Dissolution of a Firm and its Modes
The Indian Partnership Act, 1932 governs all the rules and regulations on matters relating to partnership. According to Section 4 of the Act, partnership can be defined as the relation between persons who have agreed to come together and share the profits of a business, managed by one on the behalf of others or by all. Persons who have individually come together are called as partners and collectively called as firm and the name under which they are carrying their business is called as firm name. The Indian Partnership Act, 1932 does not make it necessary for the companies to get registered themselves as firms but because of non-registration the firm can cause many disabilities. Registration of a firm may not from the very beginning of the establishment of a firm, it can be registered at any time during the working tenure of a firm. Section 56 to section 71 of the Act explains the provisions regarding the registration of firm with the registrar in the register of firms and the registrar will then issue a certificate of registration to that respected firm and the consequences of non-registration of firms.
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What is Partnership
The Indian Partnership Act, 1932 lays down the provisions for partnership among a group of people who wants to run a business or company together. According to section 4 of the Indian Partnership Act, 1932; “‘Partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually, ‘partners’ and collectively ‘a firm’, and the name under which their business is carried on is called the ‘firm-name’.”
Illustration: A is a goldsmith who promises to provide B with gold to make ornaments. They both enter into a contract to sell the ornaments and share the profit equally. Here A and B are partners and they are in a partnership for selling gold ornaments.
Essentials elements of a Partnership
There are 5 essential elements who must exist to form a partnership. These 5 essentials are explained here under;
Contract for Partnership – Partnership arises because of a contract made between the partners with their consent. It does not arise because of inheritance or by status like HUF cannot be regarded as a result of partnership as it arises because of status and inheritance. Example- if a father dies who is a partner in a firm, then his son can claim share in the partnership property but cannot become a partner. To become a partner, he will have to enter into a contract with all the other partners of the firm.
Purpose of carrying on a business – The purpose of partnership firm should be to carry on a business. The term ‘Business’ can be defined as any trade, occupation or profession carried on by a company or firm in order to make profit. Thus, any charitable work or company will not be included under partnership.
Two or more people – There must be minimum of 2 people to constitute a partnership. The Indian Partnership Act, 1932 does not specifies any upper limit on the number of members in a partnership. However, according to the Companies Act, 2013 the maximum number of members in a partnership firm should not be more than 100.
- Sharing of profits – The contract between the partners of a firm must be in order to share equal profits arising out of the business activities. However, the partners may decide upon the ratio of sharing of profit.
- Mutual agency – The most essential element of partnership is to carry on the business by all the partners or by anyone of them acting on behalf of all i.e., every partner has a dual role which is of an agent and a principle.
Dissolution of a Firm and Modes of Dissolution
According to Section 39 of the Indian Partnership Act, 1932, Dissolution of a firm can be defined as —”The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm.” So, dissolution of a firm is a process in which the relations among all the partners of a firm are dissolved or terminated permanently. Dissolution of a firm may be with and without the interference of the court. Once the firm has wind up all the activities, its assets are realized and the liabilities are settled. The partners of the firm are no more in a relationship of partnership and cannot carry a business under the firm’s name.
Section 39 to Section 44 provides provision for the modes of dissolution of a firm. Various modes in which a firm can be dissolved are given below;
Voluntary Dissolution – It is further divided into 4 types.
- Dissolution by Agreement (Section 40)
In this type of dissolution all the partners give consent for dissolution of a firm by entering into a contract or by mere consent.
- Contract for PartnershipContract for Partnership (Section 41)
A firm will be dissolved by the happening of any certain event which makes it unlawful for the business to be carried on further or by adjudication of partner as insolvent.
- On the happening of certain contingencies (section 42)
A firm may be dissolved on the basis of – by the expiry of the term period of the working of a firm; or on the completion of undertaking by the firm; or upon the death of a partner of the firm; or upon the insolvency of a partner of the firm.
- Dissolution by notice of partnership at will (Section 43)
When the partnership among the partners is at will then any one partner can dissolve the firm by showing his intention of dissolution and giving a notice to all the other partners of the firm.
Dissolution by the Court – A Court can dissolve a firm because of following reasons;
- Because of insanity or unsoundness of mind of a partner
- Permanent incapacity of a partner
- Because of misconduct of a partner
- Breach of agreement by any of the partner of the firm
- Transferring of a partner’s interest in a firm to a third party
- Experiencing continuous loss by the firm
- On the grounds of just and equitable reasons
Conclusion
The Indian Partnership Act, 1932 provides provisions relating to dissolution of a firm. It helps the person who wants to dissolve their firm so that no one takes their unfair advantage. Consent of all the partners is must for the dissolution of a firm and the books of accounts must be managed i.e., the assets and liabilities must be settled at the time of dissolution of a firm.
Author: Kushangi Sameliya – a student of Bharati Vidyapeeth New Law College (Pune) – a Legal Intern at IP And Legal Filings, in case of any queries please write back us via email at support@ipandlegalfilings.com.
