Dissolution of Partnership and its Consequences

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This article is written by Gaurav Lall pursuing BBA LL.B. (Hons.) at United World School of Law. The article speaks about the dissolution of the partnership firm and the ways of dissolution. The significant consequences of dissolution are also specified with respective sections of the Indian Partnership Act, 1932

INTRODUCTION

Dissolution of partnership firm is different from the dissolution of partners which is defined under Section 39 of the Indian Partnership Act, 1932. It defines the dissolution of partnership among all the partners of a firm. When all the activities regarding business discontinue and all the activities related to profit and loss are settled among the partners by paying off the debts is called dissolution of the firm. When a partner agrees to continue the same company even after the retirement of a partner then it is called dissolution of partners. As the firm is still continued by the partner but the partnership between the partners are finished. Dissolution of the firm leads to the dissolution of partners. It is a contractual relationship among the partners which works with the firm. If the firm gets dissolved then the partnership among the partners is also dissolved.

The Indian Partnership Act, 1932 states dissolution of partnership firm in different ways:

Section 40 defines dissolution by agreement.

Section 41 defines compulsory dissolution.

Section 42 defines dissolution on the happening of certain contingencies

Section 43 defines dissolution by notice of partnership at will.—

Section 44 defines dissolution by the Court 

Important Consequences of Dissolution

1. Continuing liability of partners after dissolution (Sec. 45)

According to the Section 45, the partners stay accountable as such to third parties for any act achieved by means of any of them which were an act of the organization if completed before the dissolution, until public notice is given of the dissolution.

 In the absence of public notice of dissolution, however, the property of a partner, who dies, or who is adjudicated an insolvent, or in case of a retiring partner, who isn’t regarded to the outsiders a partner, is not liable for the acts executed after the date on which he ceases to be the partner. 

2. Continuing authority of partners for purposes of dissolution (Sec. 47)

After the dissolution of the corporation or the firm the authority of every partner to bind the company, and different mutual rights and responsibilities of the partners, continues to the point as may be necessary for the following two purposes:

 (a) To wind up the affairs of the company, e.g., eliminating the assets, realising amount due from borrowers and paying to lenders and so on; and

 (b) To complete transactions begun however unfinished at the time of the dissolution, e.G., taking shipping of the goods ordered before dissolution and paying to buy them.

 The firm, however, is not always bound through such acts of a partner who has been adjudicated insolvent.

3. Right of partners to implement or enforce dissolution (Sec. 46)

On the dissolution of a company, every partner or his representative is entitled to have the assets of the firm realised and applied in payment of the money owed and liabilities of the company, and to have the surplus distributed among the partners or their representatives in accordance of their rights.

4. Liability to share personal profits (Sec. 50)

As long the affairs of the dissolved company are in the process of winding up, it is nevertheless the duty of each partner now not to make any personal earnings out of transactions regarding the firm. A partner, therefore, must account to the company for every benefit so derived through him and have to proportion or divide it with different partners.

5. Return of premium after dissolution (Sec. 51)

Where a partner has paid a premium on entering into a partnership for a fixed term, and the firm is dissolved earlier than the expiration of that term, that partner shall be entitled to repayment of ‘rateable amount of premium’ for the unexpired period except wherein the dissolution has been caused:

(a) By the loss of life of a partner;

(b) By the misconduct of the partner so admitted, or

(c) By mutual agreement of all the partners containing no provision for the return of premium.

6. Settlement of accounts after the dissolution of the company

Section 48 of the Indian Partnership Act defines the approaches to settling the accounts of the company. The company will pay all the losses inclusive of the deficiency of the capital out of the earnings or extra profit and then from the partner’s capital and then by the partners individually in their profit sharing ratio.

The company applies its assets inclusive of any contribution to make up the deficiency for paying to the third party and then for paying any loan or advances by the partner and lastly for paying back their capitals and if any surplus left after all this then it will be divided between the partners in their profit sharing ratio.

7. Agreements in restraint of trade 

Section 54 of the Indian Partnership Act defines the agreement in restraint of trade. It means that when one party agrees with the other party to restrict his liberty to carry on the specific trade even in the present or in the future. This section defines that partners in expectancy of the dissolution of the firm make an agreement or settlement that few or all the partners will not carry any business similar to that of the company even for a particular period or within specific local limits.

CONCLUSION

This article concludes that the Indian Partnership Act, 1932 provides provisions regarding the dissolution of the firm. Dissolution of a partnership firm means dissolution of the relationship between all the partners of the firm. That means it’s the end of the existence of the firm and no further business shall be done by the company apart from the activities related to the closure of the firm. With the dissolution of the firm, there are certain effects regarding the same as the company have to close the books of account, all the liabilities must be settled by the partners and the profit and losses to be shared by the partners as per the terms of the agreement.

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