DISSOLUTION OF A PARTNERSHIP FIRM

Dissolution of firm means complete breakdown of the relation of partnership among all the
partners. When all the partners resolve to dissolve the partnership, the dissolution of firm occurs,
i.e. the firm is wound up. If the business comes to an end, it is said that the firm has been
dissolved. Dissolution of firm means the closing down of the business. Firm’s dissolution
implies partnership dissolution but not vice versa.

MODES OF DISSOLUTION OF A PARTNERSHIP FIRM

 By agreement (Sec. 40): A firm may be dissolved with the consent of all the partners or
in accordance with a contract between the partners. Partnership is created by contract; it
can also be terminated by contract. This consent can be express or implied. For example
in the case of Pandurang Vanarase vs Janardhan Narain Vanarase1 it was held that
“When all the brothers have given in writing that they don’t claim any share In old firm,
it amounts to dissolving the firms”

 By notice (Sec. 43): 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. A notice of dissolution once given cannot be withdrawn without the consent of
other partners (Jones vs. lord). The firm is dissolved as from the date mentioned in the
notice as the date of dissolution or, if no date is so mentioned, as from the date of the
communication of the notice. For example the Partnership firm of A,B & C being
dissolved by a notice given by A. this concept was dealt in the case of Tilokram Ghosh vs
Gita Rani2 where it was held that “The Partnership Act provides that if the firm is at will
it can be dissolved by the partner or partners by giving notice in accordance with the
provisions of sec 43(1) of the Partnership Act. A notice for dissolution of the firm is a
statuary notice and must fulfil all the provisions of the statute as embodies in Sec 43(1) &
(2) of the Act.”

1
1995 A1 HC 1863(Bom)
2
AIR 1989 Cal 254
  On the happening of certain contingencies (Sec. 42): 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 the death of a partner; and
(d) By the adjudication of a partner as an insolvent. The partnership agreement may
provide that the firm will not be dissolved in any of the aforementioned circumstances.
Such a provision is valid
For example in the case of Noor Mohammad vs C.I.T3 it was held that “ where a clause
in Patnership 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”

 Compulsory dissolution (Sec. 41): A firm is compulsorily dissolved under any of the
following circumstances:
(a) When all the partners, or all the partners but one, are adjudged insolvent; or
(b) When some event has happened 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., when any partner,
who is a citizen of a foreign country, becomes an alien enemy because of the declaration
of war between his country and India). Where, however, a firm is carrying on more than
one adventures or undertakings, the illegality of one or more shall not of itself cause the
dissolution of the firm in respect of its lawful adventures or undertakings.
For example the State Government issues and ordinance Prohibiting liquor Business in all
firms. The Partnership is automatically dissolved this can also be referenced to the Sec 56
of Indian Contract Act 1872 where “Performance of a contract becomes unlawful, the
contract becomes void”. In the case of R vs Kupfer4 “ where a partnership between

3
(1991) ITR 550 (A11)
4
(1915) 112 LT 1138
 persons three of whom were in Germany & the one in England was held to have become
illegal on the outbreak of war between England and Germany.” Also in the case of
Gherualal Parakh vs Mahadeodas5 “ A firm to carry on a wagering business has been
held by Supreme court to be unlawful.”

 Dissolution by the Court (Sec. 44): Dissolution of a firm by the Court is necessitated
when there is a difference of opinion between the partners regarding the matter of
dissolution. For example, where one of the partners has become insane, some of the
partners may be willing to continue the firm and share profits with the insane partner,
while the other partner(s) may be insisting on the dissolution of the firm. Section 44
enumerates the various grounds on which a petition may be made to the court for the
dissolution of the firm. The Section lays down that at the suit of a partner, the Court may
dissolve a firm on any of the following grounds:

(a) Insanity: When a partner becomes insane. In this case the Section permits not only
any of the partners but also the next friend of the insane partner to file the suit for
dissolution of the firm.
(b) Permanent incapacity: When a partner, other than the partner suing, becomes
permanently incapable of performing his duties as partner.
For example in the case of Whitwell vs Arthur6 “ 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: When a partner, other than the partner suing, is guilty of misconduct,
which is likely to affect prejudicially the carrying on of the business of the firm. It is not
necessary that the misconduct which is made the ground of dissolution should be
connected with partnership business.

5
AIR 1959 SC 781
6
55 ER 848(1865)147 RR 73
 For example in the case of Snow vs Milford7 A Partner of a firm of bankers commited
adultery in the city where the business was carried on, thus adultery committed by a
Partner have been held to be sufficient grounds. Professional misconduct is also a ground
of dissolution
(d)Persistent breach of agreement: When a partner, other than the partner suing,
commits frequently breaches of the partnership agreement or otherwise so conducts
himself in matters relating to the business that other partners find it impossible to earn1
on the business in partnership with him. Taking away the books of accounts, using firm’s
monies, for his private debts, continuous quarrelling with other partners are good grounds
for the dissolution.
For example It has been held that destroying old account books, preparing false balance
sheets and making false entries in books are sufficient grounds under this clause. Any
conduct which is destructive of mutual confidence between the Partners is Sufficient
(e) Transfer of interest: When a partner, other than the partner suing, has transferred the
whole of his interest in the firm to a third party or has allowed his share to be sold in
execution of a decree. Transfer or assignment of partner’s interest does not by itself
dissolve the firm. But the other partners may apply to the Court to dissolve the firm if
such a transfer occurs.
(F) Continuous losses: When the business of the firm cannot be carried on except at a
loss.
(g) Just and equitable: When on any other ground the Court considers it just and
equitable that the firm should be dissolved, for example, if partners are not on speaking
terms.
For example 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 & equtable to do so. Also the power of the court to dissolve a Partnership on this
ground is analgous to its power to wind up a company on the just & equitable ground
under sec 433 of the companies Act 1956.

7
(1868) 18 LT 142: 16 WR 554