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.
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.

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.

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)

Section 44 which permits a partner to invoke the jurisdiction of the court to
dissolve a firm is not subject to contract between the partners The court ordered for
the retirement of a partner, instead of ordering for dissolution of the firm. Grounds:
a) Unsoundness of mind – Such a suit may be filed by any of the partners either
on behalf of the partner who has become of unsound mind, or by any other partner.
This dissolution under this ground is to protect the interest of the partner becoming
unsound, of the other partners as well as of the public.

b) Permanent incapacity to perform duties – When the incapacity is not

permanent the court would not grant relief. In Whitwell v. Arthur, one partner
suffered from paralytic attack. It was found from medical evidence that incapacity
was not likely to be permanent as the defendant’s health was improving. The court
did not grant dissolution of the firm. – The suit for dissolution can be filed only by
any other partner and not by partner who suffers from incapacity.

c) Conduct injurious to partnership business – Misconduct need not be with

regard to the partnership business, but the conduct should be such as should
prejudicially affect the partnership business conviction for breach of trust or by the
adultery by one partner with another partner’s wife (Abbott v. Crump), are
grounds for dissolution of the firm.

d) Persistent breach of partnership agreement – When a partner wilfully and

persistently commits breach of agreements relating to the management of the
affairs of the firm or when his conduct with regard to firm’s business is such that it
is not reasonably practicable for other partners to carry on business in partnership
with him, a suit for dissolution of the firm may be filed.

e) Transfer of whole of a partner’s interest – When a partner has transferred the

whole of his interest in a firm to third party it can be ground on which court may
dissolve a firm. Similar would be position when the partner has allowed his share
to be charged under the provision of civil procedure code, or has allowed it to be
sold in recovery of arrears of land revenue or any dues as assessee of land revenue.
– It is necessary that transfer must be of the whole of partner’s interest rather than
merely a part of it.

f) When the business can be carried on only at loss – The object of every
partnership is to make profits and if the business is carried on at loss only any of
the partners may apply to the court for dissolution of the firm.

g) When dissolution is just and equitable – This ground is provided to meet

those situations which have not been provided under Section 44. Such situations
may arise due to several reasons. As the partnership firm i.e. based mainly on trust
and confidence, this may be shaken at any time. The majority partners may harass
the minority partners. There may be deadlock between the partners.

Liability of acts done after dissolution Section 45(1) states that notwithstanding
the dissolution of the firm, the partners continues to be liable as such to third
parties for any act done by any of them which would have been the act of the firm,
if done before the dissolution, until public notice is given of the dissolution.

Section 47 – Continuing authority for the purpose of winding up

After the dissolution of the firm, the authority of each partner to bind the firm, and
other mutual rights and obligations of the partners continue notwithstanding the
dissolution, as far as it may be necessary to wind up the affairs of the firm and to
complete transaction begun but unfinished at the time of dissolution. The proviso
to Section 47 states that the firm is in no case bound by the acts of a partner who
has been adjudicated insolvent but if any person who after the adjudication
represents himself or knowingly permits himself to be represented as a partner of
the insolvent can be made liable under the doctrine of holding out.

Rights to have business wound up (Section 46)

On the dissolution of the firm every partner or his representative is entitled as
against all other partners or their representative to have the property of the firm
applied in payment of debts and liabilities of the firm and to have surplus
distributed among the partners or their representatives according to their rights.
The right contained in this section is also known as partner’s general lien over
surplus assets of the firm. The lien is not over any specific property but it is only in
form of claim against the surplus assets on realisation.

Section 48 to 55 read only from bareact (when answer related to winding up

is asked mention all these sections in brief)

Registration of Firm

For the purpose of Registration don’t refer to the bareact available on net
there are certain provisions of state amendments given in it just read the
sections I have discussed here

Procedure of Registration:-
The Partnership Act authorizes the state Government to appoint Registrars of firms
for the purpose of registering partnership firm. Accordingly an office of the
Registrar of Firms exists in every State. Registration is obtained by filing an
application with the Registrar. The application should be on prescribed form and
accompanied by the prescribed fee. The application has to State the particulars
mentioned in section 58 of the Indian Partnership Act. Change of Particulars

Section 60:-
Any change of name or of the location of the principal place of business requires
almost a new registration and therefore statement to that effect signed by all the
partners and accompanied by prescribed fee should be sent to registrar. There is no
time limit prescribed for filing the particulars.

Penalty for false particulars Section 70:-

The statements in the application form or amending forms and in notices sent to
Registrar should be true and complete. If any person knowingly or without belief
in its truth, furnishes false or incomplete information he is liable to a penalty three
months imprisonment or fine or both.

Rule of Evidence Section 68:-

Any statement, notice or intimation recorded with the Registrar by any person is a
conclusive proof against him of the fact stated. Entries relating to a firm in the
registrar of Firms may be proved by producing certified copies of the entries.

Effect of Non-Registration Section 69:-

Registration of firms is not compulsory. It is optional and there is no penalty for
non-registration. Yet registration becomes necessary at one time or the other
because section 69 seriously cuts short the capacity of an unregistered firm and its
partners to sue. This disability is too great a compelling force to bring the firm to
the Register.

The effects of non-Registration may now be stated:-

1. Suits between Partners and Firm Section 69(1):-A partner of an unregistered
firm can not sue the firm or his present or past co-partners for the enforcement of
any right arising from a contract or conferred by the partnership Act. Only a
partner of a registered firm whose name appears in registration can sue for the
enforcement of such rights. This difficulty may be overcome by getting the firm
registered before an action is brought. But once a dispute between the partners has
arisen, all of them may not sign the application form and consequently the firm
may remain unregistered. It is therefore advisable to have the firm registered as
soon as it is constituted.

2. Suits between firm and third parties Section 69 (2):-An unregistered firm can
not sue any third party for the enforcement of any right arising from contract. A
suit can be brought only by or on behalf of a registered firm and that also by
persons whose names appear as partner in the Register of Firms. This difficulty
once again can be overcome by getting the firm registered before an action is
brought. The action of an unregistered firm is, however, liable to be dismissed and
it can not be rectified by subsequent registration.

3. Set-off and Other Proceedings Section 69 (3):-The above two disabilities also
apply to a claim of set-off or other proceedings to enforce a right arising from a
contract. The Words “ Other proceedings” had created some difficulty as to their
import particularly in reference to the question whether they included “Arbitration
Proceedings” The Supreme Court by its decision in Jagdish Chnadra Gupta v.
Kajaria Traders (India) Ltd. Settled the controversy. Court held that if the
arbitration proceedings were allowed, an unregistered firm would by providing for
arbitration in the partnership deed escape the disability contained in the section
because the words of section 69 (3) or ‘other proceedings’ to enforce a right arising
from a contract. Ram Nandan Prasad Sinha v. K.M. Consultants 2003

Where reference to arbitration was possible without recourse to the court, the court
said that unregistered firm could do so.
Exceptions:-
The section, however admits of the following exceptions:-

(a) Action for dissolution and Accounts:-An unregistered firm and its partners
can bring an action for the dissolution of the firm or for accounts of a dissolved
firm. They can also enforce any right or power to realise the property to sue
disappears with the dissolution of the firm. Where the partners went on retiring
from the firm one after the other so that ultimately only one partner was left and
the firm for that reason become automatically dissolved. It was held that the suit
filed by the sale remaining partner to recover from the defendant the dues to the
firm was maintainable.

(b) Recovery of insolvent’s Share:-The official assignee, receiver or court acting

for an insolvent partner may bring an action for realization of the insolvent’s share
whether the firm was registered or not.
(c) Value of suit Rs.100:-An unregistered firm or its partners may sue or claim a
set off where the subject-matter of the suit does not exceed Rs.100 in value section
69 (4) (b).

(d) Statutory and No-Contractual Rights:-Statutory and Non-Contractual rights

are outside the scope of the disability inflicted by the section. If a person damages
the property of the firm he can be sued whether the firm is registered or not. An
unregistered firm has been allowed to sue to enforce the payment of a cheque in its
capacity as a payee, it being a statutory right under the Negotiable Instrument Act.
A similar firm has been allowed to sue a carrier for loss of goods of which the firm
was the bailee, it being a statutory right under section 180 of Indian Contract Act.

(e) Criminal Proceedings:-Criminal prosecution under section 138 of the

Negotiable Instrument Act 1881, for the dishonour of a cheque is not in the nature
of a civil suit. The bar of section 69 would not present an unregistered firm from
launching a prosecution under this Act.

(f) Suit by third Parties:-Third parties can always sue a firm whether registered or
not. The disability is that of firm and not of persons outside it.

Moving of public notice section 72:-For the purpose of formalities that must
accompany a public notice:- Formalities in case of a registered firm are:-
1. Notice to Registrar
2. Publication in the official Gazette
3. Publication in a vernacular newspaper circulating in the district where the firm
has its place or principal place of business.

In case of an unregistered firm the formality of informing the Registrar is not

necessary because the name of the firm is not there on registrar:-

A public notice is necessary in the following cases

1. When a partner retires
2. When the firm is dissolved
3. When a minor has been admitted to the benefits of the firm and on attaining
majority has to give public notice of his decision to become or not to become a
partner.