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Project Report On

Legal Aspects Involved in Partnership Firm

Prepared By

Rajat Goyal Sumit Narain Ritesh Shah Naveen Rai Nishikant Harjai

Table of Contents
INTRODUCTION .......................................................................................................................................................4 DEFINITION OF PARTNERSHIP .................................................................................................................................4 FORMATION OF PARTNERSHIP ................................................................................................................................4 Two or More Members: ..............................................................................................................................4 Agreement: ..................................................................................................................................................5 Lawful Business: ..........................................................................................................................................5 Competence of Partners:.............................................................................................................................5 Sharing of Profit - .........................................................................................................................................5 Voluntary Registration:................................................................................................................................5 No Separate Legal Existence:.......................................................................................................................5 Principal Agent Relationship:.......................................................................................................................5 Restriction on Transfer of Interest: .............................................................................................................6 Continuity of Business: ................................................................................................................................6

DIFFERENT TYPES OF PARTNERS .............................................................................................................................6 Active Partners ............................................................................................................................................6 Dormant Partners ........................................................................................................................................6 Nominal Partners .........................................................................................................................................6 Minor as a Partner .......................................................................................................................................6 Partner by Estoppel .....................................................................................................................................6 Partner by Holding Out ................................................................................................................................6

INCOMING AND OUTGOING PARTNERS ..................................................................................................................7 Incoming Partners: ......................................................................................................................................7 Rights and Liabilities of an Incoming Partner ..................................................................................................7 Outgoing Partners: ......................................................................................................................................7 By Retirement (section 32) ..............................................................................................................................7 By Expulsion (section 33) .................................................................................................................................8 By Insolvency (section 34) ...............................................................................................................................8 By Death (section 35, 42 (c) and 45)................................................................................................................9 By transfer of a partners interest of share (section 29 (2)) ............................................................................9 RIGHTS AND DUTIES OF A PARTNER........................................................................................................................9 Rights of a Partner ...............................................................................................................................................9 Duties of a Partner...............................................................................................................................................9 Liabilities of a Partner ........................................................................................................................................10 Rights and Duties of a Partner in Some Specific Situation (section 17) ............................................................10

HOW TO FORM PARTNERSHIP ..............................................................................................................................10 Procedure for Registration of a Partnership Firm .............................................................................................11 DIFFERENCE BETWEEN REGISTERED AND UNREGISTERED PARTNERSHIP FIRM...................................................12 Advantages / Benefits of Registration: ..............................................................................................................12 Effects of Non-Registration: ..............................................................................................................................12 ADVANTAGES of a Partnership Firm......................................................................................................................13 DISADVANTAGES of a Partnership Firm ................................................................................................................13 DISSOLUTION OF A PARTNERSHIP FIRM................................................................................................................14 Meaning of Dissolution of a Firm ......................................................................................................................14 Modes Of Dissolution :- .....................................................................................................................................15 1. 2. i. ii. 3. i. ii. iii. By Agreement (S.40):-............................................................................................................................15 Compulsory Dissolution (Sec.41):-.........................................................................................................15 Insolvency of Partners:- .....................................................................................................................15 Unlawful Business:- ...........................................................................................................................15 Dissolution on the happening of contingent event (Sec.42) .................................................................16 Expiry of Fixed Period:- ......................................................................................................................16 On achievement of specific task:-......................................................................................................16 Death of Partner:- ..............................................................................................................................16

iv. Insolvency of Partner:- .......................................................................................................................16 v. 4. 5. i. ii. iii. Resignation of Partner:-.....................................................................................................................16 Dissolution by notice (Sec.43):- .............................................................................................................16 Dissolution by Court:- ............................................................................................................................17 Insanity of Partner:- ...........................................................................................................................17 Incapacity of Partner:- .......................................................................................................................17 Misconduct of Partner:-.....................................................................................................................17

iv. Constant breach of agreement by partner:- ......................................................................................17 vi. Continuous Losses:- ...........................................................................................................................17 vii. Just and Equitable:- ............................................................................................................................18

INTRODUCTION
When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks, other sources of finance. Also the amount of money that the sole proprietor can contribute to the business "alone" is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow. A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions. For all the above reasons, one may choose to form a partnership firm. A Partnership is similar to a Proprietorship except that there are two or more owners (Partners). In a general partnership, all the partners share in gains or losses and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains (and losses) are divided is described in the partnership agreement. This agreement can be an informal oral agreement, such as Lets start a market research firm or a lengthy formal written document. In a Limited Partnership, one or more general partners will run the business and have unlimited liability but there will be one or more limited partners who will not actively participate in the business. A limited partners liability for business debts is limited to the amount that partner contributes to the partnership. This form of organization is common in real estate ventures, for example.

DEFINITION OF PARTNERSHIP
For the smooth functioning of the partnership firms, an act was drafted in 1932, known as The Partnership Act, 1932. This Act has 74 sections. Section 4 defines terms "Partnership", "Partner", "Firm" and "Firm-name" as follows: - Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. - Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name". Also, Section 2 provides definitions of important terms related to partnership like act of a firm, business, registrar, third party.

FORMATION OF PARTNERSHIP
On analysis of the definition, certain essential elements of partnership emerge to form a partnership as followed: Two or More Members: The members of the partnership firm are called partners. At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of banking business and 20 in case of other

business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. Agreement: To start a partnership business, first of all, there must be an agreement between all the members. This agreement contain - The amount of capital contributed by each partner - Profit or loss sharing ratio - Salary or commission payable to the partner, if any - Duration of business, if any - Name and address of the partners and the firm - Duties and powers of each partner - Nature and place of business and - Any other terms and conditions to run the business. Lawful Business: To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business. Competence of Partners: Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-. Voluntary Registration: It is not compulsory to register the partnership firm. However, if the firm registered, members will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: - Firm cannot take any action in a court of law against any other parties for settlement of claims. - In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. - Firm cannot claim adjustments for amount payable to or receivable from any other parties. No Separate Legal Existence: Just like sole proprietorship, partnership firm also has no separate legal existence from that of it owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm. Principal Agent Relationship: All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time the others become the principal. So there always exists a principal agent relationship in every partnership firm.

Restriction on Transfer of Interest: No partner can sell or transfer his interest to any one without the consent of other partners. For example - A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work anymore. He cannot do so until B and C both agree. Continuity of Business: A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship.

DIFFERENT TYPES OF PARTNERS


In a partnership firm there are different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Below are the same: Active Partners - The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm. Dormant Partners - Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any. Nominal Partners - These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm. Minor as a Partner - A minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business. Partner by Estoppel - If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in Ram Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel. Partner by Holding Out - In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out.

INCOMING AND OUTGOING PARTNERS


Incoming Partners: As per Section 31 (1) & (2) of Indian Partnership Act, 1932, subject to a contract between partners and to the provisions regarding minors in a firm, a person who is admitted as a partner into an already existing firm with the consent of all the existing partners is called an Incoming Partner.
Rights and Liabilities of an Incoming Partner

- An incoming partner enjoys all the rights as are conferred upon him by law and by the contract between him and the existing partners. - The liability of an incoming partner ordinarily commences from the date when he is admitted as a partner. - An incoming partner does not become liable for any acts of the firm done before his admission as a partner, unless he specifically agrees to bear the past liabilities. But in such agreement, he will be liable only to the other partners, not to the third parties since there is no privity of contract between the creditors and the new partner. - At the same time, the acts of the old partners cannot be ratified by the new partner according to section 196 of the Indian Contract Act, 1872, which provides that for the purpose of ratification of agency, the principal must be in existence at the time when the act was done. - The new partner would be liable for the acts of the old firm only if 1) the reconstituted firm after his admission assumes the liabilities of the old firm and 2) the creditors accept the new firm as their debtor and discharge the old firm from its liability. The process of substituting the old firm by the new firm is done by what is known as novation. Outgoing Partners: A partner who leaves a firm in which the rest of the partners continue to carry on business is called an Outgoing partner. An outgoing partner leaves the firm By Retirement (section 32)

- A partner may retire: 1) with the consent of all the other partners, 2) in accordance with an express agreement by the partners or 3) where the partnership is at will, by giving notice in writing to all the other partners of his intension to retire. - A retiring partner remains liable to the third parties for all the acts of the firm until public notice of his retirement is given either by retiring partner or by any member of the reconstituted firm. This implies the principle of holding out. - Rights and Liabilities of a Retired partner: Section 36 permits an outgoing partner to carry on business competing with that of the firm and he may advertise such business. Subject to a contract to the contrary, he cannot use the name of the firm or represent himself as

carrying on the business to the firm or solicit customers of the firm after he has left. Also, an outgoing partner may make an agreement with his partners that on ceasing to be a partner, he will not carry on any business similar to that of the firm within a specified period or within specified local limits; and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable. The retiring partner has the right to receive his share of the property of the firm, including good will, as the amount due to him is to be construed as a debt payable by the firm. A retiring partner does not cease to be liable for the debts or obligations of the firm incurred before his retirement and for unfinished transactions with third parties at time of his retirement. A specific agreement with the third party and the partners of reconstituted firm can discharge him from above mentioned liabilities. He is not liable for the acts of the firm done after his retirement, provided the persons dealing with the firm do not know that he was a partner as such. In fact, this refers to the retirement of a sleeping or dormant partner.

By Expulsion (section 33)

- A partner may be expelled from the firm if 1) the power of expulsion is conferred by a contract between the partners, 2) the power is exercised by a majority of the partners and 3) the power is exercised in good faith. The test of good faith will be satisfied if 1) the expulsion is in the interest of the partnership, 2) a notice of expulsion has been served on the partner and 3) the partner to be expelled has been given an opportunity of being heard. - If above expulsion conditions are not satisfying, then an outgoing partner may either claim re-instatement as a partner, or sue for the refund of his share of capital and profits in the firm. - The rights and liabilities of an expelled partner are the same as those of a retired partner.
By Insolvency (section 34)

- 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 thereby dissolved. - Where under a contract between the partners, the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent done after the date on which the order of adjudication is made. - It is not mandatory to give a public notice to the effect that a partner has been adjudged an insolvent.

By Death (section 35, 42 (c) and 45)

- A firm is dissolved by the death of a partner, in the absence of a contract to the contrary. - In case of a contract made between partners, after death of a partner, the firm continues its business without dissolution and provides that the estate of the deceased partner is not liable for any act of the firm done after his death. A public notice of the death of a partner is not required.
By transfer of a partners interest of share (section 29 (2))

- If the transferring partner ceases to be a partner, the transferee will be entitled, against the remaining partners, to receive the share of assets of the firm. Also for the purpose of ascertaining that share, he is entitled to an account as from the date of dissolution.

RIGHTS AND DUTIES OF A PARTNER


Rights of a Partner
- To take part in the conduct of the firms business. (section 12(a)) - To express his opinion on any matter. In case of difference of opinion, he is bound by majority decision. However, no change can be made in the future of the business without the consent of all the partners. (section 13(b)) - To have access to and inspect and copy any of the books of the firm (section 12(d)) - To share equally in the profits (section 13(b)) - To rank as a joint owner of the property of the firm. - To do, in an emergency, all such acts as are reasonably necessary to protect the firm from loss. - To be indemnified by the firm in respect of liabilities incurred by him in the ordinary course of business. (section 13(e)) - To continue in the partnership i.e. not to be expelled, unless expulsion under section 33(1). - To resist the introduction of a new partner. (section 31(1)) - To seek retirement from the firm. (section 32(1)) - To claim interest on any amount advanced by him beyond the amount of capital that he agreed to subscribe (section 13(c)).

Duties of a Partner
- General duties (section 9) Carry on the business of the firm to the greatest common advantage To be just and faithful to each other To render true accounts and full information of all things affecting the firm to any partner or his legal representative - To indemnify the firm for loss caused to it by his fraud in the conduct of the business of the firm (section 10)

- To attend diligently to his duties in the conduct of the firms business without any remuneration (section 13(a)) - If restrained by an agreement with other partners, a partner has a duty not to carry on any business other than that of the firm while he is a partner (section 11(2)) - If a partner carried on any business competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business (section 16(b)) - To account for any profit, including secret profit, derived by a partner from any transaction of the firm, or from the use of property, or business connection of the firm or the firms name (section 16 (a)) - Not to assign his share in the partnership - Unless otherwise agreed, he is to contribute equally to the losses of the firm - To indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm (section 13)

Liabilities of a Partner
- Liability of a partner stem from not complying with his duties under the partnership act, which are mentioned above. - Apart from these liabilities, every partner is jointly liable with all other partners and also severally for all the acts of the firm done while he is a partner. - Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party or any penalty is incurred, the firm is liable to the same extent as the partner. - The firm is liable to make good the loss where 1) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or 2) a firm, in the course of its business, receives money or property from a third party and the money or property is misapplied by any of the partners while it is in the custody of the fir.

Rights and Duties of a Partner in Some Specific Situation (section 17)


- Subject to contract between the partners, the mutual rights and duties of the partners remain the same In the reconstituted firm. In continuation of the firm after an expiration of its fixed term In carrying out other adventures or undertakings than decided during constitution

HOW TO FORM PARTNERSHIP


A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the THE INDIAN PARTNERSHIP ACT, 1932 will apply. The deed generally contains the following particulars:-

Name of the firm. Nature of the business to be carried out. Names of the partners. The town and the place where business will be carried on. The amount of capital to be contributed by each partner. Loans and advances by partners and the interest payable on them. The amount of drawings by each partner and the rate of interest allowed thereon. Duties and powers of each partner. Any other terms and conditions to run the business.

After preparation of the deed, it must be signed by all the partners. It must also have signatures of independent witnesses.

Procedure for Registration of a Partnership Firm


Procedure for registering a partnership firm all over India is quite similar: - Prepare a Partnership deed - Fill in the required form at the Registrar of Firms office. - Submit the required form, the Partnership Deed along with other documents to the Registrar of Firms for approval. - A Partnership firm is required to be registered under section 58 and 59 of the Partnership Act, though it is not compulsory. Every change in the constitution of a Partnership is also required to be registered. But if it is not registered, then there are certain handicaps stated in section 69 of the Act, the main handicap being that a Partnership firm or its partner cannot file a suit against a third party. For the purpose of Income tax benefits it is necessary to register a Partnership will the Department under S. 184 and 185 of the Income Tax Act, 1961. But once a firm is registered then it is not necessary to register it again if there is any change in the constitution of the firm by adding a partner or omission of a partner by death or resignation. The law relating to a partnership firm is contained in the Indian Partnership Act, 1932. - Under Section 58 of the Act, a firm may be registered at any time ( not merely at the time of its formation but subsequently also ) by filing an application with the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated. . - Under Section 59 of the Act, when the Registrar of Firms is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in the Register of Firms and issue a Certificate of Registration. - Any alterations, subsequent to Registration shall be notified to the registrar. - Partnership Act, 1932 does not provide for compulsory registration of firms. It is optional for partners to set the firm registered and there are no penalties for non-registration. However, Section 69 of the Act which deals with the effects of non-registration denies certain rights to an unregistered firm. - Rectification of mistakes (Section 64 of the Act) - Inspection of Register and filed documents (Section 66 of the Act)

- Grant of copies (Section 67 of the Act)

DIFFERENCE BETWEEN REGISTERED AND UNREGISTERED PARTNERSHIP FIRM


The entrepreneurs willing to start up partnership firm may or may not go for registering the business as the registration of the partnership firms in India is not compulsory. Even prior to the passing of the Indian Partnership Act, 1932, there were 10 provisions for registration of firms in India. Though registration of the firm is optional at the discretion of the partners, an unregistered firm suffers from certain disabilities. These disabilities have indirectly made some sort of compulsion on the part of the firms to be registered. In case of unregistered firm, payment of salary, commission, interest on borrowings or drawings are not considered as allowable expenses for determination of total income for payment of tax.

Advantages / Benefits of Registration:


The effects of non-registration or disabilities of an unregistered firm have been pointed above. Considering the same, the advantages or benefits of registration can be as follows: a. The firm can sue third parties to enforce its claim. b. A partner can enforce his claim against third parties or against his co-partner. c. The interest of third parties is safeguarded against fraud of partners because statement submitted to the Registrar is a conclusive proof of the existence partnership and the composition of partners. d. An incoming partner is empowered to enforce his dues against the other co-partners otherwise he would have to rely on their honesty. e. A retired or expelled partner is exempted from liabilities of the firm incurred after his retirement or expulsion by giving a public notice and effecting the necessary changes in the register of firms. f. It can avail tax benefits as per IT Act 1962.

Effects of Non-Registration:
An unregistered firm and its partners suffer from the following disabilities: a. An unregistered firm cannot file a suit against a third party to enforce a right arising from a contract. (For example, for the recovery of the price of goods supplied) b. A partner cannot file a suit against the firm or co-partners to enforce his rights under the Partnership Deed. c. An unregistered firm cannot claim a set-off against a third party to enforce right arising from a contract exceeding Rs.100 in value. Exception: The non-registration of a firm, however, does not affect the follow rights: a. The rights of third parties to sue the firm or any partner. b. The rights of a partner to sue for dissolution of the firm, accounts after dissolution and realisation of property after dissolution. c. The rights of firm or partners of firm having no place of business in India. d. The right to sue or claim a set-off of value not exceeding Rs. 100.

e. The powers of an Official Assignee or Receiver or the Court to realise the prop of an insolvent partner.

ADVANTAGES of a Partnership Firm


Easy to Form: Like sole proprietorships, partnership businesses can be formed easily without any compulsory legal formalities. It is not necessary to get the firm registered. A simple agreement or partnership deed, either oral or in writing, is sufficient to create a partnership. Note: Registration of the partnership is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory. Availability of Large Resources: Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business. Better Decisions: The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions. Flexibility in Operations: A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required. Sharing Risks: In a partnership firm all the partners share the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more. Protection of Interest of Each Partner: In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the partnership deed is required. In absence of the partnership deed, no legal protection is given to the partners. Benefits of Specialization: Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.

DISADVANTAGES of a Partnership Firm

Unlimited Liability: All the partners are jointly liable for the debt of the firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners. Uncertain Life: The partnership firm has no legal existance separate from its partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership. Lack of Harmony: In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the partnership and the business. Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form. No Transferability of Share: If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

DISSOLUTION OF A PARTNERSHIP FIRM


The dissolution of partnership between all the partners of a firm is called the dissolution of the firm [Section 39]. If some partner is changed/ added/ goes out, the relation between them changes and hence partnership is dissolved, but the firm continues. Thus, Dissolution of partnership is different from dissolution of firm. Dissolution of partnership is only reconstruction of firm, while dissolution of firm means the firm no more exists after dissolution.

Meaning of Dissolution of a Firm


A firm is not said to be dissolved by the fact of one or more members ceasing to be partners in it while others remain, but only when all and every one of the members of the firm cease to carry on its business in partnership. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm name but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi corporation. Matters pertaining not only to the fact of dissolution and fixing the date thereof but also matters arising out of the fact of dissolution which pertain to the winding up of the partnership, settlement of accounts, taking over of the goodwill and assets of the partnership, restrictions on the outgoing partners carrying on business in the case of transfer of goodwill to one of them, are all matters dealt with under the subject dissolution of a firm. A deed of dissolution must necessarily cover other matters, which arise directly out of dissolution, such as settlement of accounts,

payment of amounts found due on such settlement, closing down or continuation of business collection of outstanding and payment of liabilities. Notwithstanding such clauses in a deed of dissolution, it would be liable to payment of stamp duty under art 47, Sch I of the Bombay Stamps Act 1958 and would not be subject to separate duty on such matters.3 If a new firm is formed by agreement between some of the former partners, it will nonetheless be new, however closely that agreement may follow on the dissolution of the old firm. Whether a new firm is formed or not is a question of fact.

Modes Of Dissolution :1. By Agreement (S.40):-

A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement. In the matter of P. Venkateswarlu v. Lakshmi Narshima Rao, AIR 2002 AP 62, the court held that in case of dissolution of partnership, firm might be dissolved by any partner giving notice in writing to all the other partners of his intentions to dissolve the firm. In case, any of the following events take place then it becomes compulsory for the firm to dissolute:
Insolvency of Partners:- In case all the partners or all the partners except one become

2. Compulsory Dissolution (Sec.41):-

i.

ii.

insolvent. For example CIT Madhya Pradesh v. Seth Govindram Sugar Mills AIR 1966 SC and Lindley on Partnership, 15th edn, pp 693-4. Unlawful Business:- In case the firms business become unlawful on the happening of a subsequent event. e.g. trading with alien country .In the English case of Esposito v. Bowden 78 A and B charter a ship to go to a foreign country and receive a cargo on their joint venture. War breaks out between England and the country where the port is situated before the ship arrives at the port, and continues until after time appointed for loading. The partnership between A and B is dissolved. In another case of Hudgell Yeafes & Co. v. Watson9 where A is a partner with ten other persons in a certain business. An Act is passed which makes it unlawful for more than two persons to carry on that business in partnership. The partnership is thus dissolved. A firm is dissolved 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 on in partnership. Proviso to section 41(b), however provides 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. The proviso is based on the doctrine of severability. According to this principle, where there are several parts of the contract and one of the parts becomes illegal, then if the illegal part can be separated from the legal part, only the part, which has become

illegal, shall be void and the legal part shall remain valid. Similarly where the business of the firm consists of several undertakings or adventures and one of the undertakings becomes illegal, the other undertakings shall remain valid if the said illegal undertaking is severable from the other undertakings.
3. Dissolution on the happening of contingent event (S.42)

A firm may be dissolved on the

happening of any of the following contingent event:i. Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically. ii. On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist, unless there is an agreement to the contrary. For Example in Gheru Lal Parekh v. Mahadeo Das Maiya The partnership was constituted for the speculative transactions relating to sale and purchase of wheat. Under it speculative transactions were to be entered for the sale and purchase of wheat in future. After the supply of a part of goods, the contract was terminated before time. The question for consideration before the Supreme Court was, had the firm was immediately dissolved. The Supreme Court held that the firm was not immediately dissolved. It would be dissolved only after the realization of the assets. Where a firm was constituted for a specific undertaking to supply certain quantity of grain and the contract was prematurely terminated after supply of a part of the goods, it was held that the partnership did not come to an end and was dissolved only on the final realization of assets. In Mann v. DArcy,1920 the managing partner of a firm of produce merchants had entered into a single venture co-partnership with the plaintiff for the purchase and resale of a particular quantity of potatoes on the terms of equal share in the profits and the validity of the co-partnership for the said venture was upheld. iii. Death of Partner:- Death of any of the partner dissolves the partnership. The above view has been expressed by the full bench of Punjab and Haryana High Court in M/s. Nandlal Sohanlal, Jullandar v. CIT, Patiyala thus on the death of a partner the firm is dissolved provided that there is no contract to the contrary between the partners. If the remaining or surviving partners continue the business of the firm, it will be deemed that they have constituted a new firm by mutual consent. iv. Insolvency of Partner:- in the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm. The rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular venture and the same has yet not been completed. v. Resignation of Partner:- Resignation by any of the partners dissolves the partnership
4. Dissolution by notice (S.43):-In

case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners.[1] Banarsidas v. Kanshi Ram A.I.R. (1963) S.C. 1165 In those cases where a

partner has given notice of dissolution at a time when dissolution will give him some advantage over the other partners, he may be held in the firm till the pending transactions are completed.
5. Dissolution by Court:-The

court may order for the dissolution of the firm on the following

grounds:i. Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances. Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner, where a partner is imprisoned for a long period of time the court may dissolve the partnership.[2] Whitwell v. Arthur 1865 beva Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm. For example, if a doctor enters into a partnership with another doctor to run the clinic and it is found that he is immoral towards some patients, partnership firm may be dissolved on this ground Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner. Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.In Commissioner of Income Tax v. Sunil J. Kinariwala4950 the Honble Supreme Court held that when the partner assigns 50 % of his share in a partnership firm in favour of trust, the case of such assignment couldnt be treated as one of subpartnership. In A.Chinna Ramanatham Naidu v. B. Subbarami Reddy the court held that under section 44 if grounds for dissolution of the firm sought by a particular party are numerous, it could be open to such party to approach a competent civil court, so that a entire matter could be decided by that court on the basis of oral and documentary evidence. Even if one of the clauses of partnership deed envisages referring the disputes to the named arbitrators, then also the fact that arbitrators are chosen by both the parties and a date was also fixed for arbitration proceedings, cannot be ground for a seeking stay of further proceedings in a regular suit filed for a comprehensive relief. Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the

ii.

iii.

iv.

v.

vi.

vii.

future growth of the firm. For example, in a case partnership firm was established for the exploitation of mica from mines, one of the partners filed a suit for the dissolution of the firm on the ground that the firm is suffering loss continuously. Other partners opposed the suit on the ground that the partnership was for a fixed period and that the plaintiff had no valid treasons to resolve the firm before the expiry of the period. The court held that Section 44(f) will apply in this case and that the plaintiff is entitled to sue for dissolution and accounts. Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners.[3] Havidatt singh v. Mukhe Singh A.I.R. 1973, J&K Nainder Singh Randhava v. Hasrdial Singh Dhillon, AIR 1985 P&H 41; See also Kalpana Kothari v. Sudha Yadav, (2002) 1 SCC 203; AIR 2002 SC 89

CONCLUSION The firm is dissolved when all the partners of a firm is called the dissolution of the firm. Thus we can conclude that the firm is dissolved when all the partners stop carrying on the partnership business. If some partners dissociate from the firm and the remaining partners continue the business of the firm, the firm is not dissolved. The dissolution of a firm is distinct from the retirement of a partner because in latter situation others or remaining partners continue the business of the firm and the firm is not dissolved. Thus dissolution of partnership between all the partners of a firm is called dissolution of the firm. The dissolution of the partnership brings about a change in the relations between partners but partnership between them does not completely end. The partnership continues for the purpose of realization of assets or properties of the firm. Further, after the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.