According to Partnership Act 1932Partnership:- A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Abolishment, abrogation, annihilation, annulment termination; winding up Dissolution of Partnership:
When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm. Dissolution of partnership is different from the dissolution of firm. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end.
According to Partnership Act 1932Sec 39:
Dissolution of a firm:- The dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”.
Explanation: Section 39 to 55, which lay down the rules regulating the dissolution of a firm. S.39 lays down that the dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’.
The various way of dissolution of Firm:
The dissolution of a firm may take place in one of the following five ways:
- As a result of an agreement between all the partners, S.40.
- Compulsory dissolution,
- by the adjudication of all the partners, or of all the partners but one, as insolvent, S.41 (a)
- By the business of the firm becoming unlawful, S.41 (b)
- Subject to agreement between the partners, on the happening of certain contingencies, such as:
- Efflux of time,
- Completion of the adventure for which it was entered into,
- Death of a partner, and
- Insolvency of a partner, S.42
- By a partner giving notice of his intention to dissolve the firm, in case of a partnership at will, S.43
- By intervention of the Court in case of
- a partner becoming of unsound mind
- permanent incapacity of a partner
- misconduct of a partner affecting the business of the firm
- willful or persistent breaches of agreement by a partner
- transfer or sale of the whole interest of a partner
- improbability of the business being carded on save at a loss
- the Court being satisfied on any other equitable ground that the firm should be dissolved, S.44.
The above can be summarized in a tabular form thus:
|A. Without interference of Court.
|B. By order of Court. (S. 44)
|(1) By agreement (S. 40)
|(2) Compulsory dissolution (S. 41)
|(3) On the happening of certain contingencies. (S. 42)
|(4) By Notice (S. 43)
|(a) By the insolvency all or all but one, partners. (S. 41(a))
|(b) By the business becoming unlawful (S. 41(b))
(a) with the consent of all the partners or
(b) in accordance with a contract between the parties.
Clause (a) is an application of the general rule of law which lays clown that a contract can be discharged by mutual agreement.
Clause (b) covers a case where dissolution occurs in pursuance of a contract previously made, the most common example being that of a clause in the partnership deed itself providing for dissolution in certain events.
Sec: 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 carded 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.
Example, A and 10 others form a partnership and carry on a particular trade later, the legislature passes an act which makes it un-lawful for more than 10 persons to carry on that trade in partnership. The partnership is dissolved.
Case: X domiciled in England carries on business in partnership with Y. Domiciled in Germany, war breaks out between England and Germany. The partnership between A and B is dissolved. (Griswold V Waddington, (1818) Supreme Court. N.Y.15 Johns 57).
Sec 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.
Case: Activities for which firm constituted coming to an end, firm cannot function and stands dissolved on its own death. Contention that it would be very harsh if a firm having run for many years could be dissolved without even formality of notice held, without merit. (Hussain Bhai V Muhammad Iqbal and 2 others. PLD 1976 Quetta 9)
Case: Time limit for suit after dissolution: Suit for accounts and share of profits of the dissolved partnership. Whether should be brought within three years of the date of dissolution. Held, Yes. (Zainab Bai V Ibrahim (1981) 43 Tax 26 (H.C. Kar)).
Sec: 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.
Case:Dissolution deed stated a particular partner not to share profits, partnership came to an end. The mere fact that two persons decide or undertake to share the losses of a business would not convert them into partners or their association into a firm. Conversely if they agree to share profits but not the losses, the firm would nonetheless have been formed. The question of profits is a matter interests the partners. In the present case in the dissolution deed it was categorically stated that a particular partner would not be entitled to any profits. The partnership therefore came to an end. (Muhammad Afzal Khan V Manzoor Ellahi – PLD- 1975 Lah 1276).
Sec: 44 Dissolution by the Court:-
At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:-
(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by another partner;
(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner.
(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;
(d) that 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, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provision of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, V of 1908 or has allowed it to be sold in the recovery of arrears of land-revenue or of any dues recoverable as arrears of land-revenue due by the partner,
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved. Explanation: Section 44 lays down the seven important cases in which the Court can order dissolution of a firm, in consequence of a suit filed by a partner to this effect.
Clause (a) under this clause a suit for dissolution becomes necessary to protect the interest both of the insane as well as the other partners.
Clause (b) the incapacity mentioned in this clause may be due to illness, mental or physical. However, such illness should be of permanent nature. Thus, in one English case, it was held that the paralysis of a partner was not a ground of for dissolution of the firm, as the medical evidence showed that the attack of paralysis was only temporary (whitwell V Arthur, 35 Bear. 140)
Clause (c) under this clause, moral turpitude of a partner would be a sufficient ground. Professional mis-conduct would also suffice. Thus, misapplication by a solicitor and adultery by a doctor have been held to be sufficient grounds.
Although it is no necessary that such misconduct should be connected with the business of the firm, it should be of such a nature that it would damage the business prospects of the firm. Thus, a Court conviction for travelling without a ticket. (Carmichael V Evans, (1904) 90 LT 573), or breach of trust (Essel V Hayward (1860 30 Beav. 130) have been held to be sufficient grounds.
Clause (d) under this clause it has been held that destroying old accounts books, preparing false balance sheets, and making false entries in books are sufficient grounds.
Clause (f) the reason for the ground erisaged in this clause is that the motive of every partnership is the acquisition of gain if, therefore, the business can be continued only at a loss, it would be a good ground for the Court to dissolve such a partnership.
Clause (g) under this clause all such grounds are covered as are rendering it just and equitable to dissolve any form.
Thus, if the substratum of the partnership is gone, or if there is a deadlock between the partners, the court may wind up the partnership on the ground that it is just and equitable to do so.
As regards the just and equitable clause, Lord Lindley has rightly remarked that the court ought not to fetter itself by any rigid rules in this regard. This clause cannot be construed to be ejusdem generis (i.e. of the same type as) with the other six which precede it. In fact, an application of the ejusdem generis rule of construction would not leave any room for the clause to operate. However, the word just and equitable connotes something more than mare inconvenient. A mere opinion of a judge that dissolution of a firm would, on the whole, be the best course for that firm, would not be enough.
The exercise of the power by the court under this clause is discretionary. However, this discretion is judicial discretion, and must be exercised with due regard to the circumstances and exigencies of the case. On the other hand, this discretion ought not to be crystallized by decisions laying down definite rules on the point. Rather, the court should have untrammeled discretion of deciding each case on its own merits.