Discuss the term ‘dissolution of a firm.’ States the various modes of dissolution of a firm.

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dissolution of firm

Discuss the term ‘dissolution of a firm.’ States the various modes of dissolution of a firm.

Ans. Meaning of Dissolution of a Firm— It is to be noted that “when a firm, is put to an end as between all the partners, that is called dissolution. S. 39 says that the dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”. Various

Modes of Dissolution of Firm-A firm may be dissolved in any of the following ways–

1. Dissolution by Agreement – According to S. 40 a firm may be dissolved with the (i) consent of all the partners or (ii) In accordance with a contract between the partners. Thus, it may be noted that a firm may be dissolved at any time with the consent of all the partners. This applies to all cases whether the firm it for a fixed period or at will. A dissolution was held to have take 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. On the other hand, it may be noted that a firm may be dissolved in accordance with a contract between the partners. The contract providing for dissolution may be contained in the partnership deed itself or m a separate agreement.

2. Compulsory Dissolution — According to S. 41 a firm is dissolved in the following two ways—(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. The two clauses of dissolution of compulsory nature mentioned in above may be explained as under-

(a) Insolvency-It is to be noted that where all the partners of the firm have been adjudicated as insolvents, the partnership inevitably overs. This is so because partnership is a contract and insolvents, till they are not discharged, cannot contract either among themselves or with those dealing with the firm. The same result follows where only one partner remains solvent and all others have been adjudicated as insolvents.

(b) Illegality of Business-Again, it is to be noted that where the business of a firm is illegal from the very beginning, the agreement of partnership by itself is unlawful. U/S. 23 of the Contract Act, 1872. Such a case does not fall within the scope of S. 41. The section applies when the business is lawful in the beginning but subsequently, on account of some change in law or outbreak of hostilities, the business becomes unlawful S. 56 of the- Contract Act says that when the performance of a contract becomes unlawful, the contract becomes void. S. 41 (b) of the partnership Act says that when the business of a firm becomes unlawful, the firm is, by force of law, dissolves. The clause contemplates two kinds of possibility. Either the business itself becomes unlawful or its doing is not permissible by law only for the partnership even if it is a lawful act for others.