By-Shalini Garg
Abstract:In this contemporary world, business is being carried out everywhere. So, it is important to be aware of various aspects related to business including various aspects related to the partnership.
This article enlightens us about basic introduction about the Indian Partnership Act, the reason behind the enactment of the Indian Partnership Act, what exactly is a partnership firm, various methods through which partnership firm dissolution can be done, either voluntarily or through orders of the court.
So, in the end, we will be able to analyze various aspects related to the dissolution of a partnership firm.
Introduction:
The Indian Partnership Act, 1932 was enacted by the Parliament of India. It came into force on the 1st day of October 1932, except section 69, which came into force on the 1st day of October 1933. This law has a universal application, it is applicable everywhere in India except in the state of Jammu and Kashmir. Partnership results from a contract and is governed by the Indian Partnership Act, 1932.
Purpose of the act:
The main purpose of the act is to clearly define the rights and the obligations of the partners towards each other and towards the firm, for the protection of the owner's investment in the company, govern how a company will be managed, rules applicable on the parties if a disagreement arises between the parties.
In short, this act ensures a better, peaceful, and efficient relationship between the parties in a business.
What exactly is a partnership firm?
According to section 4 of IPA,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 a 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"."
Therefore, to form a partnership firm minimum of two partners and a maximum of 20 partners is required. The respective partners of the firm are collectively referred to as a partnership firm. It is not a separate legal entity from partners, unlike a company.
Meaning of dissolution of a partnership firm:
According to section 39 of IPA, 1932:
"The dissolution of a partnership between all the partners of a firm is called the "dissolution of the firm"."
When the partnership between all the partners of a firm comes to an end, it can be said that the partnership firm has dissolved. The relationship between each partner should be dissolved to dissolve a partnership firm.
Various methods of dissolution:
A partnership firm can be dissolved majorly in two ways. It can be either voluntarily without any orders of the court or by an order from the court.
Voluntarily dissolutions:
1.Dissolution by Agreement-
Section 40 of IPA, 1932 talks about the dissolution of a partnership firm by agreement and says that "A firm may be dissolved with the consent of all the partners or following a contract between the partners."
The consent and contract between all the partners regarding the dissolution are necessary for the dissolution of a partnership by an agreement.
2.Compulsory Dissolution-
Section 41 of IPA, 1932 includes compulsory dissolution and says that "(a) by the adjudication of all the partners or all the partners but one as insolvent, or (b) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership"
If because of any event the business carried by the firm becomes unlawful then it becomes compulsory for the firm to dissolve. But if the firm carries more than one undertaking and only one of them becomes unlawful then a firm doesn't need to dissolve, it can continue the rest of the business.
3.Dissolution on the happening of certain contingencies-
Section 42 of IPA, 1932, talks about the dissolution of the partnership firm on the happening of any of the following contingencies:
A.Expiry of the term: Some firms come into existence for a specific period. So, after that term is over the firm automatically dissolves.
B.Completion of the undertaking: when a firm is constituted to carry out one or more advantage or undertaking then after the completion of the undertaking, the firm dissolves.
C.By the death of a partner.
D.Adjudication of a partner as an insolvent: It is considered that if one partner becomes insolvent means all the partners become insolvent, therefore this leads to the dissolution of the partnership firm.
4.By notice of partnership at will-
This is included under section 43 of the IPA, 1932. According to this section:
"(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm."
(2) The date of dissolution of the partnership firm will the date of the notice and if no date is mentioned then the date of communication of the notice to other partners will be taken into consideration.
Dissolution by orders of the court:
If a partner brings a suit in the court on any of the following 7 grounds, the court may give orders to dissolve the partnership firm: -
1.The Insanity of the partner:
If an active partner becomes insane or of an unsound mind and another partner of the firm files a suit, then the court may decide to dissolve the partnership firm keeping in mind the nature of the illness, it should be permanent and the partner should not be a sleeping or inactive partner.
2.Permanent incapacity:
If a partner becomes incapable of performing his obligations as a partner towards the firm and other partners permanently, and the other partner files a suit, then the court may dissolve the partnership firm.
3.Misconduct:
"That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business".
It is necessary that the misconduct should be related to the conduct of the business and to take the decision, the court analyses the effect of the misconduct of the partner on the business along with the nature of the business of the firm.
4.Persistent breach of the Agreement:
If a partner, other than the partner suing, wilfully or persistently commits a breach of agreements relating to:
• The management of the affairs of the firm
• Reasonable conduct of its business
• Or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him.
Some of the acts which fall under the category of breach of an agreement are partner holding more cash than allowed, not presenting details of accounts even after repeated requests, erroneous accounts, embezzlement.
Under such a case, other partners not at fault can bring a suit against the faulty partner in the court and the court may dissolve the partnership firm.
5.Transfer of Interest:
"If a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears of land revenue or any dues recoverable as arrears of land revenue due by the partner."
When such an act is done by the partner but now if the other partner files a suit against him in the court, then the court may decide to dissolve the partnership firm.
6.Continuous losses:
If a partnership firm is running under losses and it is further believed by the court that in the future too partnership firm is going to face losses, the court may decide to dissolve the partnership firm.
7.Just and equitable grounds:
"On any other ground which renders it just and equitable that the firm can be dissolved by the court."
Some of such grounds are complete deadlock in the management, gambling on the stock shares by a partner, loss of foundation of the business, partners not in talking terms with each other.
Conclusion:
The partnership is a very common type of business prevailing in the country. The Indian Partnership Act, 1932 is complete in itself and covers all the aspects and answer everything related to the partnership. The partnership has its advantages and disadvantages. Some of the advantages are it is easy to get started, less formal with fewer legal obligations, sharing of the burden, ownership and control are combined, easy access to profit. Whereas, some of the disadvantages are no independent legal status, unlimited liability, a rise of differences and conflicts, limits on business development, slower and difficult decision making.
References:
1.The Indian Partnership act, 1932, available at:Source
2.Dissolution of partnership firm, available at: Source
3.Meaning of partnership firm, available at:Source
Also Read - What is the difference between 'OFFER' and 'INVITATION TO OFFER' ?
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By- Shalini Garg
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