What is the process of dissolution of firm under Indian Partnership Act, 1932?

dissolution of firm under Indian Partnership Act

In simple term Firm means an organisation which provides service for which common people pay for it. According to Section 4 of Indian Partnership Act , 1932 defines ‘Partnership, Partner, Firm and Firm-Name’ – When two or more than two members carry on their business to share profit and loss equally or proportion of capital is called as ‘Partnership Business’.[i] The persons who have entered into partnership with one another are individually called as partners and collectively as a ‘Firm’ and the name under which their business is carried on is called as ‘Firm-Name’.

  • Section 2(h) of Indian Contract Act, 1872 ‘Contract’ as- “An agreement enforceable by law is a contract”.
  • According to Section 10 of Indian Contract Act, 1872 states- “All agreements are contracts if they are made by free consent of parties competent to contract, for a [ii]lawful consideration and with a lawful object, and are not hereby expressly declared to be void”. Thus contract creates legal obligation – a right in one person and corresponding duty imposed on another person, which derives its force from agreement between the parties.
  • Every partnership firm is governed by Indian Contract Act, 1872 & Indian Partnership Act, 1932. The interest of the partners in a partnership firm is determined by contract. A partnership firm is only dissolved by death and insanity of a partner. In a partnership firm Doctrine of Holding out and Estoppel are applicable.

Features of Partnership

To constitute partnership between the parties the following ingredients are needed to be followed-

  • Association of two or more than two persons- To constitute partnership there must be atleast two persons. The maximum number of person is 10 members if the firm carries banking sector than the maximum number of person is 20 members.
  • Agreement/Deed of Partnership- Partnership is the result of an agreement (SEC 2 (e) of Indian Contract Act, 1872). Section 5 of Indian Partnership Act states – “The relationship of partnership arises from contract not from status”.  The contract must fulfil the essentials of valid contract .
  • To carry on Business- The object of every partnership firm is to carry on their business for the sake of profits and to share the same.
  • Sharing the profits- The term ‘partnership’ is derived from the word ‘part’, which means ‘to divide’. Thus dividing or sharing of the profits is an essential feature of partnership and is contained in partnership deed/agreement.
  • Mutual Agency- Theterm ‘mutual agency’ states business carried on by all or any of them acting for all. In simple words, ‘all acts for one and everyone acts for all’.

Dissolution of Partnership Firm

Sec 39 -55

Dissolution of a firm means putting an end to partnership business. Where there is a breakdown of the relation between one or more partners and the firm, it is called ‘dissolution of partnership’. According to Section 39 –Dissolution of a firm means complete breakdown or extinction of relationship between all partners of the firm.

Modes of Dissolution of Partnership Firm

Partnership firm may be dissolved by the following grounds-

Without the Order of Court

By Agreement {Sec 40}[iii] According to Section 40 of the Indian Partnership Act, 1932, partners can dissolve the partnership by agreement and with the consent of all partners. Partners can also dissolve the partnership based on a contract that has already been made.

Compulsory Dissolution {Sec 41}[iv] An event can make it unlawful for the firm to carry on its business. In such cases, it is compulsory for the firm to dissolve. However, if a firm carries on more than one undertakings and one of them becomes illegal, then it is not compulsory for the firm to dissolve. It can continue carrying out the legal undertakings. Section 41 of the Indian Partnership Act, 1932, specifies this type of voluntary dissolution.

Dissolution on happening  of certain contingencies {Sec 42}[v] According to Section 42 of the Indian Partnership Act, 1932, the happening of any of the following contingencies can lead to the dissolution of the firm:

  • Some firms are constituted for a fixed term. Such firms will dissolve on the expiry of that term.
  • Some firms are constituted to carry out one or more undertaking. Such firms are dissolved when the undertaking is completed.
  • Death of a partner.
  • Insolvent partner.

Dissolution by notice of partners at will {Sec 43}[vi]According to Section 43 of the Indian Partnership Act, 1932, if the partnership is at will, then any partner can give notice in writing to all other partners informing them about his intention to dissolve the firm.

Dissolution by the Court

Sec 44

Insanity of partner; [SEC 44(a)]- Where a partner has become insane or unsound mind.

Permanent incapacity;[SEC 44(b)][vii]Where a partner has been incapacitated from performing his duties as being a partner.

Misconduct;[SEC 44(c)]– Where a partner is found of guilty misconduct.

Breach of Agreement- If a partner wilfully commits breach of agreement relating to the management or authority of the affairs of the firm.

Transfer of Interest- Where a partner transfer the whole sum of interest in the firm to a third party the other partner may sue for dissolution.

Business working at loss- If the firm is running at loss any partner may sue in the Court of Law for dissolution of the firm.

Any other ground- The firm may be dissolved on any of justifiable ground that is equitable.

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Upasana Borah
I Myself, Upasana Borah, a student of NEF LAW COLLEGE, ASSAM, GUWAHATI currently pursuing BBA LL.B(Hons), 8th semester( 4th year) 2016-2021 batch. As being a law student, I strongly believe that every question arises out of a solution . For a successful outcome it is necessary to view the particular work from all side and analyse it. The depth of its root has its solution. I also believe in gaining knowledge & willing to gain more knowledge to develop my skills where i can perform efficiently.