dissolution of partnership firm

Dissolution Of Partnership Firms



Meaning

As we know that after the dissolution of the partnership firm the existing relationship between the partner's changes. But, the firm continues its activities. The dissolution of a partnership takes place in any of the following ways:

1.     Change in the existing profit sharing ratio.

2.     Admission of a new partner

3.     The retirement of an existing partner

4.     Death of an existing partner

5.     Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a partner in the firm.

6.     On completion of a specific venture in case, the partnership was formed specifically for that particular venture.

7.     On the expiry of the period for which the partnership was formed.

 

 Section 39 of the Indian Partnership Act 1932 states that the dissolution of a partnership firm among all the partners of the partnership firm is the Dissolution of the Partnership Firm. The dissolution of a partnership firm ceases the existence of the organization.

After this, the partnership firm cannot enter into any transaction with anybody. It can only sell the assets to realize the amount, pay the liabilities of the firm and discharge the claims of the partners.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here that the dissolution of a partnership may not necessarily result in the dissolution of the firm.

But, the dissolution of a partnership firm always results in the dissolution of the partnership.

How to Dissolve a Partnership Firm

Dissolving a partnership firm means discontinuing the business under the name of the said partnership firm. In this case, all liabilities are finally settled by selling off assets or transferring them to a particular partner, settling all accounts that existed with the partnership firm.

Any profit/ loss is transferred to partners in their profit sharing ratio as agreed by them in the partnership deed.

Dissolving a partnership firm is different from dissolving a partnership. In the former case, the firm ends its name and hence cannot do business in the future. But in the case of dissolving a partnership, the existing partnership is dissolved by consent or on happening of a certain event, but the firm can retain its existence if the remaining partners enter into a new partnership agreement.

Ways of Dissolving a Partnership Firm

There are different ways in which a partnership firm may get dissolved. They are –


1.     When partners mutually agreed

  It is the easiest way to dissolve a partnership firm since all partners have mutually agreed upon closing the partnership firm. Partners can give mutual consent or may enter into an agreement for the dissolution.

2.     Compulsory dissolution

A firm may need to be dissolved compulsorily if:

   All partners or all partners except one partner are declared insolvent.

  The firm is carrying out unlawful activities like dealing in drugs or other illegal products or doing business with alien countries or other countries that           may harm the interest of India or doing other such activities 

3.     Dissolution depending on certain contingent events

Upon happening of certain events, a firm may be required to get dissolved  Expiry of fixed-term– A partnership formed for a fixed term will get dissolved once the term gets over. Completion of a task– Sometimes, a partnership is formed for a certain task or objective. Once the task is completed, the partnership will automatically get dissolved. 

4.  Death of the partner–

If there are only two partners, and one of the partners dies, the partnership firm will automatically dissolve. If there are more than two partners, other partners may continue to run the firm. In such a case, only the partnership will get dissolved, and other partners will enter into a new agreement.

5.     Dissolution by notice

If a partnership business is at will, any partner can dissolve the partnership by giving advance notice. Notice will contain a date from which dissolution will be effective.
 
 6.  Dissolution by Court  

If any of the partners becomes mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in court to dissolve the firm. But a court can dissolve the firm only if it is registered with the Registrar of Firms. Hence an unregistered partnership firm can’t be dissolved by the court.

Partners still liable to third parties

Until a public notice of dissolution is given, the partners remain liable for any act done by any of the partners which would have been an act of the firm, if such act was done before resolution.
 
If a partner has been declared insolvent or has retired from the firm, he will not be liable for any acts done after his insolvency or retirement. The legal heirs of any deceased partner are also not liable for any acts done by other partners after the partner has died.

 

Settlement of Accounts

In a case where the partners do not have an agreement regarding the dissolution of the firm, the following provisions of the Indian Partnership Act 1932 will apply:

·         The firm will pay the losses including the deficiency of capital firstly out of the profits, secondly out of the partner’s capital and lastly by the partners individually in their profit sharing ratio.

·         The firm shall apply its assets including any contribution to make up for the deficiency firstly, for paying the third party debts, secondly for paying any loan or advance by any partner, and lastly by paying back their capital. Any surplus left after all the above payments is shared by partners in the profit sharing ratio.

 

Difference between the Dissolution of Partnership and Dissolution of Firm


Basis

Dissolution of Partnership

Dissolution of Firm

1. Closure of business

The business of the firm continues there is no closure.

The business of the firm gets discontinued.

2. Settling of assets and liabilities

There is a revaluation of assets and liabilities. Hence, they are shown at revalued figures in the Balance Sheet.

The liabilities are paid-off and assets are realized.

3. Intervention by court

In this case, there is no intervention by the court as the dissolution of partnership takes place by the mutual consent of all the partners.

The court may or may not intervene in this case.

4. Relationship

The relationship between the partners continues to exist though it may change its form.

The relationship between the partners ceases to exist.

5. The closing of Books of accounts

There is no closure of books as the business continues.

The books need closure as the business ceases to continue.

 

Created & Posted by Garima 
Article Assistant   at TAXAJ

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