Dissolution Of Partnership SS2 Financial Accounting Lesson Note

As we know, after the dissolution of a partnership firm, the existing relationship between the partners changes. However, the firm continues its activities. The dissolution of a partnership takes place in any of the following ways:

1. Change in the existing profit-sharing ratio.
2. Admission of a new partner
3. The retirement of an existing partner
4. Death of an existing partner
5. Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a partner in the firm.
6. On completion of a specific case, the partnership was formed specifically for that particular venture.
7. On expiry of the period for which the partnership was formed.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here that the dissolution of a partnership may not necessarily result in the dissolution of the firm.

However, the dissolution of partnership firms always results in the dissolution of the partnership.

The following is how the dissolution of a partnership firm takes place:

1. Dissolution by Agreement

A firm may be dissolved if all the partners agree to the dissolution. Also, if there exists a contract between the partners regarding the dissolution, the dissolution may take place by it.

2. Compulsory Dissolution

In the following cases, the dissolution of a firm takes place compulsorily:

i. Insolvency of all the partners or all but one partner as this makes them incompetent to enter into a contract.

ii. When the business of the firm becomes illegal due to some reason.

iii. When due to some event it becomes unlawful for the partnership firm to carry its business. For example, a partnership firm has a partner who is from another country and India Declares war against that country, then he becomes an enemy. Thus, the business becomes unlawful.

3. When Certain Contingencies Happen.

The dissolution of the firm takes place subject to a contract among the partners, if:

i. The firm is formed for a fixed term, on the expiry of that term.

ii. The firm is formed to carry out specific ventures, on the completion of that venture.

iii. A partner dies.

iv. A partner becomes insolvent.

4. Dissolution by Notice

When the partnership is at will, the dissolution of a firm may take place if any one of the partners gives a notice in writing to the other partners stating his intention to dissolve the firm.

5. Dissolution by Court

When a partner files a suit in the court, the court may order the dissolution of the firm based on the following grounds:

i. In the case where a partner becomes insane

ii. In the case where a partner becomes permanently incapable of performing his duties.

iii. When a partner becomes guilty of misconduct, it adversely affects the firm’s business.

iv. When a partner continuously commits a breach of the partnership agreement.

v. In a case where a partner transfers the whole of his interest in the partnership firm to a third party.

vi. In a case where the business cannot be carried on except at a loss.

vii. When the court regards the dissolution of the firm to be just and equitable on any ground.

SETTLEMENT OF ACCOUNTS

In a case where the partners do not have an agreement regarding the dissolution of the firm, the following provisions will apply:

1. The firm will pay the losses including the deficiency of capital firstly out of the profits, secondly out of the partner’s capital and lastly by the partners individually in their profit-sharing ratio.
2. The firm shall apply its assets including any contribution to make up the deficiency firstly, for paying the third-party debts, secondly for paying any loan or advance by any partner and lastly for paying back their capital. Any surplus left after all the above payments is shared by partners in the profit-sharing ratio.

DIFFERENCES BETWEEN THE DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF FIRM