Q.1 What is Dissolution of Partnership Firms ?

Ans. When the relation between all the partners of the firm comes to an end, this is called dissolution of
the firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership
between all the partners of a firm is called the dissolution of a firm.” It implies the complete break down
of the relation of partnership between all the partners.

Dissolution of partnership is different from the dissolution of firm.

Dissolution of a partnership firm merely involves a change in the relation of partners; whereas the
dissolution of firm amounts to a complete closure of the business. When any of the partners dies, retires
or become insolvent but if the remaining partners still agree to continue the business of the partnership
firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes
the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business
of the firm comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its
affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the
partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm.

Dissolution of a Partnership firm may be effected in the following ways:

· Dissolution without the intervention of the Court.

· Dissolution by Court.

Dissolution without the intervention of Court:-

1. By Agreement (S.40)

A partnership firm can be dissolved any time with the consent of all the partners whether the
partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms
of the Partnership Deed or of the separate agreement.

2. Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes
compulsory for the firm to dissolute:

(i) Insolvency of Partners

In case all the partners or all the partners except one become insolvent.

(ii) Unlawful Business

In case the firm is engaged in more than one business which may have become unlawful, the better view
appears to be that the firm will not dissolve as to the other legitimate businesses unless all of them are
so inter connected that stoppage of one would paralyze the others e.g. A and B charter a ship to go to
foreign port and receive a cargo on the joint venture. War breaks out between England and the country
where the port is situated before the ship arrives at the port, and continues until after the time
appointed for loading. The partnership between A and B is dissolved

3. Dissolution on the happening of contingent event (S.42) A firm may be dissolved on the happening of
any of the following contingent event

(i) Expiry of Fixed Period

A firm constituted for a term is of course not exempt from dissolution by any of the other possible cause
before the expiration of the term. The contract may expressly provide that the partnership will
determine in certain circumstances but even if there is no such express term, an implied term as to
when the partnership will determine may be gathered from the contract and the nature of the business.
The provision of this section make it clear that unless some contract between the partners to the
contrary is proved, the firm, if constituted for a fixed term would be dissolved by the expiry of that term.

(ii) On achievement of specific task

A partnership constituted to carry out contracts with specified persons during a particular season would
be taken to be dissolved once the contracts are closed. In the case of Basantlal Jalan v. Chiranjilal,
Where the firm was constituted for a specific undertaking to supply certain quantity of grain and the
contract was prematurely terminated after supply of a part of the goods, it was held that the
partnership did not come to an end and was dissolved only on the final realization of the assets

(iii) Death of Partner

When the deed of partnership did not provide that the death of a partner would not dissolve the
partnership, the partnership stood dissolve on the death of a partner. Firm, stands dissolved
automatically on death of one partner. Continuance of business after such death would not tantamount
to continuance of earlier partnership.

(iv) Insolvency of Partner

In the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the
firm.the rule shall apply even though the partnership has been constituted for a fixed term and the term
has not yet expired or has been constituted for particular ventureand the same has yet not been
completed.
(v) Resignation of Partner

Resignation by any of the partners dissolves the partnership

4. Dissolution by notice (S.43)

In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other
partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be
withdrawn without the consent of other partners was held in case of Banarsidas v. Kanshi Ram. In those
cases where a partner has given notice of dissolution at a time when dissolution will give him some
advantage over the other partners, he may be held in the firm till the pending transactions are
completed.

Dissolution by Court (S 44)

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner

On the application of any of the partner, court may order for the dissolution of the firm if a partner has
become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a
ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be
permanent. In the case of a dormant partner the court may not order dissolution even on the ground of
permanent insanity, except in special circumstances.

(ii) Incapacity of Partner

If a partner has become permanent in capable of discharging his duties and obligations then court may
order for the dissolution of firm on the application of any of the partner. where a partner is imprisoned
for a long period of time the court may dissolve the partnership was held in case ofWhitwell v. Arthur

(iii) Misconduct of Partner

If any partner other than partner suing is responsible for any loss to the firm, which amounts to
misconduct and prejudicially affects the carrying on of business then the court may order for the
dissolution of the firm.

(iv) Constant breach of agreement by partner

The court may order for the dissolution of the firm if the partner other than the suing partner is found
guilty for constant breach of agreement regarding the conduct of business or the management of the
affairs of the firm and it becomes impossible to continue the business with such partner.
(v) Transfer of Interest

When any of the partner other than the suing partner transfers whole of its share to the third party for
permanently.

(vi) Continuous Losses

The court may order for dissolution if the firm is continuously suffering losses and there is no more
capital available for the future growth of the firm.

(vii) Just and Equitable

The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g.
loss of total confidence between the partners was held in case of Havidatt singh v. Mukhe Singh

Liability for acts of partners done after dissolution ( S.45)

This section provides that despite dissolution, the partners cannot escape their liability to third parties
for acts done even thereafter unless public notice of dissolution is given. These provision emphasis the
necessity of giving a public notice before a partner could terminated his future liability whether it is a
case of dissolution, retirement or expulsion.

Rights of partners to have business wound up after dissolution (S.46)

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 ( S.47)

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 continue notwithstanding the dissolution, so far as may be necessary to
wind up the affair of the firm and to complete transactions begun but unfinished at the time of the
dissolution, but not otherwise:

PROVIDED that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent;
but this proviso 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 between partners (S.XMRagreement by the partners, be observed-

(a) Deficiencies of capital

When a partnership is dissolved, and after the debts to the third parties have been paid and advances
made by a partner have been repaid, the assets are insufficient to repay each partner his capital in full,
any deficiencies must be borne by the partners in the same proportion as the profits would have been
divided

(b) The assets of a firm are to be applied in paying

1. joint debts to third parties

2. advances, as distinguished from capital, of each partner

3. to each partner what is due from the firm to him in respect of capital.

In after the above payments are made, there is surplus, that surplus is to be divided in the proportion.

Nowell v. Nowell in this case A and B trade as partners and it is agreed that profits should be shared and
losses borne equally. On dissolution it is found that A has advanced more capital than B to the extent of
Rs.1900. the net assets were only Rs.1400. there is thus a deficiency of capital to the extent of Rs500.
Under sub section(a) both the partners must contribute in the proportion in which they have agreed to
share profits that is equally. Therefore B should pay to A sum of Rs 250.

Payment of firm debts and of separate debts ( S.49)

Where there are joint debts due from the firm, and also separate debts due from any partner, the
property of the firm shall 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 shall be applied in payment of his separate debts or
paid to him. The separate property of any partner shall 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 (S.50)

Where a partner, after dissolution and before the affairs of the partnership are wound up, derives any
personal profit for himself from any transactions of the firm, or from the use of the property or business
connection of the firm or the firm name, he shall account for the profit and pay his share to the surviving
partner or the representative of the deceased partner. But if a partner carries on another business of a
similar nature, this section would not apply.

Proviso – Where on dissolution a partner has bought the goodwill of the firm, he may use the firm name
even before the affairs of the partnership have been completely wound up. Clements v. Hall In this case
A and B carry on business in partnership. The firm holds leasehold for the purpose of the business. A
dies.before the affairs of the firm are completely wound up, the lease expires and B renews it. The
renewed property is partnership property.

Alder v. Fouracare. In this case A,B and C are partners. A agrees to take a lease in his own name, but in
fact fact partnership purpose, and dies before the lease is executed. The representative of A cant deal
with lease without the permission of B and C

Return of premium on premature dissolution ( S.51)

Where a partner has paid a premium on entering into partnership of a fixed term, and the firm is
dissolved before the expiration of that term otherwise than by the death of a partner, he shall 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.

Airey vs. Barbam in this case A and B entered into a partnership for five years. A paid premium to B. The
partnership was dissolved with into two years as a result of mutual disagreement due to A’s failure to
devote time to business as agreed. It was held that no part of premium was payable because the
dissolution has been caused by the misconduct on the part of A

Atwood v. Maude In this case A and B entered as solicitors for a term of seven years.A paying a premium
of Rs.800.B before entering into the partnership know that A was inexperienced and incompetent. After
the expiration of two years B complained that A’s incompleteness was injuries to business and called
him to dissolve the partnership. A thereupon filed a suit for repayment of proportionate premium. A
succeed.
Pease v. Hewitt In this case A and B become partners for 10years. A paying B a premium of Rs1000. A
quarrel occurs at rhe end of eight years, both parties being in the wrong and dissolution is decreed. A is
entitled to a return of Rs.200.

Rights where partnership contract is rescinded for fraud or misrepresentation (S.52)

Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of
any of the parties thereto the party entitled to rescind is, without prejudice to any other right, entitled-

(a) Lien on surplus assets- He has a right of lien on the surplus assets which are left after the debts of the
firm have been paid. The right can be used with regard to sums paid by him for purchasing share in the
firm or for the capital contributed by him.

(b) Right of subrogation- The partner who is rescinding a contract has a right to become creditor of the
firm for the payments which he makes out of his personal assets to payoff the debts of the firm

(c) Right to be indemnified- The partner rescinding the contract has a right to be indemnified by the
partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.

Right to restrain from use of firm name or firm property ( S.53)

After a firm is dissolved, every partner or his representative may, in the absence of a contract between
the partners to the contrary, restrain any other partner or his representative from carrying on a similar
business in the firm name or from using any of the property of the firm for his own benefit, until the
affairs of the firm have been completely wound up.

Proviso – Where on dissolution a partner has bought the goodwill of the firm, he may use the firm name
even before the affairs of the partnership have been completely wound up.

Agreements in restraint of trade (S.54)

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all
of them will not carry on a business similar to that of the firm within a specified period or within
specified local limits; and notwithstanding anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
Sale of goodwill after dissolution (S.55)

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the
partners, be included in the assets, and it may be sold either separately or along with other property of
the firm.

(2) Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after dissolution, a partner
may carry on a business competing with that of the buyer and he may advertise such business, but,
subject to agreement between him and the buyer, he may not-

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before its dissolution.

(3) Agreement in restraint of trade—Any partner may, upon the sale of the goodwill of a firm, make an
agreement with the buyer that such partner will not carry on any business similar to that of the firm
within a specified period or within specified local limits and, notwithstanding anything contained in
section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions
imposed are reasonable.

Q.2 What is difference between dissolution of partnership and dissolution of firm ?

Ans. Dissolution of Partnership is not equal to the dissolution of partnership firm. It is due to the fact
that when the jural relation present between all partners, comes to an end, it is known as dissolution of
firm, however, when any one of the partners become incapacitated, then the partnership between the
concerned partner and other partners of the firm, comes to an end, but the firm may continue to
operate, if other partners desire so.

The fundamental difference between the dissolution of partnership and dissolution of the firm is that
when the partnership is dissolved, there is no other dissolution, but when the firm is dissolved,
partnership too comes to an end.
olution of firm, however, when any one of the partners become incapacitated, then the partnership
between the concerned partner and other partners of the firm, comes to an end, but the firm may
continue to operate, if other partners desire so.

Definition of Dissolution of Partnership

Partnership implies the abstract legal relation that exists between the partners. Dissolution of
Partnership is, therefore, the termination of the relation between the partners.

This may take place due to the retirement or incapacity of a partner due to insanity, death or any other
cause, the partnership, meaning that the relationship between that partner and other partners comes to
an end. However, the remaining partners may continue, and thus the firm does not lose its existence.
But, when the partners do not undertake the business further, the firm is dissolved automatically.

Dissolution of Partnership can take the following forms:

  Change in existing profit sharing ratio

 Admission of a Partner

 Retirement or Death of a Partner

 Insolvency of a partner.

 Expiry of the term of the partnership.

 Completion of the specified venture.

 Dissolution by agreement.

It is to be noted that when a partnership is dissolved, the old agreement between the partners is
terminated and new agreement takes its place.

Definition of Dissolution of Firm

The composite entity for all the partners is called firm. It is the concrete form of all the partners who are
linked together. Dissolution of a firm takes place when the jural relation present between all the
partners no longer exist, i.e. the partnership between each and every partner of the firm is put to end.

Dissolution of a firm leads to the realisation of assets and settlement of liabilities and the accounts of all
the partners are closed. The modes of dissolution of the partnership are discussed below:

Key Differences Between Dissolution of Partnership and Dissolution of Firm

The points presented below explain the difference between the dissolution of partnership and
dissolution of the firm, on various grounds:

1. Dissolution of Partnership can be defined as the breaking of the relationship between the
partner and other partners of the firm. On the other hand, dissolution of a firm is used to mean
discontinuance of the entire firm including the relation among all the partners.

2. Dissolution of the partnership is voluntary in nature, as it is dissolved by mutual agreement.

Conversely, a firm is dissolved either voluntarily or compulsorily.

3. Dissolution of partnership does not lead to the discontinuance of business, and so it is carried on
by the remaining partners as before. As against this, with the dissolution of the firm, the
business carried on by the firm also comes to an end.

4. In the case of dissolution of the partnership, the economic relationship between the partners
continues to exist but in changed form. On the contrary, in the dissolution of the firm, economic
relationship between partners ceases to exist.

5. When there is the dissolution of the partnership, revaluation account is prepared in order to
revalue assets and reassess liabilities. In contrast, realisation account is prepared when the
dissolution of firm takes place.
 6. The firm’s books of accounts are not closed in the dissolution of the partnership, but the firm’s
books are closed along with the closure of partner’s account, in the dissolution of the firm.

Example

 Suppose A, B, C are partners in a firm, B retires, and A and C decide to continue the partnership
with a new profit sharing ratio. In this case, there is a dissolution of partnership between B and
A, C.

 Suppose A, B, C are partners in a firm, engaged in the business of selling a particular chemical,
after that, a law has been passed in which selling of that particular chemical is banned. In this
case, the business becomes unlawful, and the firm is dissolved.