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Mercantile Laws-I

Notes of partnership”. Thus, dissolution of firm always implies dissolution of partnership, but

dissolution of partnership need not lead to dissolution of firm. Dissolution of partnership may
involve merely a change in the relation of the partners and not the dissolution of the fi rm.
11.3.2 Dissolution of Firm

When the relationship existing between all the partners of the firm comes to an end, it is called

dissolution of the firm. It naturally involves closing down the business. There is no question of

‘reconstituted firm’ in such a case. A firm may be dissolved in any of the following ways:

1. By mutual consent. Sec.40 provides that a firm may, at any time, be dissolved with the
consent of all the partners. This applies to all cases whether the firm is for a fixed period or

otherwise.

2. By agreement. Sec.40 also provides for the dissolution of a firm in accordance with a contract
between the partners. The contract providing for dissolution may have been incorporated
in the partnership deed itself or in a separate agreement.
3. By the insolvency of all the partners but one. If all the partners or all the partners but

one become insolvent, there is a dissolution of the firm. Sec.41 calls this as compulsory
dissolution.

4. By business becoming illegal. Sec.41 provides that 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 it on in partnership. But, if the partnership relates to more than one
adventure, the illegality of one or more of them does not prevent the lawful adventure
from being carried on by the fi rm.
5. Partners becoming alien enemies. Sec.41 also covers cases of partnership between persons
some of whom become alien enemies by a subsequent declaration of war. In such a case
partnership is dissolved, because trading with an alien enemy is against public policy.

11.3.3 Dissolution by Court (Sec.44)

At the suit of a partner, the court may dissolve a firm on any of the following grounds:
1. If a partner has become of unsound mind. The application in this case may be made by
any of the partners or by the next friend of the insane partner. In the case of insanity of a
dormant partner, the court will not order dissolution, unless a very special case is made out
for dissolution.

2. Permanent incapacity of a partner. The court may order for dissolution of partnership,
if a partner becomes permanently incapable of performing his duties as a partner. The
application for dissolution, in such a case, may be made by any of the partners and not by
the incapacitated partner.
3. Misconduct of a partner affecting the business. If a partner is guilty of conduct which is
likely to affect prejudicially the carrying on of the business of the firm, the court may order

dissolution.
4. Willful and persistent disregard of partnership agreement by a partner. If a partner willfully
and persistently commits a breach of the partnership agreement regarding management,
or otherwise conducts himself in such a way that is not reasonably practicable for the other
partners to carry on business in partnership with him, the court may order dissolution.
Continuous refusal by a partner to attend to his duties in the partnership business, the
fact of hostility between the partners which makes cooperation between them impossible,
have been held to be sufficient reasons for dissolution. The suit for dissolution under this

ground can be brought by a partner other than the guilty partner.

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