Business laws
Unit-II
Partnership Act, 1932
Meaning of dissolution

The term dissolution stands for discontinuation or
termination. Under the Indian Partnership Act, 1932:
Types of dissolution
Dissolution of Firm
Dissolution of
Partnership
Dissolution of Partnership


If
the dissolution involves only the
reconstitution of firm and the business in
partnership is continued in the same name
after the dissolution of the partnership
agreement, it is called ‘Dissolution of
Partnership’.
Simply it involves change in relation
between partners without affecting
continuity of business.
Contd.

In the following cases, dissolution of
partnership will take place (but only on
depending on an agreement)
 On
the expiry of the term of partnership,
 On completion of venture
 On retirement/death of partner,
 On adjudication of a partner as an insolvent,
 On admission of a new partner.

If in the above cases there is no agreement for
continuation of firm then there will be
dissolution of firm.
Dissolution of Firm [ Sec. 39]



If the dissolution of partnership
involves discontinuation of business in
partnership, it is called dissolution of firm.
In such case, assets of firm are realized
and liabilities are paid off and the surplus,
if any is distributed among the partners
according to their right.
It is to be noted that ‘dissolution of Firm’
involves dissolution of partnership but
dissolution of partnership may not lead to
dissolution
Dissolution of Firm VS.
Dissolution of partnership
Basis of Dissolution of firm Dissolution
difference
Partnership
1.Continuat It
involves
ion of
discontinuation
of
business
business
in
partnership.
2.Winding
up
It involves winding up
of the firm and
requires realization of
assets and settlement
of liabilities.
of
It does not affect
continuation of business.
It
involves
only
reconstitution of the
firm.
It
involves
only
reconstitution
and
requires only revaluation
of assets and liabilities of
the firm.
Basis of
Difference
Dissolution of Firm
Dissolution of Partnership
3.Order of
court
A firm may be Dissolution
of
dissolved by the partnership
is not
order of
the ordered by the court.
court.
4.Scope
It
necessarily It may or may not
involves
involve dissolution of
dissolution
of firm.
partnership
5.Final
closure of
books
It involves final It does not involve
closure of books of final closure of the
the firm.
books
Mode of Dissolution of Firm [Sec.40 to 44]
Dissolution of Firm
Without the order of the
Court [Sec.40 to 43]
By mutual
Agreement
(sec.40)
Compulsory
Dissolution
(Sec.41)
Insanity
Permanent
incapacity
Misconduct
By order of the court
(Sec.44)
On happening
Of certain
Event (sec.42)
By notice
(Sec.43)
Transfer of
interest
Persistent breach
Of agreement
Just &Equitable
ground
Continuous loss
Dissolution of Firm without
the order of Court [Sec.40-44]

A firm may dissolve without the order of
court in the following cases:
Dissolution by mutual
agreement [Sec.40]


A firm may be dissolved by mutual
agreement between/among partners.
Even a firm for a fixed duration may be
dissolved by mutual agreement.
Compulsory Dissolution
[Sec.41]

In the following cases,
compulsorily dissolved:


a
firm
is
If all partners, or all the partners except one
partner of the firm are declared insolvent, or
If some event take place which make it
UNLAWFUL for the firm’s business to be
carried on.
On the happening of certain
event [Sec. 42]

In the absence of any provision to the contrary
in the partnership agreement, in the following
four cases the firm will automatically be
dissolved:




On the expiry of the fixed term for which the
firm was constituted,
On the completion of venture or undertaking
for which the firm was constituted,
On the death of a partner,
On the insolvency of a partner
By Notice [Sec.43]



Where the partnership is at will , the firm may
be dissolved by any partner by giving notice in
writing to all other partners of his intention of
dissolving a firm.
Acceptance of notice is not required.
Notice once given can not be withdrawn
without the consent of all other partners.
By Court [Sec.44]

On the following grounds a court may order
for dissolution of firm:
Insanity
Of a
partner
Misconduct
Permanent
incapacity
Transfer of
interest
Persistent
breach of
contract
Just and
equitable
ground
Perpetual
losses
The right of a partner to file a suit for dissolution on any of the ground
can not be excluded by any agreement.
Insanity of a partner [Sec 44
(a)]


If a partner (not a sleeping partner) has
become of unsound mind, then court may
allow dissolution of firm on a petition
made by any other partner or legal
representative of the insane partner.
Temporary sickness is no ground for
dissolution of firm.
Permanent Incapacity [Sec. 44
(b)]


When a partner (not a sleeping partner)
has become permanently incapable of
performing of his duties as a partner, then
court may allow dissolution of firm on a
petition made by any other partner.
Such permanent incapacity may result
from physical disability or illness etc.
Misconduct [Sec. 44 (c )]


When any partner is guilty of any misconduct
which is likely to adversely affect the
carrying on of the business, the court may
allow dissolution of firm on the petition made
by any other partner.
It is not necessary that misconduct must
relate to the conduct of the business. The
important point is the adverse effect of
misconduct on the business. In each case
nature of business will decide whether an act
is misconduct or not.
Persistent Breach of contract
[Sec. 44 (d)]

When a partner willfully or persistently commits
breach of agreement with regard to matters relating to
the business of the firm, any other partner may apply
to the court for dissolution of the firm. Following
comes in to category of breach of contract:




Embezzlement,
Keeping erroneous accounts
Holding more cash than allowed
Refusal to show accounts despite repeated request
etc.
Transfer of Interest [Sec.44 (e)

When a partner has transferred the whole
of his interest in the firm to a third party
then any other partner may apply to court
for dissolution of firm.
Perpetual losses [Sec.44 (f) ]

Where the business can not be carried on
except at a loss, any partner may apply
to court for dissolution of court.
Any other just and equitable
ground [Sec. 44 (g)


Where the court is satisfied that it is just and
equitable to dissolve the firm, it may allow
dissolution using it discretionary power.
For example:




Continued quarrel between partner
Refusal to meet on matters of business
Complete deadlock in management due to partners not
on speaking terms
Lack of confidence and good faith among partners, etc.