PROJECT

Business & Labor Law

 

DISSOLUTION OF A FIRM

Faisal Irsahd
Student Id #
Lecturer :- Nisar A. Mujahid
Advocate Supreme Court of Pakistan

PAF-KIET University Karachi

Dissolution of a firm
The dissolution of partnership between all the
partners of a firm is called the "dissolution of
the firm".

MEANING OF DISSOLUTION
Meaning of dissolution The term dissolution stands for
discontinuation or termination. Under the Partnership
Act, 1932: Dissolution of Firm Dissolution of Partnership
Types of dissolution
Dissolution of Firm [ Sec. 39]:

If the dissolution of partnership involves

discontinuation of business in partnership, it is
called dissolution of firm. In such case, assets of
firm are realized and liabilities are paid off and
the surplus, if any is distributed among the
partners according to their right. It is to be
noted that ‘dissolution of Firm’ involves
dissolution of partnership but dissolution of
partnership may not lead to dissolution
Dissolution of Firm VS. Dissolution of
partnership:-
Dissolution of Firm VS. Dissolution of partnership Basis
of difference Dissolution of firm Dissolution of
Partnership
 Continuation of business It involves discontinuation
of business in partnership. It does not affect
continuation of business. It involves only
reconstitution of the firm.
 Winding up It involves winding up of the firm and
requires realization of assets and settlement of
liabilities. It involves only reconstitution and requires
only revaluation of assets and liabilities of the firm.
 Order of court A firm may be dissolved by the order
of the court. Dissolution of partnership is not
ordered by the court.

 Scope It necessarily involves dissolution of

partnership It may or may not involve dissolution of
firm.

 Final closure of books It involves final closure of

books of the firm. It does not involve final closure of
the books
Dissolution of Firm without the order
of Court :-
A firm may dissolve without the order of court in the
following cases:

Dissolution by mutual agreement [Sec.40]:

A firm may be dissolved by mutual agreement
between/among partners. Even a firm for a fixed duration
may be dissolved by mutual agreement.

Compulsory Dissolution [Sec.41]:

A firm is compulsorily dissolved: If all partners, or all the
partners except one partner of the firm are declared
insolvent, or If some event take place which make it
UNLAWFUL for the firm’s business to be carried on.
On the happening of certain event [Sec. 42]:
In the absence of any provision to the contrary in the
partnership agreement, in the following four cases the firm will
automatically be dissolved: On the expiry of the fixed term for
which the firm was constituted, On the completion of venture or
undertaking for which the firm was constituted, On the death of
a partner, On the insolvency of a partner
 
By Notice [Sec.43]:
Where the partnership is at will , the firm may be dissolved by
any partner by giving notice in writing to all other partners of his
intention of dissolving a firm. Acceptance of notice is not
required. Notice once given can not be withdrawn without the
consent of all other partners.
 
Dissolution of Firm order By Court :-

On the following grounds a court may order for

dissolution of firm: Insanity Of a partner Permanent
incapacity Persistent breach of contract Misconduct
Transfer of interest Perpetual losses Just and equitable
ground The right of a partner to file a suit for
dissolution on any of the ground can not be excluded
by any agreement. 
Insanity of a partner [Sec 44 (a)]:
If a partner (not a sleeping partner) has become of unsound
mind, then court may allow dissolution of firm on a petition
made by any other partner or legal representative of the insane
partner. Temporary sickness is no ground for dissolution of firm.
 
Permanent Incapacity [Sec. 44 (b)]:
When a partner (not a sleeping partner) has become
permanently incapable of performing of his duties as a partner,
then court may allow dissolution of firm on a petition made by
any other partner. Such permanent incapacity may result from
physical disability or illness etc.
Misconduct [Sec. 44 (c )]
When any partner is guilty of any misconduct which is likely to
adversely affect the carrying on of the business, the court may
allow dissolution of firm on the petition made by any other
partner. It is not necessary that misconduct must relate to the
conduct of the business. The important point is the adverse
effect of misconduct on the business. In each case nature of
business will decide whether an act is misconduct or not.
 
Persistent Breach of contract [Sec. 44 (d)]:
When a partner willfully or persistently commits breach of
agreement with regard to matters relating to the business of the
firm, any other partner may apply to the court for dissolution of
the firm. Following comes in to category of breach of contract:
Misconduct [Sec. 44 (c )]
When any partner is guilty of any misconduct which is likely to
adversely affect the carrying on of the business, the court may
allow dissolution of firm on the petition made by any other
partner. It is not necessary that misconduct must relate to the
conduct of the business. The important point is the adverse
effect of misconduct on the business. In each case nature of
business will decide whether an act is misconduct or not.
 
Persistent Breach of contract [Sec. 44 (d)]:
When a partner willfully or persistently commits breach of
agreement with regard to matters relating to the business of the
firm, any other partner may apply to the court for dissolution of
the firm. Following comes in to category of breach of contract:
Embezzlement, Keeping erroneous accounts Holding more cash
than allowed Refusal to show accounts despite repeated
request etc.
 
Transfer of Interest [Sec.44 (e):
When a partner has transferred the whole of his interest in the
firm to a third party then any other partner may apply to court
for dissolution of firm.
 
Perpetual losses [Sec.44 (f) ]:
Where the business can not be carried on except at a loss, any
partner may apply to court for dissolution of court.
 
Any other just and equitable ground [Sec. 44 (g):
Where the court is satisfied that it is just and equitable to
dissolve the firm, it may allow dissolution using it discretionary
power. For example: Continued quarrel between partner Refusal
to meet on matters of business Complete deadlock in
management due to partners not on speaking terms Lack of
confidence and good faith among partners, etc.  
THANKS