Dissolving Partnership Agreement

Dissolution of partnership means putting an end to a business partnership between all the partners of the firm. Any partnership can be dissolved by the mutual consent of all the partners and is carried out by way of executing a written agreement, referred to as a Partnership Dissolution Agreement.

According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’. The dissolution of a partnership is different from dissolution of the firm. While the dissolution of partners means reconstruction of firm, the dissolution of firm means that the firm no more exists after dissolution.

Purpose Of Partnership Dissolution Agreement

To dissolve a partnership legally, it’s essential to make a dissolution agreement as it helps in-

• Avoiding misunderstandings between partners
• Settling the business’ existing obligations
• Repayment of liabilities, if any
• Creating a plan for asset distribution among the partners

Signing a dissolution agreement may not end the partnership with immediate effect but may continue for some time as mentioned in the terms of the agreement. Apart from the effective date of the end of partnership, other conditions of dissolution has to be clearly explained in the agreement.

Different Ways Of Partnership Dissolution

A partnership firm may be dissolved in the following ways:

Dissolution by Agreement

According to Section 40 of The Indian Partnership Act, 1932, a partnership firm may be dissolved either by the voluntary agreement of all the partners, or in conformity with a contract between the partners.

Compulsory Dissolution

According to Section 41 of the Act, the firm may be dissolved when all the partners or all except one are adjudicated insolvent, dissolution of the firm happens. Also, if the business though permitted by law when it came into existence, after becomes illegal, then the firm has to be dissolved.

Dissolution on Happening of Certain Contingencies

According to Section 42, on certain uncertainties a firm are dissolved, except under the circumstances where there is a contract to the contrary. Unlike Section 41, which is obligatory, the dissolution intended under Section 42 is not compulsory. If partners agree the firm will not be dissolved, and the process will be carried on as before.

The contingencies mentioned in Section 42 include – expiration of the partnership, completion of the venture, death of an existing partner, and insolvency of a partner.

Dissolution by Notice

According to Section 43, a partner by his wish retires by giving notice to other partners of his intention to retire if the partnership business is at a will. Or when a partnership is created for three years but the business of the firm is continued thereafter without specifying the duration of the extended term, then during the extended time it becomes a partnership at will and the same can be dissolved by notice.

Dissolution by Court

According to Section 44, at the petition of a partner, the court may dissolve a firm in the following cases –

Unhealthy mind: When a partner becomes unhealthy, a petition may be filed either on behalf of the partner who has become unhealthy, or by any other partner in a partnership firm for the dissolution of business.

Permanent incapacity to perform duties: When a partner becomes permanently strengthless from performing his duties as a partner they may apply for the dissolution of the firm.

Conduct injurious to the partnership business: When a partner has committed an offence which is likely to affect or harm the carrying on the business of the firm, the court may dissolve the firm on that ground. The adultery by one partner, with another partner’s wife is grounds for the dissolution of the firm.

Willful or Repeated breach of agreement: When a partner intentionally and persistently commits breach of agreements relating to the management of affairs of the firm, or behave in such a way that the other partners would find difficult to carry on the business with him/her, a suit for the dissolution of the firm may be filed.

Transfer of a partner’s whole interest to a third party: When a partner has transferred his whole interest in the firm to an external person, it can be a ground on which the court may dissolve the firm. However, the third party is not entitled to become a partner in the firm.

Perpetual Loss: When a partner files a suit for the dissolution of the firm on the ground of the firm being at continuous loss, the court may dissolve the firm.

Just and Fair: When one of the partners file a suit on the ground that it is just and equitable to dissolve a firm, the court may dissolve the firm. The court uses its discretion on the basis of facts and circumstances of the case before deciding whether it would be ‘just and equitable’ to dissolve the firm.

Conclusion

A partnership firm is not said to be dissolved if one or more partners cease to be partners while others remain. Only if all the partners of the firm stop to carry on the partnership business, it is said to be dissolved.

Further, if the former partners of the partnership firm form another firm, it will be considered as a completely new firm, however closely its agreement may follow on the old firm’s dissolution.

How Can We Help?

Ending a partnership orally is not recommended since unprompted disputes may crop up anytime in the future. So, before dissolving a partnership firm make sure there’s a proper agreement of dissolution in place. Choose the Partnership Dissolution Agreement  draft to help resolve your difference with the partnership. To avail our service, just click the button below and submit your details, and one of our customer service representatives will contact you.