Modi Law College, Kota

Contract II

DISSOLUTION OF FIRM
Dissolution of firm ends the life of partnership. It is different from the retirement
of a partner as by the retirement of a partner, the firm is not necessarily dis-
solved. If the terms of the agreement permit the partnership to be continued
after retirement of a partner, the partnership business is continued by the other
partners. Section 39 provides -
The dissolution of partnership between all the partners of a firm is called the
"dissolution of the firm"
Dissolution of partnership and dissolution of firm are two separate things.

Dissolution of Firm [Sec. 39] :

The dissolution of partnership between all partners is called the dissolution of
the firm. in case of dissolution of firm, jural relations between all the partners
are discontinued. Consequently, the business of the fim is closed down. Steps
are taken to realise the assets and pay off the liabilities of the firm. The remain-
ing surplus, if any, is distributed between the partners in the agreed ratio.
Ultimately, the firm is wound-up.

Dissolution of Partnership :
Dissolution of partnership takes place where any change in the relations be-
tween the partners or change in the composition of firm occurs and the business
is continued in firm's name under altered circumstance.In other words, dissolu-
tion of partnership takes place where a firm is reconstituted.

Illustrations :
1. A, B and C are partners. A retires. B and C continue to carry on firm's business
in the old firm's name. There is dissolution of partnership between A, B & C
and novation of partnership between B and C but no dissolution of the firm.
If B and C introduce a new partner D in the firm, again there is a novation of
partnership agreement. Old partnership between B and C comes to an end
and new partnership between B, C and D is created. There is no dissolution of
the firm since they continue to business in the old firm's name.
2. A, B and C are partners. They decide to discontinue the business and wind-up
the firm. This is a dissolution of the firm.
3. A and B are partners. A retired with the consent of B. The firm is dissolved.

Case : C.I.T.v A.W. Figgis & co.

That there is no dissolution of the firm by mere incoming or outgoing of
partners. A partner may retire or a new partner may be introduced with the
consent of all the partners. The reconstituted firm can continue to carry on its
Business in the same firm's name till dissolution.
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 KINDS OF DISSOLUTION

There are following kinds of dissolution:

(1) Dissolution by contract (Section 40)
(2) Compulsory dissolution (Section 41)
(3) Contingent dissolution (Section 42)
(4) Dissolution by notice (Section 43)
(5) Dissolution by the Court (Section 44)

1. Dissolution by contract :
Section 40 provides -
"A firm may be dissolved with the consent of all the partners or in accordance
with a contract between all the partners."
Section 40 requires the consent of all the partners. Thus, there are two ways to
dissolve the partnership by contract -
(a) Dissolution by a contract between all the partners. Such contract may be by
way of partnership deed itself or there may be a separate contract“
(b) If there is no such contract then by the consent of all the partners, the
dissolution may take place as and when the partners consent to it.

Case: Dhulla Amalner Motor,etc., Ltd. v. Raychand

When there is an agreement, the firm can be dissolved only in accordance with the
agreement. When the partnership deed provided that any dispute would be decided by
2/3 majority, the partners with 2/3 majority wrote to the manager of the firm that the
partnership should be dissolved and a private limited company should be formed, it
was held to be a mere suggestion of the 2/3 partners. It could not be said to be a decision
of 2/3 members in the absence of any meeting of all the partners or in the absence of the
knowledge of the minority that some disputed matter was going to be decided ty he
opposing majority.

Case: Choteylal Ratanlal V. Rajmal Milapchand.

partnership cannot be put to an end by the unilateral one of the partners. He can only
give a notice in writing of his intention for dissolution to other partners.

2. Compulsory dissolution“
Sec 41provides-
A firm is dissolved,-
(a) by the adjudication of all the partners or of all the partners but one as
insolvent, or
(b) by the happening of any event which makes it unlawful for the business of
the firm to be carried on or for the partners to carry it on in partnership
Provided - where more than one separate adventure or undertaking is carried on
by the firm the illegality of one or more shall not of itself cause the dissolution
of the firm in respect of its lawful adventures and undertakings.
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 Compulsory dissolution of firm takes place either by insolvency of all the part-
ners or all the partners except one or when the business of the firm becomes
illegal due to happening of some event

(a) Insolvency of partners.

When all the partners are adjudicated insolvent, the partnership comes to an
end. If all the partners but one are adjudicated insolvent, the partnership in that
event is also dissolved.Insolvency is a fact that attaches disability to enter into
contractual relations among the partners themselves or between any insolvent
partner and a third person and, therefore, the business cannot be transacted.
Solvency of only one partner disabled him to run partnership alone as the part-
nership always exists between two or more persons.

(b) Business becomimg unlawful-

If the partnership business is not unlawful from the very beginning but later
on due to some event it becomes unlawful to carry on the business, the
partnership is dissolved.
Sometimes, it may not be unlawful to carry on the business by a single
individual but it may become unlawful to carry on the business in partnership.
In such an event also, if partnership is dissolved.
The law may prohibit to carry on a business or the law may provide the
business to be carried on by individual not by the partners and in either of
these two cases, the partnership dissolves.
Another situation is when the performance of contract becomes impossible or
the object of contract is frustrated (Section 56).

3. Contingent Dissolution
Section 42: Dissolution on the happening of certain contingencies:-
Subject to contract between the partners a firm is dissolved, the contingent
dissolution takes place by -
(i) expiry of the term of the firm,
(ii) completion of adventures or undertakings,
(iii) death of a partner,
(iv) adjudication of a partner as an insolvent.

(i) Expiry of the term of the firm.-

When the firm is for a definite term it is dissolved on the expiry of the term. This
is subject to the contract to the contrary i.e., the agreement may provide the
partnership to continue even after the expiry of the term. If the partners after
the expiry of the term consent to refer their disputes to arbitration that does not
mean an agreement to the contrary.

Case : Ramanujacharya V. Pohoomal

If a partnership has been constituted for a fixed term with an option to a partner to
dissolve it by giving a notice of a specified period, any other mode of dissolution by
agreement need to be strictly proved.
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 (ii) Completion of adventures or undertakings:-
When the partnership is constituted for carrying out one or more adventures or
undertakings, the firm is dissolved by the completion thereof. This is also
subject to the contract to the contrary.
By virtue of Section 42(b), the term "terminus ad quem" of a firm may be
inferred from the nature of adventure or undertaking although the firm has not
been constituted for a fixed term. For it, the terms of agreement between the
partners, their conduct and the nature of undertaking or adventure have to be
taken into account and if it is found that the partnership was formed to carry on
only one undertaking, the firm is dissolved on its completion.

(iii) Death of partner :-

By death of partner, dissolution of partnership takes place.this is also subject to
the contract to the contrary. It is desirable and often there is an agreement
between the partners that in case of death of a partner, dissolution will not take
place. But when there is a partnership of two persons only, the death of one of
them will dissolve the partnership despite any agreement to the contrary.

(iv) Adjudication of a partner as an insolvent:-

By the adjudication of a partner as an insolvent, the partnership is dissolved.
This is also subject to the contract to the contrary. However, under Section 41,
if all the partners or all the partners but one of a firm are adjudged as insolvent,
the firm is compulsorily dissolved and any agreement to the contrary cannot
save the firm from dissolution

4. Dissolution by notice:-
Section 43 as under :
Dissolution by notice of partnership at will
(1) Where the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve
the firm
(2) The firm is dissolved as from the date mentioned in the notice as the date
of dissolution or, if no date is so mentioned, as from the date of the commu-
nication of the notice.
For dissolution by notice, it is necessary that
(i) The partnership must be at will.
(ii) Any partner must give a notice in writing to all other partners of his intention
to dissolve the firm.
(iii) The notice must be communicated to all the partners
(iv) The notice must be explicit and final
The dissolution of a partnership at will may also be inferred from the circum-
stances of the case even without any notice of intention to dissolve the firm.
When a plaint for dissolution of the firm is filed, no notice is needed because
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 when the summons are communicated by the court to all the partners, the firm
is dissolved although the plaint is not equal to notice. The dissolution of the firm
will take place on the last service of summons to the Partners.

5. Dissolution by the Court:-

Section 44: At the suit of a partner, the court Can may dissolve a firm on any of
the following grounds, namely
(i) Insanity
(ii) Incapability to perform duty
(iii) Misconduct
(iv) Wilful or persistent breach of agreements
(v) Transfer of interest to third party
(vi) Business at loss
(vii) Dissolution just and equitable

(i) Insanity-
The suit for dissolution of the firm can be filed by a partner on the ground
that a partner has become of unsound mind. Such suit car be brought by the
next friend of the partner who has become of unsound mind.The section does
not differentiate between permanent insanity or temporary insanity. Insan-
ity renders the partner incapable to perform contractual obligations and du-
ties. Therefore, insanity must be of a permanent nature. If it is a temporary
nature or there are chances of recovery, the court will not dissolve the firm

(ii) Incapability to perform duty-

When a partners has become permanently incapable of performing his du-
ties, any other partner may bring suit for dissolution. The partner may be-
come incapable due to physical or mental disability or due to any other
reason.

Case: Whitewell v. Arthur

Where a partner suffered a paralytic attack but before the hearing of the case, his
health improved, it was held that there was no sufficient ground for dissolution.

(iii) Misconduct:
When a partner is guilty of conduct which may prejudicially affect the carry-
ing on of the business, any other partner may bring suit for dissolution. It is
not necessary that the conduct of the partner should be related to the part-
nership business.

Case: Pearce V. Foster

In this case court held that gambling on the Stock Exchange was held to be
a ground for dissolution although there was no connection between it and the
partnership business.
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 Case: Abbote V. Crump
A partner who committed adultery with the wife of his co-partner was held to
be a ground for dissolution.
A conviction for travelling without ticket and conviction for breach of trust
were also held as sufficient grounds for dissolution.It is necessary that the
conduct of the partner should affect the business of the firm.

Case: Snow V. Milford

Where, a partner committed adultery with several women in the city where
the business of banking was carried on by the firm and his wife left him, was
held to be not sufficient for dissolution of the firm. According to the court,
howsoever, it might have been immoral in the personal life of the partner who
committed the adultery but how it could be said that with such conduct of the
partner, the money of customers was not safe in the bank

(iv) Wilful or persistent breach of agreements:-

If a partner wilfully or persistently commits breach of agreements relating to
the management of the affairs of the firm or the conduct of its business, any
other partner can bring a suit for dissolution.
Following are the example of willful breach of agreement

Keeping accounts erroneously or seldom accounting for the money received

Refusal to meet on business matters

Applying the partnership funds in the payment of his own debts

Raising money on the firm's credit for his own use

Refusing to account and taking away partnership books' and starting a rival
business

(v) Transfer of interest to third party:-

If a partner has transferred the whole of his interest in the firm to a third
party or has allowed his share to be charged , or has allowed his share to be
sold in the recovery of land revenue or any dues recoverable as land-revenue
due by him, any other partner can bring a suit for dissolution.

Case : Domaty v. S.R.M. Raman Chetty

A transfer of his share by a partner to a co-partner of co-partners would not cause
dissolution of the firm, although there is no such provision in the partnership
deed.

(vi) Business at loss :-

Where the partnership business cannot be carried on save at loss, any
partner can bring a suit for dissolution. The reason is obvious. The partner-
ship is created to carry on the business to earn profits in which each partner
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 has contributed his share capital but when it can be carried on only at loss
without further share capital, there is no use of it and it must be dissolved
even without expiry of the term of partnership for which it was constituted.

(vii) Dissolution-Just and equitable :-

Just and equitable ground of dissolution is a very wide ground giving the
power to the court to dissolve the firm. It is not restricted by the preceding
ground.

Case : Babulal v. Kanhaiya Lal

When there was a chronic dispute among the partners and they had lost mutual
confidence and four out of nine partners holding 7/9 shares wanted dissolution,
the dissolution was held to be just and equitable.