Dissolution on Partnership – Modes & Consequences

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Dissolution of Partnership means termination of partnership, wherein all the liabilities are settled by transferring or selling of assets and settling of accounts following the terms of the partnership agreement.
This article will discuss the dissolution of the partnership, the modes of dissolution, and partners’ rights and liabilities after dissolution; Before that, we have to know what is a partnership and the various kinds of partnership?

What is a Partnership?

Where two or more people agree to share the profit and loss of a business carried on by all or anyone acting on their behalf is called a “partnership”. “Partners” are people who have entered into a partnership individually. Whereas, when more than one person enters into a partnership and works collectively is called a “firm.”

Types of Partners

Depending on the type of partner, their share of the profits and liabilities of the business may vary. Following are different the types of partners in a firm:

  • Active Partner: Actively participates in the affairs of the business.
  • Sleeping /Dormant Partner: Does not actively participate in the business but is bound by other partner’s acts.
  • Nominal Partner: this partner is only lending his name to the firm and does not contribute any capital nor share any profits of the firm but is liable for other partners’ acts.
  • Partner by Estoppel/holding out: where a person represents himself as a partner of the firm, he cannot deny that he is not a partner, and therefore, will be liable for the actions of other partners.
  • Partner in Profits only: will only share the firm’s profits and will not hold any liabilities of the partners.
  • Minor Partner: admitted to the partnership’s benefits with all the partners’ consent, and his liability will only be limited to his share in the firm.

What are the Kinds of Partnership?

There are four kinds of partnership, namely;

  • Partnership at will: where a contract does not make the duration and determination of partnership.
  • Particular partnership: where the partnership is for a specific purpose, adventure, or undertakings
  • Partnership for a fixed period: where the partnership is for a specific time period, and the partnership dissolves after the period expires.
  • General partnership: where the partnership is for the business in general, and each partner’s liability is unlimited.

Having talked about the partnership, let us discuss the dissolution of the partnership, how a partnership can get dissolved, and the consequences of dissolution.

What is a dissolution of partnership?

In simple language, dissolution means termination. Dissolution of partnership and dissolution of a partnership firm are two different things. ‘Dissolution of partnership’ means the end of partnership business whereas ‘Dissolution of partnership firm’ means termination or end of the partnership business along with all the contractual obligations and liabilities, and all the assets and liabilities are settled and disposed of. Dissolution of a partnership may not result in the dissolution of a firm; however, the firm’s dissolution terminates the partnership.

How can a Partnership get Dissolved?

The partnership may be dissolved or terminated on the occurrence of the following contingency:

  • Change in existing profit-sharing ratio
  • Death of the partner
  • Admission of a new partner
  • Retirement of a partner
  • The bankruptcy of a partner
  • Expiry of the term of the partnership, where the partnership is for a fixed period.

What are the Modes of Dissolution of a firm?

Dissolution by agreement:

A partnership firm can be dissolved following the terms of a contract or with all the partners’ consent.

Compulsory dissolution:

  • Adjudication of all partners or any one of the partners as insolvent.
  • Unlawful adventure or undertakings is carried on in partnership.

Dissolution by notice of partnership at will:

Any partner can dissolve a partnership at will after giving a notice in writing to the other partners about the intention to dissolve the partnership firm.

Dissolution by the Court:

The court may dissolve the partnership firm on the following grounds:

  • A partner has become of unsound mind.
  • A partner has become incapable of performing his duties as a partner.
  • A partner is guilty of conduct that will affect the nature of the business.
  • A partner has committed a constant breach of contract.
  • A partner has permanently transferred his whole interest or share in the firm to the third person or has allowed his share to be charged under rule-49 of CPC or has allowed it to sell in the recovery of arrears of land revenue or any other dues.
  • On the continuous loss of the business.
  • Or any other grounds as the court deems just, fair and equitable.

What are the Consequences of Dissolution of Partnership?

Once the partnership has been dissolved, all the assets, shares, accounts, rights, and liabilities are disposed of and settled.

Following are the Liabilities for the acts of partners after dissolution:

  • Continuous liability to the third party for actions done before dissolution until public notice has been given of such dissolution provided such person has not retired, died, sleeping partner, or adjudicated as insolvent.
  • To close down affairs of the firm, and to complete any unfinished or pending transactions at the time of dissolution,
  • To share the profits of the firm as may be agreed by the partners.
  • The firm is not liable for the acts of the partner who has been adjudicated as insolvent (unless any person has represented himself as a partner of the insolvent)

Following are the Rights of partners after dissolution:

  • Right to restrain the use of firm name or property: After dissolution, the partner shall have the right to restrain the other partner from using the firm name or property to carry out similar business for his own profit until the firm has been wound up.
  • Right to earn profit by using the firm name if the person has purchased the firm’s goodwill.
  • Right to the repayment of premium amount in the event of premature dissolution.
  • Rights where the partnership is revoked for fraud or misrepresentation: Where the partnership is revoked due to fraud or misrepresentation, the partners have the following rights:
  • To lien on or right to retain any surplus oar the firm’s assets after all the debts have been cleared, and all the payment and capital contributed by the partner has been disposed of.
  • Right to rank as a creditor for any payment of debts made by him.
  • Right to be indemnified against all debts of the firm.

Conclusion:
The Indian Partnership Act’1932 lays down the provisions under which the partnership can be dissolved by an agreement between partners, by compulsory dissolution, by giving a notice of partnership at will, or under certain contingencies. When a partnership is dissolved, the parties’ assets, rights, and liabilities are disposed of and settled between the partners.

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