Question

Explain the process of dissolution of a partnership firm?

Answer 1

Dissolution of partnership firm implies discontinuation of the business of the partnership firm. According to the Section 39 of Partnership Act, dissolution of partnership between all the partners of a firm is called dissolution of partnership firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities and distribution of any surplus or borne of loss by the partners of the firm. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners:

1) Dissolution by Agreement

A firm may be dissolved with:

a) the consent of all the partners, or

b) the contract between the partners

2) Compulsory Dissolution

A firm may be dissolved by:

a) the adjudication of all the partners or of all partners but one as insolvent

b) happening of an event or change in government policies that make the business unlawful.

3) Dissolution on the happening of Certain Contingencies

Subject to the contract between the partners, a firm is dissolved

a) if formed for a specific period then on the expiry of the period

b) if formed for a specific purpose then on completion of the purpose

c) on the death of partner/partners

d) on insolvency of a partner/partners

4) Dissolution by Notice

If partnership is at will then the partnership firm is dissolved if any partner giving notice in writing to all the other partners expressing his/her intention to dissolve the firm.

5) Dissolution by Court

The court may order to dissolve a partnership firm when:

a) a partner becomes insane or lunatic.

b) a partner becomes permanently incapable of performing the duties.

c) a partner is guilty of misconduct and affects the business activities.

d) a partner repeatedly breaks the terms of agreement .

e) a partner transfers his interest to a third party without the consent of other partners.

f) a business persistently incurs losses.

Besides these above mentioned circumstances, a partnership firm may be dissolved if the court at any stage finds dissolution of the firm to be justified and inevitable.

The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.

1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:

a) First of all the external liabilities and expenses are to be paid.

b) Then, all loans and advances forwarded by the partners should be paid.

c) Then, the capital of each partners should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital, then this should be paid in the following order:

a) First these should be adjusted against firm's profits.

b) Then, against the total capital of the firm.

c) If still there exists any loss and deficiencies, then it should be borne by all the partners individually in their profit sharing ratio.