CENTRAL UNIVERSITY OF SOUTH BIHAR

Project Assignment Submission on:- MODES OF DISSOLUTION

OF PARTNERSHIP FIRM

Under the supervision of :- Dr. ANURAG AGRAWAL (Assistant

Professor, School of Law & Governance of Central University of South Bihar )

Submitted by :- ANUJ KUMAR

Sub :- CONTRACT -II
BA.L.L.B (Hons.) III Semester
Enrollment no :- CUSB2213125021
Section :- A
 ACKNOWLEDGEMENT

It is a great pleasure to express my deep Sense of thanks and gratitude to my course

instructor and guide Dr. ANURAG AGRAWAL. His dedication and keen interest above all
and her overwhelming attitude to help his students had been solely and mainly responsible for
completing my work. His Scholarly and timely advice, meticulous scrutiny, and her logical
approach has helped me to a very great extent to accomplish my project in an excellent manner.

I owe a deep sense of gratitude to Prof. S.P. Srivastava, Dean of School of law and
governance, C.U.S.B., for making sure that we are provided with best facilities and
surroundings to fetch the best out of ourselves. His prompt inspirations, timely suggestions
with kindness, enthusiasm and dynamism has also enable me to complete my project on time.
It is my great privilege to thank my parents for their constant encouragement throughout my
research period.

--- Anuj Kumar

 Table of contents

S.no Topic Page.no.

1.
Introduction 1
2. Mode of Dissolution 2-9
➢ By consent
➢ By agreement
➢ Compulsory dissolution
➢ Contingent dissolution
➢ Dissolution of firm at will by notice
➢ Dissolution by court
3.
10
Conclusion
Introduction

Dissolution:-1

The dissolution of a partnership firm refers to the termination of all contractual relationships
among partners. It implies that the working of a partnership firm is stopped and the assets are
realised to pay the various kind of liabilities. However, there is a demarcation between the
dissolution of a partnership firm and the dissolution of partnership. Dissolution of
partnerships refers to the termination of the partnership relationship of one partner with
other partners and the firm. If an existing partner dies, retires or is unable to pay the debt then
other partners can purchase the share of the outgoing partner and continue the business under
the same name.

Whereas the dissolution of partnership means the end of the partnership business.
When a firm is put to an end as between all the partners, that is called dissolution (S.39).

Dissolution of a firm: 2The dissolution of partnership between all the partners of a firm is
called the “dissolution of the firm”.

Thus, dissolution is something different from the retirement of a partner, because in

retirement the business is continued by one or more of the partners. Where immediately after
dissolution, the firm is reconstituted and the business resumed by some of the partners, even if
in the same name and place, that remains a dissolution. Where, on the other hand, on the death
of a partner, his legal heirs join the firm in accordance with the provisions of the partnership
deed, the firm would not stand dissolved, although its constitutional have to be altered.

The mere execution of a deed of dissolution does not put an end to matters of rights and
liabilities of partners. That happens only when the firm is finally wound up and its properties
are distributed.

1
https://blog.ipleaders.in/?s=Contract

2
http://student.manupatra.com/Academic/Abk/Indian-Partnership-Act/Chapter6.htm
MODE OF DISSOLUTIONS3

A firm may be dissolved in any of the following ways:

1. By Consent (S.40)

Dissolution by agreement: 4A firm may be dissolved with the consent of all the partners
of in accordance with a contract between the partners.

A partnership can be dissolved at any point of time with the consent of the existing partners
irrespective of the fact of whether:

• the partnership was formed at will, or

• for a fixed period of time in accordance with the terms and conditions of the
partnership deed, or
• of a separate agreement.

In the case of Harish Kumar v Bachan Lal, AIR 1991 5a dissolution was held to have taken
place in the case of a partnership at will when the partners decided not to carry on the business
of the firm from an agreed date. The period of limitation for filing a case for rendition of
accounts commenced from that date and was not permitted to be prolonged by a partner
subsequently giving a notice of dissolution.

2. By Agreement (S.40)

A firm may be dissolved in accordance with a contract between the partners. The
contract providing for dissolution may be contained in the partnership deed itself or in a
separate agreement. Both the above kinds of dissolution, namely, by consent and by
agreement, are provided in the same section. But they are different. Partners can
consent to a dissolution regardless of what their previous agreements are. But in dissolution by
contract they have to follow their subsisting agreement, whether all the partners give their
consent or not.

3
https://www.scribd.com/presentation/488354221/Modes-of-Dissolution-of-Firm-by-pravesh

4
https://www.toppr.com/guides/business-laws/the-indian-partnership-act/dissolution-of-a-firm
5
https://indiankanoon.org/doc/1368905/
3. Compulsory Dissolution (S.41) 6

Compulsory Dissolution: 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 that, 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.

Earlier there were two events mentioned in Section 41, but Section 245read with Schedule 1
of the Insolvency and Bankruptcy Code, 2016, has omitted clause (a) of Section 41 and
transferred to the Insolvency and Bankruptcy Code. Now the only condition for dissolution of
compulsory nature mentioned in the section is illegality of business.

Where the business of a firm is illegal form the very beginning, the agreement of
partnership by itself is unlawful under Section 23, Contract Act. Such a case does not fall within
the scope of Section- 41.

The Section applies when the business is lawful in the beginning but subsequently, on account
of some change in law or outbreak of hostilities, the business becomes unlawful. Section 56,
Contract Act says that when the performance of a contract becomes unlawful, the contract
becomes void. Section 41(b), Partnership Act says that when the business of a firm becomes
unlawful, the firm is, by force of law, dissolved. The clause contemplates two kinds of
possibility. Either the business itself becomes unlawful, or the business remaining lawful,
but carrying it on in partnership becomes unlawful. In either case the effect upon the
business is the same, that is, the firm stands dissolved by a compulsory provision of law.

The proviso of the section deals with cases in which the firm is carrying on not one business,
but more than one type of business. In such cases if at least one type of activity remains
lawful, the partnership escapes compulsory dissolution. It survives for the business
which remains lawful, though its other business operation being now unlawful, would have
to be abandoned.

6
https://ibclaw.in
In the case of Gherulal Parakh v Mahadeodas Maiya, AIR 19597, apartnership
carrying on wagering business was held by the SupremeCourt to be not unlawful.

4. Contingent Dissolution (S.42)

Dissolution on the happening of certain contingencies: Subject to contract between the partners
a firm is dissolved:-

➢ if constituted for a fixed term, by the expiry of that term;

➢ if constituted to carry out one or more adventures or undertakings, by the
completion thereof;
➢ by the death of a partner; and
➢ by the adjudication of a partner as an insolvent.

A firm is dissolved on the happening of any of the following contingencies,

provided that there is no agreement to the contrary:

➢ If the firm is constituted for a fixed period, by the expiry of that term.
➢ If the firm is constituted to carry out one or more adventures or under takings, when
they are completed.
➢ By the death of a partner.
➢ By the adjudication of a partner as an insolvent.

5. Dissolution of Firm at Will by Notice (S.43)

Dissolution of Firm at Will by Notice:

➢ 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.
➢ 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 communication of the notice.

When the partnership is at will, which means partnership the duration of which has not been
fixed, it may be dissolved at any time by any partner by giving notice of his intention to
dissolve it. Notice should be inwriting, signed by the partner giving it and should be
served upon all the partners. The notice must not be ambiguous or vague. It must be factual,

7
https://casebriefs.truthandyouth.com/2021/09/20/gherulal-parakh-v-mahadeodas-maiya-and-ors/
explicit and final. A notice that accounts must be rendered and that a certain work must not be
proceeded with, was held to be not a notice of dissolution. A majority resolution to dissolve the
firm was also held to be not a notice of dissolution. A partnership which is not at will cannot
be determined by notice.

Thus, in Moss v Elphick a deed, constituting a partnership of two persons for an undefined
time, provided that the firm could be terminated “by mutual agreement only”. It was held that
the notice of dissolution given by one of the partners was invalid as the operation of Section
43 was excluded by agreement to the contrary.

6. Dissolution by Court (S.44) 8

Dissolution by the Court: At the suit of a partner, the Court may dissolve a firm on any of the
following grounds, namely:

➢ that a partner has become of unsound mind, in which case the suit may be brought as
well by the next friend of the partner who has become of unsound mind as by any other
partner;
➢ that a partner, other than the partner suing, has become in anyway permanently
incapable of performing his duties as partner;
➢ that a partner, other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the business regard being had to the nature
of the business;
➢ that a partner, other than the partner suing, wilfully or persistently commits breach of
agreements relating to the management of the affairs of the firm of the conduct of its
business; or otherwise so conducts himself in matters relating to the business that it is
not reasonably practicable for the other partners to carry on the business in
partnership with him,
➢ that a partner, other than the partner suing, has in any way transferred the
whole of his interest in the firm to a third party, orhas allowed his share to be charged
under the provisions of rule 49of Order XXI of the First Schedule to the Code of Civil
Procedure,1908, or has allowed it to be sold in the recovery of arrears of land revenue
or of any dues recoverable as arrears of land revenue due by the partner;

8
https://www.lawteacher.net/free-law-essays
 ➢ that the business of the firm cannot be carried on save at a loss, or
➢ on any other ground which renders it just and equitable that the firm should be
dissolved.

By Section- 44 9the court is empowered to order the dissolution of a firm at the suit of a partner
in the following cases:

➢ Insanity: When one of the partners had become a person of unsound mind,
any partner, including the insane, may apply for dissolution. Insanity renders the partner
incapable of performing his duties as a partner and is, therefore, a good ground for
putting an end to the firm. Dissolution may be necessary both to protect the interest of
the insane and of the other partners.
➢ Permanent Incapacity: Where any partner, other than the partner suing, has become
permanently incapable of performing his duties as a partner, any partner may apply for
dissolution. The incapacity may be due to illness, mental or physical, but it should be
of a permanent nature.
➢ Misconduct: When a partner, other than the partner suing, is guilty of conduct which
is likely to affect prejudicially the business of the firm the court may order dissolution.
It is not necessary that them is conduct should be connected with the business of the
firm. Its only connection with the firm need be that it will damage the
business prospects of the firm. Thus, conviction for travelling without ticket,
or for breach of trust is sufficient, but misconduct in personal life may not be so.
➢ Persistent Breach of Agreement: When a partner, other than the partner suing,
persistently commits breach of agreements relating to the management of the firm or
otherwise so conducts himself in matters relating to the business that is not reasonably
practicable for the other partners to carry on the business in partnership with him. Any
conduct which is destructive of mutual confidence between the partners is
sufficient. Breech of agreement and conduct destructive of mutual confidence
gives rise to this ground.
➢ Transfer of Interest: When a partner, other than the partner suing, has transferred the
whole of his interest in the firm to a third party, or has allowed his interest to be charged,
or has allowed it to be sold in, the recovery of arrears of land revenue, or of any dues
recoverable as arrears of land revenue, the court may order dissolution.

9
https://ibclaw.in/
 ➢ Perpetual Losses: When the business of the firm cannot be carried on save at a loss
the court may dissolve it. The whole object of a partnership is to make profits and if
that object cannot be attained, it is needless for the firm to continue.
Thus, in the case of Collinghar v Sloper (1893) where the whole of the capital
contributed by the partners had already been spent and there were no business prospects
unless they contributed further capital, which they refused to do, the court granted
dissolution.
➢ Just and Equitable: When on any other ground the court thinks it just and equitable
that the firm should be dissolved. The expression, “just and equitable” gives
the court a very wide discretionary power, which is not to be fettered by any rules,
to order dissolution whenever in the circumstances it seems to be desirable.
Mismanagement of affairs has been held to be a good ground for ordering dissolution.
Like in the case of Jai Narayan Misra v Hashmathunnisa Begum, AIR 2002,
the firm was running theatre. The plaintiff partner was entitled to receive
a minimum guaranteed amount as his share of profit on monthly basis and the
same was not being paid to him. He was denied information as to the state of
accounts. This, the court said, showed mismanagement. The court accordingly
ordered dissolution.

Conclusion:-

The modes of dissolution in a partnership firm encompass both voluntary decisions among
partners and involuntary circumstances such as insolvency, expulsion, death, or legal
interventions. These modes reflect the diverse ways in which a partnership can cease to exist,
emphasizing the importance of clear agreements and legal frameworks in business
relationships.