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Dissolution of a partnership firm: Judicial Interpretation


Authored By Anshu Prasad


Keywords- dissolution, partnership, Indian partnership act.


Abstract

The Indian partnership act of 1932 deals with the provision relating to the rights, duties, and liabilities arising out of a partnership. The dissolution of a partnership firm is a process in which the relationship between the parties of the firm gets dissolved or terminated. The articles deal with the provisions relating to the dissolution of a firm explaining each ground in detail.


Introduction

The Indian partnership act of 1932 deals with the provision relating to the rights, duties, and liabilities arising out of a partnership. The dissolution of a partnership firm is a process in which the relationship between the parties of the firm gets dissolved or terminated. After the dissolution of the firm, all the assets of the firm or and settlement of accounts, assets, and liabilities are discharged and disposed of. Section 39 of the Indian Partnership Act states that when the dissolution of the partnership between all the partners of the firm occurs, this is called the dissolution of the firm.


· Dissolution by the court (Section 44)

The Court may order for the dissolution of the firm when a partner becomes insane, the partner is incapable of discharging his duties, there is misconduct by the partner, there is a constant breach of the agreement by the partner, there is a transfer of interest, suffering a continuous loss, Just and Equitable.


· Liability of the partners after dissolution. (Section 45).

The section states that the partners of the firm will still be liable to the third person for any of the acts that were performed by them before the dissolution unless a public notice for the is given for the same. The provision under this section states that it is necessary to provide a notice to the public before a partner terminates his future liability. Whether the case is that of dissolution, expulsion, or retirement.


· Rights of the partners to have business wound up after dissolution. (Section 46)

After the dissolution, each partner or his representatives is entitled to receive equal rights or based on any contract. All the partners of the firm are entitled to have the property of the firm applied in payment of the debts and liabilities of the firm, and the surplus must be distributed among-st the partners or the representatives in accordance with their rights.


· Continuing authority of partnership for purposes of winding up. (Section 47)

After the firm is dissolved the authority of each partner to bind the firm and continue so far as for being necessary o wind up the affairs of the firm and to complete the transaction that began but was left unfinished till the time of dissolution. Partners have to wind up all the transactions that are related to the 3rd party in order to wind up the business. It has been even stated that the firm is not bound by the acts of the partners who has been adjudicated insolvent but does not affect the liabilities of any person who has represented himself as a partner of the insolvent after the adjudication.


· Mode of settlement of accounts between partners. (Section 48)

This section deals with the modes in which the accounts can be settled among partners after dissolution. There are some rules to be observed by the partners such as the losses shall be paid out of profits, capital and if necessary then by the partner’s individual proportions. All the assets of the company including the sums contributed by the partners shall pay all the debts of the firm to the third party, shall pay what is due to him from the firm and what is due to him on account of capital and the residue shall be divided among-st the partners in proportions.


· Payment of firm debts and of separate debts. (Section 49)

The property/ assets of the firm or the separate property of any partner shall be applied first to the payment of the debt of the firm/ separate debts and then the surplus- of each partner shall be applied in payment of his separate debts or paid to him/in the payment of the debts of the firm.


· Personal profits earned after dissolution. (Section 50)

The provision of clause (a) of section 16(Personal profits earned by partners) shall only apply to the transactions by surviving partner or by the representative of a deceased partner after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up.


In the case of Clements v. Hall(1), A and B carry on a business in partnership. The firm holds a leasehold for the purpose of the business. A passed away before the affairs of the firm are completely wound up, the lease expires and after which B renews it. The renewed property is a partnership property.


· Return of premium on premature dissolution (Section 51)

If a firm dissolves before the expiration of the term due to the death of a partner and another partner had paid a premium on entering into partnership then he will be entitled to repayment of premium or a part as may be reasonable for the length of time during which he was a partner but if the dissolution is due to his own misconduct then there is no provision for the return of the premium or any part of it.


In the case of Airey vs. Barbam(2), A and B entered into a partnership for a term of five years. A paid premium to B. The partnership was dissolved within two years as a result of mutual disagreement due to the failure of A to devote time to the business as agreed. It was held that no part of the premium was payable because the dissolution was caused due to A’s misconduct.


Conclusion

The partnership act, 1932 provides the conditions by which a partnership firm can be dissolved. It can be dissolved even before the court and outside the court. The act was made in order to make things clear in a partnership firm so that partners do not take advantage of each other. The Act even helps us to maintain a stable environment in the firm.

References

1)232 S.W.2d 827 (1950)

2)1861, Beav, 620

3)https://blog.ipleaders.in/partnership-firm-law/#_ftn16

4)http://www.legalservicesindia.com/article/1063/Dissolution-of-partnership-firm.html

5)https://www.vakilno1.com/legal-news/all-you-need-to-know-about-dissolution-of-partnership.html

6)https://www.toppr.com/guides/accountancy/dissolution-of-partnership-firm/dissolution-of-partnership-dissolution-of-firm-and-settlement-of-accounts/

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