Various circumstances might occur when all the partners of a firm decide to terminate the relations between them in order for a complete closure of the firm to come in action. Such a closure of a firm is termed as the “dissolution of firm” according to the section 39 of Indian Partnership Act. Further, section 189 of Income Tax Act also states the dissolution of partnership of a firm. What this dissolution of a firm means is that it involves selling or disposing the firm’s assets, final settlements if its liabilities and accounts. The dissolution partnership deed also mentions about the ratio in which the final profit of the firm is required to be shared prior to its dissolution. Hence, any amount of money that remains in the end is distributed amongst the partners according to the ratio mentioned in the deed. This kind of termination of partnership is only possible when it is a collective decision of all the partners involved.
For a partnership firm to be able to go through a dissolution process, it is essential to first provide the registration documents. Below is an image by VakilSearch that states all the important documents which are required as proof of registration of the firm.
Before moving onto the different types of dissolution of partnership firm, it is important to note the crucial difference that exists between dissolution of partnership and dissolution of an actual firm. Dissolution of partnership refers only to the change in the relationship between the partners but dissolution of a firm actually revers to the termination of the whole business or firm at hand. Hence, dissolution of partnership between all the partners of the firm basically results in the dissolution of the actual firm which is also the definition of the term according to section 39 of Indian Partnership Act.
- Dissolution By Mutual Agreement
It is the fastest and the easiest way available for dissolution of a partnership firm as it allows the partners to actually come up with a mutual agreement when the partners collectively decide to terminate the business due to various professional or personal reasons. It also allows for the inception of such agreements when the contract specifying the partnership expires. For such an action to be taken the partnership agreement should possess a ‘Dissolution by Mutual Consent’ clause. This allows for the unity in the final decision making process hence resulting in the clause to be activated at the time of dissolution which further ensure smooth process for the same.
- Dissolution By Notice
If the partnership business in question is the one at will then a partner is allowed to dissolute the same by producing a written notice of such dissolution and providing the same to all the other partners of the firm given that it is duly signed by the individual. A notice should be prominent and clean for proper comprehension. It also cannot be withdrawn without the consent of all the other partners. If the person giving the notification for the dissolution of the firm is at an advantage at the time of dissolution then he shall be made to still be a part of the firm until all the pending transactions are brought to an end.
- Dissolution Due To Contingencies
The dissolution of the partnership firm may take place on the account of any of the following contingent events.
- Expiry of a fixed period or a partnership period: Some partnership firms are constituted on the basis of a fixed tenure after the expiration of which the firm automatically gets dissolved. Such a provision might be expressly provided in the contract. But such can also be impliedly mentioned which shall be determined by nature of the business or the contact itself. This basically implies that unless a contract specifying special circumstances for dissolution of the firm exists the firm will get dissolved after the completion of the fixed term.
- When a project/endeavor responsible for the formation of the firm comes to an end: Sometimes a partnership firm may be constituted in order to carry out a specific task with a specific period of time during a specific season. Once the job is conducted and completed within the specified time limit and season, the contract stating the same is deemed to have been expired leading to the termination of the partnership firm.
- Death of a Partner: If the contract doesn’t specify the continuance of the firm even after the death of a partner then the death of a fellow partner will automatically lead to the termination of the partnership firm. Further execution of the same business will not be considered as the continuance of the earlier partnership instead will be deemed to be a new business at hand.
- When a partner has been adjudicated as insolvent: If any of the partner of the firm gets insolvent then the partnership firm will be considered terminated even if the fixed tenure of the firm hasn’t expired or the specific venture that the firm was built for hasn’t come to an end.
- Resignation of a partner: Dissolution of partnership automatically takes place when a partner resigns.
- Compulsory Dissolution
Due to certain circumstances sometimes the partnership firm is forced towards a dissolution, for instance, commission of any illegal event which eventually make it condition precedent to put a halt in the further continuance of the tenure of the firm.
- Dissolution By Court
Sometimes a partnership business involves family members and relatives as the partners of the firm and these kinds of relations often result in certain number of partners or even one partner to find it uncomfortable to work under the given circumstances and continue with the business partnership. In such cases, the court is given the authority to assist in the process of the dissolution of the firm. Following are certain reasons which lead to courts deciding the final step in the execution of certain business partnerships.
- When the partner is of unsound mind or is insane: Lunacy or insanity can be valid ground for the dissolution of the firm and in such circumstances the other partners can approach the court regarding the matter. But it is not absolute that court will order for the dissolution instead it is a possibility that the court might order for the same. It is not essential for the partner to be permanently insane. If a partner is dormant then the court may also not order for the dissolution even if the partner is permanently insane. The exception in such cases lies in special circumstances.
- When the partner is incapable: When a partner has become permanently incapable of continuing with the execution of the business partnership then the court may order for its dissolution upon receiving application for the same from the other partners. Such occasions can take place under medical grounds or other special grounds such as imprisonment of a partner for a long period of time.
- Misconduct of a Partner: In case a partner, excluding the partner who is behind the filing of the suit, is found responsible for causing any loss or damage to the assets of the firm or any of their action amounts to gross misconduct and results in difficulty in further execution of the business then in such circumstances the court may order for the dissolution of the firm.
- If a partner is responsible for constant breach of agreement: In case a partner is found guilty, upon being sued by another partner or all the other partners of the firm, of having committed serious and constant breach of agreement in matters concerning the conduct of business or the ways of management of internal affairs of the firm leading to difficulty, further, incapability in continuance of the business, then in such situations the court may order for the dissolution of the business.
- Transfer of Equity/ Interest: A partner of the partnership firm may decide with the help of court to dissolve the partnership firm in case the other party is responsible for transfer of the firm’s interest/equity to a third party without the consultation of the other oartners or partner.
Some other reasons may include continuous losses and simply grounds of just, fair and equitable distribution.
- Who Should Be Held Responsible After The Dissolution Of The Partnership Firm?
The partners keep on being at risk as such to third parties for any demonstration done by any of them which would have been a demonstration of the firm whenever done before the disintegration, until open notification is given of the disintegration. Further the death of a partner, a partner who has been adjudicated as insolvent or a partner who has not been known to have been a partner, of the firm, to all the other partners of the firm, ends up retiring from the firm can be considered as grounds for holding such partners as not responsible after the date from which the partner ceases to be one.