DISSOLUTION OF A FIRM

Section 39 of Indian Partnership Act, defines ‘Dissolution of Firm’ as “the dissolution of partnership between all the partners of a firm is called ‘dissolution of firm’.” This is used to denote that there is a complete breakdown of the relation of partnership among the partners. Here stoppage of business will not result in dissolution of partnership.

MODES OF DISSOLUTION (SECTION 40-44)

A firm may be dissolved in following ways:

1. By agreement (Section 40)

A firm may be dissolved either:

a) With the consent of the partners – This is the case where all the partners agree subsequent to the formation of the partnership.

b) In accordance with contract between partners, i.e. in the original partnership articles.

2. Compulsory dissolution (Section 41)

A firm is dissolved:

a) by the adjudication of all the partners or of all the partners but one as insolvent.

b) by the happenings of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership (e.g. war/prohibition in sale of liquor).

Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of firm in respect of its lawful undertakings and adventures. This proviso is an application of the principle of reverability, which underlies Sections 24 and 58 of the Contract Act.

3. Dissolution on happening of certain contingencies (Section 42)

Section 42 mentions certain contingencies on the happenings of which the firm is dissolved, unless there is contract to contrary. Unlike Section 41 where dissolution is compulsory, the dissolution under Section 42 is not compulsory. Even on the happenings of certain contingencies mentioned in Section 42 partners may agree that the firm will not be dissolved. These contingencies are –

a) Expiration of the partnership term – After the expiration of a partnership term, the firm is dissolved but the partners may agree to carry on the business beyond that time. Such an agreement may be expressed or implied, if no fresh term is stipulated it would be considered as partnership at will. Section 17 (b) also provides that, when the partnership firm continues to carry on the business, after a fixed term, the mutual rights and duties of the partners remain the same as they were before the expiry.

b) Completion of adventure – There can however be an agreement by which the firm may not be dissolved and business may be continued for some other adventures and undertakings after completion of earlier ones. But there has to be agreement before the completion of the earlier adventure.

c) Death of a partner – Death of a partner results in dissolution of partnership unless the remaining partners agree to contrary. This provision is applicable when there are more than two partners in a firm, where on the death of one of them others may agree to carry on the business without getting the firm dissolved. However, if there are only two partners and they agree that on the death of one of them the firm would not be dissolved but will continue with surviving partner and the heir of deceased partner. The agreement is meaningless if the heir of the deceased partner is to carry on the business of partnership with the surviving partner they will have to enter into new agreement and form a fresh partnership. In Mt. Sughra v. Babu, it was held that when a firm consisted of just two partners, a term in their contract not to dissolve the firm on the death of one of them is invalid.

The same view has been adopted by Madras High Court in Narayanan v. Umaval and considered to be proper view by Supreme Court in Commissioner of Income Tax v. Seth Govind Ram. It was held that on ‘A’s death the original partnership between ‘A’ and ‘B’ had come to an end and the same partnership could not continue with ‘A’s widow takings ‘A’s place or ‘A’s son claiming that he become a partner in pursuance to agreement between A and B. It was observed that there is possibility of that in pursuance to wishes of a deceased partner a surviving partner may enter into a new partnership with the heir of deceased partner, but that would constitute a new partnership and not the continuance of the old one.

The logic why the death of a partner results to dissolution of a firm, unless the contrary agreement is made by the partners, i.e. explained by Lawrence Jenkins. He stated that the partnership business depends on the principle of “delictus persona” means on the personal skill and qualification. As the partnership depends upon the skill, reputation, credit, etc. of the partner, his death affects the partnership business. Therefore, partnership has to be dissolved. This i.e. supported by Section 37 of the Indian Contract Act where the performance of the contract is dispensed with when it depends upon the skill of the promisor.

Section 35 of Indian Partnership Act provides that when there is a contract that the firm will not be dissolved on the death of a partner, the estate of the deceased partner is not liable for the act of the firm done after his death. So, even if the firm is not dissolved, it affects the affairs or position of the partnership firm.

d) Insolvency of a partner – When a partner is adjudicated insolvent, the firm is dissolved unless there is an agreement between remaining partners to the contrary. This provision is to be read with Section 41(a), which states that when all or all except one partner becomes insolvent, there is compulsory dissolution. Thus, if there are only two partners and one of them becomes insolvent there is no question of contract or agreement to the contrary and firm is compulsorily dissolved. This contingency is also dependent upon the change in the liability of the insolvent and on the principle of delictus persona.

4. Dissolution of notice in partnership at will (Section 43)

According to Section 43, a partnership at will may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

– The notice must clearly and in unambiguous terms indicate the intention of the partner to dissolve the firm. (C. Sidhakaran Oswal v. Radhakrishnan)

– Dissolution by a notice under this section will be valid even though one of the partners to whom the notice is given is insane. (Melleresh v. Keen)

– When the partnership had completed its term but the partners continue the business even after the expiry of that term, the partnership is considered as partnership at will and can thereby be dissolved by giving notice.

 – A notice for dissolution cannot be withdrawn unless the other partners agree to the same. (Jenes v. Llyod)

– The notice for dissolution is a statutory requirement and therefore the requirement of Section 43 has to be satisfied. Therefore, if a partner writes a letter to his lawyer, who also happens to be his arbitrator, to settle a dispute that will not result in dissolution as in such a case there is no intention to dissolve the firm by notice to other partners. (Tilokram Ghosh v. Gita Rani)

– Apart from giving notice a partnership at will can also be dissolved by mutual consent, insolvency or death of a partner.

Date of dissolution –

A firm will be dissolved from the date mentioned in the notice if no such date is mentioned the dissolution will take place from the date of communication of notice.

– If a partner likes to affect the dissolution through the court “the partnership will be deemed to be dissolved when the summons accompanied by copy of plaint is served to the defendant where there is only one defendant and on all defendants when there are several defendants. Thus, the date of dissolution would be the date on which the last summon was served. (Banarsi Das v. Kanshi Ram)

5. Dissolution by Court (Section 44)

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