Dissolution of a Partnership Firm Partnership Act 1932 Notes7 WAYS OF DISSOLUTION OF A FIRM

Chapter VI of Partnership Act, 1932

Section 39 – Dissolution of a Firm

The dissolution of partnership relation between all partners is dissolution of the firm. It is the ending of partnership relation among partners.

Section 40 – Dissolution by Agreement

Partners can at any time with everyone’s consent may make an agreement in order to dissolve the firm. This applies to all cases whether the firm is for a fixed period or at will.

The provision for dissolution can be in partnership deed also or in a separate agreement.

Section 41 – Compulsory Dissolution

Compulsory dissolution is not subjected to any contract or do not depend upon the consent of the partners.

a. Clause (a) omitted by Act 31 of 2016.

b. Illegality of Business – Where the business of the firm from the very beginning is illegal, then it is void under section 23 of Indian Contract Act.

This section applies when the business in beginning was lawful but due to change in law or any subsequent impossibility, the business became unlawful. In this way the firm by operation of law gets dissolved.

Section 42 – Dissolution on happening of certain contingencies.

Subject to contract, firm is dissolved

1. If constituted for fixed term, then by expiry of the term. (Section 8)

2. If constituted for one or more adventures, by its completion thereof.

3. By death of the partner.

4. When partner becomes insolvent.

Section 43 – Dissolution by notice of partnership at will.

Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners.

The firm will get dissolved from the date of dissolution mentioned in the notice or if not mentioned then from the date when communication of notice is completed.

Section 44 – Dissolution by the court.

1. If a partner has become of unsound mind.

Insanity means that partner becomes incapable of performing duties as a partner. Either insane partner or any other partner may apply to court for dissolution.

2. Permanent incapacity of a partner.

If a partner has become permanently incapable then any remaining partner may apply for dissolution. The incapacity may be due to illness, mental or physical.

3. Partner guilty of misconduct.

When a partner’s misconduct is likely to affect the business of the firm, then any remaining partner of the firm may apply for dissolution. Basically, the nature of misconduct should be such which will damage the business prospects of the firm.

4. Persistent breach of agreement.

If a partner conducts himself in the business which is not reasonably practicable for other partners to carry on partnership business with him.

5. Transfer of interest.

When a partner has transferred to whole of his interest in the firm to third party, or has allowed his interest to be charged, for recovery of arrears under land revenue. (under Order XXI, Rule 49 of Civil Procedure Code)

6. Perpetual Losses.

When the business of the firm is meeting continuous loss.

7. Just and equitable.

It gives the court discretionary power to dissolve the firm. Where ever there is a mismanagement of the firm, it gives good ground to court for ordering dissolution.

Section 45 – Liability for acts of partners done after dissolution.
(Consequences of dissolution)

The first step in the process of dissolution is to give public notice of it. This is necessary in order to prevent the partners liability by holding out and by estoppel. If public notice is not given then the liability of the partners remains continued.

Note: Notice can be given by any partner.

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