The dissolution of partnership between all the partners of a firm is called the dissolution of the firm.
The law recognizes the difference between a dissolution of the firm and dissolution of partnership which may be as follows
(A) Dissolution of a firm takes place when the business of the firm comes to an end as a result of the dissolution but dissolution of partnership does not necessarily mean the cessation of business of the firm. Thus if partners have agreed that inspire of the death, insolvency or retirement of a partner, the firm shall continue its business, there is a dissolution of partnership but no a dissolution of the firm, as the business of the firm continues.
Different modes of dissolution of “Partnership Firm”
1. Dissolution by Agreement
A partnership may be dissolved with the consent of all the partners, or it may be dissolved in accordance with a contract among the partners to this effect.
2. Dissolution by Notice
Where a partnership is at will, the firm may be dissolved to any partner giving notice in writing to all the other partners of his intention to dissolve the firm and the firm is dissolved as from the date mentioned in the notice. If the date of dissolution is not mentioned in the notice, then from the date of the communication of the notice.
3. Contingent Dissolution
A partnership firm may be dissolved on the happening of the following events
i. At the expiry of the period fixed for the partnership firm.
ii. At the completion of the adventure or undertaking for a particular object for which the partnership was formed.
iii. Where a partner has become incapable of performing his partnership duties properly. Since the partner is unable to fulfill on of the important classes of the partnership agreement that is to devote his time, energy, efforts and capabilities to the success of the partnership firm, the firm in dissolved.
iv. On the death or retirement of a partner.
v. By the adjudication of a partner as an insolvent.
vi. When the partnership itself has been declared as insolvent.
4. Compulsory Dissolution
The following are the grounds for a compulsory dissolution of a partnership firm
i. When all the partners or all but one have been adjudicated to be insolvent by a Court of law.
ii. Where such an event has happened which makes it unlawful to carry on the partnership business.
5. Dissolution by Court
Where a partner files a suit, the court may dissolve the partnership on the following grounds
i. Where one of the partners has become of unsound mind that is mad.
ii. Where a partner is guilty of misconduct a breach of contract in the matter of running the partnership business.
iii. Where a partner intentionally commits a breach of contract in the matter of running the partnership business.
iv. Where a partner transfer his share in the partnership without the consent of all the other partners.
v. Where the interest of a partner in the firm has been charged by the court from his debts.
vi. Where it is reasonably certain the at the partnership cannot be carried on except at a loss.
vii. When any partner becomes permanently incapably of performing his duties as a partner or mad.
viii. On another grounds considered fit by the court of law. Breach contract by any partner misconduct of partners.
Any partner transfer of share to any other person without the consent of other partners or others grounds court thanks fit.
Settlement of Accounts on dissolution
Following are the rules to be observed in settling the accounts of a firm after its dissolution, subject to any agreement by the partner contrary to it.
1. Losses, including deficiencies of capital shall be paid first out of the profits, next out of capital and lastly, if necessary, by the partners individually in the proportions in which they are entitled to share the profits.
2. The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital shall be applied in the following ways.
a. in paying the debts of the firm to third parties.
b. in paying to each partner ratably what is due to him from for advances distinguished from capital.
c. in paying to each partner ratably what is due to him on account of capital .
d. The residue, (the remaining) if any, shall be divided among the partners in the proportions in which they were entitled to share the profits.