HOW TO DISSOLVE A PARTNERSHIP FIRM– Adv.Suyog Chandulal Shah

HOW TO DISSOLVE A PARTNERSHIP FIRM – Adv.Suyog Chandulal Shah

Dissolving a partnership firm means discontinuing the business under the name of said partnership firm. In this case, all liabilities are finally settled by selling off assets or transferring them to a particular partner, settling all accounts existed with the partnership firm.

Any profit/ loss is transferred to partners in their profit sharing ratio as agreed by them in the partnership deed.

Dissolving a partnership firm is different from dissolving a partnership. In the former case, the firm ends its name and hence cannot do business in the future. But in case of dissolving a partnership, the existing partnership is dissolved– by consent or on happening of a certain event, but the firm can retain its existence if remaining partners enter into a new partnership agreement. There are different ways in which a partnership firm may get dissolved-

·         When partners are mutually agreed

·         Compulsory dissolution

·         Dissolution depending on certain contingent events

·         Dissolution by notice

·         Dissolution by notice

·         Transfer of interest or equity to the third party

·         Partners still liable to third parties

·         How are accounts settled

·         Premium to be returned on premature dissolution

When partners are mutually agreed

It is the easiest way to dissolve a partnership firm since all partners have mutually agreed upon closing the partnership firm. Partners can give a mutual consent or may enter into an agreement for the dissolve. 

Compulsory dissolution

A firm may need to be dissolved compulsorily if:

• All partners or all partners except one partner are declared insolvent
• The firm is carrying unlawful activities like dealing in drugs or other illegal products or doing business with alien countries or other countries that may harm the interest of India or doing other such activities.

Dissolution depending on certain contingent events

Upon happening of certain events, a firm may be required to get dissolved:

• Expiry of fixed-term– Partnership formed for a fixed term will get dissolved once the term gets over.
• Completion of task– Sometimes, a partnership is formed for a certain task or objective. Once the task is completed, the partnership will automatically get dissolved.
• Death of the partner– If there are only two partners, and one of the partner dies, the partnership firm will automatically dissolve. If there are more than two partners, other partners may continue to run the firm. In such case, only the partnership will get dissolved, and other partners will enter into a new agreement.

Dissolution by notice

If a partnership business is at will, any partner can dissolve the partnership by giving an advanced notice. Notice will contain a date from which dissolution will be effective.

Dissolution by Court

If any of the partners becomes mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in the court to dissolve the firm. But a court can dissolve the firm only if it is registered with the registrar of firms. Hence an unregistered partnership firm can’t be dissolved by the court.

Transfer of interest or equity to the third party

If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.

Partners still liable to third parties

Until a public notice of dissolution is given, partners remain liable for any act done by any of the partners which would have been an act of the firm, if such act was done before resolution.

If a partner has been declared insolvent or has retired from the firm, he will not liable for any acts done after his insolvency or retirement. The legal heirs of any deceased partner are also not liable for any acts done by other partners after the partner has died.

How are accounts settled

Accounts of the firm are settled in the following order–

• Losses of the firm will be paid out of the profits, next out of the capital of the partners, and even then, losses aren’t paid off, losses will be divided among the partners in profit sharing ratios,
• Assets of the firm and the capital contributed by the partners to set-off losses of the firm will be applied in the following order–

1. Third party debts will be paid first
2. Next, loan amount taken by firm from any partner will be repaid to that partner
3. Capital contributed by each partner will be repaid to him in the capital contribution ratio
4. Balance amount will be shared among the partners in their profit sharing ratios.
5. this article deals with how a partnership firm can be dissolved according to partnership act, 1932 and what are its consequences...
6. Dissolution of Firms

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.

Dissolution of partnership is different from the dissolution of firm.
Dissolution of a partnership firm 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 a Partnership firm may be effected in the following ways:
·Dissolution without the intervention of the Court.
·Dissolution by Court.

Dissolution without the intervention of Court:-

1. By Agreement (S.40)

A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.

2. Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes compulsory for the firm to dissolute:
(i) Insolvency of Partners

In case all the partners or all the partners except one become insolvent.

(ii) Unlawful Business

In case the firm is engaged in more than one business which may have become unlawful, the better view appears to be that the firm will not dissolve as to the other legitimate businesses unless all of them are so inter connected that stoppage of one would paralyze the others e.g. A and B charter a ship to go to foreign port and receive a cargo on the joint venture. War breaks out between England and the country where the port is situated before the ship arrives at the port, and continues until after the time appointed for loading. The partnership between A and B is dissolved

3. Dissolution on the happening of contingent event (S.42) A firm may be dissolved on the happening of any of the following contingent event

(i) Expiry of Fixed Period

A firm constituted for a term is of course not exempt from dissolution by any of the other possible cause before the expiration of the term. The contract may expressly provide that the partnership will determine in certain circumstances but even if there is no such express term, an implied term as to when the partnership will determine may be gathered from the contract and the nature of the business. The provision of this section make it clear that unless some contract between the partners to the contrary is proved, the firm, if constituted for a fixed term would be dissolved by the expiry of that term.

(ii) On achievement of specific task
A partnership constituted to carry out contracts with specified persons during a particular season would be taken to be dissolved once the contracts are closed. In the case of Basantlal Jalan v. Chiranjilal, Where the firm was constituted for a specific undertaking to supply certain quantity of grain and the contract was prematurely terminated after supply of a part of the goods, it was held that the partnership did not come to an end and was dissolved only on the final realization of the assets

(iii) Death of Partner

When the deed of partnership did not provide that the death of a partner would not dissolve the partnership, the partnership stood dissolve on the death of a partner. Firm, stands dissolved automatically on death of one partner. Continuance of business after such death would not tantamount to continuance of earlier partnership.

(iv) Insolvency of Partner

In the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm.the rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular ventureand the same has yet not been completed.

(v) Resignation of Partner

Resignation by any of the partners dissolves the partnership

4. Dissolution by notice (S.43)

In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners was held in case of Banarsidas v. Kanshi Ram. In those cases where a partner has given notice of dissolution at a time when dissolution will give him some advantage over the other partners, he may be held in the firm till the pending transactions are completed.

Dissolution by Court (S 44)

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner

On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances.

(ii) Incapacity of Partner

If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner. where a partner is imprisoned for a long period of time the court may dissolve the partnership was held in case of Whitwell v. Arthur

(iii) Misconduct of Partner

If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm.

(iv) Constant breach of agreement by partner

The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner.

(v) Transfer of Interest

When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.

(vi) Continuous Losses

The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.

(vii) Just and Equitable

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

Liability for acts of partners done after dissolution ( S.45)
This section provides that despite dissolution, the partners cannot escape their liability to third parties for acts done even thereafter unless public notice of dissolution is given. These provision emphasis the necessity of giving a public notice before a partner could terminated his future liability whether it is a case of dissolution, retirement or expulsion.

Rights of partners to have business wound up after dissolution (S.46)
On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have 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.

Continuing authority of partners for purposes of winding up ( S.47)
After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:

PROVIDED that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.

Mode of settlement of accounts between partners (S.48)In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed-

(a) Deficiencies of capital

When a partnership is dissolved, and after the debts to the third parties have been paid and advances made by a partner have been repaid, the assets are insufficient to repay each partner his capital in full, any deficiencies must be borne by the partners in the same proportion as the profits would have been divided

(b) The assets of a firm are to be applied in paying
1.joint debts to third parties
2.advances, as distinguished from capital, of each partner
3. to each partner what is due from the firm to him in respect of capital.

In after the above payments are made, there is surplus, that surplus is to be divided in the proportion.

Personal profits earned after dissolution (S.50)
Where a partner, after dissolution and before the affairs of the partnership are wound up, derives any personal profit for himself from any transactions of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for the profit and pay his share to the surviving partner or the representative of the deceased partner. But if a partner carries on another business of a similar nature, this section would not apply.

Sale of goodwill after dissolution (S.55)

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

(2) Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not-

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before its dissolution.

(3) Agreement in restraint of trade—Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.

Documents Required for dissolution of partnership firm :-

A partnership firm may be discontinued or dissolved in any of the following ways.

· Dissolution by Agreement. The easiest and the most hassle- free  
method to dissolve a partnership  firm is by mutual consent or an agreement. ...

·                      Dissolution by Notice. ...

·                      Dissolution due to contingencies. ...

·                      Compulsory Dissolution. ...

·                      Dissolution by Court.

Adv.Suyog Chandulal Shah

Adv.Suyog Shah & Associates,

Email :- advsuyogshah@gmail.com,

Mobile No.9850827178

Office No.0253-2313178