A partnership firm may be dissolved by various methods. They are:
1. Dissolution by consent.
2. Compulsory dissolution.
3. Contingent dissolution.
4. Dissolution by notice.
5. Dissolution by court order.
1. Dissolution by consent:
A partnership firm may be dissolved if all the partners’ consent to the dissolution is obtained. Even if the period is fixed, the firm may be dissolved by mutual consent of partners before expiry of such period.
2. Compulsory dissolution:
A partnership firm may automatically be dissolved.
a. If all the partners become insolvents.
b. If the business of the firm becomes unlawful.
3. Contingent dissolution:
A partnership firm is also dissolved under the following circumstances.
a. If any partner dies.
b. If any partner becomes insolvent.
c. If the period of agreement is kept undecided.
d. If the firm does any other business not mentioned in agreement.
4. Dissolution by notice:
Any partner may serve a notice to the remaining partners in the firm to effect dissolution of the firm
5. Dissolution by court order:
Under rules of the Partnership Act, 1932, the court may order the dissolution of the partnership on the following grounds:
a. If a partner becomes mad.
b. Due to misconduct of a partner, which will damage the reputation of the firm?
c. If the firm is suffering from continuous losses for a long time.
d. If any partner breaks the agreement intentionally.
e. If a partner transfers his interest in the firm to others without the consent of other partners.
Under the above circumstances, the court may order the dissolution of partnership firm. When a partnership firm is dissolved all the assets of the firm are sold and all the liabilities are paid out of assets realised. If anything remains, the same may have to be distributed among the partners to discharge them from the firm.
The various circumstances leading to dissolution of a partnership firm can be summarised by taking the various letters used to coin the term “dissolution”.
D – Death of a partner.
I – Incapacity of a partner, (permanent)
S – Stipulated or specified period of partnership completed in case of particular partnership.
S – Serious misconduct of a partner.
O – Object of the firm completed (particular partnership)
L – Lunacy of a partner.
U – Unavoidable continuous loss
T – Transfer of interest in the firm, wholly or partly (Sale of firm to a company). I – Insolvency of a partner or partners. O – Objectionable or unlawful objects of the business. N – Notice of dissolution by a partner.