DISSOLUTION OF A DISSOLUTION OF A PARTNERSHIP FIRMPARTNERSHIP FIRM

Prepared by,Prepared by,Anand Anand

MohanMohan & &Ribi Ipe Ribi Ipe KovoorKovoor

Meaning of Dissolution of a

Partnership Firm According to section 4 of the Partnership Act of 1932, According to section 4 of the Partnership Act of 1932,

"Partnership is defined as the relation between two or "Partnership is defined as the relation between two or more persons who have agreed to share the profits and more persons who have agreed to share the profits and losses according to their ratio of business run by all or losses according to their ratio of business run by all or any one of them acting for all". any one of them acting for all".

This definition superseded the previous definition given This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – in section 239 of Indian Contract Act 1872 as – “Partnership is the relation which subsists between “Partnership is the relation which subsists between persons who have agreed to combine their property, persons who have agreed to combine their property, labour, skill in some business, and to share the profits labour, skill in some business, and to share the profits thereof between them”.thereof between them”.

The 1932 definition added the concept of mutual The 1932 definition added the concept of mutual

agency.agency.

DISSOLUTION DISSOLUTION implies “the undoing or breaking of a implies “the undoing or breaking of a bond tie’’bond tie’’

A partnership dissolution does not mean A partnership dissolution does not mean the termination of the business. A the termination of the business. A dissolution of a partnership is the change dissolution of a partnership is the change in relationship of the partners caused by in relationship of the partners caused by any partner ceasing to be associated in any partner ceasing to be associated in the carrying on as distinguished from the the carrying on as distinguished from the winding up of a business. winding up of a business.

Incase of dissolution of partnership, the Incase of dissolution of partnership, the firm continues, only the partnership firm continues, only the partnership relation is reconstituted.relation is reconstituted.

Incase of dissolution of firm, not only Incase of dissolution of firm, not only partnership is dissolved but the firm also partnership is dissolved but the firm also loses its existence.loses its existence.

Dissolution of a Dissolution of a PartnershipPartnership

In dissolution of partnership, the economics basis of In dissolution of partnership, the economics basis of relationship of partners is reconstituted without affecting the relationship of partners is reconstituted without affecting the entity of the firm which continues to remain in business as entity of the firm which continues to remain in business as ever before. A partnership is dissolved by change of mutual ever before. A partnership is dissolved by change of mutual contract in the following cases:contract in the following cases:

Change in profit sharing ratio among partners;Change in profit sharing ratio among partners; Admission of a new partner;Admission of a new partner; Retirement of a new partner, where atleast two persons Retirement of a new partner, where atleast two persons

remain as partners;remain as partners; Death of a partner (Sec.42);Death of a partner (Sec.42); Adjudication of a partner as an insolvent;Adjudication of a partner as an insolvent; Completion of a venture if partnership is formed for that;Completion of a venture if partnership is formed for that; Expiry of the period of partnership if partnership is for a pre-Expiry of the period of partnership if partnership is for a pre-

determined period;determined period; Merger of one partnership firm into another.Merger of one partnership firm into another.

Dissolution of a Firm

A partnership firm can be dissolved by many modes like by agreement on the happening of certain contingencies, or judicially. There are basically five modes of dissolution given under Sections 40 – 44 of the Indian Partnership Act.

Dissolution by Agreement – Sec. 40 Compulsory Dissolution – Sec 41 Dissolution on the happening of certain

contingencies – Sec.42 Dissolution by notice of partnership at will –

Sec.43 Dissolution by the Court – Sec.44

1. By 1. By AgreementAgreement

A firm may be dissolved A firm may be dissolved any time with the any time with the consent of all the consent of all the partners of the partners of the firm. Partnership is cared firm. Partnership is cared by contract; it can also by contract; it can also be terminated by contact be terminated by contact

2. Compulsory 2. Compulsory DissolutionDissolution

A firm is dissolved –A firm is dissolved – By the adjudication By the adjudication

of all the of all the partners or of partners or of all the partners but all the partners but one as insolvent, orone as insolvent, or

By the happening By the happening of any event which of any event which makes the business makes the business of the firm of the firm unlawful.unlawful.

3. On the happening 3. On the happening of Certain of Certain

ContingenciesContingencies

Subject to contract between the partners, a firm is Subject to contract between the partners, a firm is dissolved –dissolved –

If constituted for a fixed term, by the expiry of that term;If constituted for a fixed term, by the expiry of that term; If constituted to carry out one or more adventures or If constituted to carry out one or more adventures or

undertakings, by the completion thereof:undertakings, by the completion thereof: By the death of a partner; andBy the death of a partner; and By the adjudication of a partners as an insolvent.By the adjudication of a partners as an insolvent.

The partnership agreement may provide that the firm The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned cases. will not be dissolved in any of the aforementioned cases. Such a provision is valid.Such a provision is valid.

4. By notice4. By notice

Where the partnership is at will, the firm Where the partnership is at will, the firm may be dissolved by any partner giving may be dissolved by any partner giving notice in writing to all other partners of notice in writing to all other partners of his intension to dissolve the firm. The his intension to dissolve the firm. The firm is dissolved as form the date firm is dissolved as form the date mentioned in the notice as the date of mentioned in the notice as the date of dissolution, or, if no date is mentioned, dissolution, or, if no date is mentioned, as from the date of communication of as from the date of communication of the notice.the notice.

5. Dissolution by the 5. Dissolution by the CourtCourt

At the suite of a partner, the court At the suite of a partner, the court may dissolve a firm on any one of may dissolve a firm on any one of the following ground:the following ground:

(A) Insanity (A) Insanity (B) Permanent Incapacity (B) Permanent Incapacity (C) Guilty Conduct(C) Guilty Conduct (D) Persistent Break of (D) Persistent Break of

AgreementAgreement (E) Transfer of whole Interest (E) Transfer of whole Interest (F) Loss (F) Loss (G) Just and Equitable clause(G) Just and Equitable clause

Dissolution of Partnership Dissolution of Partnership vs. Dissolution of Firmvs. Dissolution of Firm

BasisBasis Dissolution of Dissolution of PartnershipPartnership

Dissolution of Dissolution of FirmFirm

1. Termination of 1. Termination of businessbusiness

NoNo YesYes

2. Settlement of 2. Settlement of assets & liabilitiesassets & liabilities

Assets & liabilities are Assets & liabilities are revalued & new balance sheet revalued & new balance sheet is drawnis drawn

Assets are sold & Assets are sold & realized and liabilities realized and liabilities are paid off.are paid off.

3.Court’s 3.Court’s interventionintervention

Court does not intervene Court does not intervene because partnership is because partnership is dissolved by mutual dissolved by mutual agreement and through the agreement and through the process of reconstitution.process of reconstitution.

A firm can be A firm can be dissolved by the dissolved by the court’s order.court’s order.

4.Economic 4.Economic RelationshipRelationship

Economic relationship may Economic relationship may remain and/or change.remain and/or change.

Economic relationship Economic relationship between partners between partners comes to an end.comes to an end.

5.Closure of books5.Closure of books Not required as business is not Not required as business is not terminated.terminated.

All books of accounts All books of accounts are closed.are closed.

ReferencesReferences

http://www.rajputbrotherhood.com/eng/articles/dissolution-of-partnership-firm.html

http://chestofbooks.com/business/reference/The-Business-Man-Encyclopedia/Dissolution-Of-Partnership.html

ACCOUNTANY, Partnership and ACCOUNTANY, Partnership and Company Accounts, G.C.Maheshwari, Company Accounts, G.C.Maheshwari, S.C.Jain, S.S.SehrawatS.C.Jain, S.S.Sehrawat

THANK YOU & HAVE A NICE DAY!!THANK YOU & HAVE A NICE DAY!!