Dissolution of a partnership firm

Dissolution of partnership simply means a change in the relation of the partners. Such a change is usually caused when a firm is reconstituted i.e., when a new partner is admitted or when an cxisting partner retires, dies, becomes insolvent or is expelled. The dissolution of partnership may or may not involve the dissolution of a firm. A firm, after a change in relation of the partners, may decide to continue as a reconstituted firm. But, when a firm is dissolved, it necessarily involves the dissolution of partnership.

Dissolution of Firm

 Dissolution of a firm means the dissolution of partnership between all the partners of a firm .It occurs when there is complete breakdown of relationship between all the partners. In such a situation, the business of the firm is completely stopped, its assets are realised, the liabilities paid off and the surplus distributed among the partners according to their share in the property of the firm. Thus, the partnership is completely discontinued

Consequent to dissolution of the firm, the partners are entitled to

 (i) equitable distribution of firm's property,

(ii) return of premium on premature dissolution,

(iii) restrain the use of firm's name and property, and

 (iv) certain rights where partnership is rescinded for fraud, etc.

The partners continue to remain liable to third parties for any acts done after dissolution if public notice is not given. In any case, the partner's authority to bind the firm, and mutual rights and obligations of the partners continue so far may be necessary to wind up the affair of the firm, and to complete transactions begun but unfinished at the time of the dissolution.

 Section 48, 49 and 55 of the Act lay down detailed rules regarding settlement of , accounts between the partners. In the absence of any contract to the contrary, all losses including deficiencies of capital must be paid first out of profits, next out of capital, and lastly, if necessary, by contribution by all partners in their profit sharing ratio.

The assets of the firm, including sums contributed by partners to make up the deficiency of capital, shall be applied

 (i) in paying debts of the firm,

 (ii) in paying each partner, rateably, for advances by him to the firm,

 (iii) in paying each partner, rateably amount due for his capital contribution, and

 (iv) the surplus in paying each partner according to his share in profits. If, however, a partner becomes insolvent and is unable to pay the amount due from him, the solvent partners will share such deficiency in the ratio of their capitals as on the date of dissolution as per Garner v. Murray rule