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Dissolution of a partnership firm means the discontinuance (break-up) of the legal relationship between all the partners of the

firm [Section 39].

Distinction Between Dissolution and Reconstitution of a Partnership Firm Reconstitution of a partnership firm necessarily takes place in the event of the retirement, death, or insolvency of a partner of the firm. In the cases of such eventualities, the firm may not necessarily get dissolved, provided the partnership deed provides to such effect.

Distinction B tw Di ti ti Between Di Dissolution a d econstitution l ti an tit ti of a Part r hip Firm f Partnership Contd But then, the firm has got to be reconstituted with the remaining partners of the firm, which is known as the reconstitute firm. But, when a new partner is admitted into an existing partnership firm, it also involves reconstitution of the firm.

Distin tion B tw n Dissolution a d Di ti ti Di l ti and onstitution tit ti of a Part rship Firm f Partn r hip Contd Reconstitution of a firm involves only a change in the relationship of the partners of the firm. But, in the case of the dissolution of the firm, there is a complete discontinuation in the relationship of the partners of the firm.

Dissolution of a issolution

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(a) y mutual agreement: That is, any time, with the mutual consent of the partners, in accordance with the contract between them. (b) y notice of dissolution: That is, by giving a notice, in writing, to the other partners of the firm, of the intention of the partner concerned to dissolve the firm [Section 43]. Dissolution will be effective from the specific date, if mentioned in the notice, or with effect from the date of communication of the notice. But the filing of a suit for dissolution of the firm is not considered to be a notice. In such a case, the effective date of dissolution of the firm will be the date of passing of the preliminary decree by the Court for the dissolution of the firm.

Dissolution of a
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y o eration of law [Section 41] A compulsory dissolution can take place: (i) If all the partners of the firm, or if all but one of the partners of the firm, are adjudicated as insolvent, or

(ii) By the happening of an event which makes the carrying on the firms business, or the continued existence of the firm, as unlawful.

Dissolution of a

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Because, trading it alien enemies is against ublic licy. T e term alien enemy includes a erson of any nationality oluntarily residing in any enemy country.

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(d) By t e appening of ertain ontingencies [Section 42], Unless ot er ise agreed bet een t e partners of a firm, on t e appening of any of t e following events: (i) If t e firm as been constituted for a fi ed term, on t e expiry of t at term. (ii) On completion of one or more projects, if t e partnership was constituted only for such specific purpose. (iii) In the event of the death of a partner.

Dissolution of a

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(iv) In the event of the adjudication of a partner as insolvent. Such dissolution of a firm is also referred to as optional dissolution, because the partnership firm could still continue, if the partnership agreement (deed) would have made such provisions.

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(e) By a decree of the Court [ ection ] If any of the partners of the firm file a suit, the Court may dissolve a firm under the following circumstances: (1)Where a partner of the firm becomes insane (i.e. of unsound mind), any of the partners, or the next friend of the insane partner, can file a petition in the Court for the dissolution of the firm, and the Court may pass the order for the dissolution of the firm. But, in case a dormant (inactive) partner of the firm becomes insane (i.e. of unsound mind), the Court will not pass the order for the dissolution of the firm, unless a very special case is made out for the dissolution of the partnership firm.

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( ) Where a partner of the firm becomes permanently incapable of performing his duties as a partner of the firm, the Court may pass the order for the dissolution of the firm. Thus, in case a partner is suffering from paralysis, which is found to be curable, it cannot be termed as a permanent incapacitation, and therefore, the Court will not dissolve the firm. But the incapacitated partner himself cannot file such application.

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(3) Where a partner is found guilty of the conduct, which is likely to prejudicially affect the carrying of the business of the firm, the Court may pass the order for the dissolution of the firm. The misconduct includes speculating the price of commodities like cotton sugar, etc., conviction for travelling in a railway compartment without ticket, with the intention of defrauding the railway undertaking, or convicted for an offence under moral turpitude, and so on. However, in such cases, the suit can be filed only by the other partners of the firm, and not by any one else.

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( ) Where a partner willfully and persistently commits breach of the partnership agreement regarding management, or otherwise conducts himself in such a manner that it is not reasonably practicable for the other partners of the firm to carry on the business of the partnership with him. Continuous refusal by a partner to attend his duties in the business of the firm, and the existence of hostility between the partners of the firm such that any cooperation between the partners becomes impossible, etc.

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(5) Where a partner is found to have transferred in any manner (like by sale, mortgage or charge), his entire interest in the partnership to a third party (i.e. to an outsider), or to have allowed his share to be charged for the execution of a decree against him or to have allowed the same to be sold for arrears of land revenue, or for charges recoverable as land revenue. But then, a partner can transfer even his entire (whole) share in the partnership firm to a co-partner of the firm, because in such an event no new partner gets admitted or introduced to the firm.

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(6) In the case of a loss-making firm, the Court can pass an order for the dissolution of a partnership firm, where its business cannot be run except at a loss. In such cases, the Court can dissolve a partnership firm even if it was established for a fixed period. (7) The Court can also pass the order for the dissolution of the firm on any other ground which, in the Courts opinion, is a fit ground for the dissolution of a partnership firm. For example, where there is a deadlock in the management, where the substratum (the very basis or foundation) of the business has disappeared, or where the partners are not on speaking terms with each other.

Consequences of Dissolution
(a) It is necessary to wind up all the affairs of the firm. For example, all its assets have to be realised, all its liabilities are to be paid off, and the surplus (the remaining balance), if any, is to be distributed among the partners or their representatives as per their respective rights in the firm. As stipulated under ection 6, any of the partners or his representative has some rights against the other partners like: (i)To have the property of the firm applied in the payment of the debts of the firm; and (ii)To have the surplus distributed amongst the partners of the firm or their representatives in accordance with their respective rights.

(b)

Consequences of Dissolution

Cont

The rights of the partner is usually referred to as the partners lien, though the word lien is used not in its technical sense, as it is used in the context of the unpaid sellers lien. (c) After the dissolution of a partnership firm, a partner cannot bind the firm in any case, except: (i) Where it may be necessary to wind up the affairs of the firm; and (ii) For the purpose of completing the transaction already begun but not completed, till the time of the dissolution of the partnership firm.

Consequences of Dissolution

Cont

A partner, who has been adjudged as an insolvent, cannot bind the firm in any case after the passing of the adjudication [ ection 7] (d)In case any of the partners earns any profit from any transaction connected with the firm, after its dissolution, he is required to share such profit with the other partners of the firm, and the legal representatives of the deceased partner of the firm [ ection 50].

Return of

remium on

remature Dissolution

As stipulated under ection 51, in case a partner had paid a premium on his entry into the partnership firm for a fixed term, and the firm has been dissolved before the expiry of such term, he will be entitled to get the refund of the premium paid by him earlier, or such part thereof as may be reasonable (keeping in view the term and length of the time during which he was a partner).

Return of
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remium on

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But he will not be entitled to receive the refund of the premium paid by him earlier (i) If the dissolution of the partnership firm has been caused by the death of a partner; or (ii) If the dissolution of the partnership firm has taken place due to his own misconduct; or (iii) If the dissolution of the partnership firm is in pursuance of an agreement containing no provision regarding the refund of the premium or ant part thereof.

Restraint of Trade by t e

uyer of Goodwill

On actual dissolution, or in anticipation of the dissolution of the partnership firm, the partners of the firm may enter into an agreement with the buyer of the goodwill of the firm that some or all of them (partners), will not carry on a business similar to the business of the firm within a specified period or within the specified local limits. uch trade restrictions, however, must be reasonable; otherwise the agreement will be treated as void.

Settlement of Accounts
If the accounting clause is not provided in the Deed of Partnership as to how the final accounts of the partners of the firm will be settled, the provisions made under ection 8 will apply, which proves that: (a) Losses, including the losses on capital (i.e. amount invested by the partners in the firm), must be paid first of all from the profit of the firm, and only thereafter out of the capital, and at the end, any further loss still remaining, it will be met by contribution of each partner in proportion to his share in the profit.

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(b) Further, the assets of the firm (including the amount contributed by the partners of the firm for making up the deficiency in the capital of the firm), will be applied in certain order like: (i)First, in paying the debts of the firm to the outsiders; (ii)Next, in paying each partner, rateably, for the advances made by him to the firm, in addition to and different from the capital contributed by him in the firm;

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(b) Further, the assets of the firm (including the amount contributed by the partners of the firm for making up the deficiency in the capital of the firm), will be applied in certain order like: (iii)Thereafter, in paying each partner, rateably, amount due for capital contribution; and (iv)Finally, the balance amount, if any, will be applied for paying each partner according to his share in the profit of the firm. However, if a partner becomes insolvent, or he is even otherwise not in a position to pay his share of his contribution, the remaining solvent partners must rateably share the available assets of the firm (including their own contribution in the capital deficiency of the firm).

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Limitation Period for filing a case in the Court, in regard to the settlement of the firms account on its dissolution, is three years. Thus, in case a partner fails to file such case against even one partner within this period of three years, the whole claim gets time-barred against the remaining partners of the firm as well.

Payment of Partners i

Debt [Section 49]

The property of the firm shall be applied first in the payment of the debts of the firm. And in case there is still some surplus (property/assets of the firm) available, the share of each partner shall be applied in payment of his separate debts, or it will be paid to him direct. Further, the separate property of any partner shall be applied first in the payment of his separate debts. And in case there is still some surplus (property/assets of the partners) available, the same shall be applied in the payment of the debts of the firm.

Sale of Goodwill after Dissolution [Section 55] While settling the final accounts of a partnership firm after its dissolution, the goodwill of the firm shall (in accordance with the terms of the contract between the partners), be included in the assets of the firm, and it may be sold either separately or along with the other property (assets) of the firm.

Sale of Goodwill after Dissolution [Section 55] After the sale of the goodwill of the firm on its dissolution, a partner of the dissolved firm may carry on a business, competing with the business of the buyer of the goodwill of the dissolved firm, and he may also advertise such business. But, subject to the agreement between him (partner) and the buyer of the goodwill of the dissolved firm, he (partner) may not do the some things like: (i) He may not use the name of the firm; (ii)He may not represent himself as carrying on the business of the firm; or (iii)He may not solicit the customers who were dealing with the firm before it was dissolved.