Dissolution of a Partnership Firm

Last Updated at: January 20, 2020
35625
dissolution of partnership firm

What is the dissolution of a partnership firm? What are the methods of it? Who is responsible after dissolution? These are the question the post answers to help partnership businesses understand the ins and outs of the decision of all partners, collectively, to terminate the business agreement made between them. According to the Income Tax Act, Section 189 speaks about the dissolution partnership firm income tax act.

For a partnership firm to cease to exist, it needs to be dissolved. The process, known as dissolution of a partnership firm, involves the sale or disposal of all assets of the firm, final settlement of all of its liabilities, and the settling of the accounts. Any sum that remains in the business is then transferred to the partners in the profit-sharing ratio mentioned in the dissolution partnership deed.

If you need more pointers on government registrations, trademarks, patents or tax filing, browse a few services provided at Vakilsearch below

 

Hence, the dissolution of a partnership firm is the decision of all partners collectively to terminate the business agreement made between them. There are many ways in which the dissolution of the partnership firm happens.

Dissolution by Mutual Consent

The best and the easiest way to dissolve a partnership firm is by mutual consent. When the contract that specifies the partnership comes to an end or the partners mutually agree, due to various business or personal reasons to end the partnership, they can produce an agreement for dissolving it.

It is essential for all the partners to agree mutually for dissolving partnerships. It can be through the Dissolution by Mutual Consent clause in the partnership agreement.

Dissolve your partnership firm now

Dissolution by Notice

If the partnership business is at will, any one partner (or more) can, through a simple and advanced notice, dissolve a partnership. The notice should specify the date on which the dissolution comes into force. Such a dissolution can be initiated by any individual partner after proper notice is issued.

The dissolution of partnership firm format can be viewed or downloaded by clicking this link.

Dissolution Due to Contingencies

There are certain clauses/situations wherein the partnership firm can be/is dissolved:

1.On account of the end of a project/endeavour where the formation of the firm undertakes.
2.By the death of a partner.
3.By the adjudication of a partner as an insolvent or one or more partners.
4.By the expiry of a partnership period. Some firms are started with a clear view of the tenure for which the partnership will exist. Such partnerships will, naturally, come to an end once the period of partnership is complete.

The contingencies may vary depending upon the clauses specified in the agreement prepared at the time of forming the partnership. The agreement should specify the terms on which the dissolution may take place under such circumstances.

Compulsory Dissolution

Certain occurrences can make the dissolution of a firm compulsory. For example, by the occurrence of any event judged as illegal and thus, making it difficult for the partnership firm to continue its tenure

Dissolution by Court

A partnership business involves working with various individuals at a time. Even if they are friends and relatives, there are instances where one or more partner may find it not suitable for him or her under circumstances to continue. In these cases, the court may also dissolve the firm. Let us look at some of the reasons why or how the partnership firms can be dissolved through court cases. Do note, however, that for this to be possible, the partnership deed should be registered.

Due to Mental Instability
When a partner becomes mentally unstable/incapacitated

A business venture cannot proceed in case a partner is unable to deal with the pressures of the job at hand because of mental instability. In such instances, the other partner/partners can file a case/request to dissolve the partnership firm.

Illness or incapacity of a partner due to medical or any other reasons can also result in dissolution of partnership through a court case. The partner, other than the one incapacitated/mentally unstable, needs to file the request for dissolution of partnership through the court.

Due to Misconduct
The other reason for dissolution by the court is misconduct. Any partner/partners in the partnership misbehaving with others or not heeding to the signed agreement of the partnership will find themselves ousted by their partners through a court case.

The agreement (if registered) that the partner’s sign is a legally binding one, and any partner who misses out on any particular clause, and even after giving warnings, are not heeding to it, might face the court. The dissolution of the partnership firm may take place through court interference in such instances.

Transfer of Equity/Interest

A partner may decide to dissolve the partnership through the court if the other individual in the partnership has transferred their interest/equity of the firm to a third party without consulting them.

Who is responsible after dissolution?

Although the liabilities of the partners cease to exist once the dissolution of the firm takes place, the partners are liable for any act/occurrence prior to the dissolution of the firm. Only partners who are incapacitated/adjudicated as insolvent/dead are exempt from the liability.

In a gist, the various modes through which a partnership can be dissolved are dissolution by mutual consent, dissolution by notice, dissolution due to contingencies, compulsory dissolution and lastly dissolution by the court. Each method has its own clauses and contingencies which should meet to the fulfilment of the dissolution.

    SHARE
    A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.