Dissolution of a Partnership Firm

Dissolution of a Partnership Firm


Dissolution of a Partnership Firm

Section 189 of the Income Tax Act deals with the Dissolution of a Partnership Firm in India. Any partner of the firm has the right to dissolve the firm at any time. The value of the partnership firm at the time of the dissolution shall be assessed by an Assessing Officer and the value would be ascertained as if no such dissolution has been taken place.

Every partner of the firm to be dissolved, including the legal representative of the deceased partner, if any, shall be held liable for any outstanding tax or penalty in the name of the firm.

The dissolution of a partnership firm can be done in one of the various ways presented below:

  • Dissolution by the way of agreement

This is an easiest way of dissolving a partnership. This is done with the mutual consent of all the partners by the way of a contract between the partners. Therefore, we can say that a partnership can be established as well as dissolved by the means of an agreement.

The dissolution clause of the partnership agreement mentions the procedure of dissolution through agreement.

  • Dissolution by the way of Notice

In case of partnership at will, the firm may be dissolved by the way of a notice sent by any of the partners of the firm, in written form, addressed to all other partners about his intentions to dissolve the partnership. This notice, of the dissolution, once served cannot be revoked without the approval of all other partners.

  • Dissolution arising out of contingencies

There may be a bunch of conditions wherein the partnership can be dissolved. They may be enumerated as below:

  1. Some of the partnership firm are established to give effect to some specific assignments, at the successful completion of which, the partnership firm is dissolved.
  2. Another kind of partnership firms are established for a period of fixed tenure, after which it is successfully dissolved.
  3. In case of death or insanity of one or more of the partners.
  4. When one or more partners of the firm become insolvent.
  • Compulsive Dissolution

Sometimes, due to the occurrence of certain events, it becomes impossible to continue with the designated tenure of the partnership firm. This happens in the following conditions:

  1. When all the partners of the firm become insolvent except one;
  2. In the circumstances wherein carrying on activities of the firm become illegal.
  • Dissolution through court

A partnership firm involves the association of various person at some particular point of time. When different individuals are involved, there could be situations where one or more of the partners may find it difficult to continue with the partnership due to personal or professional reasons. In such cases, the court has the right to dissolve the partnership firm. In the following specified cases, a partnership firm can be dissolved though the court of law : 

a. On account of mental instability of one or more of the partners

In case on or more partners become mentally instable or mentally incapacitated, it would not be possible for the firm to run its activities in an efficient manner. It would be difficult for the partner to deal with the pressure of the job. Therefore, the best possible option would be to dissolve the firm by the court of the law. The remaining partners shall be open to enter into any new agreement and shall form a new partnership firm.

b. On account of a misconduct

In case one or more of the partners of the firm or whole of the partnership firm engages itself in certain kind of misconduct, which is outside the routine task of the partnership firm, it may seem feasible in the interest of public at large, to dissolve the firm at the earliest. The partnership agreement is the major document which binds the partners to route their activities for a particular cause of action. In case any partner deviates from the activities as mentioned in the agreement, then, its accounts towards the misconduct and shall be concluded through the dissolution of the firm.

  • Dissolution due to the transfer of equity

In case any one or more partner of the firm transfers his share of the equity in the firm in the favour of a third party without the consultation of the other partners of the firm, then it may also lead to the dissolution of the partnership.

It shall be further noted that the dissolution of the partnership is different from the dissolution of the firm. In case of partnership dissolution, the relation between the partners goes through a change, while in case of dissolution of the firm, it means the complete closure of the activities of the firm. This happens in case where any partner dies, retires or leaves the firm but the remaining partners carry on the activities through a fresh set of agreement in place, it would be called as dissolution of the partnership, not the dissolution of the firm.

Apart from the above, the partnership firm may also be dissolved in the following two cases:

  • In case of continuous losses: If the firm is incurring the losses for a significant period of time, then it may be in the interest of the partners to close the firm and work on their individual goals. This way, a lot of time and resources can be saved.
  • In case the dissolution seems just and equitable: In any other case, where the dissolution seems just in the eyes of the law, it shall be implemented without any delay.

Procedure of Sale of goodwill after dissolution of the firm

(1) In the process of settling the accounts of the partnership firm after dissolution, the goodwill of the firm shall, in accordance with the contract between the partners, be included in the assets, and it shall either be sold separately or along with rest of the property of the firm.

(2) Rights of buyers and sellers of goodwill of the partnership firm-In case the goodwill of the firm is sold after the dissolution, any partner of the firm may carry on a business similar to that of the buyer in accordance with the agreement between him and the buyer, but shall not-

(a) use the firm name at any place of his business,

(b) represent himself as being the part of the firm whose goodwill is being sold, or

(c) Reach out to the customers of partners who were dealing with the firm before its dissolution.

(3) Execution of Agreement in restraint of trade—One or more partners can, upon the sale of the goodwill of a firm, make an agreement with the buyer that they will not carry on any similar business to that of the firm within a specified period of time or within specified local limits.

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