Dissolution of Partnership firm by Court Order – Indian Partnership Act, 1932

Last Updated at: February 11, 2020
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Dissolution of Partnership by Court Order - Indian Partnership Act, 1932

What is a Partnership firm?

Partnership is the relation between two or more persons who have agreed to run a business and share the profits equally. Partnership firms are regulated by the Indian Partnership Act, 1932. In the Indian Partnership Act, the Partnership Agreements determine the rights and duties of the partners by subject to provisions. Dissolution of the firm leads to the dissolution of partnership too.

What is a Dissolution?

Dissolution refers to the end of any legal or contractual relationship among all the partners in a business. Section 39 of the Indian Partnership Act defines the term ‘dissolution of partnership firm’. It determines the conclusion or complete break down of the partnership relation. The question of dissolution arises when there is either the death of a partner, retirement or if any of the partners turn insolvent. 

Dissolution of Partnership Vs Partnership firm

It is to be noted that the dissolution of Partnership firm is different from the dissolution of Partners. In dissolution of a firm, the partners stop all the business activities within the firm. At the time of dissolution of the firm, the assets are used to pay off the debt. When a partner agrees to continue the same firm even after the retirement of a partner, then it is the dissolution of partners and not firm. Though the firm is still in process by the partner, the partnership between the partner is done.
According to the Indian Partnership Act, 1932, it defines dissolution in different ways. Section 40 to 44 mentions the dissolution of the firm. Dissolution which follows Section 40 to 43 takes place without the intervention of the court.

The consequences of a dissolution of a Partnership

    1. The dissolution ends the partnership amongst the partners.
    2. It changes the dynamics of the mutual relations of the partners. 
    3. The dissolution of Partnership doesn’t end the relations and the business of the firm. 
    4. It doesn’t end in the existence of the firm as a different unit. 
    5. Though one of the partners who leave is discharged, the assets and liabilities of the firm remain unchanged.

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When can the dissolution take place according to the Indian Partnership Act, 1932?

a) Either the partnership could be dissolved by mutual agreement among the partners (Section 40), compulsory dissolution which may be due to any unlawful business activities (Section 41), dissolution on the happening of a contingent events like death of the partner, adjudication of a partner as insolvent (Section 42) and dissolution by way of notice (Section 43).

b) Or by way of a court’s order: The Indian Partnership Act, 1932 gives the power to the court to effectuate the dissolution of a partnership is some circumstances as given in the act. The conditions invoking the power of the court to dissolve a partnership arises in the following situations as per Section 44:

1. Partner of unsound mind
If it comes to the notice of the court by one of the partners, the legal action can be taken. Otherwise, that one or more partners have been declared unsound or lunacy, the court can initiate the proceedings of dissolution. However, insanity or lunacy is not an absolute ground to dissolution, rather it should be effectuated only at the instance of other partners. Moreover, it is not always necessary that the state of insanity is a permanent one. Furthermore, other circumstances are also considered to make it a ground for dissolution. For instance, the character of the partner or the nature of their involvement.
2. Incapability or misconduct of the partner
Incapacity of a partner is when he either becomes temporarily or permanently unable to discharge his duties in the position of a partner. If the partner goes out of character to perform some activity, then the ground of professional misconduct can be invoked. If the character is not up to his professional standards, then accordingly the action will take place. Often a sound ground for misconduct is made out when the ill actions of the partner causes harm to the firm. 
3. Breach of agreements
The firm can be dissolved if the partner has breached the agreements that are related to managing the business affairs or conduct of the business. The other reason could be if the partner indulges in other business activities. The other activities may not be practical for other partners to carry on the business with him. 
4. Transfer of shares
If the partner other than the suing partner has transferred or sold his rights and shares to a third party, the other partners can file for dissolution of the firm, according to the Indian Partnership Act.
5. Runs on losses
Any business is susceptible to face losses due to unforeseen circumstances. In such cases, the court can choose to dissolve the firm that can no longer churn profits. 
6. Other justifiable causes
If the court finds any other justifiable and equitable reasons apart from the ones mentioned above, a partnership firm can be dissolved.

 

 

Dissolution of Partnership firm by Court Order – Indian Partnership Act, 1932

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What is a Partnership firm?

Partnership is the relation between two or more persons who have agreed to run a business and share the profits equally. Partnership firms are regulated by the Indian Partnership Act, 1932. In the Indian Partnership Act, the Partnership Agreements determine the rights and duties of the partners by subject to provisions. Dissolution of the firm leads to the dissolution of partnership too.

What is a Dissolution?

Dissolution refers to the end of any legal or contractual relationship among all the partners in a business. Section 39 of the Indian Partnership Act defines the term ‘dissolution of partnership firm’. It determines the conclusion or complete break down of the partnership relation. The question of dissolution arises when there is either the death of a partner, retirement or if any of the partners turn insolvent. 

Dissolution of Partnership Vs Partnership firm

It is to be noted that the dissolution of Partnership firm is different from the dissolution of Partners. In dissolution of a firm, the partners stop all the business activities within the firm. At the time of dissolution of the firm, the assets are used to pay off the debt. When a partner agrees to continue the same firm even after the retirement of a partner, then it is the dissolution of partners and not firm. Though the firm is still in process by the partner, the partnership between the partner is done.
According to the Indian Partnership Act, 1932, it defines dissolution in different ways. Section 40 to 44 mentions the dissolution of the firm. Dissolution which follows Section 40 to 43 takes place without the intervention of the court.

The consequences of a dissolution of a Partnership

    1. The dissolution ends the partnership amongst the partners.
    2. It changes the dynamics of the mutual relations of the partners. 
    3. The dissolution of Partnership doesn’t end the relations and the business of the firm. 
    4. It doesn’t end in the existence of the firm as a different unit. 
    5. Though one of the partners who leave is discharged, the assets and liabilities of the firm remain unchanged.

Talk to our Legal Experts

When can the dissolution take place according to the Indian Partnership Act, 1932?

a) Either the partnership could be dissolved by mutual agreement among the partners (Section 40), compulsory dissolution which may be due to any unlawful business activities (Section 41), dissolution on the happening of a contingent events like death of the partner, adjudication of a partner as insolvent (Section 42) and dissolution by way of notice (Section 43).

b) Or by way of a court’s order: The Indian Partnership Act, 1932 gives the power to the court to effectuate the dissolution of a partnership is some circumstances as given in the act. The conditions invoking the power of the court to dissolve a partnership arises in the following situations as per Section 44:

1. Partner of unsound mind
If it comes to the notice of the court by one of the partners, the legal action can be taken. Otherwise, that one or more partners have been declared unsound or lunacy, the court can initiate the proceedings of dissolution. However, insanity or lunacy is not an absolute ground to dissolution, rather it should be effectuated only at the instance of other partners. Moreover, it is not always necessary that the state of insanity is a permanent one. Furthermore, other circumstances are also considered to make it a ground for dissolution. For instance, the character of the partner or the nature of their involvement.
2. Incapability or misconduct of the partner
Incapacity of a partner is when he either becomes temporarily or permanently unable to discharge his duties in the position of a partner. If the partner goes out of character to perform some activity, then the ground of professional misconduct can be invoked. If the character is not up to his professional standards, then accordingly the action will take place. Often a sound ground for misconduct is made out when the ill actions of the partner causes harm to the firm. 
3. Breach of agreements
The firm can be dissolved if the partner has breached the agreements that are related to managing the business affairs or conduct of the business. The other reason could be if the partner indulges in other business activities. The other activities may not be practical for other partners to carry on the business with him. 
4. Transfer of shares
If the partner other than the suing partner has transferred or sold his rights and shares to a third party, the other partners can file for dissolution of the firm, according to the Indian Partnership Act.
5. Runs on losses
Any business is susceptible to face losses due to unforeseen circumstances. In such cases, the court can choose to dissolve the firm that can no longer churn profits. 
6. Other justifiable causes
If the court finds any other justifiable and equitable reasons apart from the ones mentioned above, a partnership firm can be dissolved.

 

 

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