MEANING OF DISSOLUTION OF A FIRM

A firm is not said to be dissolved by the fact of one or more members ceasing to be partners in
itwhile others remain, but only when all and every one of the members of the firm cease to carryon
its business in partnership. The law with respect to retiring partners as enacted in thePartnership
Act is to a certain extent a compromise between the strict doctrine of EnglishCommon Law which
refuses to see anything in the firm name but a collective name forindividuals carrying on business in
partnership and the mercantile usage which recognizes thefirm as a distinct person or quasi
corporation
Matters pertaining not only to the fact ofdissolution and fixing the date thereof but also matters
arising out of the fact of dissolution whichpertain to the winding up of the partnership, settlement of
accounts, taking over of the goodwilland assets of the partnership, restrictions on the outgoing
partners carrying on business in thecase of transfer of goodwill to one of them, are all matters dealt
with under the subject ‘dissolution of a firm’.
A deed of dissolution must necessarily cover other matters, which arise directly out ofdissolution,
such as settlement of accounts, payment of amounts found due on such settlement,closing down or
continuation of business collection of outstanding and payment of liabilities.Notwithstanding such
clauses in a deed of dissolution, it would be liable to payment of stampduty under art 47, Schedule I
of the Bombay tamps Act 1958 and would not be subject toseparate duty on such matters. If a new
firm is formed by agreement between some of theformer partners, it will nonetheless be new,
however closely that agreement may follow on thedissolution of the old firm. Whether a new firm is
formed or not is a question of fact.
WHY DO FIRMS
DISSOLVE....?
1.FINANCIAL DIFFICULTIES
2.FAMILY OR HEALTH CRISIS
3.PERSONAL DISAGREEMENT
4.BUSINESS DISAGREEMENT
 MODES OF DISSOLUTION
There are essentially two modes of dissolution of the
firm and in the whole of this
unit the dissolution of the firm shall be discussed. The
modes of disso'rution of the
firm are: (a) Dissolution without the order of the court,
and (b) Dissolution by the order of the court.
A)Dissolution without the order of
the court
A firm is dissolved without the order of the court
in any one of the following ways:
:

A firm may be dissolved (i) with the consent

of all the partners or (ii) in accordance with a contract
between the partners.
 A firm
is compulsorily dissolved under the
following circumstances:
i) When all the partners or all the partners
but one are adjudicated insolvent.
The reason is simple that an insolvent
person ceases to be a partner and there
cannot be a partnership firm without at
least two persons.
ii) When one of the partners is adjudicated
insolvent unless there is a coptract
to the contrary.
iii) When the business becomes unlawful on
the happening of some event.
3) Dissolution on the
happening of certain
contingencies
;These are as follows:
i) the expiry of the term for which
the firm was constituted
ii) the completion of the adventure
iii) the death of a partner
iv) the adjudication of a partner as
an insolvent already discussed
under (2) (ii) above.
4) Dissolution by Notice: in case of
partnership at wil!.
B)Dissolution by Court
Under Section 44, the court ian order
dissolution of the firm on the following
grounds
1) Where a partner becomes of an unsound
mind
ii) Where a partner is permanently
incapacitated to perform his duties
iii) Where a partner is guilty of misconduct
iv) Where a partner persistently commits
breach of the partnership agreement
v) Where a partner has transferred the
whole of his interest in the firm
vi) Where the business cannot be carried on
except at a loss
vii) Where the court is satisfied that it is
just and equitable that the firm should be
After dissolution, the rights and obligations
of all the partners continue as before in
all the things necessary for the smooth
winding up of the business of the firm. .
HOW TO DISSOLVE A PARTNERSHIP FIRM.?
Dissolving a partnership firm means discontinuing the business under the
name of said partnership firm. In this case, all liabilities are finally
settled by selling off assets or transferring them to a particular partner,
settling all accounts existed with the partnership firm.Any profit/ loss is
transferred to partners in their profit sharing ratio as agreed by them
in the partnership deed.Dissolving a partnership firm is different from
dissolving a partnership. In the former case, the firm ends its name and
hence cannot do business in the future. But in case of dissolving a
partnership, the existing partnership is dissolved– by consent or on
happening of a certain event, but the firm can retain its existence if
remaining partners enter into a new partnership agreement. There are
different ways in which a partnership firm may get dissolved.
When partners are mutually
agreed
It is the easiest way to dissolve a partnership
firm since all partners have mutually agreed upon
closing the partnership firm. Partners can give a
mutual consent or may enter into an agreement
for the dissolve.
Transfer of interest or equity to the
third party
If any partner transfers control in the form of
interest or equity to a third party without
consulting other partners, the partner(s) may
dissolve the firm.
Partners still liable to third parties
Until a public notice of dissolution is given, partners remain liable
for any act done by any of the partners which would have been an
act of the firm, if such act was done before resolution.If a
partner has been declared insolvent or has retired from the firm,
he will not liable for any acts done after his insolvency or
retirement. The legal heirs of any deceased partner are also not
liable for any acts done by other partners after the partner has
died.
How are accounts settled...?
Accounts of the firm are settled in the following order–
• Losses of the firm will be paid out of the profits, next out of
the capital of the partners, and even then, losses aren’t paid
off, losses will be divided among the partners in profit
sharing ratios,
• Assets of the firm and the capital contributed by the
partners to set-off losses of the firm will be applied in the
following order–
1. Third party debts will be paid first
2. Next, loan amount taken by firm from any partner will be
repaid to that partner
3. Capital contributed by each partner will be repaid to him in
the capital contribution ratio
4. Balance amount will be shared among the partners in their
profit sharing ratios.
• Upon realization, all assets will be sold off in the market,
and the cash realizing out of such a sale will be used for
paying the liabilities. Assets or liabilities may also be taken
over by the partner(s) for which the respective partner
capital accounts will be adjusted by such amount.
Premium to be returned on premature dissolution
If a partner paid a certain premium for entering into a
partnership for a fixed term, and the firm is dissolved before
the end of fixed term, the firm is liable to repay the partner his
premium amount. But few conditions are attached with this –
• Firm isn’t dissolving due to death of a partner
• Dissolution shouldn’t be happening due to his misconduct
• Dissolution is happening on the basis of an agreement that
contains no provision for repayment of full or a part of the
premium.