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Partnership Firm

Dissolution of a Partnership Firm

There are many ways in which you can dissolve a partnership firm. To have a good understanding of how to dissolve a partnership, read this article.

When you are considering the dissolution of your partnership firm, you might encounter a lot of questions. What is the dissolution of a partnership firm? What are the methods of it? Who is responsible after dissolution? 

We are going to answer all these questions in this article to give you clarity on how to close your partnership business. 

For a partnership firm to cease to exist, it needs to be dissolved. The process involves the sale or disposal of all assets of the firm, the 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. 

A partnership cannot be dissolved without the intervention of the court. When a company dissolves, it no longer does business and must settle its finances. It sells all of its assets in order to fulfil all of the claims against it.

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.

Ways of Dissolution of a Partnership Firm

1. 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.

All the partners need to agree mutually for dissolving partnerships. Then, it can be through the Dissolution by Mutual Consent clause in the partnership agreement:

2. Dissolution by Notice

If the partnership business is at will, anyone (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 dissolution can be initiated by any individual partner after proper notice is issued.

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3. 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 on which the formation of the firm was based.
  2. On the death of a partner.
  3. By the adjudication of one or more partners as an insolvent.
  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 a partnership is complete.

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

4. Compulsory Dissolution

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

5. 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 partners may find it not suitable for them under the circumstances to continue. In these cases, the court may also dissolve the firm.

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Let us look at some of the reasons why or how partnership firms can be dissolved through court cases. 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 the dissolution of the partnership through a court case. So, 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. If any partner/partners in the partnership are misbehaving with others or not heeding to the signed agreement of the partnership, they will find themselves ousted by their partners through a court case.

The agreement (if registered) that the partner sign is a legally binding one, and any partner who misses out on any particular clause, and even after giving warnings, are not heeding 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 before the dissolution of the firm. Only partners who are incapacitated/adjudicated as insolvent/dead are exempt from 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 clauses and contingencies.

Hope this article gave you clarity on the dissolution of a partnership firm. You can get the help of Vakilsearch’s team to dissolve your firm without any hassle. Our team will take care of all the documentation and the entire process will be completed online.

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