Dissolution of Partnership Firm

Modes of Dissolutions of Firm: The various ways under which a firm can be dissolved are:-

(A) Dissolution by agreement: This is a case where all the partners decide to dissolve the firm & end the business.

(B) Compulsory Dissolution: A firm is dissolved on the happening of any of the events:-I. By insolvency of all the partners or of all but one.(section:41(a)

II. By the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partner to continue in the partnership.[section:41(b)]

III. If the firm is created for a fixed term. Then at the completion of that term. By the death or insolvency of the partner. [section:42]

IV. If the partnership is at will. By a partner giving a notice to all other partner of his intention to dissolve the firm. [section:43]

(C) Dissolution by the Court:(a) Partner has become unsound of mind. A friend of such partner or any other partner

may file a suit for dissolution.(b) Partner in any way has become incapable of performing his duties as a partner.

Example: Where a partner has suffered from paralysis but he is recovering speedily by treatment. Firm cannot be dissolved. Incapacity has to be permanent for dissolution to take place.

(c) That a partner is guilty of misconduct which is likely to harm the business. The nature of the business is to be considered Example: Gambling on the stock exchange.

(d) That the partner willfully or persistently commits breach of agreement relating to the affairs of the firm. The partner so conducts himself that it is not practicable for other partners to continue with the business of the firm.Example :(i) A systemic neglect to account for sums received. (ii) Raising money on firms name for personal use. (iii) Starting rival business

(e) That the partner has in any way transferred the whole of his interest in the firm to a third party.

(f) That the business of the firm cannot be carried out. It has to be saved from loss

What Happens after Dissolution of Firm?

(A) Liability for the acts of the partners after dissolution: Partners will continue to be liable to third parties for all the acts taken in firms name until public notice is given of firm’s dissolution. [section:45]

(B) Right of the partner to have business wound up after dissolution: Every partner or his representative is entitled against all the other partners to apply the entire firm’s assets/property for payment of debts & liabilities of the firm & distribute the surplus to the partners according to their shares/rights. [section:46]

(C) Continuing authority of the partners for the purposes of winding up the business: After the dissolution of the firm the mutual rights & liabilities of the partners continue till the winding up process is completed. To complete the transaction began before the dissolution but was unfinished at the time of dissolution. [section:47]Example: Recovery of debts due to the firm.

(D) Mode of Settlement of Accounts between the partners: After dissolution the rules will be applied for settlement of the accounts, subject to any agreement among the partners. [section:48](a) Losses including deficiencies in capital are to be paid out of

(i) Profits.(ii) Next out of capital(iii) By partners in proportions in which they are entitled to share profits.

(b) Assets of the firm: including any sum contributed by partners to make up the deficiencies of capital shall be applied in the following manner.(i) To pay the debts of the firm due to third parties.(ii) Paying each partner rate ably which is due to him from the firm any

advances.(iii) Paying each partner ratably which is due to him on account of capital

contributed by partner.(iv) The residue, if any, shall be divided among the partners in proportion to their

shares in profit.