Dissolution of a Firm


Sneha Verma

Section 39 of the Indian Partnership Act, 1932 defines dissolution of a firm, which means termination of partnership between all the partners of a firm. However, there is a difference between dissolution of a firm and dissolution of partnership. Dissolution of Partnership means end of relationship between one or more partners.

Dissolution of Partnership occurs in cases, like, on expiry of the duration for which partnership is formed; on the death of any partner; on completion of adventure; on insolvency of any partner; and on retirement of any partner.

Dissolution of a firm can be done in different ways. The Act provides various modes in which a firm can be dissolved, such as:

Dissolution by Agreement

Section 40 of the Act deals with the dissolution of a firm by agreement. In this case, a partnership firm is dissolved as agreed in the contract with the consent of the partners.

Compulsory Dissolution

Section 41 of the Act deals with the provisions relating to compulsory dissolution of a firm. In certain circumstances the statute provides for compulsory dissolution such as, when all the partners except one become insolvent, or on the happening of any subsequent event the business of the firm becomes unlawful.

Dissolution on the happening of contingent event

Section 42 of the Act deals with the provisions relating to dissolution of a firm on the happening of a contingent event. A firm can be dissolved, on expiry of the term if it was operational for a fixed term; on completion of specific task for which the adventure or undertaking was carried on; on death of any partner; and on insolvency of a partner.

Dissolution by notice of partnership at will

Section 43 of the Act deals with the provisions relating to dissolution of a firm by notice of partnership at will. Under Section 43(1) of the Act, any partner can dissolve the partnership by giving notice of dissolution in writing if a partnership is at will. Such dissolution will take place on the date mentioned in the notice and if no such date is specified then the date on which communication of notice took place will be considered the date of dissolution.

Dissolution by the Court

Section 44 of the Act deals with the provisions relating to dissolution of a firm by court. A court may dissolve a firm by passing an order on any of the ground specified in the said section:

  • In case, one of the partners becomes of unsound mind. In such circumstances, suit may be filed  either by the insane or through his guardian or other partners.

  • In case, a partner becomes permanently incapable of performing his duties as a partner.

  • In case, a partner commits breach of the partnership agreement, which affects the management of the firm, and conduct of the business or when rest of the partners find it difficult to carry on the business of the firm.

  • In case, a partner transfers his interest or share to introduce a new partner into the firm. It may happen when he transfers his interest to a third party if the said interest is attached under a decree or sold under any process of law.

  • In case, the firm's business is working at loss.

  • In case, the court feels it just and equitable to dissolve a firm on any other grounds, which are not, mentioned herein.

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