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Sem 7 Dissolution of Firm
Sem 7 Dissolution of Firm
VI
Dissolution of Partnership
+ Dissolution of partnership means coming to an 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.
+ Eg when the firm consists of A B and C and A retires, there is dissolution of
partnership between A and others but partnership as between B and C is not
dissolved. In such a case, there is dissolution of partnership between some of the
partners only, but there is no dissolution of the firm.
Dissolution of Firm
+ When a firm is put to an end as between all the partners that is called dissolution.
+ When the relation between all the partners of the firm comes to an end, this is called
dissolution of the firm.
+ Section 39 of the Indian Partnership Act, provides that “the dissolution of the
partnership between all the partners of a firm is called the dissolution of a firm.”
+ It implies the complete break down of the relation of partnership between all the
partners. When the dissolution of partnership between all the partners of the firm
occurs is dissolution of firm.
+ Eg 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
Dissolution of partnership is different from the
dissolution of firm
+ Dissolution of partnership is different from the dissolution of firm- Dissolution of a
partnership merely involves a change in the relation of partners; whereas the dissolution of
firm amounts to a complete closure of the business.
+ When any of the partners dies, retires or become insolvent but if the remaining partners still
agree to continue the business of the partnership firm, then it is dissolution of partnership not
the dissolution of firm.
+ Dissolution of partnership changes the mutual relations of the partners. But in case of
dissolution of firm, all the relations and the business of the firm comes to an end.
+ On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up
by selling the assets and by paying the liabilities and discharging the claims of the partners.
The dissolution of partnership among all partners of a firm is called dissolution of the firm.
Dissolution of partnership is different from the
dissolution of firm
+ Thus the dissolution of firm means the discontinuation of the jural relation
existing between all the partners of the firm. But when only one or more partners
retires or becomes incapacitated from acting as a partner due to death, insolvency
or insanity, the partnership i.e. relationship between as a partner and other is
dissolved, but the rest may decide to continue. In such cases, there is in practice,
no dissolution of the firm. The particular partner goes out but the remaining
partners carry on the business of the firm, it is called dissolution of partnership. In
the case of dissolution of the firm, on the other hand the whole firm is dissolved.
The partnership terminates as between each and every partner of the firm.
cases
+ The court may order for dissolution on any other ground which court think is just, fair and
equitable. e.g. loss of total confidence between the partners was held in case of Havidatt
singh v. Mukhe Singh
Dissolution by Court
+ Abbot v Crump 1870, adultery by one partner with another partner’s wife was
held to be a good ground for the dissolution of the firm by court.
+ Thus, where the court considers any other ground to be just and equitable for the
dissolution of the firm, it may dissolve a firm. The following are the cases for the
just and equitable grounds:
+ Deadlock in the management
+ Where the partners are not in taking terms between them
+ Loss of substratum
+ Gambling by a partner on a stock exchange
Dissolution by Court
+ Dissolution may be ordered when on any other ground the court thinks it just
and equitable that the firm should be dissolved. The expression, “just and
equitable” gives the court a very wide discretionary power, which is not to be
fettered by any rules, to order dissolution whenever in the circumstances it
seems to be desirable. (N Satyanarayana v M V Bala 1989)
+ Where the terms of a partnership deed provided to a partner the facility of with
drawing from the firm by transferring his interest to others, the court said that
this would keep the right to seek dissolution in abeyance unless a crisis is
created by others by refusing to pay him out. Gur Dayal Prasad v L
Raghunath Prasad 1976
Dissolution by Court
+ Whether right to apply for dissolution can be excluded
+ The right of a partner to ask for dissolution on any of the above grounds cannot be
excluded by any agreement to the contrary. Where no other mode of dissolution is
available, section 44 being the lender of last resort, its operation cannot be allowed to be
nullified. A Gopala Reddi v E Jayarami Reddi 2003
+ Hardutt Singh v Mukha Singh 1973, J&K High Court stated that it can be safely said
that section 44 confers an absolute and independent right and it is not open to the partners
to take away that right by means of an agreement between them. The court held that the
requirement of the partnership agreement that there should be one month’s notice and
reference of every dispute to arbitration must give way to the clear provisions of section
44.
Dissolution by Court
+ The court equally concerns itself with the interest of the other partners.
+ Where the managing partner supplied to the firm from his personal business certain material for which he
overcharged, this was held to be a breach of faith entitling other partners to demand dissolution in which
no notice is necessary under section 43. Saritha Enterprises v S Rajagopal 2003
+ The court has to take into account all the facts and circumstances and mould relief according to the
exigencies of the case. Pannalal v Padmavati 1960
+ Jai Narayan Misra v Hashmuthunnisa Begum 2002 Mismanagement of affairs has also been held to
be a good ground for ordering dissolution. The firm was running a cinema theater in which plaintiff was
entitled for minimum profit share every months but no given and no explanations for the same. Accounts
of books and Income tax returns not given and submitted the incorrect returns with Income Tax purposes.
All this showed that the defendant partner was mismanaging the affairs and court ordered dissolution.
+
Dissolution by Court
+ Suit for Accounts without seeking dissolution
+ The bombay high Court has expressed the opinion that even if the suit
is only for accounts, the court would order dissolution. It is open for
the courts, irrespective of the parties’ pleadings, to call upon the
plantiff to amend his plaint suitably so as to include the prayer for
accounts and dissolution as without seeking dissolution, accounts
ordinarily cannot be demanded. Manmohan Muttappa Attavar v
Harendra Sakarlal Parikh 2003
Dissolution by Court
+ Suit for Partition without seeking dissolution
+ A suit for partition of the assets of the firm without dissolution is not
possible. An agreement to create a partnership need not be express. It
can arise out of mutual understanding evidenced by course of conduct.
A suit for partition of property without there being dissolution was
held to be not maintainable. Kinjarapu Chinnayya v Kinjrapu v
Chinnammi 2003
Dissolution by Court
+ Property situate out of territorial jurisdiction of court
+ A suit for dissolution is not to be barred on the ground that certain immovable
properties of the firm were situated beyond the territorial jurisdiction of the court.
The primary object of a dissolution suit is not relief in respect of some immovable
property. Mohd Hassen Hashmi v Kaberi Roy 1993
+ A suit was filed for declaration of the dissolution of a partnership firm. The theatres
of the firm which were a part of its property were situate beyond the jurisdiction of
the High Court. The head office of the firm was within jurisdiction. The notice of
dissolution was issued and received within jurisdiction. It was held that the High
Court had jurisdiction to entertain the suit. Smriti Jaiswal v Romi Jaiswal 1999
Consequences of Dissolution- Liability for acts of partners done
after dissolution