Dissolution of a partnership firm is a process as the end of the relationship between the partners of the partnership firm by the dissolution of the partnership firm business- with the dissolution of a partnership firm, all relations between the partners are terminated with the firm, it is known as the dissolution of a partnership firm. In the dissolution of a partnership firm, the firm ends all its business operations. The dissolution process also includes disposing of all assets and liabilities with the settlement of accounts. In this article, we address the dissolution of a partnership firm, How to dissolve a partnership firm, and the settlement of the firm account, etc. So please stay tuned and read below:
The Process of the Dissolution of a Partnership Firm
Dissolution of a partnership firm means making the end of the firm’s business that is run by the partners and is owned by the firm. Here, with the dissolution of a firm, all accounts need to be settled between the partners. All the liabilities of the firm are settled by selling assets or by transferring between the partners who are eligible for that. In short, all existing accounts of the firm are set among the partners with the dissolution of the partnership firm.
With the dissolution of the firm, all profits or losses will be contributed between the partners according to the basis of the profit-sharing ratio as described under the partnership deed. After the dissolution of the firm, there is no existence of the firm. All due, liabilities, assets, profit or loss, and accounts will settled among the partners as per the agreement of the partnership firm.
What is the Dissolution of a Partnership?
There is a difference between the dissolution of a partnership and the dissolution of the partnership firm. In the case of the dissolution of a partnership, the relationship between partners changes, and the partnership firm still exists. However, the dissolution of the partnership firm means all the relationships between the partners and the firm’s existence also end.
We refer to the provision of section 39 of the Indian Partnership Act, 1932, which clearly says that the dissolution of the partnership firm is the dissolution of all the partners of the firm. The said dissolution ends the existence of the organization of the firm. After that, the firm will lose its identity and cannot make a deal with anyone else. In that situation, the firm can only sell the assets to settle the unpaid of others and the claims of the firm’s partners. However, one notable point is that, in the case of the dissolution of a firm, the court can interfere if any requirements to the intervener occur to the court.
In the case of dissolution of a partnership, that means not automatically a result of the dissolution of the firm. However, we can say that the dissolution of a partnership firm can be the reason for the dissolution of the partnership.
The dissolution of the partnership can take place in any of the ways which is given below:
- A change in the current profit-sharing ratio between the partners.
- An admission of a new partner in the firm.
- In the event of the retirement of an existing partner of the firm.
- In the event of the death of an existing partner of the firm.
- Any of the firm’s partners declared insolvent or bankrupt. Thus, he becomes incompetent to enter the contract and legally cannot exist as a partner.
- In the event of when the partnership was made for a particular project and that is completed.
- In the event of when the partnership was formed for a specific period and that expired.
Ways of Dissolution of a Partnership Firm
There are several ways on the basis the partnership firm can be dissolved. Those are given below:
When the Partners Mutually Agree to the Dissolution
Here, all partners of the firm mutually decide and agree to the dissolution of the partnership firm, and the partners can consent or agree to the dissolution of the firm. This method of dissolution is easy compared to other ways of dissolution.
The partnership firm can be compulsorily dissolved if the following events accrue such as:
- If all partners except one of them are declared insolvent, then the exception of one partner is incompetent to agree.
- For any reason, the firm business is declared illegal by the law.
- In any event, the firm business becomes unlawful. For example, if a partnership firm makes a deal with another country and India declares war against that country, it becomes an enemy of India. As a result of that, the business is declared unlawful.
If Certain Contingent Events Happen
The dissolution of the partnership firm can take place due to certain events happening, such as:
- A firm was formed for a fixed term that is expired.
- When the firm was formed for the specific venture that is completed now.
- Due to the death of the firm’s partner. If two partners run the firm business and one partner dies, the firm is automatically dissolved.
- If the firm’s partner becomes bankrupt or insolvent.
If the partner of the firm files a lawsuit in the court, and after determination of the grievance, the court can pass an order for the dissolution of the firm on the following grounds;
- The partner becomes insane or mentally unable to understand.
- If a partner becomes responsible for the misconduct, it hurts the partnership business.
- A partner does not follow the terms of the partnership agreement and always commits to breaching the terms.
- A partner transfers his whole interest in the firm to a third party without the consent of the other partners.
- In cases of heavy loss, the firm’s business is not able to be carried out.
After considering these grounds or any of them, the court can order the dissolution of the partnership firm. But, one notable thing is that the court can order the dissolution of the firm if the partnership firm is registered. An unregistered partnership firm cannot be ordered by the court to dissolve.
Dissolution by Notice
In the case of the partnership, the firm is at will. Then, any of the partners can dissolve by giving an advance notice to the other partner in writing form and explaining his intention to dissolve the partnership firm.
Settlement of Accounts on the Dissolution of the Partnership Firm
Section 48 of the Indian Partnership Act of 1932 deals with the settlement of accounts in the event of the dissolution of a partnership firm. According to that section, the following procedure needs to be followed for the settlement of accounts between the partners of the firm;
In this way:
- Firstly- the losses, including deficiencies of capital, will be paid out from the profits, secondly from the capital, and thirdly, if necessary, it will be paid by the firm’s partners individually according to their profit-sharing ratio.
- The partnership firm will apply its assets to make up for the deficiency of capital in the following ways:
- Firstly, paying third-party debts of the firm.
- Secondly, paying loans and advances.
- Thirdly, repayment of partners’ capital.
- Any surplus left after the above will be divided among the partners according to the basics of their profit-sharing ratios.