Dissolution of partnership firm

What is dissolution?

Dissolution of a firm means the end of a firm by the break up o the relation of partnership between all the partners. Dissolution is to be distinguished from reconstitution of a firm. In the latter case, the partnership continues but there is a change in the number of partners. In the former case there is complete severance of jural relation between all the partners.

The Grounds of Dissolution

A firm by dissolved on any of the following ground:

1. By Agreement

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

2. Compulsory Dissolution

A firm is dissolved –

  • By the adjudication of all the partners or of all the partners but one as insolvent, or
  • By the happening of any event which makes the business of the firm unlawful.

3. On the happening of Certain Contingencies

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

  1. If constituted for a fixed term, by the expiry of that term;
  2. If constituted to carry out one or more adventures or undertakings, by the completion thereof:
  3. By the death of a partner; and
  4. By the adjudication of a partners as an insolvent.

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

4. By notice

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

5. Dissolution by the Court.

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

  • (A) Insanity: If a partner has become of unsound mind. The suit for dissolution in this case can be filed by the next friend of the insane partner or by any other partner.
  • (B) Permanent Incapacity: If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. A partner was attacked with paralysis which on medical evidence was found to be curable. Dissolution was not granted. The suit for dissolution in this case must be brought by a partner other than the person who has become incapable.
  • (C) Guilty Conduct: If a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business. To justify dissolution under this clause the misconduct must be of such a nature as to affect adversely the particular business concerned. Misconduct which affects one business may not affect another business. Therefore the court must take into account the nature of business that the partnership carries on. The test generally applied is whether the act complained of is likely to affect the credit and custom of the particular business.
    The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner who is guilty of misconduct.

Examples:

  • The partner of a firm of solicitors was convinced of traveling on the railway without a ticket and with intent to defraud. It was held that since the conviction was for dishonesty, it was likely to be detrimental to the partnership business and dissolution was granted.
  • In English cases dissolution has been grated for the following acts- conviction for an offence involving moral turpitude; misapplication of monies of a client by a solicitor; adultery by a doctor; speculation in shares by the partners of a regular mercantile business.
  • (D) Persistent Break of Agreement: If a partner willfully and persistently commits breach of the partnership agreement regarding management or otherwise conducts him in such a way that is not reasonably practicable for the other partners to carry on business in partnership with him. The suit for dissolution in cases coming under this clause is to be brought by a partner other than the partner guilty of the acts.
  • (E) Transfer of whole Interest: If a partner has transferred the whole of his interest in the firm to an outsider or has allowed his interest to be sold in execution of a decree. Transfer of a partner’s interest does not by itself dissolve the firm. But the other partners may ask the court to dissolve the firm if such a transfer occurs. Only the transfer of the entire interest of the partner gives ground for action. The transfer of a part of the partner’s interest does not provide any ground for dissolution. The formation of a sub-partnership is, therefore, not a ground for dissolution. The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner whose interest has been transferred or sold.
  • (F) Loss: if the business of the firm cannot be carried on except at a loss. Since the motive, with which partnership are formed, is acquisition of gain, the courts have been give discretion to dissolve a firm in cases where it is impossible to make profits.
  • (G) Just and Equitable clause: If the court considers it just and equitable to dissolve the firm. This clause gives a discretionary power to the court to dissolve a firm in cases which do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution.