PROJECT REPORT

OF
BUSINESS LAWS
ON
MODES OF DISSOLUTION OF
FIRM
SUBMITTED BY:
SUBMITTED TO:
 ACKNOWLEDGEMENT
First of all it is my great privilege to acknowledge my deepness of gratitude and heartiest
thanks to my esteemed teacher DR. Amita Verma, UILS Panjab University. It is due to
her valuable guidance and sparing of time for me that I am able to complete my project
report. Her vast and rich experience, excellent teaching and scholarly guidance helped
me a lot in improving my report.
And at last I express my heartiest gratitude to my friends and family who supported me
throughout the project.
 MEANING OF DISSOLUTION OF FIRM

Dissolution of partnership of firm means counting to the end of the relation known as partnership,
between various partners. When one or more partners cease to be partners but others continue the
business in partnership, there is dissolution of partnership between the outgoing partners on the one
hand and remaining partners on the other. The remaining partners as between themselves still continue
as partners.

For ex: When the firm consists of A, B and C and A retires, there is a dissolution of partnership
between A and others but partnership as between B and C is not dissolved. In such a case, dissolution
of partnership between some of the partners only, but there is no dissolution of the firm.

According to section 39,When the dissolution of partnership between all the partners of the firm
occurs, this is called dissolution of the firm.

For ex : When in a firm consisting of A,B and C all of these cease to be partners with one another, its
amount to dissolution of firm.
MODES OF DISSOLUTION OF A PARTNERSHIP FIRM

A partnership firm can be dissolved by many modes like by agreement on the happening

of certain contingencies, or judicially. There are basically five modes of dissolution given

under Sections 40-44 of the Indian Partnership Act.

● Dissolution by Agreement Sec. 40

● Compulsory Dissolution Sec 41
● Dissolution on the happening of certain contingencies Sec.42
● Dissolution by notice of partnership at will Sec.43
● Dissolution by the Court Sec.44
1. Dissolution by Agreement : A firm may be dissolved either:

(a) With the consent of all the partners,

(b) In accordance with a contract between the partners.

As partners can create partnership by making a contract as between themselves, they are also
similarly free to end this relationship and thereby dissolve the firm by their mutual consent. When all
the partners so agree, they may dissolve the firm at any time they like.

Sometimes there may have been a contract between the partners indicating as to when and how a firm
may be dissolved, a firm can be dissolved, in accordance with such a contract. For instance, if the
contract between the partners provides that on 6 months' notice by a partner the firm may be
dissolved then in accordance with this contract, a partner could give 6 months notice and get the firm
dissolved.

Case: P. Venkateswarlu v. Lakshmi Narshima Rao (AIR 2002 AP 62)

The court held that in case of dissolution of partnership, firm might be dissolved by any partner
giving notice in writing to all the other partners of his intentions to dissolve the firm.
2. COMPULSORY DISSOLUTION:

A firm is dissolved :

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

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.

(a) All partners or all the partners but one becoming insolvent.

Section 34, sub-section (1), under which a partner adjudged insolvent ceases from that date to be a
partner. If no partner or only one partner is left it is obvious that there can no longer be a firm.
(b) Happening of any event making the business of the firm unlawful
Clause (b) is in the same words as Section 34 of the English Act, and the illustrations and
comments to this section are taken, with some modifications, from Pollock on partnership.
3. DISSOLUTION ON CERTAIN CONTINGENCIES
Subject to contract between the partners a firm is dissolved
a) Expiration of the partnership firm
b) Completion of the adventure
c) Death of a partner
d) Insolvency of a partner
According to section 42, subject to contract between partners, a firm is dissolved on the
following contingencies:
(a) EXPIRATION OF THE PARTNERSHIP FIRM
When the partnership had been constituted for a fixed term, it continues obviously for the contemplated term and would be
dissolved on the expiry of such term. If the partners so like they may agree to the contrary and continue the business even
beyond that time. Such an agreement may be expressed or implied. If a fresh term is not stipulated, then it will be
considered to be a partnership at will. Unless otherwise agreed, the same mutual rights and duties continue for the
extended period as they were before the expiry of the term.
(b) COMPLETION OF ADVENTURES
Partnership created for some specific adventures or undertakings comes to an end on the completion of such
adventures or undertakings. There can however be an agreement by which the partnership may not be
dissolved and the business may be continued for some other adventures or undertakings after the
completion of the earlier ones. Unless otherwise agreed, the same mutual rights and duties between the
partners continue in respect of their relationship for the new adventures and undertakings also.
(c) BY THE DEATH OF A PARTNER
Subject to the contract between the partners a firm is dissolved by the death of a partner.
The main reason for this rule is that a law firm is not a person, it is only a group of persons and the name of
the firm is only the collective name of the persons who constitute the firm. In other words, the name of the
firm is a mode of describing the persons who have agreed to carry on the business. Law also recognizes the
distinction between the continuation of business and member of the firm who carry on the business.
For limited purposes of section 37, the firm is dissolved on the death of a partner. If the surviving or
remaining partners, a new partnership comes into existence. So is the case when a new partner is admitted
into partnership or a partner retires or is allowed to retire. In all such cases a new group and a new form
comes into existence.
(d) INSOLVENCY OF PARTNER
When a partner is adjudicated insolvent, he ceases to be partner. The firm is also dissolved unless there is an agreement
between the remaining partners to the contrary. According to section 41(a) which states that when all or all except one
partner become insolvent, there is compulsory dissolution of the firm. If therefore there are only two partners and one of
them is adjudicated insolvent, there is compulsory dissolution under section 41 and there is no question of there being a
contract to the contrary making the firm continue.

4. DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL

According to section 43 of the Indian Partnership Act, 1932:
1. “Where the partnership is at will the firm may be dissolved by any partner giving notice 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 communication of the notice.
Under section 43(1), if the partnership is at will, any partner may dissolve the firm by giving notice. But in order to dissolve the
firm the following conditions must be fulfilled:
A. Notice must be in writing;
B. Notice must express the intention of the partner to dissolve the firm; and
C. Written notice must be given to all the other partners.
5. DISSOLUTION BY COURT

This declaration of the grounds for judicial dissolution corresponds, with verbal variation and
additional provision adapted to Indian procedure, to section 35 of the English Act, which was itself a
somewhat enlarged version of section 254 of the Contract Act . The section confers a right to pray for
dissolution on any of the grounds specified therein notwithstanding any term of the partnership deed.

According to Section 44, Indian Partnership Act, 1932, the court may dissolve a firm on any of the
following grounds, namely:

a) UNSOUNDNESS OF MIND

According to section 44(a) At the suit of a partner, the court may dissolve a firm on the ground that a
partner has become of unsound mind, in which case the suit may well be brought as well by the next
friend of the partner who has become of unsound mind as by any other partner.

Since a person of unsound mind cannot perform the works of a partnership firm, it is in the interest of
such a person as well as other partners that the firm be dissolved. Hence the next friend of unsound
partner or any other partner may through a suit request the court to dissolve the firm.
b) A PARTNER BECOMING PERMANENTLY INCAPABLE

According to section 44(b) At the suit of a partner, the court may dissolve a firm on the ground that a
partner, other than the partner suing, has become in any way permanently incapable of performing his
duties as partner.

If the incapacity is temporary or is such that does not affect the duties of a partner, the firm cannot be
dissolved on this ground.

c) CONDUCT INJURIOUS TO THE PARTNERSHIP BUSINESS

At the suit of a partner, the court may dissolve a firm on the ground 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. The acts of adultery by a partner in firms of
bankers has been considered to be no ground for seeking dissolution by the other partners but that
may be so if it is a firm of medical practitioners. Conviction for a breach of trust, or the adultery by
one partner, with another partners wife are grounds for dissolution of firm.
d) PERSISTENT BREACH OF PARTNERSHIP AGREEMENT

According to section 44(d) At the suit of a partner, the court may dissolve a firm on the ground that a
partner, other than the partner suing, wilfully or persistently commits breach of agreements relating to
the management of the affairs of the firm or the conduct of its business or otherwise so conducts
himself in matters relating to the business that it is not reasonably practicable for the other partners to
carry on the business in partnership with him.

If the breach of agreement is not wilful, a single breach shall not be sufficient to dissolve a firm.
Constant or continuous behaviour of enmity between the partners making the cooperation between
them impossible, persistent refusal by one partner to perform his duties, one partner habitually
accusing the other partner of gross misconduct in the business, and to maintain wrong accounts and
not to enter the receipts, are the examples of some of the grounds on which the firm may be dissolved
under this section. In the end it may be noted that the firm may be dissolved by the court on the suit
of a partner other than the one who is guilty.
e) TRANSFER OF THE WHOLE INTEREST IN THE FIRM BY A PARTNER TO A THIRD
PARTY

According to section 44(e) At the suit of a partner the court may dissolve a firm on the ground 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. If a
partner transfers whole of his interest to a third party he will have no interest left in the firm and
therefore, any other partner can get the firm dissolved by filing a suit in court on this ground.

Such a third party or transferee does not thereby become a partner in the firm. It does not entitle the
transferee, during the continuance of the firm to interfere in the conduct of the business, or to require
account or to inspect the books of the firm, but entitles the transferee only to receive share of profits
of the transferring partner and the transferee shall accept the account of profits agreed to by the
partners.

If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled, as
against the remaining partners, to receive the share of the assets of the firm to which the transferring
partner is entitled, and for the purpose of ascertaining the share, to an account as from the date of the
dissolution.
In Commissioner of Income Tax v. Sunil J. Kinariwala (AIR 2003 SC 668)

The Honble Supreme Court held that when the partner assigns 50 % of his share in a partnership firm
in favour of trust, the case of such assignment couldnt be treated as one of sub-partnership.

f) PERPETUAL LOSS

At the suit of a partner, the court may dissolve a firm on the ground that the business of the firm
cannot be carried on save at a loss .According to the definition of the partnership as given in Section
4, the chief objective of partnership is to acquire profit. If the circumstances are such that this chief
objective cannot be attained and the business of the firm cannot be carried on the court on this ground
may dissolve save at loss, firm. Every partnership firm is established to attain a particular objective
and if the circumstances are such that it is not possible to attain that objective, the remedy in such
cases is to dissolve the firm.

g) JUST AND EQUITABLE

The court has been given very wide power of dissolution. Apart from ordering the dissolution of the
firm. The court has been vested with the power of dissolving the firm on any other ground which
renders it just and equitable that the firm should be dissolved.
 BIBLIOGRAPHY

● Bangia. RK, Contract- II, Allahabad Law Agency

● Indian Partnership Act, 1932