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Commerce - Dissolution of Partnership | 11th Commerce : Chapter 5 : Hindu Undivided Family and Partnership

Chapter: 11th Commerce : Chapter 5 : Hindu Undivided Family and Partnership

Dissolution of Partnership

Dissolution of Partnership is different from the dissolution of partnership firm.

Dissolution of Partnership

Dissolution of Partnership is different from the dissolution of partnership firm. It is due to the fact that when the relation present between all partners, comes to an end, it   is known as dissolution of firm. When any one of the partners become incapacitated, then the partnership comes to an end, but the firm may continue to operate, if new partnership is arranged among the other partners.


a. Dissolution of firm

Dissolution  of  firm  means   dissolution  of partnership. On dissolution of firm, partnership business comes to an end. Its assets are realised and the creditors are paid off. The business cannot be continued after dissolution of partnership firm. For example A, B and C are partners in a business. If all the three partners decide to dissolve, it is known as “dissolution of the firm”.


b. Dissolution of partnership

Dissolution of partnership means the termination of the original partnership agreement. A partnership is dissolved by insolvency, retirement, expiry or completion of the term of partnership. The business will continue after dissolution of partnership. For example: A, B and C are partners in a business. If ‘A’ retires, ‘B’ and ‘C’ can continue the business which is known as dissolution of partnership.

The various circumstances leading to dissolution of partnership firm can be summarised by taking the first letters used in the term “Dissolution”.

D - Death of partner

I - Incapacity of a partner

S        -     Stipulated period of partnership completed in the case of particular partnership

S - Serious misconduct of a partner

O - Object is completed (Particular partnership)

L - Lunacy of a partner

U - Unavoidable continuous loss

T - Transfer of interest of the firm

I - Insolvency of a partner

O - Objectionable unlawful objectives

N - Notice of dissolution by a partner.

The fundamental difference between the dissolution of partnership and dissolution of the firm is that when the partnership is dissolved, there is no other dissolution, but when the firm is dissolved, partnership too comes to an end.


Dissolution of Partnership can take the following forms


·           Change in the existing profit sharing ratio

·           Admission of a Partner

·           Retirement or Death of a Partner

·           Insolvency of a partner.

·           Expiry of the term of the partnership.

·           Completion of the specified venture.

·           Dissolution by agreement.


Dissolution of a partnership firm is taken place in two ways.

a. without the order of the court and

b. By order of the court.


a. Without the order of the court


i. By agreement or mutual consent

A firm may be dissolved when all the partners agree to close the affairs of the firm. Just as a partnership is created by contract, it can also be terminated by contract.


ii. By insolvency of all the partners but one

If any of the partners adjudged an insolvent (or if all the partners become insolvent) it is necessary to dissolve the firm.


iii. When the objective becomes illegal

When the business carried on by the partnership becomes illegal, the partnership firm is automatically dissolved.


iv. By notice of dissolution

In the case of partnership at will when any partner gives in writing to all the other partners indicating his intention to dissolve the firm, the firm will be dissolved.


v. On certain contingencies:

Dissolution of partnership itself may involve the dissolution of the firm unless parties agree to continue it otherwise, it will take place.

a.        On the expiry of a specified period in case of partnership for a fixed term.

b.        On the completion of a particular adventure for which it has been formed

c.         in case of particular partnership.

d.        On the death of a partner.

e.         On the retirement of a partner.

f.          On the insolvency of a partner.

In all the above cases if  the  business  is not continued by the remaining partners, dissolution of the firm takes place automatically.


b. Dissolution through court


The court may order dissolution of a firm at a suit of a partner in any of the following circumstances.

a.        When a partner becomes insane

b.        Permanent incapacity of any partner

c.         Misconduct of any partner

d.        Breach of agreement which makes the business impracticable

e.         Transfer of interest to third person

f.          Continued loss

g.        When the court finds that it is just and equitable to dissolve the firm


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