Dissolution of a Partnership Firm

and Consequences of Dissolution

Partnership ActSubject-wise Law Notes
February 19, 2021

Generally, it is understood that there is no difference between

dissolution of partnership and dissolution of firm, and both are
synonymous. But this is not correct, because both of them are
different concepts. The dissolution of partnership means
disconnection of some partners from partnership and the dissolution
of firm means disconnection of all partners from each other. The
latter ends in an end of business.

Dissolution of a partnership firm means a process in which

relationship between partners of firm is dissolved / terminated or it
can be said that it means discontinuing the business under the name
of said partnership firm.

According to Section 39 of the Partnership Act, 1932 the dissolution

of a partnership firm between all the partners of the firm is called the
“Dissolution of the Firm”. The business of the firm essentially comes
to and upon the dissolution of the firm. When a firm is dissolved, the
assets of the firm are sold out and liabilities of the firm are satisfied.
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 After Dissolution of the partnership firm, the firm cannot do any
activity with anybody after the dissolution of the firm.

However, the partnership firm is dissolved under certain

circumstances, they are as follows-

1. Change or shift in its existing profit-sharing ratio.

2. A new partner’s entry
3. Retirement of one or more existing partners of the firm
4. Demise of one of the partners
5. Completion of a specific partnership venture
6. Expiry of partnership period of agreement
7. A partner’s insolvency due to incompetence to contract[1]

After Dissolution, a partnership firm can only sell the assets to realise
the amount, pay the liabilities of the firm and discharge the claim of
the partners. The dissolution may be done with or without the
intervention of the court.

1. Ways of Dissolution of a Partnership Firm

2. Consequences of Dissolution of a Firm
3. Rights of A Partner on Dissolution of a Firm
4. Liabilities of A Partner On Dissolution Of Firm
5. Settlement of Accounts After Dissolution of a Firm

Ways of Dissolution of a Partnership Firm

There are various ways through which the partnership firm may be
dissolved, they are as follows:

Dissolution by Agreement (sec 40)

Dissolution by Notice
Contingent Dissolution
Compulsory Dissolution (sec 41)
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 Dissolution by Court

Dissolution by agreement- A firm can be dissolved with an

agreement among its existing partners in accordance with the terms
of the agreement.

Dissolution by notice- When a partnership is formed at will, the

dissolution of the firm may take place if any of the partners gives a
notice in writing to the other partners indicating his intention to
dissolve the firm.

Compulsory Dissolution- Circumstances under which a firm is

dissolved compulsorily are as follows:

When one or more partners of a firm become solvent, making

them incompetent to enter any contract or agreement
If it becomes unlawful for a specific partnership firm to continue
its business and revenue generation.

Contingent dissolution- Upon happening of certain events, a firm

may be required to get dissolved:

Expiry of fixed-term- Partnership formed for a fixed term will

get dissolved once the term gets over.
Completion of task- Sometimes, a partnership is formed for a
certain task or objective. Once the task is completed, the
partnership will automatically get dissolved.

Death of partner- If there are only two partners, and one of the
partner dies, the partnership firm will automatically dissolve.

Dissolution by the court- When of the partners of a firm files a legal

suit; a court of law can direct the dissolution of a firm. That can be
done on any of these following grounds described below.
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 Insanity- If a partner loses mental stability
Permanent incapacity- If one partners become incapable of
fulfilling his/her duties
Misconduct- When a partner is found guilty of any misconduct
that goes on to affect his firm’s business adversely when a
lawful court deems its dissolution
Transfer of interest- If one or more partners turn their whole
interest in the partnership to a third party.
Business at loss- Where the business of a firm cannot be
carried on except at a loss, the court may dissolve the firm at
the suit of partner. A partnership is essentially formed to earn
and share the profits, and if it is carried on only at loss, it comes
to an end, i.e the court may dissolve the firm.

Consequences of Dissolution of a Firm

Rights of A Partner on Dissolution of a Firm
On Dissolution of firm, a partner has following rights:

Right to have business wound up- on dissolution of a firm,

each partner is entitled to have the property of the firm applied
in payment outside debts and liabilities of the firm, and to have
the surplus distributed among the partners in accordance with
their rights. This right of a partner is called “partner’s lien”.
Right to personal profits earned after Dissolution- Where
any partner has bought the goodwill of the firm on its
dissolution, he has the right to use the firm’s name and earn
profit by its use.
Right to return of premium on premature dissolution- Where
a partner has paid a premium on entering into partnership for a
fixed term and the firm is dissolved before the expiration of the
term, he is entitled to repayment of the whole or part of the
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 premium, regard being had to:
(a)- the terms upon which he becomes partner.
(b)- the length of the time during which he was a partner.
Right where partnership contract is rescinded for fraud or
misrepresentation- Where partnership is rescinded on the
ground of fraud or misrepresentation of one partners, the
partner entitled to rescind has the following rights:
Right in lieu of surplus assets
Right of subrogation
Right to be indemnified
Right to restrain partners from the use of firm name or firm
property- After a firm has been dissolved, every partner or his
representative may restrain any other partner or his
representatives from carrying on a similar business in the firm
name or from using any property of the firm for his own benefit,
until the affairs of the firm have completely wound up.

Liabilities of A Partner On Dissolution Of Firm

After the dissolution of firm has taken place, the following liabilities
have been casted upon the partners.

1. Issuing of public notice- Public notice must be given of the

dissolution in order to absolve partners of the liability for any act
done after the dissolution of the firm. If it is not done, the
partners continue to be liable as such to third parties for any act
done by any of them after the dissolution, and in such case, the
act of partner done after dissolution is deemed to be an act
done before the dissolution.
2. partner to make use of the assets of the firm for the payment
of loans and settlement of other liabilities on behalf of the firm.
Whatever is left after the payment of loans and settlement of
other dues, the same is distributed among the partners of the
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 firm.
3. Continuing rights and liabilities of partners- After the
dissolution of a firm, the authority of each partner to wind-up
the firm and for the other mutual rights and obligations of the
partners continue, so far as may be necessary:
4. To wind up the affairs of the firm
5. To complete transactions begum but unfurnished , at the
time of the dissolution

The firm is not liable for the act of an insolvent partner in above two
cases.

Settlement of Accounts After Dissolution of a

Firm
Final settlement of account after dissolution, if there is no other
agreement among the partners in that regard, is made as follows:

1. Loss of business- Losses, including deficiencies of capital,

shall be paid first out of profits, then out of capital and lastly by
partners individually in the proportions in which they were
entitled to share profits.
2. Use of Assets of Business- The assets of the firm, including
any sums contributed by the partners to make deficiencies of
capital, shall be applied –
3. In paying the debts of the firm .
4. In paying each partner rateably what is due to him from the
firm for advances as distinguished from capital .
5. In paying each partner what is due to him from the firm for
advances as distinguished from capital .
6. Payment of Business loans and the loans of partners- If the
firm has to pay business or commercial loans like bank overdraft
and has also to pay back the loans taken from the partners, then
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 at the time of dissolution of the firm, first business or
commercial loans are paid and , thereafter , loans taken from
partners are paid.
7. Profits acquired after Dissolution of the Firm – A partnership
firm may come to an end due to the death of a partner. It may
happen that the surviving partner has earned some profits after
the death of the partner, but before the dissolution of the firm
has in fact taken place. Under the circumstances, it becomes
the duty of the surviving partner to give the share of profit of the
dead partner to his legal representatives.

For More Articles On Partnership Act, Click Here.

For Notes On Other Subjects, Click Here.

For Case Briefs And Analysis, Click Here.

[1] https://www.vedantu.com/ dissolution of a firm.

Author Details: Madhvee Singh (Student, Shri Ramswaroop memorial

university, Lucknow)

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