Indian Partnership Act- Dissolution of Partnership

Introduction

So far we have seen how firm is formed, what are rights of partners, how partner can move out of partnership and last how partner can be removed from partnerships. In this article we will discuss how partnership is dissolved.

Chapter 6, from section 39 to 54 deals with dissolution of firm.

Section 39 defines what a dissolution of firms mean. Subsequent sections talks about various methods in which firms can be dissolved.

What is dissolution by the way ?

By the way, it mean termination of relationship of each partner with every other partner. For example there is a firm of three folks, A, B and C. Each of them terminate relationship as to partner then it would be termed as dissolution.

Below are various methods of dissolution of firms.

Dissolution by Agreement (Section 40)

If you get bore of partnership, or business, you all can agree on stopping to do business.

There are two ways to

1. With consent of all partner: Again, permission of all other partner is required.
2. In accordance with the contract between the partners: Firm can be dissolved by agreement expressly mentioned in partnership deed. For example, it partnership deed contains the clause that firm can be dissolved by Majority of member by their consent, in this case consent of all partner will not be required.

Compulsory dissolution (Section 41)

Under certain circumstance, firm would have to compulsorily wind up it's business. There are two such scenarios mentioned in section 41.

Related to insolvency : When all member except one become insolvent, then firm has to be compulsorily dissolved. Why ? For example there are 3 partners A, B and C and two of them become insolvent then firm has to be dissolved compulsorily. Can B and C continue if A become solvent ?

When Business become unlawful :  There is NDPS act, which ban trading in Ganjaa. Suppose there is firm Ganjawale,  who trades in marijuana or ganjaa. Now by application or introduction of some law, their business become unlawful, can partners still continue ? In such cases or happening of such events which makes business unlawful, then such partnership will be dissolved.

There is proviso which states that if there are multiple business, and one of them become unlawful, then firm can continue in other business.

Dissolution on happening of certain contingencies (Section 42)

Section 42 have provision related to happening of certain events on which firm is dissolved. Below are four cases it covers

1) Expiration of partnership term : If partnership deed have a clause that partnership will continue for two years, or ends in 31st Dec 2019, then such partnership will be dissolved. What happen if they continue ?

2) Completion of adventure : Say Ambani and Adani, two businessmen come together to build flyover in Mumbai and form a partnership. Once the flyover is constructed, and Modiji inaugurates it with photos, such partnership will be dissolved.

3)Death of partner: If one of the partner dies, technically firm should dissolve. But if other members agree to continue, partnership can be continued.

4)Insolvency of partner : If any partner become insolvent, partnership can be dissolved. But if other partners who are not insolvent want to continue the firm, they can do so.

Dissolution of partnership by notice. (Section 43)

We have discussed partnership at will in section 7. It's a partnership where there is no clarity as to when partnership will end. 

In such partnership, it partner is not in mood, then he can give a notice to other firms regarding dissolution of partnership.

Dissolution of partnership by Court. (Section 44)

There are 7 scenarios under which partnership can be dissolved.

1) Unsoundness of mind : When any partner cannot take rational decisions or has become unsound, then other partner or any friend of partner who became unsound can file a suit for dissolution.

2)Permanent incapacity to perform duties: In Whitewell V Arthur, court held the there should be permanent disability to dissolve the firm. For example A and B formed partnership, where A was conferred administrative and accounting duties. If A is unable to perform those duties for some reason, then B can file a suit for dissolution of the firm.

3)Conduct Injurious to the partnership business : If partner acts in some ways in which it would harm partnership business, then other partner can dissolve the firm.

There is recent example in this regard. Three filmmaker had partnership. (Anurag Kashyap of Gangs of Wasseypur was one of them). One of the partner was accused in sexual assault in #metoo movement. The firm was dissolved because conduct of partner was injurious to partnership.

4)Persistent Breach of partnership agreement : If partner is deliberately doing stupid acts which are in breach of agreement about partnership, then other partner can file for suit for dissolution of firm.

For example, if one partner again and again and again making false accounting entries, in such scenario the faith and trust is lost and hence other partners can file for a suit.

5)Transfer of whole of partner's interest : As said above, partnership is relationship about trust and faith on each other. If one of the partner transfer all his interest to other partner, how the remaining partner can trust that "other" person or third party. Such situation can be a ground for dissolution of a firm.

6) Loss making business : Partnership is established for sharing of profits. What if there are no profits? For example, firm is in trading business, and because of websites like Flipkart and Amazon, they would never be able to make profits, in such cases partnership can be dissolved.

7)When dissolution is just and equitable :  This clause offers lot of discretion to the court. Do you have any definition for "just" ?

In Abbot V Crump,  one of the partner committed adultery with wife of another partner. Court thought that this is ground for dissolution of partnership. Seriously!!!

 Conclusion

There are tons of methods by which partnership can be dissolved.Literally. Chapter 6 of Indian Partnership act deals with all such methods.

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