Partnership Firm Dissolution Process & Timeline
Dissolution of Firms
When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm. Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.” It implies the complete break down of the relation of partnership between all the partners.
Dissolution of partnership is different from the dissolution of firm.
Dissolution of a partnership firm merely involves a change in the relation of partners; whereas the dissolution of firm amounts to a complete closure of the business. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm.
Dissolution of a Partnership firm may be effected in the following ways:
· Dissolution without the intervention of the Court.
· Dissolution by Court.
Dissolution without the intervention of Court:-
1. By Agreement (S.40)
A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.
2. Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes compulsory for the firm to dissolute:
(i) Insolvency of Partners
In case all the partners or all the partners except one become insolvent.
(ii) Unlawful Business
In case the firm is engaged in more than one business which may have become unlawful, the better view appears to be that the firm will not dissolve as to the other legitimate businesses unless all of them are so inter connected that stoppage of one would paralyze the others e.g. A and B charter a ship to go to foreign port and receive a cargo on the joint venture. War breaks out between England and the country where the port is situated before the ship arrives at the port, and continues until after the time appointed for loading. The partnership between A and B is dissolved
3. Dissolution on the happening of contingent event (S.42) A firm may be dissolved on the happening of any of the following contingent event
(i) Expiry of Fixed Period
A firm constituted for a term is of course not exempt from dissolution by any of the other possible cause before the expiration of the term. The contract may expressly provide that the partnership will determine in certain circumstances but even if there is no such express term, an implied term as to when the partnership will determine may be gathered from the contract and the nature of the business. The provision of this section make it clear that unless some contract between the partners to the contrary is proved, the firm, if constituted for a fixed term would be dissolved by the expiry of that term.
(ii) On achievement of specific task
A partnership constituted to carry out contracts with specified persons during a particular season would be taken to be dissolved once the contracts are closed. In the case of Basantlal Jalan v. Chiranjilal, Where the firm was constituted for a specific undertaking to supply certain quantity of grain and the contract was prematurely terminated after supply of a part of the goods, it was held that the partnership did not come to an end and was dissolved only on the final realization of the assets
(iii) Death of Partner
When the deed of partnership did not provide that the death of a partner would not dissolve the partnership, the partnership stood dissolve on the death of a partner. Firm, stands dissolved automatically on death of one partner. Continuance of business after such death would not tantamount to continuance of earlier partnership.
(iv) Insolvency of Partner
In the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm.the rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular ventureand the same has yet not been completed.
(v) Resignation of Partner
Resignation by any of the partners dissolves the partnership
4. Dissolution by notice (S.43)
In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners was held in case of Banarsidas v. Kanshi Ram. In those cases where a partner has given notice of dissolution at a time when dissolution will give him some advantage over the other partners, he may be held in the firm till the pending transactions are completed.
Dissolution by Court (S 44)
The court may order for the dissolution of the firm on the following grounds:-
(i) Insanity of Partner
On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances.
(ii) Incapacity of Partner
If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner. where a partner is imprisoned for a long period of time the court may dissolve the partnership was held in case ofWhitwell v. Arthur
(iii) Misconduct of Partner
If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm.
(iv) Constant breach of agreement by partner
The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner.
(v) Transfer of Interest
When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.
(vi) Continuous Losses
The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.
(vii) Just and Equitable
The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners was held in case of Havidatt singh v. Mukhe Singh
Liability for acts of partners done after dissolution ( S.45)
This section provides that despite dissolution, the partners cannot escape their liability to third parties for acts done even thereafter unless public notice of dissolution is given. These provision emphasis the necessity of giving a public notice before a partner could terminated his future liability whether it is a case of dissolution, retirement or expulsion.
Rights of partners to have business wound up after dissolution (S.46)
On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.
Continuing authority of partners for purposes of winding up ( S.47)
After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:
PROVIDED that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.
Mode of settlement of accounts between partners (S.48)In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed-
(a) Deficiencies of capital
When a partnership is dissolved, and after the debts to the third parties have been paid and advances made by a partner have been repaid, the assets are insufficient to repay each partner his capital in full, any deficiencies must be borne by the partners in the same proportion as the profits would have been divided
(b) The assets of a firm are to be applied in paying
1. joint debts to third parties
2. advances, as distinguished from capital, of each partner
3. to each partner what is due from the firm to him in respect of capital.
In after the above payments are made, there is surplus, that surplus is to be divided in the proportion.
Nowell v. Nowell in this case A and B trade as partners and it is agreed that profits should be shared and losses borne equally. On dissolution it is found that A has advanced more capital than B to the extent of Rs.1900. the net assets were only Rs.1400. there is thus a deficiency of capital to the extent of Rs500. Under sub section(a) both the partners must contribute in the proportion in which they have agreed to share profits that is equally. Therefore B should pay to A sum of Rs 250.
Payment of firm debts and of separate debts ( S.49)
Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.
Personal profits earned after dissolution (S.50)
Where a partner, after dissolution and before the affairs of the partnership are wound up, derives any personal profit for himself from any transactions of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for the profit and pay his share to the surviving partner or the representative of the deceased partner. But if a partner carries on another business of a similar nature, this section would not apply.
Proviso – Where on dissolution a partner has bought the goodwill of the firm, he may use the firm name even before the affairs of the partnership have been completely wound up. Clements v. Hall In this case A and B carry on business in partnership. The firm holds leasehold for the purpose of the business. A dies.before the affairs of the firm are completely wound up, the lease expires and B renews it. The renewed property is partnership property.
Alder v. Fouracare. In this case A,B and C are partners. A agrees to take a lease in his own name, but in fact fact partnership purpose, and dies before the lease is executed. The representative of A cant deal with lease without the permission of B and C
Return of premium on premature dissolution ( S.51)
Where a partner has paid a premium on entering into partnership of a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless-
(a) the dissolution is mainly due to his own misconduct, or
(b) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.
Airey vs. Barbam in this case A and B entered into a partnership for five years. A paid premium to B. The partnership was dissolved with into two years as a result of mutual disagreement due to A’s failure to devote time to business as agreed. It was held that no part of premium was payable because the dissolution has been caused by the misconduct on the part of A
Atwood v. Maude In this case A and B entered as solicitors for a term of seven years. A paying a premium of Rs.800.B before entering into the partnership know that A was inexperienced and incompetent. After the expiration of two years B complained that A’s incompleteness was injuries to business and called him to dissolve the partnership. A thereupon filed a suit for repayment of proportionate premium. A succeed.
Pease v. Hewitt In this case A and B become partners for 10years. A paying B a premium of Rs1000. A quarrel occurs at rhe end of eight years, both parties being in the wrong and dissolution is decreed. A is entitled to a return of Rs.200.
Rights where partnership contract is rescinded for fraud or misrepresentation (S.52)
Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties thereto the party entitled to rescind is, without prejudice to any other right, entitled-
(a) Lien on surplus assets- He has a right of lien on the surplus assets which are left after the debts of the firm have been paid. The right can be used with regard to sums paid by him for purchasing share in the firm or for the capital contributed by him.
(b) Right of subrogation- The partner who is rescinding a contract has a right to become creditor of the firm for the payments which he makes out of his personal assets to payoff the debts of the firm
(c) Right to be indemnified- The partner rescinding the contract has a right to be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.
Right to restrain from use of firm name or firm property ( S.53)
After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up.
Proviso – Where on dissolution a partner has bought the goodwill of the firm, he may use the firm name even before the affairs of the partnership have been completely wound up.
Agreements in restraint of trade (S.54)
Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
Sale of goodwill after dissolution (S.55)
(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.
(2) Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.
(3) Agreement in restraint of trade—Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
Curt Brothers Ltd. V. Webster in this case A sells the goodwill of his business to B and sets up a new business. X who remains customer of the old firm deals his own accord with the new firm set by A. A is not entitled to solicit even such a customer as X, though if X continues to deal with A of his own accord, A would be entitled to deal with him.
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