Modes of Dissolution of Partnership | Indian Partnership Act
Partnerships can be dissolved in several ways, depending on the circumstances and agreements among the partners.
Upon dissolution, the partners are typically required to settle all the debts and liabilities of the partnership, collect and realize the assets, and distribute the remaining assets among themselves according to their rights and interests in the partnership.IntroductionA partnership is a business structure where two or more people engage in business activities, share responsibilities, and profits. The definition of partnership is given in Section 4 of the Indian Partnership Act, 1932....
Upon dissolution, the partners are typically required to settle all the debts and liabilities of the partnership, collect and realize the assets, and distribute the remaining assets among themselves according to their rights and interests in the partnership.
Introduction
A partnership is a business structure where two or more people engage in business activities, share responsibilities, and profits. The definition of partnership is given in Section 4 of the Indian Partnership Act, 1932. It describes partnership as the relationship between two or more persons who have agreed to share the profit of a business carried on by all or one of them acting for all.
The Indian Partnership Act, 1932 governs the determination of the rights and duties of partners, the conduct of business, mutual rights, the application of property, and personal profit earned by the partner. Chapter VI of the Act deals with the dissolution of a firm. In this article, we shall delve deeper into the concept of dissolution of a partnership firm.
Dissolution of Partnership and Dissolution of Partnership Firm
Dissolution of a Partnership and Dissolution of a Partnership Firm are two different concepts. While dissolution of a Partnership Firm deals with putting an end to the Partnership Firm, dissolution of a Partnership only refers to a situation where one or more Partners cease to continue their work as a Partner of the Partnership Firm.
It must be noted that with the dissolution of the Partnership Firm, there is the dissolution of the Partners as well. However, vice versa isn’t true, In the Dissolution of a Partnership, the Business or the Partnership Firm tends to continue in such a situation.
Example: The firm AZB Amarchand, has three partners: Arun, Bhavesh, and Cherry. If Cherry wishes to withdraw from the partnership, the partnership agreement needs to dictate the procedures for withdrawal. Generally, Cherry would need to settle all liabilities owed to the partnership. This can be done by either transferring them to one of the remaining partners (Arun or Bhavesh) or liquidating Cherry's assets to cover the liabilities.
In this scenario, Cherry's withdrawal results in the dissolution of his partnership with AZB Amarchand. However, the firm itself may continue to operate with the remaining partners, Arun and Bhavesh. The partnership agreement may also stipulate whether Cherry's share in the firm is to be bought out by the remaining partners or if new partners will be admitted to replace Cherry.
Dissolution: Meaning and Definition
While incorporation is giving birth to the Firm, Dissolution is bidding goodbye to the Partnership Firm. Section 39 of the Partnership Act defines dissolution of a Partnership Firm. It says:
"The dissolution of partnership between all the partners of a firm is called dissolution of the firm."
To put it in simple words, Dissolution of a Partnership Firm means to put an end to the activities of the Business activities within the Firm. The activities are stopped completely, assets are used to pay off all the debts and liabilities. The remaining profit is shared among the Partners or as per the agreement. The existence of the Partnership Firm ceases when the Dissolution process comes to an end.
While it is important to know the reasons for the termination or dissolution of the Partnership. Dissolution of Partnership allows a new Partner to join in and the old one to leave.
Reasons for the Dissolution of the Partnership:
- Death of the Partner.
- Admission of a New Partner
- Retirement of a Partner, Voluntarily or Statutorily
- Bankruptcy of a Partner
Expiry of Partnership Period (in certain cases)
Modes of Dissolution of Partnership
There are various modes where the Partnership of the Partners can come to an end. A Partner when discontinues to participate in the Business operation, the Partnership is deemed to be dissolved.
A. By the Act of Partner
When one or more Partners, disagree to continue the Partnership or agree to dissolve a Partnership, all the Partners can come into the agreement of dissolution of such a Partnership among them after a particular time.
Example: The Partners at the beginning of the Partnership agreed to continue the Partnership for seven years. Post which, the Partnership comes to an end.
B. Operation of Law
A Partnership when starts as a consequence of an agreement governed by the law. The end to it, similarly, is regulated by the provisions of law. Thus, any hindrance or disobedience of any statute or unlawful operation of the business can lead to the termination of the Partnership.
C. Court’s Decree
A Partner can request the dissolution of the Partnership, but the Law typically permits dissolution only under specific conditions, such as Incapability to work, Breach of Agreement and Mental instability of Partner, and Misbehaviour impacting the Partnership.
D. Statement or Notification of Dissolution
Partnerships can be dissolved via statement or the notification given by the Partners for dissolution. Partners can submit a dissolution statement to their state’s secretary, which can be obtained via its website. The document contains the Partnership’s name, Partner's name, date of dissolution and reason for dissolution of the Partnership.
The Partners can also notify its creditors and other involved parties for dissolution of the Partnerships.
Modes of Dissolution of Partnership
I. Dissolution of Partnership Firm by the way of agreement (Section 40)
A partnership can be ended, if all the partners agree to dissolve it or by following the terms that are laid out in the partnership agreement. There is no involvement of the court in such cases.
For example, if all the partners mutually decide that they no longer want to work anymore in the partnership firm. They simply agreed to dissolve the partnership and part ways.
II. Dissolution of Partnership Firm by Compulsory Dissolution (Section 41)
Section 41 outlines a situation where a partnership may be dissolved compulsorily. If all the partners of the firm become insolvent or if all the partners except one become insolvent become insolvent, the firm may be dissolved. Also, in situations where the firm is involved in unlawful activities, the partnership may be dissolved. Unlawful activities include trading illegal substances, engaging in illegal services or illegal trade with other countries, etc.
For example, let us say, ABC is a Bar, that serves alcohol to minor individuals. Here, ABC is engaged in an illegal business which may be dissolved compulsorily
III. Dissolution of Partnership Firm by Happening of certain Contingencies (Section 42)
Section 42 of the act focuses on the dissolution of the partnership firm on the happening of certain contingencies. Contingencies such as expiry of fixed term, death of the partner, completion of a project, etc.
Expiry of fixed term: A contract of partnership may be made for a certain period. After the expiration of the fixed period, the partnership firm may dissolve as per the contract.
If the firm was formed for a particular number of tasks: If a partnership firm is established for a specific number of tasks or projects, the firm will then dissolve upon the completion of such tasks. The designated number of tasks are completed and compiled with the partnership, automatically comes to an end. However, the precondition here is the presence of a partnership agreement stating the dissolution of the partnership after a specific number of tasks or projects.
In case of death of a partner: In the case where there is a death of a partner, all the other partners can choose to discontinue the partnership firm, which can further lead to dissolution. However, dissolution in such cases is not compulsory, it’s at the option of all the other partners.
Similarly, if one of the partners turns insolvent or is unable to pay his or her debt, other partners may choose to discontinue the partnership.
Dissolution can also occur if one of the partners chooses not to continue and resigns from the partnership. This may also dissolve the firm.
IV. Dissolution of Partnership Firm by Statement of Dissolution (Section 43)
A partner in a partnership firm also has the authority to dissolve the firm by providing notice of dissolution to other partners. The notice, however, must be provided by the terms provided in the partnership agreement. If, a partnership agreement is silent about the mode of communication, a reasonable method can be chosen.
The notice must be clear and precise to avoid any confusion and misunderstanding. Also, it should be noted that the dissolution by such a mode cannot be done amid an ongoing transaction or project.
V. Dissolution of Partnership Firm by Dissolution by the Court (Section 44)
The process of dissolution of a partnership firm can be initiated through legal action taken by one partner before the court. The court may pass an order for the dissolution of the firm on the following grounds:
a. Unsoundness of mind: If one of the partners becomes mentally incapable or unable to continue his duties. The other partner can seek for dissolution of the partnership firm Unsoundness of mind can be permanent or temporary.
b. Permanent Incapacity: If the partner becomes permanently incapable of fulfilling his or her duty due to any disease, imprisonment, being abroad for a prolonged period, etc. dissolution can be ordered by the court.
c. Misconduct causing loss: If due to any action of the partner, leads to a situation of loss for a partnership firm, a Dissolution order may be passed by the court.
d. If there is a consistent breach of the agreement by the partner, making it practical and impossible for the partnership firm to continue, the solution may be ordered by the court
e. If the partner transfers its share to a third party permanently or if there are continuous losses without sufficient capital, the court may order the dissolution of the firm
Case Law: Narendra Bahadur Singh v. Chief Inspector Of Stamps, U.P, AIR 1972 All 1
The dissolution of the partnership resulted in Narendra Bahadur Singh being granted all assets and liabilities of the firm, including debts. The other three partners, however, were not entitled to or liable for the profits or loss of the business or for the liabilities. The settlement terms were agreed upon concerning capital profit and loss distribution. Narendra Bahadur Singh agreed to pay the specified amount. Even Narendra Bahadur Singh hypothecating and charging certain properties for securing settlement the court ruled that the firm property was jointly owned by all the partners and settlement must adhere to the provisions outlined in Section 48 of the Indian Partnership Act. Section 48 of the Act defines the modes of settlement of account of partners after the resolution process takes place
This case underscores the importance of adhering to legal provisions and ensuring fairness in the distribution of assets and liabilities among partners during the dissolution of a partnership
Conclusion
In conclusion, the dissolution of partnership and partnership firm can be through various means whether due to financial strain or maybe changes in partnership dynamics or external circumstances. The dissolution of a partnership firm is a crucial decision which requires careful consideration and legal guidance. Regardless of method or reason, it marks the ending of one chapter and the beginning of a new one for each partner, who is involved.
References
[1] Indian Partnership Act, 1932, Available Here
[2] Difference between Dissolution of Firm and Dissolution of Partnership, Available Here
[3] Partnership Firm Closure - Dissolution, Available Here
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Deepa Bajaj
A third-year student pursuing BBA LLB (Hons.) College: SVKM'S Narsee Monjee Institute of Management Studies. Having a strong passion for writing along with a deep understanding of legal concepts
