This article is written by Meera Patel, from Maharaja Sayajirao University, School of Law. This article highlights the ways by which a partnership can be dissolved if a partner opposes that decision. 

Introduction

When two people collaborate and create an organization for business known as a partnership, these collaborations are very common in the professional field of services and firms. It is very customary that when two different brains put their work together, disputes are bound to happen. The partnership disputes cannot be left unsolved as this matter involves money, time, and a lot of effort from all the parties involved therefore to resolve situations like these, proper legal actions are necessary so that no irrevocable damages are suffered by the partners.

Partnership disputes arise from various reasons and settings because contrary to the common belief, these disputes happen in the most successful business too. These situations usually arise when the involved partners disagree on things like future goals of the company, involvement of new partners, personal vendetta, grudges, transfer of interest, etc. This article talks about the ways one can dissolve a partnership if the other partner/ partners do not wish for the same.

The Indian Partnership Act, 1932

As per Section 39 of the Indian Partnership Act, 1932, the dissolution of a partnership is the process of terminating the professional relationship between the involved partners due to various circumstances. This termination also puts an end and divides all the assets, debts, shares, liabilities, and accounts about the partnership amongst all the partners as a settlement deed. The main highlight of this section is that even though the dissolving of a firm and a partnership seems the same, they are completely different:

Dissolution of a firm

When all the business-related activities are stopped which also includes the generation of profit or loss, it can lead to the dissolution of a partnership firm. All the profits and losses should be fractioned among the involved partners. 

Dissolution of a partnership

Dissolution of a partnership happens when a partner retires or leaves the partnership but even though the partner is no longer a part of that organization/ business, that corporation continues to run and produce its day to day activities. 

The Indian Partnership Act, 1932 states all the terms, conditions, and rules one must abide by if they wish to enter into a partnership. This Act provides all the loopholes to escape the grey areas related to partnerships. Listed below are a few provisions that are provided under this Act  states a different way to dissolve a firm/ corporation: 

Section 40

According to Section 40 of the Indian Partnership Act, 1932, any firm can be dissolved via an agreement. Legal consent from all the partners is the key element for these agreements. The partners can dissolve the said firm without involving the court at all. 

Section 41

As per Section 41 of the Indian Partnership Act, 1932, the partners are bound to compulsorily dissolve the firm. The necessity of compulsion may arise due to multiple reasons such as:

• Insolvency of all the partner.
• Insolvency of all the partners except one.
• Partners are involved in illegal/ unlawful activities such as selling illegal products or services such as drugs, ivory, etc.

Section 42

As per Section 42 of the Indian Partnership Act, 1932, a firm can be dissolved only under certain circumstances. These events include:

• If it is pre-decided, then the partnership should be dissolved within the decided period of them.
• A firm can be dissolved if the involved partners die. Although, if a partner dies, the other partners can continue to run the firm/ business if they please to do so.
• As mentioned above, if a partner is insolvent, then the firm can be dissolved.
• If the pre-decided purpose/ goal of the partnership is completed, then the partnership can be dissolved immediately.

Section 43

Under Section 43 of the Indian Partnership Act, 1932, a firm can be dissolved by one partner through a notice. The partner who wishes to dissolve the firm must send out a notice to all the other partners that communicate the intentions of dissolving the said firm.

Section 44

As per Section 44 of the Indian Partnership Act, 1942, a partner can dissolve the involved firm by the method of suing the other partners. One can sue the other partner based on:

• If one partner becomes unsound or mentally unstable, then the other partners have the authority to sue the said partners so that the court can dissolve the firm.
• A partner can dissolve a firm if the other partner is unable to perform the promised duties. The reason for the incapability of the partner’s work can be medical reasons, imprisonment for the long term, etc.
• If the partner hinders the reputation of the firm due to some treacherous activities they have done, then that can become the grounds for the other partners to dissolve the firm.
• In cases where the firm has been under a crushing debt or hasn’t been able to generate any profit for a long period can be dissolved by the orders of the court.
• In cases where the partners breed the pre-decided agreement related to the firm can become the ground for the dissolution of the firm.

Kinds of partners

In a partnership, there are different kinds of partners.

Working partner

The partner who is actively contributing their share in the form of capital, daily activities, payment of debts, etc.

Silent partner

The partner who only contributes capital in the business/ firm but does not get involved in the daily business activities. 

Nominal partner

This partner contributes neuter capital nor takes part in the daily business activities. Although, their names are used as partners in the books of the firm they work for.

Partner by estoppel

Such partners aren’t technically a part of the firm but they pose as they are active partners of the firm to the outsiders by their actions and conduct. 

Secret partner 

These partners do not publicize their partnership to the public. 

Partner by holding out

The said partner isn’t technically a part of the firm but is posed as a partner by the firm itself to the public.

Dissolution of a firm

Listed below are a few ways by which a firm can be dissolved.

Dissolution by agreement

A firm can be dissolved by a pre-decided agreement that must be signed by the partners. The agreement/ contract needs to include all the details regarding the dissolution of the firm which should specifically highlight when to dissolve the firm.

Compulsory dissolution

Listed below are a few situations or circumstances where the dissolution of the firm becomes a compulsory necessity:

• If all the partners or all except one turn out to be insolvent, then they will be incompetent to enter into a contract.
• If the objective of the said firm/ business is illegal
• If special circumstances make the once legal partnership illegal due to changes in the laws

Contingencies

In situations like this, the firm needs to be dissolved due to the former future predictions and the goals set for the same. For example, the partners fixed a term during which they will carry out their partnership, the partners set a goal for their business, if the partners die or like mentioned above if the partners become insolvent.

Dissolving a partnership firm by notice

In such situations, the partners have the liberty to give a notice in writing to the other partners notifying them about their intentions of dissolving the firm. 

Dissolution of the partnership firm by court 

There are situations where the other partners might not agree to dissolve the firm therefore the partners can get to the court directly to resolve the issue. Circumstances like these involve:

• A partner turns insane.
• A partner cannot carry out his duties due to permanent incapacity.
• A partner’s unethical action affects the reputation of the firm.
• A partnership breaches the agreement multiple times.
• A party transfers all their interest front the firm to a third party.

How to dissolve a firm if a partner disagrees

As mentioned above, there are multiple cases where the partners do not wish to dissolve their firm even if the other partners strongly wish to do the same. Therefore, listed below are a few ways through which one can try to find a common ground with the disagreeing party.

Settle the accounts

In cases where the partners do not agree with the other partners regarding the dissolution of the said firm, then the distressed members can seek guidance under the Indian Partnership Act, 1932.

The partners who wish to dissolve the firm can offer to pay for all the losses of the disagreeing partners to cover the capital deficiency out of their profits. The second incentive option can be that the firm can agree that all the capital deficiency, debts, advances, loans will be settled down by the firm’s money. Lastly, the firm can offer to distribute the remaining money amongst the partners as profit after settling all the debts, loans, etc.

Negotiate a buyout

In cases where the partner who prefers to dissolve the firm owns either a 50 percent share or a minor share in the firm can be easily outvoted by the other partners therefore to increase the chances of the dissolution of the firm, the willing partner can increase their strength by negotiating a buyout of their ownership position. 

If the partner manages to cut himself out of the firm, then dissolving the company will no longer be their problem. These partners also have the option of becoming silent partners in the firm.

Ownership percentage

In cases where the partner who wishes to dissolve the company owns the major shares of the company will not need to seek the permission of the other partners’ consent to dissolve the company. As simple as it sounds, the major shareholders dominate the major decisions related to the firm/ corporation and that is how it works.

State laws 

State laws play a major role in disputes like these. Therefore, the disputed parties must approach the state where the formation paperwork was created. Very often, these firms/ corporations tend to pose a representative management structure and in those structures, the shareholders who own shares in the said business are also allowed to people who will manage the operations of the company/business as their alternatives. A different scenario for the firm/ corporation is the fact that the owner of the firm/ corporation does not have the right to participate in the direct core management of the firm. corporation.

Majority

According to this solution, the willing partners need to try and change the opinion of the other partners and board directors to change their decisions and convert the votes into a majority so that the dissolution of the firm can prevail on the grounds of majority votes of the board.

Hiring an attorney

In situations like these, the involved parties must understand the importance to hire an attorney and the necessity to involve the court so that they can find a common ground for their disputes as an attorney who is thoroughly experienced will be able to assist the disputed parties while preparing a partnership agreement. 

Hiring a mediator

In situations where the disputed parties do not wish to involve the court can always prevail the option of hiring a mediator who is also an expert in the same field as getting an arbitrator will not only help the disputed parties to resolve their dilemma but will also help them save up money, time and energy.

Conclusion

There are situations where partnership corporations flourish abundantly but at the same time there are various partnerships that were taken down by the partners themselves due to multiple facts such as insolvency of the panthers, partners going insane, transfer of interest, etc. not all the partnerships end on a good note as there are various instances where the majority of the partners do not wish to dissolve the firm but with a lot of persuasion and negotiation, those partnerships can be resolved too.

References

• https://www.legal.io/guide/551c5f627777773fa2950100/5-Ways-To-Avoid-And-Resolve-Partnership-Disputes
• https://www.toppr.com/guides/accountancy/dissolution-of-partnership-firm/dissolution-of-partnership-dissolution-of-firm-and-settlement-of-accounts/
• http://www.legalservicesindia.com/article/1063/Dissolution-of-partnership-firm.html
• https://blog.ipleaders.in/dissolution-of-a-partnership/

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