: Dissolution of a firm

The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the





Section 40: Dissolution by agreement.

A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

(1) By Contract: A firm may be dissolved at any time at the consent of all the partners. This applies to all the cases whether the firm is for a fixed period or at will. A Dissolution was

held to have taken place in the case of a partnership at will when the partners decided not to carry on the business of the firm from an agreed date.

(2) By Agreement: A firm may be dissolved in accordance with a contract between the partners. The contract provided for dissolution may be contained in the partnership deed itself or in a separate agreement.

Section 41: Compulsory Dissolution.

A firm is dissolved: –

(a) By the adjudication of all the partners or of 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: Provided that, where more than one separate adventure or undertaking is carried on by the firm the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

(A) Insolvency: The sub-Section is based upon the obvious principle that that there must be at least 2 persons to constitute a firm. As already seen, on adjudication as insolvent partner ceases to be a partner as from the date on which he is adjudicated an insolvent.

Under Section 42(d), in the absence of a contract to the contrary the adjudication of a single partner operates as a dissolution of a firm. The case contemplated, however by this Section is where the whole firm adjudged insolvent, or all the partner but one are adjudged insolvent. It is clear that under circumstances, the firm is dissolved, there being no question of a contract to the contrary.

(b) Prohibition of Business: where a partnership carrying a business in British/Indian Territory is dissolved by 1 partner becoming an alien enemy and the Indian profits made after the dissolution by the use of his capital, payment being of course suspended during the war, an agreement may be void but not illegal. An agreement by way of Wager is void but not illegal under Section 30 of the Contract Act. The Supreme Court6 has held that a partnership formed for entering into wagering would not be illegal; though it would be void.

Where the business of a firm is illegal from the very beginning, the agreement of partnership is itself unlawful under Section 23 of the Contract Act.

Section 42: Dissolution on the happening of certain contingencies. Subject to contract between the partners a firm is dissolved,—

(a) If constituted for a fixed term, by the expiry of that term;

(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof;

(c) By the death of a partner; and

(d) By the adjudication of a partner as an insolvent.


(a) If the firm is constituted for a fixed period, by the expiry of that firm: Where a partnership has entered into for a fixed term, the partnership is at the end of the term dissolved by the expiry of that term, without any further act or notice, even when there is a partnership for a fixed period, the death of a partner taking place during the continuance of the partnership period dissolves the partnership earlier

(1) Expiry of a Term: where a firm is constituted for a fixed term, it becomes dissolved on the expiry of that term, unless the dissolution is prevented by an agreement between the partners. The Supreme Court held on the facts on the case before it that, in the absence of an agreement to the contrary there was no question of the survival of the firm after the expiry of the term of its term and the fact that the partners, subsequent to the expiry of the term, consented to refer the disputes to arbitration did not amount to an agreement to the contrary.

(2) Completion of Business: A partnership is dissolved by operation of law when the business for which it was formed has been completed.

(c) By the death of a partner13:The effect of clause (c) of Section 42 is that in the absence of a contract to the contrary, a partnership is dissolved by the death of a partner. Death of a partner means dissolution of partnership.

(d) By the adjudication of a partner as an insolvent.: A partnership is dissolved at the adjudication of a partner as an insolvent. Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is hereby dissolved.

Section 43: Dissolution by notice of partnership at will.

(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 firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.


Dissolution of partnership at will.

Notice: – But in order to dissolve the firm the following conditions must be fulfilled:

A. Notice must be in writing;

B. Notice must express the intention of the partner to dissolve the firm; and

C. Written notice must be given to all the other partners.


Section 44: Dissolution by the Court.


(a) Insanity- Insanity does not dissolve the partnership ipso facto confirmed lunacy provides a ground for dissolution by the court if other partners apply to court for dissolution20.

(b) Permanent Incapacity- whether any partner has become permanently incapable of performing his duties as a partner; any partner can apply for dissolution. The incapacity may be due to illness, mental or physical in nature but it must be permanent.

(c) Partner guilty of conduct likely to affect prejudicially the carrying on of the business.


(d) Persistent Breach of Agreement:- When a partner, other than suing persistently commits breach of agreement relating to the management of the firm or otherwise so conducts himself in matters relating to business that it is not reasonably practicable for the other partners to carry on the business in partnership with him, the court may order dissolution.


(e) Transfer of Interest – When a partner has transferred the whole of his interest in the firm, to a third party or has allowed his interest to be charged, or has allowed it to be sold in, the recovery of arrears of land revenue, or any of the dues recoverable for land revenue, the court may order dissolution.


(f) Perpetual Losses – When the business of the firm cannot be carried on save at a loss, the court may dissolve it. The whole object of the Partnership is to make profits and if that object cannot be attained, it is needless for the firm to continue.


(g) Just & Equitable – Dissolution may be ordered when on any other ground the court thinks it just & equitable that the firm should be dissolved.

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