Explain and illustrate the grounds on which a firm can be dissolved. A, B, C and D enter into partnership at will. After sometime D is adjudged insolvent. Is the firm dissolved?”
QUESTION 7 (Detailed Analysis – LLB Exam Style)
“Explain and illustrate the grounds on which a firm can be dissolved. A, B, C and D enter into partnership at will. After sometime D is adjudged insolvent. Is the firm dissolved?”
1. Meaning of Dissolution of Firm
Dissolution of a firm means the complete ending of the partnership business and relationship between all partners, as per the Indian Partnership Act, 1932.
After dissolution:
- The business stops
- Assets are sold
- Liabilities are cleared
- Profit or loss is distributed
2. Grounds on Which a Firm Can Be Dissolved
The Indian Partnership Act, 1932 provides various grounds:
I. Dissolution by Agreement (Section 40)
A firm may be dissolved:
- By mutual consent, or
- According to a contract between partners.
This is the simplest mode.
Example: All partners sign a deed to close the business.
II. Compulsory Dissolution (Section 41)
A firm is compulsorily dissolved in two situations:
a. Insolvency of all partners or all except one
If all partners become insolvent (or all except one), the firm automatically dissolves.
b. Unlawful business
If the business becomes illegal (for example, import of goods gets banned), the firm dissolves.
III. Dissolution on Occurrence of Certain Events (Section 42)
A firm is dissolved automatically when:
a. Expiry of the term
If the partnership was for a fixed period.
b. Completion of the specific venture
If partnership was created for a specific project.
c. Death of a partner
Unless there is an agreement to continue.
d. Insolvency of a partner
If any partner is adjudged insolvent, the firm is dissolved unless partners agree otherwise.
IV. Dissolution by Notice (Section 43) – Partnership at Will
In a partnership at will:
- Any partner may dissolve the firm
- By giving written notice to all other partners
- Stating his intention to dissolve
The firm dissolves from the date mentioned in the notice.
V. Dissolution by Court (Section 44)
A partner may sue for dissolution on the following grounds:
a. Insanity of a partner
Permanent unsoundness of mind.
b. Permanent incapacity of a partner
Example: paralysis.
c. Misconduct of partner
Serious misconduct affecting business reputation.
d. Persistent breach of agreement
Partner repeatedly violates the partnership deed.
e. Transfer of partner’s interest
When a partner transfers his entire share to a third person.
f. Continuous losses
Business cannot be carried on except at a loss.
g. Just and equitable grounds
Any situation that makes it unfair to continue.
Example: Deadlock between partners.
3. Whether the Firm is Dissolved When D Becomes Insolvent?
The question states:
- A, B, C, and D enter into partnership at will
- Later, D is adjudged insolvent
As per Section 42(c) of the Indian Partnership Act, 1932:
Insolvency of any partner results in dissolution of the firm unless the partnership agreement says otherwise.
Since it is a partnership at will, and no agreement to continue is mentioned:
Yes, the firm stands dissolved when D becomes insolvent.
4. Supporting Case Laws
1. Mohd. Laiquiddin v. Kamala Devi (2010)
Supreme Court held that insolvency of a partner automatically dissolves the firm unless an agreement states otherwise.
2. Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy (2003)
Court held that the moment a partner becomes insolvent, he ceases to be a partner and dissolution follows.
3. Narayanappa v. Bhaskara Krishnappa (1966)
Partnership relation ends on death, retirement, or insolvency of a partner in absence of contract to the contrary.
5. Conclusion
- A firm can be dissolved by agreement, by compulsory events, by certain contingencies, by notice, or by court order.
- In a partnership at will, insolvency of any partner dissolves the firm automatically.
- Therefore, when D becomes insolvent, the partnership of A, B, C, and D stands dissolved by operation of law.
Comments
Post a Comment