Dissolution of firm
📘 Dissolution of a Firm
Dissolution of a firm means the complete closure of the business and termination of the partnership among all partners. It is broader than dissolution of partnership (which may just involve one partner leaving or joining).
🔍 Definition
Dissolution of a firm occurs when the partnership between all the partners comes to an end and the firm ceases to exist as a legal entity.
⚖️ Legal Basis
In jurisdictions like India, Section 39 of the Indian Partnership Act, 1932 defines it:
“The dissolution of partnership between all the partners of a firm is called the dissolution of the firm.”
🛠️ Modes of Dissolution of a Firm
1. Dissolution by Agreement (Section 40)
When all partners agree to dissolve the firm voluntarily.
2. Compulsory Dissolution (Section 41)
Occurs when:
All partners become insolvent, or
Business becomes illegal due to a change in law.
3. Dissolution on Contingency (Section 42)
On the expiry of a fixed term.
On completion of a particular venture.
On the death or insolvency of a partner (unless otherwise agreed).
4. Dissolution by Notice (Section 43)
In a partnership at will, any partner can dissolve the firm by giving written notice to all other partners.
5. Dissolution by Court (Section 44)
A partner may apply to court if:
A partner is insane or incapable.
There’s misconduct or breach of agreement.
Business can’t be carried on profitably.
On any just and equitable ground.
📊 Distinction: Dissolution of Partnership vs Firm
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Definition | Ends the relationship with one or more partners | Ends the relationship among all partners |
| Continuation of Business | Business may continue | Business ends completely |
| Involves | Change in constitution | Complete closure of firm |
🔚 Consequences of Dissolution of a Firm
Business stops operating.
Firm enters winding-up process.
Assets are sold, and liabilities paid off.
Remaining amount (if any) is distributed among partners.
Firm's registration (if any) is cancelled.
🧾 Example
Ali, Ben, and Carla run a travel agency under a partnership. After Carla dies, and no agreement exists to continue, the firm is dissolved. All operations stop, assets are liquidated, and liabilities settled.
✅ Summary Table
| Mode | Description |
|---|---|
| By Agreement | Mutual decision of partners |
| Compulsory | Due to insolvency or illegality |
| On Contingency | Expiry, death, insolvency (unless agreed otherwise) |
| By Notice | In partnership at will |
| By Court | Due to misconduct, incapacity, etc. |
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