All about Dissolution of A Partnership Firm

CA Kapil Goel

Dissolution of A Partnership Firm

There are many consequences where the partners feel the need to close the partnership firm. As per our Partnership Act the closure of firm is termed as dissolution of firm. In the words of bare act “The dissolution of partnership between all the partners of a firm is called the dissolution of the firm.” There are some ways to dissolve the partnership firm which are as follows :-

a.) Dissolution by mutual Agreement : The very first and easy way to dissolve the firm is dissolution by agreement. A firm may be dissolved with the consent of all the partners. Or partners may enter into an agreement to dissolve the firm.

b.)  Compulsory dissolution : A firm may be dissolved :

(1) by the adjudication of all the partners or not of all the partners but one as insolvent, or

(2) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership:

Provided that, when more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

c.) Dissolution on the happening of certain contingencies. A firm is dissolved—

(1) if constituted for a fixed term, by the expiry of that term;

(2) if constituted to carry out one or more adventures or undertakings, by the completion thereof;

(3) by the death of a partner; and

(4) by the adjudication of a partner as an insolvent.

d.) Dissolution by notice of partnership at will.

(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communi­cation of the notice.

e.) Dissolution by the court- At the suit of a partner, the court may dissolve the firm on any of the following grounds, namely:—

(a) that a partner has become of unsound mind in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

(d) that a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;

(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908), or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION.

(1) The partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution. The estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner. Notice to that effect may be given by any of the partner.

RIGHTS OF PARTNERS TO HAVE BUSINESS WOUND UP AFTER DISSOLUTION.

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.

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, continued so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution, but not otherwise. The firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this 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.

In settling the accounts of a firm after dissolution the following rules will be applied:—

(a) Losses, including deficiencies of capital will be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital will be applied in the following manner and order:—

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner, in proportion, what is due to him from the firm for advances as distinguished from capital;

(iii) in paying to each partner in propportion, what is due to him on account of capital; and

(iv) the residue, if any left, will be divided among the partners, in the proportions in which they were entitled to share profits.

PAYMENT OF FIRM DEBTS AND OF SEPARATE DEBTS.

Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm will be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner will be applied in payment of his separate debts or paid to him. The separate property of any partner will be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.

PERSONAL PROFITS EARNED AFTER DISSOLUTION.

Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up:

RETURN OF PREMIUM ON PREMATURE DISSOLUTION.

Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he will be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless—

(a)   the dissolution is mainly due to his own misconduct, or

(b)   the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.