Page 174 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

(ii) By the completion of adventure: Where a partnership has been constituted for carrying Notes
out a particular adventure, such partnership comes to an end on the completion of the
adventure. This is in the absence of an agreement to the contrary [s.42(b)].
(iii) By the death of a partner: A partnership, whether at will or for a fixed period, is dissolved
by the death of a partner, unless there is a contract to the contrary [s.42(c)].

(iv) By the insolvency of a partner: A partnership whether for a fixed period or at will is
dissolved by the adjudication of a partner as an insolvent. This is subject to the contract to
the contrary between the partners [s.42(d)].
(v) By the retirement of a partner: Where a partner retires from the partnership, then the
partnership is dissolved, but not the firm necessarily. However, if there are only two
partners and one of them retires then the dissolution of partnership would be dissolution
of firm.

On the happening of the contingencies mentioned above the remaining partners may continue
in the firm in pursuance of an express or implied contract to that effect. If they decide not to
continue, the firm is dissolved automatically. These methods of dissolution are also known as
“contingent dissolution” as the dissolution depends on the happening of a contingency and
unless otherwise agreed, partnership will stand dissolved on the happening of any of the above
mentioned events. Also dissolution under s. 42 is known as ‘optional dissolution’ because the
partnership may continue if the partnership agreement so provides.

6.7.3 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:
(i) By mutual consent: Section 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.
(ii) By agreement: Section 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.
Though the same section provides for these two methods of dissolution, they are different.
If all the partners give consent, the firm may be dissolved irrespective of what is contained
in the partnership deed. But in dissolution by agreement, the partners have to follow the
terms thereof, whether some of the partners consent or not. However, there is one
commonality between these two methods. The dissolution in both of them is based on the
general principle that a contract may be discharged by agreement – either a existing one
or by consent later on.
(iii) 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. Section 41 calls this as compulsory
dissolution.
(iv) By business becoming illegal: Section 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 firm.

(v) Partners becoming alien enemies: Section 41 also covers cases of partnership between
persons some of whom become alien enemies by a subsequent declaration of war. In such

LOVELY PROFESSIONAL UNIVERSITY 167