Firm Dissolution and Dissolution of Partnership

Firm Dissolution: It means complete breakdown or extinction or the relationship of partnership between all the partners of a firm. If this breakdown or severance of partnership relation between a few and not all the partners, this amount dissolution of partnership and not of the firm.

Dissolution of Partnership: It involves only a change in the relation of the partners. It merely serves the partnership relationship between the retiring partner and the continuing partners. It leaves the partnership amongst the continuing partners unaffected and the firm continues with the change constitution.

The Indian partnership act distinguishes between:

  1. Firm Dissolution.
  2. Dissolution of Partnership.

Section 39 provides that the dissolution of partnership between all the partners of a firm is called the ” Dissolution of the firm”.

Difference between Dissolution of Firm and Dissolution of Partnership

Firm Dissolution

Dissolution of Partnership

1. The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. Any change in the relationship of the partners is called dissolution of partnership.
2. Dissolution of the firm is the dissolution of the partnership. Dissolution of partnership is not the dissolution of the firm.
3. Business will come to an end in the dissolution of a Firm. Business may or may not come to an end in dissolution of the partners.

Modes of Firm Dissolution

Dissolution Without the Order of Court

  1. Dissolution by agreement [Section 40]: A firm may be dissolved:
  1. With the consent of all the partners,
  2. In accordance with a contract between them.

2. Compulsory Dissolution [Section 41]:

A firm is compulsorily dissolved in the following two circumstances:

  1. If all the partners or all but one partner of the firm are declared insolvent. The reason is that there must be atleast two persons to continuous a firm and such persons must be competent to contract.
  2. If some event takes place which makes it unlawful for the firm’s business to be carried-on.

3. On the Happening of certain Contingencies [Section 42]: 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 partner as an insolvent.

4. Dissolution by Notice [Section 43]: Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. The firm is dissolved from the date of dissolution mentioned in the notice or if no date is mentioned, as from the date of the communication of the notice.

Dissolution by Court

Under Section 44, the court may, at the suit of a partner, Firm dissolution on the following grounds:

1. Insanity: Where a partner has become of unsound mind, the court may dissolve the firm on the petition of any of the other partner or by the next friend of the insane partner [Section 44 (a)].

2. Permanent Incapacity: Where a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as a partner, the court may dissolve the firm [Section 44(b)].

3. Misconduct: Where a partner, other than the partner suing, is guilty of misconduct and it is likely to affect prejudicially the carrying-on of the business, regard being had to the nature of the business, the court may dissolve the firm [Section 44(c)].

4. Transfer of Interest: Where a partner has in any way transferred the whole of his interest in the firm to a third party or where his share has been attached under a decree, or sold in the recovery of arrears of land revenue, the court may dissolve the firm at the instance of any other partner.

5. Just and Equitable: The court can order dissolution on any other ground which in the option of the Court is a fit ground for dissolution of partnership. Dissolution on this ground has been granted in case of deadlock in the management, disappearance of the substratum of the business, partners not on speaking terms, etc. [Section 44 (f)].

6. Business Working at a Loss: Where the business of the firm cannot be carried-on except at a loss, the Court may dissolve the firm at the suit of a partner [Section 44 (e)].