Dissolution of a Partnership Firm – its Methods

The dissolution of a Partnership firm means termination of the relationship between the partners but when there is the termination of the relationship between all partners then this situation is known as a Dissolution of Firm.

Meaning of Dissolution of a Partnership Firm: –

Dissolution of Partnership Firm means the discontinuation of the operation of the firm or Closing down or wound up the operation of the Partnership Firm. In this situation, all assets of the firm will be sold, all liabilities paid off and the balance of capital and current account will be adjusted with the available cash balance(if any).

According to Section 39 of the Indian Partnership Act, 1932: –

“Dissolution of the firm means dissolution of partnership among all the partners in the firm.” 

Methods of Dissolution of A Firm: – 

The methods by which a firm can be dissolved shown as following: –

1. All Partners’ Mutual Agreement. 
2. Compulsory Dissolution by Law. 
3. Notice to all partners by one partner
4. On some special events 
5. By Court Order. 

All Partners’ Mutual Agreement: –

In the case where all partners will mutually agree to dissolve the partnership firm and they don’t want to continue its operation. This method of dissolution is adopted in a situation where the business incurring year-on-year losses then all partners decide to dissolve their firm. 

Compulsory Dissolution by Law: –

The partnership firm may compulsorily dissolve in the situation where one partner becomes insolvent or where all or minimum one of the operations of the firm becomes unlawful. 

For Example: – 

Now in India manufacture of plastic bag are baned. So, if any firm now manufactures these types of bags then this operation will be known as unlawful operation. 

Notice to all partners by one partner: –

One partner can opt for an option to dissolve the firm by giving the notice to other partners in writing. He can show his intention to dissolve the firm in the written form. 

Dissolution of a Partnership Firm on some special events: –

On some following special events the firm may be dissolved: – 

1. If the Partnership is for the specific venture then on the completion of the venture it will dissolve.
2. On the Admission of the Partner. 
3. When one partner dies 
4. The retirement of Partner
5. The partnership firm is for a fixed period of time, so at the end of the time period, it will be dissolved. 
6. A partner becomes insolvent by adjudication. 

Dissolution of a Partnership Firm by Court Order: – 

The court can give an order to dissolve the partnership firm in the following cases: –

1. Breach of partnership deed by any partner or partners. 
2. If the Court finds that the dissolution of the Partnership firm is justified. 
3. A partner’s mind becomes the unsound mind. 
4. The operation of the Partnership firm cannot be carried on. 
5. One or more partners found guilty of misconduct. 

Settlement of Accounts under Dissolution of a Partnership: – 

The two issues have to be resolved at the time of the dissolution of the firm these are as following: – 

1. Settlement of Accounts 
2. Payment of Firm’s Debts and Private Debts

Settlement of Accounts: – 

Section 48 of the Indian Partnership Act, 1932 deals with the settlement of accounts when the firm is dissolved. The following two-point are of the settlement of accounts of the firm

Payment or Treatment of Losses: –

The payment of losses firstly paid out of the profit, then out the partners’ capital balance, and Lastly if the amount required over the balance of partners’ capital then all partners will pay for the loss with their personal assets in the profit-sharing ratio. 

Payment of Firm’s Debts and Private Debts

Any amount is due for payment which is owed by the firm to outsiders is known as the firm’s debts, whereas Any amount is due for payment which is owed by the partner(s) to outsiders is known as the Private Debts.

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