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written by | April 28, 2022

How to Dissolve a Partnership Firm?

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When it comes to business and marketing, you can establish a firm as a sole proprietorship or under a partnership. Either the case is, the industry needs to follow several terms and conditions for the smooth and convenient running of the company. However, in the case of a partnership firm, several conditions occur when the firm needs to be dissolved. 

The dissolution of a firm means closing the firm on the base level, i.e., the company or business will cease to exist, or the firm can transfer to any third-party dealer. However, there are several conditions under which this dissolution can take place. Some of the most basic requirements that cause the dissolution situation are the partner's resignation, expiry of the partnership period, completion of the firm's plan, death of the partner, etc. According to the Indian Partnership Act, there are several rules and regulations implemented over the partners that a firm needs to carry out during the partnership firm's dissolution procedure.

Did you know?

There are more than 1 lakh partnership firms registered in India.

Also Read: How to Register a Partnership Firm Under Indian Partnership Act 1932

What is Compulsory Dissolution?

Firms are compulsory dissolved when: all of the partners are adjudicated as insolvent, or all of the partners but one are adjudicated as insolvent. In the event that a circumstance occurs which makes it unlawful for the business of the firm to be carried on or for the partners to carry on the business in partnership.

What is the Dissolution of a Partnership Firm?

A partnership firm is a business or a company that is run or held by more than two people in partnership altogether. This business, running under the authority of several partners, is called a firm. However, sometimes situations and conditions arise where this firm needs to be closed or dropped down for several reasons, including a dispute among the partners, the addition of a new partner, dissolution through mutual consent and expiry of the partnership period etc.

The Indian Partnership Act of 1932 came up with the law under Section 39, where the dissolution of a partnership firm is explained in detail and all the necessary procedures that a firm needs to undertake. Some of the basic rules and regulations that need to be followed during the dissolution of a firm include the settlement of all the liabilities, selling or stocking the shares, transfer of the firm to any third party, settling all the accounts, etc.

When it comes to the dissolution of a firm, there are two ways how a partnership firm can be dissolved. They are described as the dissolution of the partnership firm without any court intervention, which is further subdivided into dissolution by agreement and compulsory dissolution. The second way of dissolving a firm is said to be the dissolution of the partnership under the court's intervention.

Ways to Dissolve a Partnership Firm

When it comes to the dissolution of a partnership firm, there are two basic grounds for the dissolution. Under several conditions, the court's involvement is not required during the procedure of dissolution of the partnership firm. Some conditions related to the same are:

1. Dissolution by Agreement

Dissolution by agreement explains the  procedure for dissolving a partnership firm under which all of the partners have mutual consent over the dissolution of the firm. Therefore, a contract is  signed among the partners, where each of them provides their consent in favour of the dissolution of the firm. This dissolution by agreement is termed in Section 40 of the Indian Partnership Act 1932.

2. Compulsory Dissolution

The Indian Partnership Act 1932 came up with section 41, where there are certain conditions under the influence of which it becomes compulsory and mandatory to dissolve that particular partnership firm. There are two conditions over which the dissolution can be carried out. One of which includes the insolvency of a partner, where all the partners are considered insolvent, i.e., under the depth or unable to pay their share for the business, which leads to the dissolving of the partnership firm. Secondly, if any activity or event carried out by that particular partnership firm is termed unlawful or illegal, it becomes mandatory for the partnership firm to be dissolved.

3. Dissolution Influenced by Certain Conditions

Several conditions cause the dissolution of the partnership firm. Some of these conditions include:

  • Expiry of Partnership: While establishing a partnership firm, an agreement is signed among the partners, agreeing on a certain partnership tenure. Therefore, once this partnership period expires, it requires the dissolution of that firm.
  • Completion of the Goal: In certain conditions, the dissolution of the partnership firm is carried out when the goal or the plan of that particular firm is completed or achieved. 
  • Death of the Partner: The dissolution of the firm is liable when two partners hold the business and one dies before the end of the partnership period. It becomes necessary for the partnership firm to be dissolved.
  • Insolvency: When all of the partners except one are considered insolvent, i.e., they are under debt or cannot pay for the business. This causes a situation to arise that demands the dissolution of the partnership firm.
  • Resignation: One of the most common reasons for the dissolution of a partnership firm is resignation. When one or more company partners resign, this leads to the dissolution of that particular firm.

Also Read: Difference Between Company vs Partnership Firm vs LLP

4. Dissolution by Notice

Dissolution by notice is a legal procedure where each partner transfers information of dissolution to another partner, giving a certain period to provide their consent over dissolving the firm or keeping their opinion. The dissolution by notice is explained under section 43 of the Indian Partnership Act, 1932.

Partner Still Liable to the Third Party

Before the dissolution of a firm, a certain period is granted for the settlement of the business deals, debts and liabilities before the expiry of the tenure. If any of the firm's partners carry out any event during the given period, it will be termed liable for the consequences, and the act will be considered the act of the firm. However, if the partner resigns from the firm, there will be no liability on the partner's act after the acceptance of their resignation. Moreover, in the condition of the partner's death, there will be no liability charged over the heir of that deceased individual.

How are Accounts Settled?

One of the basic considerations during the procedure for the dissolution of a partnership firm is the settlement of the accounts and the liabilities. Some of the terms that need to be considered during the dissolution of a firm are:

  1. Clearing all the losses by dividing the overall cost among the partners according to their profit sharing ratio.
  2. To settle the liabilities, the stocks and shares are sold off in the market, and the amount gathered by that selling will be used to settle the liabilities. 
  3. The capital collected by the partners during the establishment of the firm will be used to pay the debts.
  4. The firm will repay each partner the amount invested as capital during the establishment of the firm.
  5. The firm will share the end balance during the firm's closure among the partners according to their profit-sharing ratios.

Conclusion

A business or a firm can be a partnership firm when more than one individual is involved in the running and investment of that business. Once the business is termed a partnership firm, several liabilities and conditions become mandatory for the firm to follow. However, several conditions occur where these conditions and regulations are violated, which leads the path toward the dissolution of that particular partnership firm.

Moreover, the dissolution can be over the mutual consent where an agreement is signed among the partners, who signed it giving their full consent to the firm's closure. And if the firm carries out any illegal activities, it becomes mandatory for the firm to be dissolved. Several conditions and rules need to be followed during the procedure for the dissolution of the partnership firm. These rules and regulations of dissolution are explained and briefly termed under various sections of the Indian Partnership Act 1932.
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FAQs

Q: What is the Indian Partnership Act 1932?

Ans:

The Indian Partnership Act is a law postulated by the Indian government in 1932 for the proper and efficient running of the partnership business. It came up with certain rules and regulations that determine the efficient running and the termination of a particular business or partnership firm, i.e., dissolution of the firm.

Q: How to dissolve a partnership firm?

Ans:

There are certain grounds over which the partnership firm can be dissolved, including expiry of the partnership period, death of any partner, any event carried out by the business that is termed as illegal, insolvency among the partner, completion of the goal of that particular business, etc.

Q: What do you mean by the dissolution of a partnership firm?

Ans:

The meaning of dissolution of a partnership firm can be explained as the condition or a procedure carried out for the termination or closure of that particular business based on several grounds.

Q: What do you mean by partnership firm?

Ans:

A partnership firm can be defined as a business or company held or controlled by more than one partner. However, certain rules and conditions under which a partnership firm is run. Otherwise, it may cause a situation for the dissolution of a firm.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.