by Asok Nadhani
4.1 Dissolution of Firm
Dissolution of
partnership between all the partners of a firm is called ‘Dissolution of Firm’
(S. 39). In such a case, the business of the firm and the partnership between
all the partners comes to an end and the firm as a whole is closed down. Thus,
dissolution of firm results in complete severance of relationship between all
the partners.
Example:
X, Y and Z were
partners in a firm. After some time, X died and the firm was closed down. In
this case, the firm is dissolved and the relations between all the partners
come to an end.
4.2 Dissolution of Partnership
If a change
takes place in the constitution of a firm, but the firm is not dissolved, it is
called as Dissolution of Partnership. After such change in the composition of
firm, the firm is called as Reconstituted Firm.
If one or more
partners cease to be the partners in the firm while other partners continue in
the firm (e.g., in case of retirement, death or expulsion of a partner), the
partnership is dissolved but the firm continues. Therefore, the dissolution of
partnership firm leads to dissolution of partnership also, but, dissolution of
partnership may or may not lead to dissolution of firm.
Example:
X, Y and Z,
partners in a firm, forms an agreement between them that the firm shall not be
dissolved on the death or insolvency of a partner. After some time, X was
declared as an insolvent by the court. In this case, the firm as a whole is not
dissolved. Only the partnership between X, Y and Z is dissolved and a new
partnership between Y and Z comes into existence. The new firm is called as the
‘Reconstituted Firm’. Thus, only the relations between the partners are changed
on X’s insolvency.
4.3 Distinction between Dissolution of Partnership &
Firm
|
Basis
|
Dissolution of
Partnership
|
Dissolution of
Firm
|
|
1. Definition
|
If a change takes place in the constitution of a firm, but the firm is
not dissolved, it is called as Dissolution of Partnership.
|
Dissolution of partnership between all the partners of a firm is
called as Dissolution of Firm.
|
|
2. Relation
|
In case of dissolution of partnership, generally a partner or partners
terminate their connection with the firm.
|
In case of dissolution of a firm, there is termination of the relation
between all the partners of the firm.
|
|
3. Status of Business
|
In dissolution of partnership, the business of the firm continues as
before.
|
In dissolution of the firm, the business of the firm ceases to exist.
|
|
4. Liabilities of
Firm after Dissolution
|
After dissolution of the partnership, the firm has to ascertain the
share of the outgoing partner, without winding up the entire business.
|
After the dissolution of the firm, the firm has to realize and
distribute all the assets of the firm among the partners.
|
|
5. Modes of
Dissolution
|
Dissolution of partnership occurs due to-
(i) expiry of
term.
(ii) completion of
an adventure.
(iii) retirement of
a partner.
(iv) death of
partner.
(v) insolvency of
a partner.
|
Dissolution of the firm occurs by the-
(i)
mutual consent of all the partners. [Sec.(4)]
(ii)
insolvency of all the partners. [Sec. 41(a)]
(iii)
business becoming unlawful. [Sec. 42(b)]
(iv)
notice of dissolution, if the partnership is at
will. [Sec.43]
(v)
the Court. [Sec.44]
|
4.4 Modes of Dissolution of Firm
Dissolution of a firm takes
place in the following modes:
4.4.1 Dissolution by Mutual Agreement (Sec. 40)
When all the
partners by a mutual agreement agree to bring an end to the partnership, the
partnership is dissolved.
Hence, a firm
may be dissolved-
a)
with the consent of all the partners, or
b)
in accordance with a contract between them.
Such type of
dissolution shall apply in the following cases:
§ where the
partnership is for a fixed duration,
§ where the
partnership is for a particular venture,
§ where the
partnership is for an uncertain duration (i.e., at will).
4.4.2 Compulsory Dissolution (Sec. 41)
The term ‘compulsorily
dissolved’ means that the agreement between the partners cannot provide that
the firm shall continue to exist in certain circumstances as explained below:
(a)
Where all the partners die or become insolvent.
(b)
Where all the partners except one die or become
insolvent.
(c)
Where, due to happening of some event, the business
of the firm becomes unlawful.
Compulsory Dissolution’
is also called as ‘Dissolution by Operation of Law’.
Example:
A firm carries
on the business of manufacturing medicine ‘XYZ’. The Government imposes a ban
on manufacture and trading in that medicines as some harmful chemicals were
found in it. The firm shall be compulsorily dissolved as from the date of
imposition of ban. However, if the firm were carrying on any business other than
the manufacturing of that medicine, the firm shall continue even after
imposition of ban.
Example:
Imperial &
co. is a partnership firm having partners A, B and C who is a citizen of Pakistan
4.4.3 Dissolution on happening of certain Contingencies
(Sec. 42)
Generally, a
firm shall be dissolved in the following cases:
(a)
Where a partner is adjudicated as an insolvent.
(b)
Where a partner dies.
(c)
Where the partnership is formed for a fixed period,
and such period expires.
(d)
Where the partnership is formed for a particular
venture or undertaking, and such venture or undertaking is completed.
However, the
partners may agree that their firm shall continue to exist even on happening of
any of the above contingencies.
4.4.4 Dissolution by Notice of Partnership-at-Will
(Sec. 43)
If the
partnership is at will, it can be dissolved anytime by giving a notice in
writing only by a partner. The partner giving notice of dissolution must serve
the notice to all other partners [sec.43(1)]. If the notice specifies some
future date from which the dissolution shall be effective, the firm shall be
dissolved from the particular date mentioned in the notice. If no such date of
dissolution is mentioned in the notice, the dissolution shall become effective
immediately on service of notice. Notice once given cannot be withdrawn unless
all the partners agree to it.
4.4.5 Dissolution by an Order of the Court (Sec. 44)
Sec. 44 empowers
the Court to make an order for dissolution of the partnership firm at the suit
of a partner on any of the following grounds:
(a)
Insanity: If a partner
becomes incapable of performing his duties as a partner due to unsound mind and
the application on this ground has been made by the next friend of the insane
partner or any other partner, the court can dissolve the firm [sec.44(a)].
(b)
Permanent
incapacity: If a partner becomes permanently incapable of performing his duties as
a partner due to illness, mental or physical disablement of any kind; the court
can dissolve the firm depending upon the suit filed by other partners for
dissolution of the firm. However, the firm cannot be dissolved on the
incapacity of a sleeping partner. [sec.44(b)]
(c)
Misconduct: Where a partner,
other than the partner suing, is guilty of misconduct which is likely to affect
prejudicially the carrying on of the business and business prospects of the
firm, the court can dissolve the firm [sec.44(c)].
Example:
A and B were partners in a
business. B was convicted of traveling on a railway without ticket and with
intent to defraud. Held, as the conviction was for dishonesty, it was considered
a sufficient ground for compulsory dissolution of the firm.
(d)
Persistent
breach of agreements: Where a partner, other than the partner suing,
willfully or persistently commits breach of agreements relating to the
management of the affairs of the firm or the conduct of its business, the court
can dissolve the firm at the suit filed by any of the other partners.
[sec.44(d)]
(e)
Impossibility to
work together: Where the conduct of some other partner is such, that it becomes
impossible to carry on the business in partnership with him for the other
partners, the court may dissolve the firm on the suit filed by a partner.
Example:
A and B are partners in a
firm. A has adulterous relations with B’s wife. This is a sufficient ground for
the compulsory dissolution of the firm. The conduct of A, though not committed
in the actual business, is likely to effect prejudicially the carrying on the
business so far as A and B are concerned because this destroys mutual
confidence.
(f)
Transfer of
interest: Where a partner has transferred the whole of his interest in the firm
to a third party, or has allowed his share of interest in the firm to be
charged, or has allowed his share of interest in the firm to be sold in the recovery
of any dues recoverable as arrears of land revenue, the court may dissolve the
firm at the instance of any other partner. [sec.44(e)]
(g)
Perpetual
losses: If the business of the firm cannot be carried on except at a loss, the
court may dissolve the firm at the suit filed by a partner. [sec.44(e)]
(h)
Just and
equitable ground: The court can dissolve a firm on the ground that
it is just and equitable in the circumstances of the case of dissolution of a
firm. This clause empowers the Court with a very wide discretionary power to
order dissolution if it appears to the Court that the dissolution of the firm
is desirable in the present circumstances.
4.5 Consequences of Dissolution[
The immediate
consequences of a dissolved firm are as follows:
§ Continuing liability on failure of giving public
notice: The liability of the partners of a dissolved firm continues until they
give public notice of dissolution of the firm. (sec.45)
§ Continuing authority of partners for winding up: The authority of
a partner to bind the firm and the mutual rights and obligations of the
partners continues in spite of dissolution of firm, but only to the extent
necessary for winding up the affairs of the firm and to complete the
transaction begun but unfinished at the time of dissolution”. (sec.47)
§ Right of a partner to enforce winding up: On dissolution
of a firm, every partner or his representative is entitled as against all the
other partners or their representative, to have the property of the firm
applied in payment of debts and liabilities of the firm and to have the surplus
distributed among the remaining partners or their representative according to
their rights (s.46).
§ Right to return premium: If a partner has
paid premium during admission in the partnership for a fixed term and the firm
is dissolved before the expiry of such term otherwise than by the death of a
partner, such partner is entitled to repayment of premium paid or such amount
as may be reasonable (s.51)
Example:
A and B are two partners.
They admitted C, a third partner, and asked him to pay a premium of Rs.80,000
to the firm by promising him that the firm would last for another 10 years. Due
to incapacity of B, the firm is dissolved after the expiry of 5 years from the
admission of C. C is entitled to claim Rs.40,000 from the firm as refund of
premium.
§ Liability to share personal profits: It is the duty
of every partner to not to make any personal profit out of the transaction of
the firm concerning dissolution. A partner must account for to the firm, every
benefit so derived by him, and must share it with other partners.
§ Right to impose restriction: After the
dissolution of a firm, every partner or his representative may, restrain any
other partner or his representative from carrying on similar business in the
firms name or from using any of the firms property for his personal benefit
until the affairs of the firm have been completely wound up. (sec.53)
§ Rights where partnership contract is rescinded for
fraud or misrepresentation (Sec. 52)
Where a contract
creating partnership is rescinded on the ground of fraud or misrepresentation
of any of the partners, the partner entitled to rescind can exercise the
following rights:
(a)
Right of lien on
the surplus assets: He can exercise the right of lien on the surplus
or the assets of the firm remaining after the debts of the firm have been paid,
for any sum paid by him for the purchase of his share in the firm and for any
capital contributed by him.
(b)
Right of
subrogation: He becomes a creditor of the firm in respect of any payment made by him
towards the settlement of debts of the firm.
(c)
Right to be
indemnified: He has a right to be identified by the partner(s) guilty of the fraud
or misrepresentation against all the debts of the firm.
§ Personal profits earned after dissolution (Sec. 50)
If any partner
or his representative has bought the goodwill of the firm on its dissolution,
he shall have a right to use the firm name and earn profit by using it.
§ Right to have the debts of the firm settled out of
the firms property (sec. 49)
On dissolution of a firm,
the debts of the firm have to be settled out of the firm’s property. If there
is any surplus, the amount should be utilized in paying of the private debts of
the partners. Similarly, on payment of the private debts of the partners, their
private estate should be utilized first. Again if there is any surplus, the
balance amount should be utilized towards the settlement of the firm’s debt.
4.8 Settlement of Accounts
After the
dissolution of a firm, the mode of settlement of accounts between partners is
determined by the partnership agreement. If there is no such agreement between
the partners, provisions of sec.48, 49 and 55 shall apply.
1.
Mode of
Settlement of Accounts between Partners (Sec. 48)
In settling the accounts of
a firm after dissolution, the following rules shall be followed:
(a)
Treatment of Losses: Losses,
including deficiencies of capital, shall be paid first out of profits, next out
of capital, and, lastly, if necessary, by the partners individually in the
proportions in which they were entitled to share profits. [sec.48(a)]
(b)
Application of Assets: The assets of
the firm, including any sums contributed by the partners to make up
deficiencies of capital, shall be applied in the following manner and order:
i.
In paying the debts due to third parties.
ii.
In paying to each partner rateably what is due to
him from the firm for advances as distinguished from capital.
iii.
In paying to each partner rateably what is due to
him on account of capital.
iv.
The residue, if any, shall be divided amongst the
partners in the proportions in which they were entitled to share profits.
[sec.48(b)]
If the assets are
sufficient to pay the debts stated in (i) & (ii) above, but insufficient to
repay to each partner his full capital, the deficiency in the capital shall be
borne by the partners in their profit sharing ratio.
Example:
Suman, Kabir and Latif are
three partners having Rs.10,000, Rs.8,000 and Rs.6,000 credit balance in their
capital A/c. They are sharing profit and loss equally. The firm is dissolved
due to dispute among the partners. The firms assets realized Rs.20,000, outside
liabilities being Rs.5,000 and amount advanced by Kabir being Rs.3,000. The
amount received from sale of firms will be used firstly for payment of outside
liability of Rs.5,000, remaining Rs.3,000 towards amount advanced by Kabir. The
surplus of Rs.12,000 would be distributed amongst the three partners equally
Rs.4,000 each.
2.
Payment of Firm
Debts and Private Debts (Sec. 49)
(a)
The property of the firm shall be applied in the
first instance in payment of the firm’s debts. If there is any surplus, the
agreed share of such surplus shall be applied in payment of private debts of
each partner (if any), or paid to him.
(b)
The private property of any partner shall be
applied first in the payment of his private debts. If there is any surplus, it
shall be applied in the payment of the firm’s debts if any.
3.
Sale
On setting the accounts of
a firm after dissolution, the goodwill shall be included in the assets and it
may be sold either separately or along with other property of the firm.
However, the agreement between the partners may provide otherwise.
4.
Losses from Insolvency
On insolvency of a partner,
the rule of Garner v. Murray Murray
(i) The loss in
realization of assets shall be borne by all the partners in their profit
sharing ratio.
(ii) The loss on
account of deficiency of capital of the insolvent partner shall be borne by the
solvent partners in the ratio of their capital. In certain circumstances, each
can be brought or notional adjustment is done.
4.9 Agreements in restraint of trade
1.
Restrictions on
partners upon or in anticipation of the dissolution of the firm (Sec.54)
Partners may, upon in
anticipation of the dissolution of the firm, make an agreement that some or all
of them will not carry on a business similar to that of the firm within a
specified period or within specified local limits, and notwithstanding anything
contained in sec. 27 of the Indian Contract Act, 1872, such agreement shall be
valid if the restrictions imposed are reasonable.
2.
Restrictions on
carrying on similar business (Sec. 55)
Upon the sale of the
goodwill of a firm any partner may, make an agreement with the buyer that such
partner will not carry on any business similar to that of the firm within a
specified period or within specified local limits. Notwithstanding anything
contained in sec. 27 of the Contract Act, 1872, such agreement shall be valid
if the restrictions imposed are reasonable.
3.
Rights of buyer
and seller of goodwill (Section 55)
On selling of goodwill
after dissolution of a firm, a partner may carry on a business competing with
that of the buyer and he may advertise such business, but, he shall not use the
firm name; or represent himself as carrying on the business of the firm; or
solicit the customers or persons who were dealing with the firm before its
dissolution.
4.10 Public Notice (Sec.72)
A public notice to the effect of dissolution of the firm is mandatory in
the following cases:
(a)
In case of retirement of a partner
(b)
In case of dissolution of firm
(c)
In case of expulsion of a partner
(d)
In case of minor admitted to benefits of
partnership, elects or does not elect, to become a partner in the firm.
Where a public notice is given, the law presumes that those dealing with
the firm, including past and present customers, have come to know the fact
stated in the public notice. However, a
public notice is not required in case of death and insolvency of a partner[a4] .
Modes of giving Public Notice
(a)
In case of a
Registered Firm: The notice shall be given as under:
i.
The notice shall be given to the Registrar as
provided under sec. 63.
ii.
It shall be published in the Official Gazette.
iii.
The notice shall be advertised in at least one
vernacular newspaper circulating in the district where the principal place of
business of the firm is situated. [sec.72(a)]
(b)
In case of an
Unregistered Firm: The notice shall be given as under:
i.
The notice shall be published in the official
Gazette.
ii.
It shall be advertised in at least one vernacular
newspaper circulating in the district where the principal place of business of
the firm is situated. [sec.72(b)]
Mere publication
of notice in a vernacular newspaper is insufficient to relieve the retired
partner from his liability to third persons until it is not given to the
Registrar of Firms.
Consequences of not giving Public Notice
(a)
On admission of
a Minor to Benefits of Partnership: Within 6 months of
attaining majority or on coming to know that he had been admitted to the
benefits of partnership, whichever date is later, the minor must decide as to
whether he will become a partner or not and a public notice should be issued by
him. If the minor admitted to the benefits of partnership under sec.30 fails to
give public notice, then on the expiry of 6 months the minor shall be deemed to
have become a partner.
(b)
On retirement of
a Partner: A retiring partner has to give public notice of his retirement. If a
public notice is not given, he is liable for all the acts of the firm
subsequent to his retirement and the firm also continues to be liable for all
acts subsequent to the date of retirement, if such subsequent acts would have
been acts of the firm if done before his retirement.
(c)
On expulsion of a
Partner: An expelled partner has to give public notice of his expulsion. If a
public notice is not given, he is liable for all the acts of the firm
subsequent to his expulsion and the firm also continues to be liable for all
acts subsequent to the date of expulsion, if such subsequent acts would have
been acts of the firm if done before his expulsion. (sec.33)
(d)
On dissolution
of a Firm: A public notice of dissolution of a registered firm is to be given.
Otherwise, the erstwhile partners shall continue to be liable to third parties
for all acts, done by any of them, subsequent to the date of dissolution, if
such subsequent acts would have been acts of the firm if done before
dissolution. (sec.45)
For more details, refer to Mercantile law, by Asok Nadhani,
BPB Publications,www.bpbonline.com, bpbpublications@gmail.com
No comments:
Post a Comment