The dissolution of the firm means when the partnership between all the partners is dissolved, then it is called the dissolution of the partnership firm. After the dissolution of the firm, the partners have specific rights and liabilities in accordance with the Indian Partnership Act, 1932, which provides the consequences of the dissolution of the firm. In a partnership firm, there are more than two partners.
This procedure involves the disposing of all the assets and settlement of all the accounts and liabilities of all the partners. The Indian Partnership Act,1932 under section 4 defines a partnership as it is the relation between the partners who entered into a business and share all the losses and profits. Under the partnership deed, all the losses and profits are shared appropriately. A partnership deed is an agreement between the partners in which all the terms and conditions are outlined.
Partnership firms aren’t complicated to start in most of the cases as there is only a requirement of partnership deed. Decision making is one of the most difficult problems in any organization but in the partnership firm one can make decisions easily and the partners can take benefit of a wide range of powers. In comparison to other firms, a partnership firm can simply raise funds. As by the contribution of the multiple partners raising funds becomes more convenient. There are fewer chances of risk in partnership firms as risk is shared by all the partners in the firm.
The Indian Partnership Act, 1932 under section 39 defines the dissolution of partnership firms. The dissolution of the firm means putting an end to all the business activities with the firm. There is a difference between the dissolution of the firm and the dissolution of the partnership.
When all the activities regarding business ends and all the loss and profit are settled between the partners is called dissolution of the firm and when the partner takes the retirement from the firm even though the firm continues to perform its activity with another partner is known as dissolution of a partnership.
Ways of Dissolution
The Indian Partnership Act, 1932 defines dissolution in different ways which are the following as under:
- Dissolution by agreement (Section 40): Dissolution by agreement means a firm can be dissolved with the agreement in which the consent of all the partners are mentioned and by the mutual consents of all the partners to dissolve the firm. Without the interruption of the court, one can dissolve it easily.
- Compulsory dissolution (section 41): compulsory dissolution can be because of several reasons and some of them are the following as under:
- If all the partners become insolvent or if all the partners except one become insolvent then the firm will be dissolved.
- If partners are carrying out a business of illegal activities like drugs, selling illegal products, etc then it will be dissolved.
- Dissolution on the happening of a certain event (section 42): Under these events, a firm can dissolve which are as under:
- If the partnership is done for a particular period of time and when that period expires then the firm dissolves.
- Dissolution can also take place due to the death of the partner but if other partners want to continue they can.
- If the partners of the firm are insolvent or one partner then the dissolution takes place.
- If the partnership is created for a specific adventure or undertaking and if that objective is done then the firm will dissolve.
- Dissolution by notice of partnership at will (Section 43): The firm can be dissolved by any partner by giving notice in writing to all the other partners and that notice should be well communicated to all the partners by which the firm can dissolve.
- Dissolution by the court (Section 44): The dissolution can be done in a formal manner by suing the other partners and the grounds on which court can dissolve the firm are the following as under:
- When one of the partners becomes unsound then in such a case the other partners can file a suit and bring the case to the court to dissolve the firm.
- When the partner is not able to perform his duties permanently due to which the other partners file a case and dissolve the firm. The cause of the incapability of work can be imprisonment for a longer time.
- If the partner commits such an act that brings guilt and affects the reputation of the firm due to which firm faced losses then in that case court may order to dissolve the firm.
- If the partner breaches the agreement of the firm then the court may order for the dissolution of the firm. As it is the most necessary document of any firm.
- If the partner transfers his full interest to the third party and permits his share to be charged under the provision of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 and permit it to be sold in the recovery area of land revenue because of the partner than the court can order for dissolution of the firm.
- If the firm is facing a continuous loss, then the court can order for the dissolution of the firm.
Consequences of Dissolution
- Rights after dissolution: The Indian Partnership Act, 1932 under section 46 provides the rights of partners to have business wound up after the dissolution of the firm. It states that after the dissolution of the firm, all the partners or his representative are entitled to the property of the firm as applied in the payment of liabilities and debts of the firm and the surplus to be distributed between all the partners of the firm.
- Liabilities after dissolution: The Indian Partnership Act, 1932 under section 45 provides liabilities for an act of the partners after the dissolution of the firm. As per this section, the partners of the firm are liable to the third party for any act done by any of them unless they give public notice of the dissolution of the firm. Hence, it safeguards the third party who doesn’t know about the dissolution of the firm.
- Settlement of accounts after the dissolution of the firm: The Indian Partnership Act under section 48 explains the methods of settling the accounts of the firm. The firm will pay all the losses including the deficiency of the capital out of the profit and then from the partner’s capital and by the partners individually in their profit sharing ratio.
- Return of premium after dissolution: The Indian Partnership Act under section 51 defines the return of premium after dissolution. At the time of entering into a partnership firm, the partner has to pay a sum as a premium. So when the firm dissolves before the time period due to any cause, then he is entitled to the repayment of premium.
- Agreements in restraint of trade: The Indian Partnership Act under section 54 defines the agreement in restraint of trade. It means that when one party agrees with the other party to limit his liberty to carry on a certain trade even in the present or in the future. This section states that partners in anticipation of the dissolution of the firm make an agreement that some or all the partners will not carry any business similar to that of the firm even for a specific period or within some local limits.
The Indian Partnership Act, 1932 provides provisions relating to the dissolution of the firm. This act assists the people who want to dissolve the firm so that no one can take the wrong advantage for the same. With the dissolution of the firm, you have some consequences relating to the same as you have to close the books of account, all the liabilities must be settled by the partners and the profit and losses will be shared by the partners according to the terms of the agreement.