As per the Indian Partnership Act, 1932
Meaning
The dissolution of partnership refers to a change in the contractual relationship among the partners of a firm. It signifies the termination of an existing partnership agreement without necessarily bringing the business of the firm to an end. The firm may continue with a reconstituted partnership, excluding the outgoing partner(s).
This is distinct from dissolution of a firm, which results in the complete cessation of the partnership business.
Statutory Provisions
The relevant provisions are contained in Sections 39 to 55 of the Indian Partnership Act, 1932.
Modes of Dissolution of Partnership
1. Dissolution by Agreement (Section 40)
The partners may mutually agree to dissolve the partnership, either by express consent or as provided in the partnership deed.
2. Compulsory Dissolution (Section 41)
The partnership must be dissolved:
- When all the partners, or all except one, become insolvent.
- When the business of the firm becomes unlawful due to changes in law.
3. Dissolution on the Occurrence of Certain Contingencies (Section 42)
A firm is dissolved upon:
- Expiry of a fixed term (in a partnership for a fixed period).
- Completion of the venture or undertaking.
- Death or insolvency of a partner.
- Retirement of a partner (if not otherwise agreed).
4. Dissolution by Notice (Section 43)
In case of a partnership at will, any partner may dissolve the firm by giving a written notice of his intention to dissolve the firm to all the other partners.
5. Dissolution by the Court (Section 44)
The court may order dissolution of the firm on grounds such as:
- Mental incapacity of a partner.
- Permanent incapacity to perform duties.
- Misconduct affecting the firm’s reputation or business.
- Persistent breach of the partnership agreement.
- Business operating at a consistent loss.
- Just and equitable grounds.
Distinction: Dissolution of Partnership vs Dissolution of Firm
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Effect | Change in the relationship among partners | Termination of the business as a whole |
| Continuation of Business | The business may continue | The business comes to an end |
| Legal Entity | Reconstitution of the firm | Dissolution of the legal entity |
| Result | Requires a new agreement | Assets are liquidated, liabilities paid |
Consequences of Dissolution
- Realisation of assets and payment of liabilities.
- Settlement of accounts in accordance with Section 48.
- Distribution of any surplus among partners as per agreed profit-sharing ratio.
- Sale of goodwill (if applicable).