The Indian Partnership Act makes a distinction between dissolution of firm and dissolution of partnership. Section 39 provides that the dissolution of partnership between all the partners of a firm is called the dissolution of the firm.
Therefore, dissolution of the firm denotes complete breakdown of the contractual relationship between all the partners or termination of the partnership business. But when the existing contractual relationship is terminated and the business continues, it is a case of dissolution of partnership.
Therefore, in dissolution of partnership the change in contractual relation of the partners may arise because of admission of new partners, retirement of partners, expulsion or insolvency or death of a partner etc. Dissolution of the firm involves dissolution of partnership but dissolution of partnership may not imply dissolution of firm.
Modes of Dissolution of a Firm:
A partnership firm may be dissolved under the following circumstances:
1. Dissolution by Agreement:
Partnership arises from contract and can come to an end by contract. Therefore, the firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
2. Dissolution by Notice:
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing of his intention to dissolve the firm. The firm is dissolved from the date mentioned in the notice as the date of dissolution. An individual partner is empowered to bring an end to the firm.
3. Dissolution on the happening of certain contingencies:
Subject to contract between the partners, a firm can be dissolved on the happening of following circumstances :
i. Expiry of the term when constituted for a fixed term.
ii. Completion of the venture or undertaking when the firm constituted to carry on a venture or undertaking.
iii. Death of a partner.
iv. Adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved in any of the above circumstances.
4. Compulsory Dissolution:
A firm is compulsorily dissolved under any of the following circumstances :
i. When all the partners or all but one are adjudged insolvent.
ii. When the business of the firm becomes unlawful because of happening of some event.
5. Dissolution by the Court:
When the partners are having difference of opinion regarding dissolution of the firm on certain grounds, a suit can be filed by any partner in the court to dissolve the firm. Depending upon the merits of the matter, the court may order for dissolution of the firm. Under Section 44 of the Act, the court may dissolve the firm on the following grounds :
When.a partner becomes insane, the court may order to dissolve the firm. The suit can be filed by any of the other partners or even by any friend of the insane partner.
ii. Permanent incapacity:
When a partner becomes permanently incapable of doing his duties as a partner, the court may dissolve the firm. The suit for dissolution must be filed by a partner other than the incapacitated partner.
When a partner, other than the partner suing is guilty of misconduct and such misconduct is likely to affect the carrying on of the business, the court may dissolve the firm. The misconduct may be outside the business (punishment for an offence, adultery of a partner etc.
iv. Persistent breach of agreement:
When a partner persistently or willfully commits breach of agreement or conducts himself in such a manner that it is impossible on the part of other partners to carry on the business with him, the court may dissolve the firm. Maintaining wrong accounts, taking away the books of accounts, continuous quarreling with other partners are good grounds.
v. Transfer of interest:
When a partner transfers his whole interest in the firm to a third party or all his shares are sold or attached by the court under a decree, the court may dissolve the firm.
vi. Continuous losses:
When the business cannot be carried on except at a loss, the court may dissolve the firm.
vii. Any other ground:
The court may dissolve the firm on any other ground where the court considers it just and equitable to wind up the business.