Indian Partnership Act,1932

Dissolution Of Firms

Dissolutions of firmsSec 39 to 55

Se. 39 lays down that the dissolution of partnership between all the partners of a firm is called the “ Dissolution of a firm”.

Changes in the constitution of a firm does not amount to a Dissolution of a firm.

Retirement of Partner does not amount a dissolution of firm.

Modes of dissolution of Firm

1. Sec. 40 Dissolution by Agreement2. Sec.41 Compulsory dissolution3. Sec.42 on happening of certain Contingencies4. Sec.43 By notice of Partnership at will5. Sec.44 By the Court

WITHOUT THE INTERVEN-TION OF THE COURT

UNDER THE ORDER OF THE COURT

Sec(40-43) (S.44)

1. By Agreement (sec.40) 1. Unsoundness Mind

2.By Compulsory Dissolution (Sec.41)

a.) Insolvencyb.) Illegality of business

2. Permanently Incapacity.

3. By Happening of Certain Contingencies.a.)Expiry of a fixed term

b.) Completion of the Adventurec.) Death of a Partnerd.) Insolvency of a Partner

3. Misconduct

4. By notice from one partner to the others-In case of “Partnership At Will”(Sec.43)

4. Partner willfully or Persistently commitsa Breach Of Agreement

5.Partnera.) Has Transferred the whole of his interest in the firm to a 3rd Partyb.) Has allowed his share to be charged under O:-21 R:-49 of the Civil Procedure Codec.) Has allowed his share to be sold in the recovery of arrears of Land Revenue.

6. Business of a firm cannot be carried on save at a loss.

7. On any other just & equitable ground

Sec. 40 Dissolution by Agreement

A firm may be dissolved-(a) With the CONSENT OF ALL THE PARTNERS;

Example:- A firm can be discharged by the Mutual Agreement of the Partners.

(Partners can, whenever they please, sit together & Consent to a dissolution.) (Spontaneous Consent)

Consent can be Express or Implied.

Pandurang Vanarase V. Janardan Narain Vanarase1995 A1 HC 1863 (Bom)

“When all the brothers have given in writing that they do not claim any share in old firm, it amounts to dissolving the firms.”

b.) in accordance with a Contract between the Partners.

Where dissolution occurs in pursuance of a contract previously made, the most common example being that of a clause in partnership deed itself, providing for the dissolution in certain events like “Unsoundness of partner”

Sec. 41 Compulsory Dissolution

A firm is Dissolved:-(a) By the adjudication of all the partners, or all of

the partners but one as, insolvent; Orwhere all the partners of the firm have been adjudicated

insolvents, the partnership inevitably ends. Or only one partner remains solvent & all others have been adjudicated insolvent.

The partnership is dissolved under clause (a)(b) By the happening 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.

Example:- The state Government issues an ordinance prohibiting liquor business in all firms. The partnership is automatically dissolved.

(Sec.56 of Indian Contract Act, 1872)“Performance of a contract becomes unlawful, the contract becomes void.

R. v. Kupfer (1915) 112 LT 1138

Where a partnership between persons three of whom were in Germany & the one in England was held to have become illegal on the outbreak of war between England & Germany.

Gherualal Parakh V. Mahadeodas AIR 1959 SC 781

A firm to carry on a wagering business has been held by supreme court to be unlawful.

Sec. 42 Dissolution on the happening of certain

contingencies

Subject to contract between the partners a firm is dissolved,-

(a) if constituted for a fixed term, by the expiry of that term;(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;(c) by death of a partner; and(d) by adjudication of a partner as an insolvent.

Noor Mohammad v. C.I.T (1991) ITR 550 (A11)

Change in the constitution of a firm

Where a clause in partnership deed provided that firm does not automatically stand dissolved on the death of a partner, widow of the deceased partner joined the firm and fresh deed of partnership was executed.

Logical Exception

The only logical exception is that such stipulation will be of no effect when the partnership consists of only two partners.

Sec. 43 Dissolution by notice of Partnership at

will.

1.) where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm.

2.) The firm is dissolved as from the date mentioned in the notice as the dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

(Notice to Dissolve the Deed)

Tilokram Ghosh v. Gita Rani AIR 1989 Cal 254

If the firm is at will, then it can be dissolved by the partner or partners by giving notice in accordance with the provisions of Sub-sec. (1) and (2) of Sec. 43 of Partnership act.

Sec.44 Dissolution by Court

Sec. 44 lays down Seven Important Cases in which the court can order of dissolution.

A). Unsoundness of Mind / Insane

That a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other person.

In such cases, dissolution become necessary to protect the interest both of the insane as well as other partners.

B). Permanent Incapacity.

That a partner, other than the partner suing, has become in anyway permanently incapable of performing his duties as partner;

Whitwell v. Arthur 55 ER 848 (1865) 147 RR 73

A partner suffered from an attack of paralysis & that would have been good ground for dissolution but for the fact that the medical evidence showed that the attack was only temporary and he had already started showing signs of improvement by the time of hearing of his partner’s application for dissolution.

C.). Misconduct

that a partner, other than a partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

• Moral turpitude of a partner would be a sufficient ground

• Snow v. Milford (1868) 18 LT 142: 16 WR 554

• A partner of a firm of bankers committed adultery in the city where the business was carried on.• thus, adultery committed by a partner have been held to be sufficient grounds.

• Essel v. Hayward (1816 30 Beav. 130)

• (breach of trust)

• The court said that a partnership between two solicitors for their joint lives may be dissolved if one of the parties fraudulently sells out trust funds and applies the proceeds to his own use.

• Professional Misconduct is also a ground of Dissolution

•D). Persistent Breach of Agreement

• That a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of this business, or otherwise so conducts himself in matters relating to the business that is not reasonably practicable for the other partners to carry on the business in partnership with him;

It has been held that destroying old account books, pre-paring false balance sheets and making false entries in books are sufficient grounds under this clause.

Harrison v. tennant, (1856) 21 Beav 142.

Any conduct which is destructive of mutual confidence between the partners is sufficient.

(e) Transfer of InterestThat a partner other than a partner suing :-

• Has, in any way , transferred the whole of his interest in the firm to a third party; or• Has allowed his share to be charged under Order 21,Rule 49 of the Civil Procedure Code, 1908 ; or• Has allowed his share to be solved in the recovery of arrears of land revenue, or any other dues which are recoverable as arrears of land revenue.

(f) Perpetual Losses

• The reason for this ground is that the motive of every partnership is the acquisition of gain. If, therefore, the business can be constituted only at a loss.

• It would be a good ground for the court to dissolve such a partnership.

(g) Just & Equitable

• On any other ground which renders it just & equitable that the firm should be dissolved.

• Thus, if the substratum (bottom) of the partnership is gone or if there is a deadlock between the partners, the court may wind up the partnership on the ground that it is just & equitable to do so.

• The power of the court to dissolve a partnership on this ground is analogous to its power to wind up a company on the just & equitable ground under s. 433 of the Companies Act, 1956.

• Thus, Courts have winding up of a partnership firm in the following cases, observing that it would be Just & Equitable to wind up the firm:

a). When the substratum of the partnership was goneb). When there was a serious deadlock between the partners;c). Where there was a perpetual state of tense feelings between the partners

Difference between Dissolution of Firm &

Partnership

Dissolution of Firms Dissolution of Partnership

1.) complete breakdown of the partnership relation & not in any change in constitution of the Firm.

1).Partner may by agreement amount themselves provide for the continuance of the firm.

2.) Complete termination of the relation b/n the Partners

2.) Partner terminates his relationship with the firm.

3.) Business in closed. 3.)Business of the firm continues for the remaining Partner.

4.)Assets & Liabilities of firms are set-off & share of each partner is calculated.

4.) Only the share of out-going partner is calculated.