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contract_laws:dissolution_of_a_firm

Dissolution of a firm

As per section 39, the dissolution of the partnership between all the partners of a firm is called the dissolution of the firm. The firm is dissolved when all the partners stop carrying on the partnership business. It is possible that some partners may decide to disassociate from the firm while others carry on the business. In this case the partnership is not dissolved. After dissolution of the firm, the partnership between the partners does not completely end. It continues for the purpose of realization of assets or properties of the firm. Also, after the dissolution, the right and power of the partners of the firm to bind the firm exists as is necessary to wind up the operation and for the acts that started before the dissolution but have not yet ended.

Modes of dissolution

  1. Compulsory Dissolution - According to section 41, a firm will be compulsorily dissolved if
    1. all the partners or all but one of the partners become insolvent - This happens because if a partner becomes insolvent, he becomes incompetent to contract and so he ceases to be a partner as per section 34(1). Thus, if all or all but one partners become insolvent the firm will compulsorily dissolved because for a partnership, at least two partners are required.
    2. If the business of the firm becomes unlawful - It is possible that due to legislation, the business may become unlawful. For example, liquor sales may become unlawful in a particular state. In such a case, a partnership that sells liquor will be dissolved.
  2. Dissolution upon contingencies - According to section 42, subject to the contract, a firm is dissolved on the happening of following contingencies -
    1. By Expiry of fixed term - A firm is dissolved, if it is constituted for a fixed term, which that term expires.
    2. On completion of adventures or undertakings - In many cases, a partnership is started with a specific goal to accomplish or for a particular task. Upon completion of such task, the partnership gets dissolved.
    3. By the death of a partner - Subject to the contract between the partners,a partnership gets dissolved if a partner dies.
    4. By the adjudication of a partner as an insolvent - If a partner becomes insolvent and if there is no provision in the contract to keep the partnership alive in such case between the solvent partners, the partnership is dissolved.
  3. Dissolution by notice of partnership at will - According to section 43, a partnership at will can be dissolved any time by any partner by giving a notice of such intention to other partners.
  4. Dissolution by agreement - According to section 40, a firm may be dissolved either with the consent of all the partners or in accordance with a contract between the partners.
  5. Dissolution by court - According to section 44, the court may dissolve a partnership if -
    1. a partner becomes of unsound mind - In such a case, the next friend of the person with unsound mind may request the court to dissolve the firm.
    2. a partner becomes permanently incapable - At the suit of a partner, the court may dissolve the firm on the ground that a partner other than the one suing has become permanently incapable of performing the duties of partnership.
    3. a partner is guilty of conduct likely to affect prejudicially the carrying on of business - At the suit of a partner the court may dissolve a firm on the ground that a partner other than the one suing, is guilty of conduct which is likely to affect the business prejudicially. For example, in partnership of doctors, if one doctor is guilty of immorality towards some patients, it is possible for the court to dissolve the partnership upon suit of other partners.
      In Carmichael vs Evans 1856, a partner was convicted of traveling without ticket and the court dissolved the firm on this ground.
    4. willful or persistent breach of agreements relating to the business or management of the affairs of the firm - If a partner willfully or persistently commits breach of the agreements related to the firm, or the conduct of its business, or conducts such that it is not reasonably practical for other partners to carry on the business, the court may dissolve the firm upon suit by other partners.
    5. transfer of the whole interest in the firm by a partner to a third party - At the suit of a partner the court may dissolve a firm on the ground that a partner other than the one suing, has in any way transferred the whole of his interest in the firm to a third party.
    6. perpetual loss - At the suit of a partner, the court may dissolve the firm on the ground that the business of a firm cannot be carried on without incurring loss. It is indeed impractical to run a business that is continuously going in the loss. Thus, if a partner of such a business desires, he can request the court to dissolve the firm.
    7. Just and Equitable cause - As per section 44(g), the court may dissolve the firm on any just and equitable ground upon request by a partner. This gives very wide powers to the court because the court has to decide whether there is a just and equitable ground for dissolving a firm.

Consequences of Dissolution

  1. Liabilities of the partners for acts done after dissolution - As per section 45, until public notice is given of the dissolution, partners remain liable for their acts as they were before dissolution. It is therefore essential to give notice of dissolution if the partners want to escape liability for the acts of the firm.
  2. Right of partners to have business wound up after dissolutions - Upon dissolution of the firm, every partner is entitled, as against other partners, to have the property of the firm applied in payments of debts and other liabilities of the firm and to have the surplus distributed to the partners as per the contract.
  3. Continuing authority of partners for purpose of winding - Each partner continues to enjoy implied authority but for the acts done in the process of winding up of the business.
  4. Settlement of accounts - Upon dissolution, the accounts of the firm will be settled as per the agreement of the partners.
  5. Payment of debts - where there are any joint debts, the property of the firm will be first applied to clear those debts and then it will be applied to any separate debts due to a partner.
  6. Restrain the use of name of the firm - Every partner has a right to restrain another from using the name of the firm, subject to any contract between them. However, if the goodwill of the firm is sold, the buyer may use the name of the firm for his business.
  7. Restrain in trade - Subject to contract, the partners of the firm may be restrained from doing the same business as the firm after the dissolution as long as the conditions of the restrain do not violate section 27 of ICA 1872.


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Created on 2020/10/19 23:13 by • Last modified on 2020/11/07 18:32 (external edit)