DISSOLUTION OF PARTNERSHIP FIRM

Dissolution of Partnership Firm means the firm closes down its operations and comes to an end. On the dissolution of the firm, the assets of the firm are sold and liabilities are paid off. The balance, if any, is paid to the partners in settlement of their accounts. If there is shortfall in meeting outside liabilities, it is met by the partners from their private assets.

ACCORDING TO SECTION 39 OF INDIAN PARTNERSHIP ACT, 1932

“Dissolution of partnership among all the partners of the firm is known as Dissolution of Partnership Firm.”

In other words, it means the breakdown or discontinuance or severance of the relation of partnership between all the partners. Thus, when all and every one of the members of a firm stops to carry on the business of the firm, the firm is said to be dissolved.

DISSOLUTION OF PARTNERSHIP

The word ‘Dissolution’ implies the undoing or breaking of a bond or tie. In other words, the dissolution implies that the existing state of arrangements is done away with.

Dissolution of partnership implies a change in the existing relationship of partners through reconstitution of the firm without affecting the entity of the firm. In other words, the firm continues to function as ever before but only the economic basis of relationship of the partners is reconstituted. So the dissolution of partnership does not involve the complete breakdown of relationship among the partners but it merely means a change in the economic relationship.

The change in the economic relationship is caused by change in Profit sharing ratio, admission of a new partner, retirement of partner and death of a partner. These events lead to reconstitution of existing firm.

In short, the existing partnership dissolves, wherever a firm is reconstituted through change in the profit sharing ratio, admission, retirement or death of a partner etc. Such reconstitution takes place by pursuance of express or implied contract.

CIRCUMSTANCES IN WHICH THE PARTNERSHIP IS DISSOLVED             

The partnership is deemed to have been dissolved in any of the following cases:

  • If there is change in profit-sharing ratio of the existing partners.
  • In case of Admission of Partner.
  • If a partner retires from the firm, where at least two persons remain as partners.
  • In case of Expulsion of Partner.
  • If a partner dies, where at least two persons remain as partners.
  • If there is insolvency of any one of the partners.
  • In case of expiry of the period of partnership if the partnership is formed for fixed period.
  • Completion of venture, if the partnership is formed for that venture.
  • Merger of one partnership firm into another.
BASIS OF DIFFERENCE DISSOLUTION OF PARTNERSHIP DISSOLUTION OF FIRM
MEANING It refers to a change in the existing agreement between the partners. It refers to the dissolution of partnership between all the partners of the firm.
COURT’S INTERVENTION Not required. Required in some cases.
BUSINESS CONTINUATION Business of the firm continues. Business of the firm comes to an end.
CLOSURE OF BOOKS OF ACCOUNTS Books of accounts of the firm need not to be closed. Books of accounts of firm are closed.
ASSETS AND LIABILITIES Assets of the firm are revalued and liabilities of the firm are reassessed. The gain or loss due to it, is distributed among the partners in their old- profit sharing ratio. Assets of the firm are realized and liabilities of the firm are settled. The balance amount, if any, is distributed among all e partners
ECONOMIC RELATIONSHIP Economic relationship among the partners changes. Economic relationship among the partners comes to an end.
EFFECT Dissolution of partnership does not necessarily mean the dissolution of firm. Dissolution of firm necessarily means the dissolution of partnership.
NATURE It is voluntary. It may be both voluntary and compulsory.
MODES OF DISSOLUTION Dissolution of partnership occurs on the mutual agreement among the existing partners. Dissolution of the firm occurs either at the expiry of specific term or mutual agreement of the partners or by the order of the court.
SCOPE Its scope is narrower than dissolution of firm, because it involves the reconstitution of relationship without effecting the continuation of the firm. Its scope is wider than dissolution of partnership because it involves complete breakdown of relationship of partners and leads to discontinuance.
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