24 March 2024 12:10

Synopsis:
Introduction
Dissolution of firms
Modes of dissolution of firms
Consequences of Dissolution of a Firm
• Rights
• Liabilities
Insolvent partner
Effect of Insolvency of a Partner
Case laws on legal insolvency of a partner
Conclusion

Introduction

A firm is not said to be dissolved merely by the fact of one or

more members ceasing to be partners in it while others remain,

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more members ceasing to be partners in it while others remain,
unless and until all and everyone of the members of the firm
cease to carry on its business in partnership. But where there
are only two partners in a firm and one retires or relinquishes
his share in favour of the other, the firm dissolves. However,
where there are more than two partners, the relinquishment of
his right by one of the partners in favour of another does not
dissolve the firm.

Dissolution of the firm means when the partnership between all

the partners dissolved, then it is called dissolution of the
partnership firm. After the dissolution of the firm, the partners
have certain rights and liabilities as per the Indian Partnership
Act, 1932, which provides the consequences of the dissolution
of the firm. In a partnership firm, there are more than two
partners. This process includes the disposing of all the assets
and settlement of all the accounts and liabilities of all the
partners.

Dissolution of firms

Section 39 of the Indian Partnership Act, 1932 defines the

dissolution of partnership firms. The dissolution of the firm
means to stop all the business activities with the firm. There is a
difference between the dissolution of the firm and the
dissolution of the partnership.

When all the activities regarding business stops and all the
profit and loss is settled among the partners is called
dissolution of the firm and when the partner takes the
retirement from the firm even though the firm continues to
perform its activity with another partner is called dissolution of
a partnership.

Modes of dissolution of firms

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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.

Insanity- If a partner loses mental stability

Permanent incapacity- If one partners become incapable of
fulfilling his/her duties

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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 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.

Issuing of public notice-

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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.

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
firm.

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:

To wind up the affairs of the firm

To complete transactions begum but unfurnished , at the time

of the dissolution

Insolvent partner

Any partner who is unable to pay its debts in the usual course of
business and has been declared to be insolvent by the
appropriate court is an insolvent within the meaning of this Act.

Effect of Insolvency of a Partner

In case of insolvency of a partner, he ceases to be a partner on

the date on which he is adjudicated as an insolvent by the
appropriate court or tribunal irrespective of the fact that the
firm is dissolved or not. Where under a contract the firm is not
dissolved because of a partner becoming insolvent, thereafter
from such order of adjudication the estate of the insolvent
partner shall not be liable for the act of the firm and the firm
shall not be liable for the act of the insolvent partner.

Ordinarily, but not invariably, the insolvency of partner results

in the dissolution of a firm; but the partners are competent to
agree among themselves that the adjudication of a partner as an
insolvent will not give rise to the dissolution of the firm.

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Case laws on legal insolvency of a partner

Laxmichand v. Amirchand, AIR 1932 Sind 164:

It is to be noted that in India dissolution of a partnership does

not take place at its own on the insolvency of a partner. An
insolvent partner is competent for and on behalf of the firm, to
make a valid transfer of a decree obtained by a firm, specially
when it is necessary to the winding up of the partnership.

Chettiar Firm v. Dayabhoy, AIR 1935 Rang 59:

If there are two or more partners, dissolution automatically

follows on the adjudication of all the partners or all but one as
insolvent. It follows that where all the partners or all but one
are adjudicated as insolvent, firm can no longer remain in
existence for the reason that there must be two partners
competent to carry on the trade.

Conclusion

The insolvency of a partner can have a significant impact on a

partnership firm under the Indian Partnership Act, 1932.

• Subject to contract between the partners a firm is

dissolved—by the adjudication of a partner as an insolvent.
• The estate of the insolvent partner becomes relieved of any
liability for the firm's debts incurred after the date of
insolvency.
• The adjudication of a partner as insolvent automatically
leads to their ceasing to be a partner, irrespective of
whether it causes firm dissolution
• Even after dissolution due to insolvency, partners (except
the insolvent one) remain liable to third parties for pre-
dissolution obligations of the firm unless a public notice of
dissolution is given
• In essence, insolvency of a partner can lead to the firm's
closure unless a continuation clause exists in the
partnership agreement. The insolvent partner's estate is
shielded from post-insolvency debts, but other partners
might still be liable to third parties.

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