Dissolution of Partnership Firm

Meaning of Dissolution of Partnership Firm

Dissolution of Partnership Firm, In such a situation, while the prevailing partnership is dissolved, the firm may continue under an equivalent name if the partners so decide. In other words, it’s the outcome of the dissolution of a partnership but not that of the firm.

As stated by Section 39 of the partnership Act 1932, the dissolution of partnership between all the partners of a firm is known as the dissolution of the firm. That means the Act recognises the difference within the breaking of relationship between all the partners of a firm and between a number of the partners, and it’s the breaking or discontinuance of relationship between all the partners which is termed because of the dissolution of the partnership firm. This brings an end to the existence of the firm, and no business is transacted after dissolution except the activities connected to closing of the firm because the affairs of the firm are to be aroused by selling the firm’s assets and paying its liabilities and discharging the claims of the partners.

Dissolution of Partnership

As stated earlier dissolution of partnership changes the prevailing relationship between partners but the firm may continue its business as before. The dissolution of partnership may happen in any of the subsequent ways:
(1) Change in existing share ratio among partners;
(2) Admission of a new partner
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if a partnership is made for that; and
(7) Expiry of the amount of partnership, if the partnership is for a selected period of time;

Dissolution of a firm

Dissolution of a partnership firm may happen without the intervention of a court or by the order of a court, in any of the ways specified later during this section. It may be noted that the dissolution of the firm certainly brings in the dissolution of the partnership. Dissolution of a firm takes place in any of the following manners:

1. Dissolution by the deal: A firm is dissolved :
(a) with the approval of all the partners or
(b) under a contract within the partners.

2. Compulsory Dissolution: A firm is dissolved compulsorily within the following cases:
(a) when all the partners or about one partner, become insolvent, rendering them insufficient to sign a contract;
(b) when the business of the firm becomes not legal; or
(c) when some event has taken place which makes it unlawful for the partners to hold on to the business of the firm in partnership, e.g., when a partner who is a citizen of a rustic becomes an alien enemy due to the declaration of war together with his country and India.

3. On the happening of certain probability: Subject to contract between the partners, a firm is dissolved :
(a) if constituted for a hard and fast term, by the expiry of that term;
(b) if constituted to hold out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the conclusion of a partner as an insolvent.

4. Dissolution by Notice:

just in case of partnership at will, the firm could also be dissolved if anybody of the partners gives a notice in writing to the opposite partners, signifying his aim of seeking dissolution of the firm.

5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the subsequent grounds:
(a) when a partner becomes insane;
(b) when a partner becomes forever incapable of performing his duties as a partner;
(c) when a partner is guilty of misconduct which is probably going to adversely affect the business of the firm;
d) when a partner endlessly commits a breach of partnership agreement;
(e) when a partner has transferred the entire of his interest within the firm to a 3rd party;
(f) when the business of the firm can’t be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and reasonable.

The distinction between Dissolution of Partnership and Dissolution of Firm

Basis Dissolution of Partnership Dissolution of Firm
1. Termination of business The business is not terminated. The business of the firm is closed.
2. Settlement of assets and liabilities Assets and liabilities are revalued and a new balance sheet is drawn. Assets are sold and liabilities are paid off.
3. Court’s intervention The court does not intervene because the partnership is dissolved by mutual agreement. A firm can be dissolved by the court’s order.
4. Economic relationship The economic relationship between the partners continues though in a changed form. The economic relationship between the partners comes to an end.
5. Closure of books Does not require because the business is not terminated. The books of account are closed.
6. Other dissolution It may or may not involve the dissolution of the firm. It necessarily involves the dissolution of the partnership.

Settlement of Accounts

In case of dissolution of a firm, the firm ceases to conduct business and possesses to settle its accounts. For this purpose, it adjusts off all its assets for satisfying all the claims against it. In this context, it should be noted that, subject to agreement among the partners, the subsequent rules as provided in Section 48 of the Partnership Act 1932 shall apply.

(a) Treatment of Losses
Losses, including insufficiency of capital, shall be paid :
(i) first out of profits,
(ii) next out of the capital of partners, and
(iii) lastly, if necessary, by the partners independently in their profits sharing ratio.

(b) Application of Assets
The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied within the subsequent manner and order:
(i) In repay the debts of the firm to the third parties;
(ii) In paying each partner proportionately what’s thanks to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan);
(iii) In paying to every partner proportionately what’s thanks to him on account of capital; and
(iv) the excess, if any, shall be divided among the partners in their share ratio.

Thus, the quantity realised from assets alongside a contribution from partners, if required, shall be utilised first to pay off the surface liabilities of the firm like creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have preference over the unsecured loans); the balance should be applied to repay loans and advances made by the partners to the firm. (in case the balance amount isn’t adequate enough to pay off such loans and advances, they are to be paid proportionately); and balance, if any is to be utilised in settlement of the capital account balances, after adjusting all profits and losses.

Private Debts and Firm’s Debts: Where both the debts of the firm and personal debts of a partner co-exist, the subsequent rules, as stated in Section 49 of the Act, shall apply.
(a) The property of the firm shall be applied first within the payment of debts of the firm then the excess, if any, shall be divided among the partners as per their claims, which may be utilised for payment of their private liabilities.
(b) The personal property of any partner shall be applied first in payment of his private debts and therefore the surplus, if any, could also be utilised for payment of the firm’s debts, just in case the firm’s liabilities exceed the firm’s assets.

It may be noted that the personal property of the partner doesn’t include the private properties of his wife and youngsters. Thus, if the assets of the firm aren’t adequate enough to pay off the firm’s liabilities, the partners need to contribute out of their net private assets (private assets minus private liabilities).

Accounting Treatment

When the firm is dissolved, its books of account are to be closed and thus the profit or loss arising on the relocation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is ready to determine the internet effect (profit or loss) of realisation of assets and payment of liabilities which can be is transferred to partner’s capital accounts in their share ratio.

Hence, all assets (other than taking advantage of hand bank balance and fictitious assets, if any), and all external liabilities are transferred to the present account. It also records the sale of assets, and payment of liabilities and relocation expenses. The balance during this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in their share ratio.


2 thoughts on “Dissolution of Partnership Firm”

  1. Good blog,

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