Partnership Firm

Dissolution of Partnership Firm as per Companies Act, 2013

The Indian Partnership Act 1932 deals with dissolution of partnership of firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called “dissolution of a firm.” It implies the complete breakdown of all the relation between all the partners as well as realizing the assets and the liabilities of the firm and sharing the gain and loss between the partners.

There are different ways through which a firm may be dissolved which are mentioned as follows:

1. Dissolution by agreement (Section – 40)
2. Compulsory Dissolution ( Section – 41)
3. Contingent Dissolution ( Section – 42)
4. Dissolution by notice ( Section -43)
5. Dissolution through court ( Section – 44)

Dissolution of Partnership by Agreement under Section – 40

The firm is not a separate legal entity and is represented through partners and a partnership firm may be dissolved with the consent of all the partners. The condition precedent would be if all the partners agree to dissolve the partnership or a contract has been made for dissolution of partnership then it will be dissolved by necessary intimation to the Registrar of firms.

Compulsory Dissolution under Section – 41

A Partnership firm can be dissolved compulsorily by the Registrar of firm due to two reasons which are as follows:

1. By adjudication of all partner but one as insolvent
2. By happening of any event which makes it unlawful for the business of the firm to be carried on.

It is also provided that if a firm has more than one undertaking and unlawfulness of one undertaking does not affect then the firm will not dissolve.

Contingent Dissolution of Firm under section – 42        

Under this case a firm will be dissolved on the happening of certain events. Hence, the dissolution of firm depends on the happening or non- happening of following event. This type of dissolution is also known as contingent dissolution.

1. If the time period for which firm was constituted has been expired.
2. If the firm was constituted for one or more purposes, adventures or undertaking and it has been completed.
3. By the death of a partner
4. By adjudication of a partner as insolvent

Therefore, contingent dissolution of firm depends on these four events only. The above list is exhaustive in nature. It is discretion of the Registrar of firm to decide whether to dissolve the firm.

Dissolution by Notice under Section – 43

Under this type of dissolution of firm the partnership can be dissolved by any partner by giving notice to all other partners of his intention of dissolving the firm. This type of dissolution can only happen in case of partnership at will. Partnership will dissolve on the date mentioned on the notice or in case no date is mentioned on the notice then on the date of communication of notice to all the partners.

This section gives power to partners to dissolve the firm if no agreement is made. Also, any partner can exit from the partnership and extinguish its assets and liabilities from the firm.

Dissolution through Court under Section – 44

Under these cases a firm shall be dissolved by the court only. Following are the instances in which a firm can be dissolved by court:

• That any partner has become unsound mind and his next friend brought the suit in the forum.

In this case if any partner is not able to handle the pressure of the business or if mentally unstable due to any professional or personal reasons.

• That any partner during the course of business is unable to perform his duties as partner.

In this case if any partner is not able perform the business duties during the course of business proceeding. For example: if partner suffering from incurable disease, or permanently disabled that is unable to perform duty.

• That a partner is guilty of misconduct which is likely to affect prejudicially the carrying on of the business.

In this case if any partner breaks any rules or regulation or bye –laws of the

firm and is accounted as misconduct then partnership firm will be dissolved. For example- if any partner purchase/sale of any goods without with prior permission from the other partner or disclose any confidential information to any outsider.

• That any partner commits breach of agreement of:
  • Management of the affairs of the firm.
  • The conduct of its business.
  • Conducts its business which is not practicable for other partners to carry on business.

• That a partner has transferred the whole of his interest in the firm to a third party or has allowed his share to be charged under the provision of rule 49 of Order XXI of the first Schedule to the Code of Civil Procedure 1908 or allowed to be sold.

In this case if any partner sold his interest or sold his share to third person then he will not be considered as partner of the firm and firm will be dissolved.

• That business is running in losses for a long period.

• On any other ground which appears to the court just and equitable after considering the facts of the case.

In this section it gave wide power to court to take up matter relating to any dissolution of firm which is not mentioned from sub-clause (a to f). It is the court to decide whether it would be just and equitable to dissolve the partnership. It is the discretion of the court to decide whether the matter is just and equitable to dissolve the firm.   

Who is responsible after Dissolution?

Generally, after dissolution of firm the partner ceases to be a member of partnership. But in some cases if any liability arises after  dissolution the existing partner would be liable except who is adjudicated insolvent , is of unsound mind , dead etc.

For more information, please contact Enterslice.