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Dissolution of Firm

Unit IV
Dissolution
 Firm ceases to exist
 Dissolution of Firm
 Complete breakdown of relationship among
partners
 Dissolution of Partnership
 Business of firm continues
 Change in relationship between partners
 Dissolution of Partnership may or may not
include dissolution of firm
Mode of Dissolution of Firm
 Dissolution by Agreement Sec. 40
 Compulsory Dissolution Sec. 41

 On the happening of certain contingencies


Sec. 42
 Dissolution by Notice Sec. 43

 Dissolution by the Court Sec. 44


Dissolution by Agreement
 Created by Contract; Can be terminated by
Contract.
 Dissolved at any time with the consent of all
partners
 Contract of dissolution may be express or
implied
Compulsory Dissolution
 Insolvency
 One partner insolvent, reconstitution of firm.
 All partners or all but one partner are insolvent :
Dissolution of firm
 Business of firm is unlawful
 One out of several undertakings of the firm is
unlawful, only that business is closed. Dissolution
of firm not caused.
Dissolution on the happening
of certain contingencies
Contract between partners is dissolved
 If constituted for fixed term, by expiry of the
term
 If constituted to carry out one or more
adventures or undertakings, by the
completion thereof.
 By Death of a partner

 By Adjudication of a partner as an insolvent.


Dissolution by Notice
 Partnership at Will : Any Partner giving notice
in writing to all other partners of his intention
to dissolve the firm
 Dissolved on the date mentioned, if no date is
mentioned then on the date of
communication of notice the firm is dissolved
Dissolution by the Court
Partner may file a suit for dissolution of the firm
on following grounds:
 Insanity of a Partner Sec. 44 (i)

 Permanent Incapacity of a Partner Sec. 44 (ii)

 Misconduct of a Partner Sec. 44 (iii)

 Persistent breach of contract Sec. 44 (iv)

 Transfer of Interest Sec. 44 (v)

 Continuous Loss Sec. 44 (vi)

 Just and Equitable Sec. 44 (vii)


Dissolution by the Court
 Insanity of Partner
 Suit can be filed by any partner other than the
partner who is insane.
 Insanity does not itself dissolve the firm.
 Permanent Incapacity of a Partner
 Permanently incapable of performing the duties
as a partner
 If incapacity is temporary, court will not grant
dissolution.
Dissolution by the Court
 Misconduct of a Partner
 If acted with intent to defraud, dissolution is
granted.
 Persistent breach of Agreement
 If done willfully and persistently and is not
reasonably practicable for the other partners to
carry on business with him, the court will order so.
 Suit can be brought by a partner other than the
guilty one.
Dissolution by the Court
 Transfer of Interest
 Transfer of Interest by itself does not dissolve the firm.
 Other Partners has to bring that issue to court.
 Continuous Loss
 Firm cannot be carried on except at loss, the court
may allow dissolution of firm.
 Just and Equitable
 If court finds any other group to be just and equitable
for dissolution, it may order so. Eg. Mismanagement,
quarrels, partners not on speaking terms, etc.
Consequences of Dissolution :
Rights of Partners on Dissolution
 Right of Partners to enforce winding up (Sec.
46)
 Each partner can have the property sold and
proceeds applied to repay outside debts and
distribute the surplus in accordance to their rights.
 Rightto have the debts of the firm settled out
of the property of the firm (Sec. 49)
 Joint Debts : Joint property and then surplus is
shared
 Separate Debts : Separate property
Consequences of Dissolution :
Rights of Partners on Dissolution
 Rights
to earn personal profit by using firm’s
name (Sec. 50)
 If goodwill is bought, can use firm’s name and
earn personal profits.
 Returnof Premium on Premature dissolution
(Sec. 51)
 If premium is paid on entering for fixed term and
dissolution is before expiry of term, repay rateable
amount of premium
 Except in case of death, misconduct of the
partner, mutual agreement of all partners
Consequences of Dissolution :
Rights of Partners on Dissolution
 Rights where Partnership contract is rescinded
for fraud (Sec. 52)
 Right on surplus of assets of firm
 Entitled to rank as creditor for payment made for
clearance of debts of the firm
 Right to claim indemnity from the partners guilty of
fraud against all debts of the firm caused.
 Right
to restrain from use of firm name or
property (Sec. 53)
 Till the affairs of the firm is completely wound up
 Partner who purchased goodwill cannot be
restrained.
Consequences of Dissolution :
Liabilities of Partners on Dissolution
 Liabilityfor acts of partners done after
dissolution (Sec. 45)
 After dissolution public notice is necessary
 Otherwise partners held responsible for the acts
till public notice is given.
 Deceased partner, Insolvent partner and Retiring
partner not held responsible for acts even if public
notice is not given.
Consequences of Dissolution :
Liabilities of Partners on Dissolution
 Continuing authority of partners for the
purpose of winding up (Sec. 47)
 Authority only for winding up the affairs (disposing
property, realizing amount due from debtors,
payment to creditors) & complete transactions left
unfinished (taking delivery of goods ordered and
pay)
 Insolvent cannot bind the firm
Mode of Settlement of Accounts
 Given by Agreement
 If not, then Sec. 48 applies.

 Sharing Deficiency
 Losses of the firm shall be paid from (Sec. 48 a)
 First : Profits
 Next : Capital
 Last : Partners Individually based on sharing ratio
Application of Assets (Sec. 48b)
 Assets include any sum contributed by
partner for loss or deficiency of capital
 First : Payment of debts to third parties

 Second : Payment to partner for advances

 Third : Payment rateably for capital

 Last : Surplus divided in profit sharing ratio


Sale of Goodwill (Sec. 55)
 Be included in the assets and sold separately
or with other property of the firm
 Partners to make agreement with the buyer
(agreement valid if restrictions are reasonable)
 Subject to agreement between him and the
buyer he may not use the firm’s name,
represent himself as carrying business, solicit
the custom of persons who were dealing with
the firm before dissolution.

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