Indian Partnership Act
Dissolution of a Firm: Sections 39 to 44
Section 39 defines it in a line: the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. Everything else in Chapter VI follows from that. A firm may be dissolved by agreement, compulsorily, on the happening of contingencies, by notice where it is at will, or by the court on one of seven grounds. Knowing which route applies decides what must be proved and who decides. This note covers Sections 39 to 44, and the crucial difference between dissolution of partnership and dissolution of the firm.
The five modes of dissolution, the seven grounds under Section 44, and the choice between notice and a suit
1. Dissolution of Partnership and of the Firm
§ Section 39, and the distinction Section 39. The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. Dissolution of partnership. The tie ends between some partners: one retires, is expelled, dies or becomes insolvent, and the others continue. The firm is reconstituted; there is no winding up. Dissolution of the firm. The relation ends between all the partners. The business stops, the assets are realised, the debts are paid, and the surplus is divided under Sections 46 to 55. Test it by asking: does the firm survive the event? If yes, it is a reconstitution; if no, it is dissolution of the firm. |
2. Dissolution by Agreement: Section 40
i. The rule. A firm may be dissolved with the consent of all the partners, or in accordance with a contract between the partners.
ii. The widest route. Whatever the duration or nature of the firm, the partners may agree to end it.
iii. By the deed. The contract may itself provide for dissolution on stated events, such as the loss of a licence or the retirement of a named partner.
3. Compulsory Dissolution: Section 41
§ Two situations, and a proviso (a) Insolvency. By the adjudication of all the partners, or of all the partners but one, as insolvent. A firm cannot exist where only one solvent partner is left. (b) Unlawful business. 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. A change in law, or a war making trade with a country unlawful, are the standard illustrations. Proviso: partial illegality. Where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more of them does not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings. 'Compulsory' because the dissolution follows by force of law; the partners' wishes are irrelevant. |
4. Dissolution on the Happening of Contingencies: Section 42
Clause | Event | Note |
|---|---|---|
(a) | Expiry of the fixed term, where the firm was constituted for one | If the partners carry on afterwards, Section 17(b) keeps the terms as before, so far as consistent with a partnership at will |
(b) | Completion of the adventure or undertaking, where the firm was constituted to carry out one or more | The natural end of a particular partnership under Section 8 |
(c) | The death of a partner | Very often displaced by a clause that the firm shall continue |
(d) | The adjudication of a partner as an insolvent | Read with Section 34, under which he ceases to be a partner in any event |
- Subject to contract. All four clauses open with those words, so the deed may provide that the firm shall not be dissolved on any of these events.
5. Dissolution by Notice: Section 43
§ Only for a partnership at will • The right. Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. • The date. The firm is dissolved from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, from the date of communication of the notice. • Not withdrawable. Once communicated, the notice cannot be withdrawn without the consent of the other partners. • Read the notice. A notice of retirement under Section 32(1)(c) is a different thing; the language must show an intention to dissolve the firm. |
6. Dissolution by the Court: Section 44
Ground | What must be shown |
|---|---|
(a) Unsound mind | That a partner has become of unsound mind; the suit may be brought by the next friend of that partner or by any other partner |
(b) Permanent incapacity | That a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner |
(c) Misconduct | That a partner, other than the partner suing, is guilty of conduct likely to affect prejudicially the carrying on of the business, regard being had to its nature |
(d) Persistent breach | That a partner, other than the partner suing, wilfully or persistently commits breach of agreements on management or the conduct of the business, or so conducts himself that it is not reasonably practicable for the others to carry on in partnership with him |
(e) Transfer of interest | That a partner, other than the partner suing, has transferred the whole of his interest to a third party, or allowed his share to be charged or sold in execution or in the recovery of arrears of land revenue |
(f) Business at a loss | That the business of the firm cannot be carried on save at a loss |
(g) Just and equitable | Any other ground which renders it just and equitable that the firm should be dissolved |
§ What falls under 'just and equitable' • Deadlock in management, where the partners cannot agree and the business is paralysed. • Loss of mutual confidence, so complete that the relationship of good faith required by Section 9 cannot continue. • Gross misconduct not covered by the specific clauses. • Disappearance of the substratum, where the object for which the firm was formed can no longer be achieved. • The discretion is the court's, and it is exercised on the whole of the facts. |
7. Choosing the Route
Basis | By notice, s. 43 | By the court, s. 44 |
|---|---|---|
Available in | A partnership at will only | Any firm |
What must be proved | Nothing beyond the firm being at will | One of the seven grounds |
Who decides | The partner giving notice | The court |
Date of dissolution | As named in the notice, or the date of communication | As the court determines |
Cost and time | Immediate and inexpensive | A suit, with evidence |
Use | A quick exit where the firm is at will | Where the firm is for a fixed term, or a partner needs the court to settle accounts |
8. Frequently Asked Questions
What is the difference between dissolution of partnership and dissolution of a firm?
Dissolution of partnership ends the relation between some partners, with the firm continuing; dissolution of the firm, under Section 39, ends it between all the partners and the affairs are wound up.
When is dissolution compulsory?
Under Section 41, on the adjudication of all the partners or all but one as insolvent, or where the business becomes unlawful.
Can a partnership at will be dissolved without going to court?
Yes. Under Section 43, any partner may dissolve it by notice in writing to all the other partners.
What is the 'just and equitable' ground?
The residuary ground in Section 44(g), covering deadlock, loss of mutual confidence, gross misconduct and the disappearance of the firm's substratum.