Under what circumstances a firm may be dissolved?

Indian Partnership Act makes a clear distinction between dissolution of firm and dissolution of partnership. The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. In a dissolution of the firm, all partners go out. When the business of the firm is closed down and its affairs are wound up, it is called dissolution of the firm.

Modes of Dissolution of a Firm :

By Mutual Agreement. A firm may, at any time be dissolved with the consent of all the partners, or in accordance with a contract between the parties.

Compulsory dissolution: A firm is compulsorily dissolved in the following cases:
  • When all or all but one partners are adjudged insolvent or
  • When the business of the firm becomes unlawful due to the happening of any event.
Dissolution on the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved on the happening of the following contingencies :
  • If the firm is constituted for a fixed term, on the expiry of that term,
  • If constituted to carry out one or more adventures, on the completion thereof,
  • On the death of a partner,
  • On the adjudication of a partner as an insolvent.

Dissolution by notice: When the partnership is at will, it, may be dissolved at any time by any partner by giving a notice of his intention to dissolve it. No particular formality is required, but the notice must be a clear intimation
of a final intention to dissolve the firm.

Dissolution by court: 

At the suit of a partner, the court may order dissolution of the firm on anyone of the following grounds:

Insanity: When a partner has become of unsound mind the court may allow dissolution of the firm. The suit for dissolution can be filed by any partner.

Permanent incapacity: When a partner, other than the partner suing, has become in anyway permanently incapable of performing his duties as a partner, any other partner may apply for dissolution.

Misconduct: The court has the power to dissolve a firm on the ground of misconduct of a partner, where the misconduct is of such a nature as to affect pre judicially the carrying on of the firm’s business.

Persistent breach of agreement: If a partner. willfully or persistently commits breach of agreement regarding the management, or otherwise so conducts himself in matters relating to business of the firm that it is not reasonably practicable for the other partners to carry on the business in partnership with him, then any other partner can apply for dissolution on that ground.

Transfer of interest: If a partner has transferred the whole of his interest in the firm to a third party or has allowed his share to be sold in execution of a decree, the court may dissolve the firm at the instance of any other partner.

Continuous losses: The court may order the dissolution of the firm when its business cannot be carried on except at a loss.

Just and Equitable: On the other ground which, is the opinion of the court, is a fit ground for dissolution of partnership. Dissolution on this ground has been granted in case of deadlock in the management disappearance of the substratum of the business etc.

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