Dissolution of Partnership firms in India and its method

A partnership firm is a business entity and is set up for the sole purpose of profiting from business. Two or more people form a formal agreement (known as a Partnership Deed) to own and manage a business. When the purpose is attained or the partners decide to end the partnership, it must be wound up and the partnership ends. The firm’s business ceases to exist upon dissolving because its affairs are covered up by selling the assets, discharging the partners’ claims etc. The dissolution of a partnership firm refers to the dissolution of a partnership among all partners of a firm. 

What do you mean by Dissolution of Partnership firm? 

Any gain or loss is shared out to partners in accordance with the profit-sharing ratio agreed upon in the partnership agreement.

The process of dissolving a partnership firm differs from that of dissolving a partnership. In the first case, the company’s name is put to an end ,than the firm is no longer permitted to do business in the future. However, when a partnership is brought to an end, the existing partnership is put to an end by consent or the occurrence of a specific event. Even though, the firm can continue to exist if the remaining partners enter into a new partnership.

Various methods of Dissolution of Partnership firm 

Dissolution by mutual consent, i.e. Agreement  

This is the simplest method of dissolving a partnership. The process of dissolution came about with the mutual consent of all partners through the use of a contract between the partners. As a result, a partnership is set up as well as put to an end through the use of an agreement.

Dissolution by notice 

If a partnership at will, the firm may be dissolved by a writing a notice which is given by either of the collaborators to all other partners , stating their willingness to dissolve the partnership. Once served, this notice to dissolve a firm cannot be withdrawn without the permission of all the other partners.

Dissolution depends upon the happening of certain contingent events  

• Any partnership if formed for a fixed tenure  will dissolve itself after the completion of the tenure. 
• Some collaborations were formed in order to achieve a specific goal. However, when a certain goal is fulfilled the partnership automatically dissolves
•  In case of insanity or death of any partner. 
• If any of the partners became insolvent.

Compulsive dissolution     

• All but one of the firm’s partners became bankrupt.
• If the company engages in any illegal activities. For example- dealing with an alien enemy or dealing in drugs,etc. 

Dissolution by court

 If one of the partners becomes mentally unstable, cheats on another partner, or does not comply with the terms of the contract, etc. As a result, the other partner will file a proceeding to dissolve the company. However, the court may dissolve the company only if the company is on record with the company’s registrar. Therefore, any firm, i.e. not on record that partnership is not dissolved in court.

Partners continue to be responsible to third parties 

 Until the public declaration of dissolution, the Partner carries on with the responsibility for the action taken by the partner if such action is taken prior to the statement. 

 If a partner of the firm is bankrupt/leaves the company, the partner is not liable for any action after bankruptcy/retirement. However, the legal heir of the one who is no more is not responsible for any action taken by the other partner after the death of the partner.

Equity transfer to third party

If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.

Documents required for the Dissolution of a Partnership firm 

• PAN Card 
• Address Proof of firm 
• Accounting information 
• Legal Liabilities 
• Original partnership deed and all its modified versions

How to settle the accounts of the firm? 

• The company’s losses are reimbursed from the profits and then from the partners’ equity, and even in this case, if the losses are not reimbursed, the losses is split up between the partners in proportion to their shares in the profits. 
• The company’s assets and capital contributed by the partners to offset the company’s losses are applicable in the following order: 
  • Debts owed to third parties are paid first.
  • If any loan taken out by the company from a partner is repaid to that partner. 
  • Each partner’s capital contribution is repaid in proportion to his contribution.
  • The balance is distributed among the partners based on the profit-sharing ration.
• All assets of the firm are put on sale in the market and the firm’s member required to utilise the money for the payment of debts. Assets or liabilities are also transferred to some other person, usually to a partner whose respective equity accounts synchronise by the corresponding amount.

What are the conditions under which the Premium is reimbursed?

If the partner pays a certain premium to join the partnership for a certain period of time . However, if the company is put to an end before the lapse of the time period. As a result, the firm is bound to return the premium amount to the partner. However, there are some conditions i.e.

• The reason for dissolution should not be the death of any partner, 
• Misconduct or 
• If the agreement does not contain a clause for repayment in case of the dissolution of the company. 

Conclusion 

Dissolution of a firm can be for various reasons. Various reasons, such as continued  losses, death of either of the partners, the partner’s mental instability and so on. Due to the various circumstances discussed above, partnership firms can decide to dissolve the partnership firm. 

Further, if you are looking for assistance of any kind related to partnership firms, feel free to contact.