PARTNERSHIP ACT- NOTES ! PART II


DISSOLUTION OF PARTNERSHIP :

SECTIONS 39 TO 47# 'dissolution' =discontinuation.

What is dissolution of partnership ?

DISSOLUTION OF PARTNERSHIP = the change in the existing relations of the partners.

Effect ! Firm continues its business after being reconstituted.

When it occurs ?

This may happen on admission, retirement or death of a partner or change in profit sharing ratio in the firm

What is dissolution of firm ?

DISSOLUTION OF FIRM - dissolution of partnership between all the partners of a firm.

Effect of dissolution of firm : Business of firm is discontinued.

What is difference between dissolution of partnership and firm ?

What are the modes of dissolution of firm ?

Modes of Dissolution of a Firm : Relevant Provision : Sections 40 to 44 :

The dissolution of firm occurs by

(1) By the order of the court &

(2) Without the order of the court .

Dissolution without the Order of the Court

Relevant provision : Sections 40 to 43

What are the modes of dissolution can be effected without order of the court ?

1. Dissolution by mutual agreement # Section 40: A firm may be dissolved by mutual agreement among all the partners. Even a firm for a fixed duration may be dissolved by mutual agreement.

2. Compulsory dissolution # Section 41: A firm is compulsorily dissolved in the following two circumstances: (i) If all the partners, or all but one partner o- declared insolvent; (ii) If firm's business becomes unlawful.

When two or more business is carried if any one business is declared unlawful then other lawful business can be carried on.

3. Dissolution on the happening of certain contingencies #Section 42:

A firm is dissolved on the happening of any of the following four contingencies:

(i) On the expiry of the fixed term for which the firm was constituted;

(ii) On completion of purpose of the firm.

(iii) On the death of a partner; and

4. On the insolvency of a partner.

Effect of death of all partners / only one partner left alive = firm must be compulsorily dissolved .

5. Dissolution by notice # Section 43 # Notice in writing by partner must be given to all other partners of his intention to dissolve the firm.

Date of dissolution = date of dissolution mentioned in the notice.

If no date is mentioned ? then date of the communication of the notice.Notice once given cannot be withdrawn without the consent of all other partners # Jones v. Lloyd.

DISSOLUTION BY AN ORDER OF COURT # SECTION 44.

Who can apply for dissolution ?

Who can apply :On the receipt of petition by a partner, court can order for dissolution # grounds for dissolution.

What are the grounds under which dissolution can be effected by court order ?

GROUND I - Insanity # Section 44(a)J- Court may allow dissolution.

  • WARNING ! temporary sickness is no ground for dissolution of partnership.

  • EXCEPTION ! Dormant partner's insanity no ground to dissolve.

  • BECAUSE ! Dormant partner has hardly any duties to perform.

  • WHO CAN FILE THE PETITION ? - any other partner / the next friend of the insane partner.

Ground II- Permanent Incapacity # Section 44(b) When a partner an actual partner becomes permanently incapable dissolution could be ordered. WHO CAN APPLY ? Any other partner .

GROUND III- Misconduct # Section 44(c) When a partner guilty of misconduct which is likely to adversely affect the carrying on business, the court may allow dissolution # It is not necessary that the misconduct must relate to the business of the firm.

CASE LAW : Abbot v. Grump – Adultery between partner and another partner’s wife -Dissolution was ordered as mutual trust was broke .

GROUND IV - Persistent Breach of Agreement # Sec 44(d)- When a partner wilfully or persistently commits breach of agreement in matters relating to the business other partner may seek for dissolution of the firm.

EXAMPLES ! Embezzlement.

CAUTION ! The partner seeking dissolution must not be a party to such misconduct.

GROUND V : Transfer of Interest # Section 44(e)

  • When partner has transferred whole of his interest in to a third party or

  • Allowed his share to be charged on account of a decree passed by a court towards payment of liabilities of that partner or

  • Allowed his share to be sold in the recovery of arrears of land revenue.

GROUND VI – Business in perpetual Losses :Where the business incur perpetual loss it can be dissolved.

GROUND VII - Any other Just and Equitable Ground # Section 44(f): Where the court is satisfied that it is just and equitable to dissolve the firm it may allow dissolution Example ! Continued quarrelling between the partners.

RIGHTS AND LIABILITIES OF A PARTNER ON DISSOLUTION

Relevant Provision: Sections 46, 51 to 53.

What are the rights of the partners ?

Right I - Partner's General Lien # Sec 46: Every partner or his representative is entitled-

  1. to have the firm's property applied in payment of the firm's debts, and

  2. to have the surplus distributed amongst the partners .

  3. If a partner joined a firm for a fixed term and had paid a premium and the firm is dissolved before the fixed term, he is entitled to return of the premium. # section 51.

EXCEPTION ! Exceptional circumstances :

  • When the dissolution is due to the death of partner,

  • When the dissolution is due to misconduct of the partner who paid the premium; or

  • The dissolution is according to an agreement which had no provision for the return of premium or any part thereof.

Right II- Rights of a Partner in Case of Dissolution on Account of Fraud or Misrepresentation # Section 52:

  • He has a right of lien on the surplus assets after the payment of firm's debts.

  • He is entitled to rank as a creditor of the firm in respect of any payment;

  • He is entitled to be indemnified by the partners guilty of fraud.

Right III- Right to Restrain from Use of Firm Name or Firm Property # Section 53: Every partner may restrain any other partner or his representative from carrying on a similar business in the firm name /property of firm for own use.

Liabilities of a Partner on Dissolution # Sections 45 and 47.

Liability I - Continuing Liability for Acts of Partners Done After Dissolution # Section 45 -Until a public notice is given of dissolution, the partners continue to be liable for any act done .

EXCEPTION !

  1. the estate of a deceased partner;

  2. the estate of an insolvent partner;

  3. a sleeping or dormant partner who has retired from the firm.

Right III - Continuing authority of Partners After Dissolution # Section 47

After the dissolution of a firm, the authority of a partner to bind the firm and the other mutual rights and obligations of the partners continue, so far as may be necessary-

(i) to wind up the affairs of the firm, and

(ii) to complete the unfinished transactions pending at the date of dissolution.

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