Dissolution of a Partnership Firm and Consequences of Dissolution
đź“Ś Dissolution of a Partnership Firm
âś… Meaning
Dissolution of a partnership firm means the complete termination of the relationship between all the partners of the firm. It is different from the retirement or admission of a partner because in dissolution the firm ceases to exist and its business comes to an end.
đź“– Legal Provisions
Governed by the Indian Partnership Act, 1932 (Sections 39 to 55).
Section 39 defines dissolution:
"The dissolution of partnership between all the partners of a firm is called the dissolution of the firm."
📌 Modes of Dissolution of a Firm (Sec. 40–44)
| Mode | Explanation | Case Law |
|---|---|---|
| By Agreement (Sec. 40) | With consent of all partners or as per contract. | Suresh Kumar Sanghi v. Amrit Kumar Sanghi (1982) – Partnership may be dissolved as per agreement. |
| Compulsory Dissolution (Sec. 41) | When all partners become insolvent or when business becomes unlawful. | Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty (1975) – Business of gambling being illegal, firm dissolved. |
| On Occurrence of Certain Contingencies (Sec. 42) | (a) Expiry of fixed period, (b) Completion of venture, (c) Death of partner, (d) Insolvency of partner. | CIT v. Pigot Champan & Co. (1982) – Firm dissolved on death of a partner. |
| By Notice (Sec. 43) | In partnership at will, any partner may dissolve firm by giving written notice. | Banarsi Das v. Kanshi Ram (1963) – Partnership at will dissolved by notice. |
| By Court (Sec. 44) | Grounds include: (a) Insanity of partner, (b) Permanent incapacity, (c) Misconduct, (d) Persistent breach of agreement, (e) Loss, (f) Just and equitable grounds. | Haji Sheikh Subhan v. Madhorao (1962) – Court dissolved firm due to misconduct. |
đź“Ś Consequences of Dissolution
Once the firm is dissolved, the following consequences arise:
1. Business Closure
The firm ceases to carry on its business except for winding up.
Case: CIT v. A.W. Figgies & Co. (1953) – Dissolution means complete closure of business.
2. Liability of Partners (Sec. 45)
Partners remain liable for acts done before dissolution until public notice is given.
Case: Scarf v. Jardine (1882) – Partners liable for obligations before dissolution.
3. Settlement of Accounts (Sec. 48)
Assets are applied in the following order:
Payment of firm’s debts to outsiders.
Loans/advances by partners.
Capital contribution of partners.
Residue distributed as profit.
Case: Garner v. Murray (1904) – Loss due to insolvency of a partner shared by solvent partners in proportion to capital.
4. Return of Premium (Sec. 51)
If a partner paid a premium on entering partnership for a fixed term but firm is dissolved before expiry (not due to his fault), he can claim proportionate refund.
5. Restraint of Trade Agreement (Sec. 54)
After dissolution, partners may agree not to carry on similar business within specified limits.
6. Registration Effects (Sec. 72)
Firm’s name is struck off from register of firms after dissolution.
đź“Š Summary Table
| Aspect | Provision | Case Law |
|---|---|---|
| Definition | Sec. 39 | – |
| By Agreement | Sec. 40 | Suresh Kumar Sanghi v. Amrit Kumar Sanghi |
| Compulsory | Sec. 41 | Pratapchand Nopaji v. Kotrike Venkata Setty |
| Contingencies | Sec. 42 | CIT v. Pigot Champan & Co. |
| By Notice | Sec. 43 | Banarsi Das v. Kanshi Ram |
| By Court | Sec. 44 | Haji Sheikh Subhan v. Madhorao |
| Settlement of Accounts | Sec. 48 | Garner v. Murray |
| Liability till Notice | Sec. 45 | Scarf v. Jardine |
| Business Closure | – | CIT v. A.W. Figgies & Co. |
✅ In short: Dissolution ends the firm’s existence. Partners’ rights, liabilities, and settlement of accounts are handled as per Sections 39–55 of Partnership Act, 1932.
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