MODULE 5

DISSOLUTION OF FIRM
Under the Indian Partnership Act, Section 39 provides for the Dissolution of a Firm that means
when all the partners of firm dissolute their partnership it results in the dissolution of the firm
in entirety. That implies there is a complete disintegration between the partners who formed
the partnership. Basically, when one or more partners of a firm dissolute the partnership, then
it refers to the “dissolution of partnership” and the firm shall be reconstituted with the
remaining members. This implies that the dissolution of firm necessarily leads to dissolution
of partnership. However, dissolution of partnership may or may not lead to dissolution of the
entire firm. There are five modes of dissolution of a firm, namely, by agreement, by notice, by
occurrence of certain contingencies, compulsory dissolution and dissolution by court. All of
these are described below:
• Section 40 of the Indian Partnership Act states that a firm may be dissolved with the
consent of all the partners or in accordance with a contract between the partners.
Partnership is created by contract, it can also be terminated by contract.
• Section 43 of the Indian Partnership Act states that 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. In the case of Jones v. Llyod, the Court held that A notice of
dissolution once given cannot be withdrawn without the consent of the other partners. The
firm is dissolved on and from the date mentioned in the notice as the date of dissolution or,
if no date is mentioned, on and from the date of communication of notice.
• Section 42 of the Indian Partnership Act states that Section 42 of the Indian Partnership
Act, 1932 (“Act”) provides for dissolution of partnership on occurrence of certain
contingencies which includes ‘death of the partner’ as one of those contingencies. Plain
reading of the Section 42 would show that, subject to the contract between the partners, a
firm stands dissolved by death of a partner. However, in cases where the terms of the
partnership deed are silent on continuation of partnership’s business, a contract to continue
the partnership after the death of a partner may be implied from the conduct of the parties.
This means that where it is evident that such an intention was present, the nominee or legal
representative of the deceased partner can take the place of deceased partner and business
of the firm can be continued with the presumption that the partnership was never dissolved
on the death of that partner. The above legal position is based on two assumptions- (a) there
are more than two partners in the firm, and (b) the legal representatives are interested in
taking forward the business of the firm.
• Under Section 41 of the Partnership Act, a firm is compulsorily dissolved under any of the
following circumstances: a) When all the partners or all the partners but one, are adjudged
insolvent, or b) When some event has happened which makes it unlawful for the business
of the firm to be carried in or for the partners to carry it on in partnership. However, where
a firm is carrying on more than one adventures or undertakings, the illegality of one or more
shall not of itself cause the dissolution of the firm in respect of its lawful adventures or
undertakings.
• According to Section 44 of the Partnership Act, the suit of a partner, the Court may dissolve
a firm on any of the following grounds: Insanity, Permanent incapacity, Misconduct,
Persistent breach of agreement, Transfer of interest, Continuous losses and Just and
equitable grounds.

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