Dissolution of Partnership
Dissolution of partnership refers to the formal termination or cessation of a business arrangement between two or more individuals who jointly operated a business entity. It signifies the end of the partnership agreement, resulting in the discontinuation of business operations under the partnership’s name.
Various factors can trigger dissolution, such as mutual agreement among partners, completion of a specific term or task, death or departure of a partner or legal actions. Upon dissolution, partners settle financial matters, including liabilities and asset distribution, often guided by the terms outlined in the partnership agreement. The process aims to conclude the partnership’s legal and financial obligations, paving the way for partners to pursue independent endeavors.
Ways of Dissolving a Partnership Firm
There are different ways in which a partnership firm may get dissolved. They are –
When partners mutually agreed
It is the easiest way to dissolve a partnership firm since all partners have mutually agreed upon closing the partnership firm. Partners can give a mutual consent or may enter into an agreement for the dissolve.
Compulsory dissolution
A firm may need to be dissolved compulsorily if:
- All partners or all partners except one partner are declared insolvent.
- The firm is carrying unlawful activities like dealing in drugs or other illegal products or doing business with alien countries or other countries that may harm the interest of India or doing other such activities.
Dissolution depending on certain contingent events
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 a 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 the partner– If there are only two partners, and one of the partner dies, the partnership firm will automatically dissolve. If there are more than two partners, other partners may continue to run the firm. In such case, only the partnership will get dissolved, and other partners will enter into a new agreement.
Dissolution by notice
If a partnership business is at will, any partner can dissolve the partnership by giving advance notice. Notice will contain a date from which dissolution will be effective.
Dissolution by Court
If any of the partners become mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in the court to dissolve the firm. But a court can dissolve the firm only if it is registered with the Registrar of Firms. Hence an unregistered partnership firm can’t be dissolved by the court.
Transfer of interest or equity to the third party
If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.
Insolvency or Retirement of a Partner
If a partner is declared insolvent or voluntarily retires from the partnership, it may result in the dissolution of the partnership. However, if there are multiple partners, the remaining partners may choose to continue the business under a new agreement.
Premium to be Returned on Premature Dissolution
In cases where a partner paid a premium for entering into a partnership for a fixed term and the dissolution occurs before the term ends, the partnership is obligated to repay the premium amount to the partner. Certain conditions, such as the dissolution not being due to the partner’s death or misconduct, apply.
Transfer of Assets and Liabilities
Partners may opt for dissolution by transferring the partnership’s assets and liabilities among themselves. This method allows for a smooth transition and settlement of the partnership’s affairs.
Expiration of Fixed Term
Partnerships formed for a specific period automatically dissolve upon the expiry of that term. This mode of dissolution is predetermined and specified in the partnership agreement.