Different modes in which a firm can be dissolved are as follows:
1. By agreement (Sec. 40):
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Partnership is created by contract; it can also be terminated by contract.
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2. By notice (Sec. 43).
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. A notice of dissolution once given cannot be withdrawn without the consent of other partners (Jones vs. lord).
The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.
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3. On the happening of certain contingencies (Sec. 42):
Subject to contract between the partners, a firm is dissolved;
(a) If constituted for a fixed term, by the expiry of that term;
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(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof;
(c) By the death of a partner; and
(d) By the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned circumstances. Such a provision is valid.
4. Compulsory dissolution (Sec. 41):
A firm is compulsorily dissolved under any of the following circumstances: (a) When all the partners, or all the partners but one, are adjudged insolvent; or (b) When some event has happened which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership (e.g., when any partner, who is a citizen of a foreign country, becomes an alien enemy because of the declaration of war between his country and India).
Where, however, a firm is carrying on more than one adventures or undertakings, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures or undertakings.
5. Dissolution by the Court (Sec. 44):
Dissolution of a firm by the Court is necessitated when there is a difference of opinion between the partners regarding the matter of dissolution. For example, where one of the partners has become insane, some of the partners may be willing to continue the firm and share profits with the insane partner, while the other partner(s) may be insisting on the dissolution of the firm.
Obviously in these circumstances intervention by the Court becomes necessary. On receiving the petition for the dissolution of the firm the Court is not bound to decree dissolution and it enjoys complete discretion in the matter. It may or may not order for the dissolution of the firm depending upon the merits of each case.
Section 44 enumerates the various grounds on which a petition may be made to the court for the dissolution of the firm. The Section lays down that at the suit of a partner, the Court may dissolve a firm on any of the following grounds:
(a) Insanity:
When a partner becomes insane. In this case the Section permits not only any of the partners but also the next friend of the insane partner to file the suit for dissolution of the firm.
(b) Permanent incapacity:
When a partner, other than the partner suing, becomes permanently incapable of performing his duties as partner.
(c) Misconduct:
When a partner, other than the partner suing, is guilty of misconduct, which is likely to affect prejudicially the carrying on of the business of the firm. It is not necessary that the misconduct which is made the ground of dissolution should be connected with partnership business.
Conviction for travelling without ticket or the adultery by one partner with another partner’s wife is good grounds for the dissolution of the firm. Under this clause the suit cannot be brought by the guilty partner for that would allow him an excuse for getting a firm dissolved at his will.
(d) Persistent breach of agreement:
When a partner, other than the partner suing, commits frequently breaches of the partnership agreement or otherwise so conducts himself in matters relating to the business that other partners find it impossible to earn1 on the business in partnership with him.
Taking away the books of accounts, using firm’s monies, for his private debts, continuous quarrelling with other partners are good grounds for the dissolution.
(e) Transfer of interest:
When a partner, other than the partner suing, has transferred the whole of his interest in the firm to a third party or has allowed his share to be sold in execution of a decree.
Transfer or assignment of partner’s interest does not by itself dissolve the firm. But the other partners may apply to the Court to dissolve the firm if such a transfer occurs.
(F) Continuous losses:
When the business of the firm cannot be carried on except at a loss.
(g) Just and equitable:
When on any other ground the Court considers it just and equitable that the firm should be dissolved, for example, if partners are not on speaking terms.