You may have a lot of questions when considering dissolving your partnership firm. How does a partnership firm dissolve? What are the methods of it? After dissolution, who is responsible?
Our goal in this article is to clarify how to close your partnership business by answering all of these questions.
A partnership firm must be dissolved in order to cease to exist. A company’s assets are sold or disposed of, its liabilities are settled, and its accounts are settled. Upon dissolution of the partnership, any remaining funds are distributed to the partners in accordance with the profit-sharing ratio specified in the dissolution deed.
Therefore, a partnership firm dissolves when all partners collectively decide to end the business agreement between them. Dissolution of a partnership firm can take many forms.
The ways in which a partnership firm can be dissolved
1. By mutual consent, the relationship is dissolved
Mutual consent is the easiest and best way to dissolve a partnership firm. A dissolution agreement can be produced when the partnership contract expires or the partners mutually agree, due to various business or personal reasons, to dissolve the partnership.
Dissolving partnerships requires mutual agreement between all partners. If the partnership agreement contains a Dissolution by Mutual Consent clause, it can be dissolved by mutual consent.
2. Notice of dissolution
Anyone (or more) can dissolve a partnership at will through a simple and advanced notice if the partnership is at will. It is important to specify the date on which the dissolution takes effect in the notice. A proper notice of dissolution can be issued by any partner.
3. Contingencies that lead to dissolution
The partnership firm can be dissolved under certain clauses/situations:
- Due to the completion of a project/initiative that sparked the formation of the company.
- When a partner passes away.
- An insolvent partner or partners has been adjudicated.
- As a result of the expiration of a partnership period. In some firms, the tenure of the partnership is clearly defined at the outset. Partnerships of this type will, of course, end once their period has expired.
Contingencies may differ based on the agreement drafted at the time of forming the partnership. A dissolution agreement should specify the terms under which such a dissolution can take place.
4. Dissolution by Compulsory Order
A firm can be forced to dissolve due to certain circumstances. A partnership firm may find it difficult to continue its operations when an illegal event occurs, for example.
5. Court-ordered dissolution
In a partnership business, various individuals work together at the same time. It is possible that one or more of the partners may find it not appropriate to continue the relationship under certain circumstances, even if they are friends and relatives. Firms may also be dissolved by the court in these cases.
A court case can dissolve a partnership firm for several reasons. Let’s take a look at some of them. The partnership deed must, however, be registered in order for this to be possible.
Instability of the mind
In the event that a partner becomes mentally unstable or incapacitated.
Mental instability prevents a business venture from proceeding if a partner cannot deal with the pressures of the job at hand. A case for dissolving a partnership firm may be filed by the other partner or partners in such a case.
A partner’s illness or incapacity can also result in the dissolution of their partnership through a court action. The other partner must file a court request for dissolution of partnership, not the incapacitated/mentally unstable partner.
Due to Misconduct
In addition to misconduct, the court may dissolve the marriage for other reasons. In the event a partner/partners in the partnership misbehave or do not abide by the signed partnership agreement, they will be ousted by their partners through a court case.
A registered partnership agreement is legally binding, and any partner who fails to abide by any clause, even after being warned, might have to face the court. In such cases, a court may interfere with the dissolution of the partnership firm.
When one partner transfers their interest/equity in the firm to a third party without consulting the other, that partner can dissolve the partnership through the courts.
In the event of dissolution, who is responsible?
Even though the partners’ liabilities cease to exist after the dissolution of the firm, they are still liable for any acts or occurrences that occurred before the dissolution. The liability of partners is only exempt in the event of incapacitated/insolvent/dead partners.
It should be noted that there are various methods of dissolving a partnership, including dissolution by mutual consent, dissolution by notice, dissolution by contingencies, compulsory dissolution, and dissolution by the court. There are clauses and contingencies associated with each method.