Dissolution of partnership firm

Section 39 of the Indian Partnership Act, 1932 [4] defines dissolution of

partnership firm. It defines the dissolution of partnership between all the
partners of a firm is called the dissolution of the firm.

Dissolution of partnership firm is different from the dissolution of partners.

Dissolution of the firm means to discontinue all the business activities within
the firm. When the activities are stopped and the assets are used to pay off
the debt it amounts to the dissolution of the firm. When a partner agrees to
continue the same firm even after the retirement of a partner then it is called
dissolution of partners and not firm. As the firm is still in process by the
partner but the partnership between the partner is finished.

Dissolution of firm leads to the dissolution of partnership too. There is a

contractual relationship among the partners which works with the firm. If the
firm is dissolved then the partnership is also dissolved.

The Indian Partnership Act, 1932 defines dissolution in different ways.

Section 40 to 44 states dissolution of partnership firm.

Dissolution of a partnership firm can be done in 2 ways:

 Dissolution without the intervention of the court(section 40-43)

 Dissolution by the Court (Section 44)

Dissolution without the Intervention of the court

(Section 40-43)

Section 40 – Dissolution by agreement

A firm may be dissolved with the consent of all the partners or in accordance
with a contract between the partners. The firm may be dissolved by the
consent of all the partners or by entering into an agreement to dissolve the
firm. This is one of the simple methods of dissolution of partnership firm and
intervention of the court is not required in this.[5]
Section 41-Compulsory Dissolution
A firm may be dissolved by the following points:

 Insolvency of partner: In case all the partners become insolvent or

all the partners except one partner become insolvent then firm may
be dissolved.
 Unlawful business: in case any unlawful activities are happening in
the business of the firm to be carried on or for the partners to carry
it on in partnership, the firm may be dissolved. Unlawful activities
like selling of drugs, trading with alien countries, dealing in illegal
products etc.
 For example, A, a resident of India and B a resident of China are
partners. If war breaks out between the two countries, then the
partnership will become unlawful and hence it is dissolved
automatically.[6]

Section 42 – Dissolution on the happening of certain contingencies

This section focuses on the dissolution of the firm on happening of certain
events. Dissolution of the firm can take place if the following events take
place:

 Expiry of fixed term: If the contract of a partnership firm is on a

fixed term. Then, dissolution of that firm will take place on the
expiry of that contract. when the contract expires dissolution will
take place.
 If the firm was formed for a certain number of task. Then on
completion of that task, the firm ceases to exist. If the firm is
constituted for a particular task then on completion of that task firm
will dissolve, unless there is a contract or agreement.
 Dissolution can also take place with the death of a partner.
Dissolution of the firm can take place only when the other partner
chooses too. If he wants to continue the firm even after the death of
a partner then there will be no dissolution of the firm. Only the
partnership will be dissolved.
 When one of the partners or all the partners is insolvent then
dissolution can take place. Even the insolvency of one partner can
dissolve the firm.
 Dissolution can also take place if any one of the partners resigns. If
one partner thinks not to continue further then he/she can resign
but this will also dissolve the firm.[7]
Section 43 – Dissolution by notice of partnership at will
Partner in a partnership firm can dissolve it by giving notice of dissolution to
other partners. The notice should be communicated to the other partners as
mentioned in the agreement and if not mentioned then a mode of
communication should be reasonable. The notice of dissolution should not be
in between any transaction and is a partner give notice of dissolution in
between the transaction his notice should be held until the time the
transaction is completed. The notice should be clear and should not be
confusing in any sense. It should be properly communicated to the other
partners.[8]

Dhulia-Amalner Motor Transport … vs Raychand Rupsi Dharamsi And Ors.

[9]
section 43 is explained in 3 points. It requires three things: (1) the giving
of a notice, (2) the notice has to be in writing, and (3) the notice must
express an intention to dissolve the firm. Unless these 3 things are complied
with, the provision of section 43 of the Act would not come into operation at
all.

Section 44 – Dissolution By the court

Dissolution of a firm can be done by suing the other partner and bringing the
case before the court. The court may dissolve a firm on any of the following
grounds:

 When one of the partners becomes of unsound mind and is unable

to continue further than in this case a suit may be brought up by the
other partner to dissolve the firm. Unsoundness of a partner does
not automatically dissolve the firm but it can be a ground for
dissolution. It is not necessary that the unsoundness should be
permanent.
 If a partner has become permanently incapable of performing his
duties as a partner then another partner can sue for dissolution of
the firm. The Court may order for dissolution of the firm. Incapable
to perform his duties can be due to any reason like going abroad for
long time or imprisonment of a partner for a long time. As a partner
won’t be able to perform his duties, the court will order for
dissolution of the firm.
 If there is any misconduct by a partner other than the suing partner
due to which firm has suffered loss, then the court may order the
dissolution of the firm. Misconduct or guilty of conduct which is
likely to affect prejudicially the carrying on of the business. Then the
other partner can sue the partner for misconduct which is the
ground for dissolution of the firm.
  Agreements are the most important document that all the partners
must follow. If any partner breaches the agreement regarding the
conduct of business then the other partner can sue him for breach
of an agreement which is a ground of dissolution. The court may
order for dissolution of a firm if a partner is found guilty of constant
breach of the agreement and it becomes impossible to continue the
business.
 When a partner transfers whole of his share/interests to the third
party for permanently then it can be a ground for dissolution of firm
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 (5 of 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 the firm is suffering from continuous loss, then the court may
order for dissolution if there is no capital available for further
growth.[10]

Section 45-Liability of partners after dissolution

Section 45 defines liability for acts of partners done after dissolution. The
partner, in this case, continue to be liable as such to the third parties for any
act done before the dissolution. Liability of a partner does not finish
automatically, the liability of a partner finishes when all the event are
finished that has been taken up before the dissolution of the firm until public
notice is given of the dissolution. A Partner who dies or who is adjudicated an
insolvent or a partner who retires from the firm is not liable under this
section for acts done after the date on which he ceases to be a partner.
Notice of dissolution can be given by any partner. [11]

Section 46 – Rights of partners to have business wound up after

dissolution
After the dissolution of the firm, every partner is entitled to equal rights or
according to the contract. All the partners are entitled to the property of the
firm applied in payment of the debts and liabilities of the firm and to have
the surplus distributed among the partners or their representatives according
to their rights. These rights are given when winding up of the firm is taking
place.[12]

Section 47 – Continuing Authority of partners for purposes of

winding up
After the dissolution of the firm the authority of each partner to bind the firm
continues so far as for being necessary to wind up the affairs of the firm and
to complete the transactions begun but unfinished at the time of dissolution.
This section focuses on the transactions that are unfinished until the time of
dissolution. Partners have to finish all the transactions that are related to a
3rd party for the purpose of winding up the business. It also states that firm
is not bound by the acts of a partner who has been adjudicated insolvent but
this provision does not affect the liability of any person who has after the
adjudication represented himself as a partner of the insolvent. [13]

Section 48- Mode of settlement of accounts between partners

This section defines all the modes in which the accounts can be settled
among partners after dissolution.

The following rules shall be observed subject to agreement by the partners:

 All the losses of the company including deficiencies of capital shall

be paid out of profits first, then out of the capital and lastly if
necessary by the partners individually in proportions to which they
are entitled to share profits.
 All the assets of the company including all the sums contributed by
the partners shall be applied in the following manner:
 In paying all the debts of the firm to the third parties
 in paying each partner rateable what is due to him from the firm for
advances as distinguished from capital
 in paying to each partner rateable what is due to him on account of
capital
 The residue shall be divided among the partners in the proportions
in which they were entitled to share profits.[14]

Section 49- Payment of firm debts and of separate debts.

Payment of Joint debts and separate debts due form any partner is explained
in this section.

The property/assets of the firm shall be applied first in payment of the debt
of the firm and if there is any surplus then of each partner shall be applied in
payment of his separate debts or paid to him.

The separate property of any partner shall be applied first to the payment of
his separate debts and then the surplus in the payment of the debts of the
firm. [15]
Section 50 – Personal profits earned after dissolution
The provision of clause (a) of section 16(Personal profits earned by partners)
shall apply to the transactions by surviving partner or by the representative
of a deceased partner after the firm is dissolved on account of the death of a
partner and before its affairs have been completely wound up. [16]

Section 51 – Return of premium o premature dissolution

Where a partner paid a premium on entering into partnership and the firm is
dissolved before the expiration of that term due to death of a partner, then
he shall be entitled to repayment of the premium or of a part as may be
reasonable. The term upon which he became a partner and to the length of
time during which he was a partner such part will be repaid as may be
reasonable except the dissolution is mainly due to his own misconduct the
dissolution is in pursuance an agreement containing no provision for the
return of the premium or any part of it.[17]

Conclusion
In Indian Partnership Act, 1932 provisions are given by which a partnership
firm can be dissolved before the court or outside the court. The grounds on
which dissolution of firm takes place is written clearly in the act. The act is to
make things clear and just in a partnership firm so that partners do not take
advantage of each other. Act also help us to maintain a stable environment
in the firm.