In this article, Debolina Mitra pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses ways of dissolving a partnership.
How to Dissolve a Partnership
The dissolution of a partnership firm refers to the termination of all contractual relationships among partners. It implies that the working of a partnership firm is stopped and the assets are realised to pay the various kind of liabilities. However, there is a demarcation between the dissolution of a partnership firm and the dissolution of partnership. Dissolution of partnerships refers to the termination of the partnership relationship of one partner with other partners and the firm whereas the dissolution of partnership means the end of the partnership business. If an existing partner dies, retires or is unable to pay the debt then other partners can purchase the share of the outgoing partner and continue the business under the same name.
However, dissolution of partnership firm is triggered when some predefined conditions as per the Partnership Act of 1932 are met such as:
- Dissolution by Agreement
- Dissolution by Notice
- Dissolution by the Court
- Compulsory Dissolution
- Conditional Dissolution
Dissolution of Partnership
This is triggered on account of the death of a partner, retirement or in case where the partner fails to pay the debt. Section 42 of the Indian Partnership Act 1932 provides for the dissolution of partnership due to certain contingencies and death of a partner is one of them.
Dissolution of Partnership Firm
Dissolution of the firm and its effects and consequences are dealt or legislated in various sections starting from section 39 to 55 incorporated in the chapter VI and partly section 72 incorporated in chapter VIII. There are five types of dissolution under the act as stated above.
Dissolution by Agreement
We find this form of dissolution in section 40 of the Partnership Act of 1932. A partnership can be dissolved at any point of time with the consent of the existing partners irrespective of the fact of whether the partnership was formed at will or for a fixed period of time in accordance with the terms and conditions of the partnership deed or of a separate agreement. As we know that partnership is formed by mutual consent and volition of individuals who are called partners. This type of partition takes into account of the above fact and honours the decision of the partners. It also provides for a disjunctive clause that partnership can be dissolved by complying with the contract that was made between the partners. The second part speaks of a situation that if there was a written contract which provided for the manner and mode of dissolution then by following or adopting the same it can be dissolved. For example if the contract provides that consent of one partner has to be made in writing only then it must be adhered.
This is a form which does not leave any room for the partners to decide or resolve. It is like auto dissolution. Section 41 of the act speaks of two situations numbered as 41(A) and 41(B) where this form is applicable. The first situation is when all partners or even one partner is adjudged as insolvent. The second situation is section 41(B) wherein it speaks that in event of the business of the firm becoming unlawful or it would be unlawful for the partners to carry on the business. For example in case of the business of prize chit funds.
However, an exception has been carved out which says that if out of many projects or ventures if one becomes illegal and the other business can be carried out then the firm will not stand automatically dissolved.
Dissolution Due to Certain Contingencies (section 42)
It says that if on the happening of four contingencies numbered as a, b, c and d and qualified by the term of the contract the firm shall stand dissolved. They are as follows:
On the expiry of the term.
For example if a partnership was formed to sell a particular item for one year. On the completion of the one year the firm would be dissolved.
On completion of the undertakings.
For example a firm was formed to provide service to VAT registration. Since the law has been amended and VAT no longer exists therefore the firm shall stand dissolved.
On the death of a partner.
Adjudication of partner as insolvent.
In the case the partner is adjudged as insolvent the firm would be dissolved even though the term has not been expired for the particular venture has not been finished.
Dissolution by Notice
Section 43 of the act provides an opportunity to avail this section to dissolve the firm provided it is formed at will. The law also says that such option to be exercised only in writing and such notice to be given to all other partners or partner. Therefore to come within this provision of law the partnership must be formed at will. Now according to section 7 of the act if there is no mention of a fixed duration or determination the partnership constituted is considered to be formed at will. Thus in such cases a partner by notice in writing intimating the other partners or partner can dissolve the firm.
Dissolution by Court
This provision states seven grounds on which the court can dissolve a firm. Section 44 applies only when one of the partners approaches a court of competent jurisdiction praying for dissolution. The seven grounds are as follows:
- Any partner becoming of unsound mind.
- A partner becoming incapable of discharging or performing duties as a partner but not as a person.
- The nature of the business being such that the conduct of a partner prejudicially affects the carrying on the business in which case the partner suing must not be the person whose conduct is complained.
- The partner commits breach of agreement relating to the management and affairs of the firm or the conduct relating to the business is such that the other partners for reasonably for all other practical purpose cannot carry on the business of the firm.
- The guilty partner transferred in interest of the firm to a third party or share charged under civil procedure code or allowed his share to be sold for the recovery of land revenue.
- The firm business carried on if results in the loss of the business.
- Any other ground which appears to the court as just and equitable.
Liabilities for acts of partners done after the dissolution
Any act done by the partners to the third party would hold liability as would have done had the partnership being not dissolved unless public notice is published. However the estate of a partner who dies, or adjudged as insolvent or who retires would not be held liable for the acts done after the date on which he ceases to be a partner.
Mode of settlements of accounts
While settling the accounts of the firm after the dissolution the following rules must be adhered to:
- Losses which also includes the deficiency of capital must be paid out profits first then out of capital and lastly by individual partners in proportions in which they were supposed to share their profits had the firm been not dissolved.
- The assets of the firm to make up decencies of capital must be used in the following manner:
- First to third parties.
- Second to partners for advances made by them.
- Third to each partner in proportion that is due to them for capital contribution.
- The remaining amount if left would be divided among the partners in proportion to their share profit ratio.
Payment of firm debts and separate debts
If there is any joint debt of the partnership firm then the assets of the firm will be first used to pay the joint debt and if any residual amount remains after the clearance then that amount can be used to pay the debt of the partner. Similarly the separate property of any partner will be used to pay his debt first and if any amount remains then the joint debt of the firm can be paid.
Personal profits earned after dissolution
According to section 16 of the Partnership Act 1932 the provisions of section 16 may be applied to transaction by any partner or the representatives of the deceased partner after the firm is dissolved after the death of a partner before the affairs of the firm has been completely wound up.
Return of premium on premature dissolution
If a partner has entered a partnership by paying premium for a fixed term he would be entitled to receive the payment of the premium if the firm dissolves before the completion of the fixed term unless due to death of a partner. However this clause will not be applicable if the firm is dissolved due to his own misconduct or the partner had entered into an agreement stating that no premium would be paid to him on dissolution.
Dissolution of a partnership firm requires plenty of paperwork and must be conducted in accordance to the procedure mentioned in the Partnership Act of 1932.
- Partnership. Studymode. 2012. www.studymode.com
- The Indian Partnership Act, 1932. https://mponline.gov.in/Quick%20Links/Firms And Society/IPA 1932 English.pdf
- Kapil Goel. All about dissolution of firm. Tax Guru. http://taxguru.in/corporate-law/dissolution-partnership-firm.html.