the partnership has been constituted for a fixed period of time, it continues till the
completion of that time period and dissolves thereafter.
 If partners agree, the firm may continue beyond the agreed time. Such agreement maybe
expressed or implied.
 Unless otherwise agreed, the same rights and duties continue.

b) If constituted to carry out one or more adventures or undertakings by the completion

thereof –

 Partnership created for some specific adventures or undertakings comes to an end on the
completion of such adventures or undertakings.

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 E.g.: partnership for carrying out contract of construction of a building

 There can be an agreement by which the partnership may not dissolved.

 Unless otherwise agreed, same rights and duties between the partners continue

c) by the death of a partner

 Death of a partner results in the dissolution of the firm unless the remaining partners
agree to the contrary.
 However, if there is a contract between the partners, the firm would not be dissolved.
Such a contract may be express or implied.

d) by the adjudication of a partner as an insolvent-

 When a partner is adjudicated insolvent, he ceases to be a partner.

 The firm is also dissolved unless there is an agreement between the remaining partners to
the contrary.
 If there are only two partners and one of them is adjudicated insolvent, there is
compulsory dissolution.

4. Dissolution by notice in “Partnership at Will” (S.43)

(1) Where the partnership is at will the firm may be dissolved by any partner giving notice in
writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if
no date is so mentioned, as from the date of the communication of the notice.

 In “Partnership at Will” – partners are not bound to continue the partnership for any fixed
period.
 Such a partnership maybe dissolved at any given time with the consent of all the partners.
 A clear and unambiguous notice has to be given to the other partners by the partner who
wants to dissolve the firm.

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  The notice for dissolution is a statutory requirement.

5. Dissolution by the Court (S.44)

At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely :

a) That a partner has become of unsound mind, in which case the suit may be brought as well by
the next friend of the partner who has become of unsound mind as by any other partner.

b) That a partner, other than the partner suing, has become in any way permanently incapable of
performing his duties as partner.

c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business, regard being had to the nature of the business.

d) that 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 the conduct of its business, or
otherwise so conducts himself in matter relating to the business that it is not reasonably
practicable for the other partners to carry on the business in partnership with him.

e) That a partner, other than the partner suing has in any way transferred the whole of his
interest in the firm to a third party, or has allowed his share to be charged under the provisions
of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 or has
allowed it to be sold in the recovery of arrears, of land revenue or of any dues recoverable as
arrears of land revenue due by the partner.

f) That the business of the firm cannot be carried on save at a loss.

g) On any other ground which renders it just and equitable that the firm should be dissolved.

S.44 - Dissolution by the Court –

a) Unsoundness of mind

b) Permanent incapacity to perform duties.

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c) Conduct injurious to the partnership business:

 Misconduct in or outside the business affecting the business.

 Breach of trust, adultery by one partner with another’s wife.

d) Persistent breach of partnership agreement:

 Wilful and persistent breach of agreement relating to management of the firm, refusal to
show books or accounts, preparation of false accounts, frequent quarrels, misuse of funds
of the business.

e) Transfer of the whole of the partner’s interest:

 When a partner has transferred whole of his interest in the firm to a third party or if a
partner has allowed his share to be charged under the provisions of CPC or has allowed it
to be sold in the recovery of the arrears of land revenue or any dues as arrears of land
revenue, court may order dissolution of the firm.

f) When the business can be carried on only at a loss

g) When dissolution is just and equitable.

3. S.45 - Liability for acts of partners done after dissolution

 Partners will be liable to the third parties for any act done by any of them which would
have been an act of the firm if done before the dissolution, until public notice of
dissolution is given.

4. S.46 - Right of partners to have business wound by after

dissolution
 Right to clear of the debts of the firm from firm’s property and distribute the surplus
among partners or their representatives.

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