Dissolution of Partnership

A partnership is the business arrangement between two or a group of people that share their profits and liabilities in the profit-sharing ratio. Sometimes, due to certain arising conditions, the partners need to dissolve this relationship or simply cancel their business partnership. The dissolution of partnership varies from the dissolution of the firm, as the dissolution of a firm involves the complete closure of the business, whereas the dissolution of the partnership shall only involve the breaking of a partnership bond between two or more people. The dissolution of a partnership can be due to various reasons such as insolvency of a partner of the firm, change in an existing partner, death of a partner, admission of a new partner, or simply by mutual agreement of the partners. 

Types of partnership

To understand the reasons for the dissolution of the partnership, first, let’s know about the types of partnerships.

1. Partnerships for fixed time: As the name suggests, a partnership for a fixed time will automatically dissolve at the end of that period. For example, if the partners decide on a partnership for the next four years, it will dissolve after those four years.
2. The partnership of will: Partnership at will completely relies on the choice of partners; if they want to end the partnership, they can at any time by giving notice to other partners.
3. Particular partnership: If any partnership is done especially for a particular venture or continuous business, that partnership is a particular partnership.
4. General partnership: As the name suggests, this type of partnership is generally to carry out any business. In this type of partnership, each partner has unlimited liability.

Reasons for change of any partnership deed

The reasons for the dissolution of any partnership are as follows:

• Insolvency of a partner or death of a partner
• Retirement of a partner
• Change in existing partners
• Admission of new partners
• On completion of the venture for which the partnership came into the act
• Completion or expiration of the partnership period

Modes of dissolution of any partnership

1. Dissolution by agreement: Dissolution by agreement is the easiest way to dissolve any partnership. In this type of agreement, the partners mutually decide to end their partnership due to certain reasons.
2. Dissolution by notice: As discussed above, if the partnership is at will, any partner of such partnership can give notice to others for the end of the partnership. This notice will have the date of dissolution of the partnership so that other partner can resolve their leftover ventures.
3. Dissolution due to certain events: The dissolution of a partnership may include different reasons, such as the expiration of the partnership period. This happens when the partnership is for a fixed time. It may be due to the death of any partner. Another reason for dissolution may be the completion of the venture for which the partnership was done.
4. Required dissolution or compulsory dissolution: The compulsory reason for the dissolution of any partnership involves insolvency of a partner, illegal activities of any firm, and when the firm becomes unlawful due to their certain activities.
5. Dissolution by the court: The court may order the dissolution of the partnership in cases such as when any partner becomes mentally unstable and is incapable of performing their duties towards the firm. When a partner becomes guilty of some crime that can affect the company’s reputation or when a partner disobeys the laws of the company willingly, the court can simply dissolve the partnership if they find that there is no chance of any profit and the company will always be at a loss.

Rights after dissolution

The partners’ rights after dissolution are clearly mentioned in Section 46 of the Indian Partnership Act, 1932. These rights are:

• Every partner has the right to surplus distribution among all the partners
• Every partner must get the premium they pay at the initiation of the partnership
• After the dissolution of the partnership, the partner will not have the right to use the name of the company or firm for their personal benefits
• They also lose the right to earn any benefit out of the partnership’s name after the dissolution

Liabilities after dissolution

The partners have certain liabilities during or after the dissolution of the firm. These are:

• All the partners (other than those found to be insolvent or dead) are liable to the third party until the official public notice of dissolution of the partnership
• The partners need to pay off their debts and wind up all their other affairs after the dissolution of the partnership
• The profits after the dissolution are to be shared according to their profit share ratio in agreement

Conclusion 

Dissolution of any partnership is the ending of business between two or a group of people due to certain incidents or mutual decisions. The dissolution of the firm is completely different from the dissolution of a partnership as the firm dissolution involves the complete winding-up of the business, whereas the dissolution of the partnership only involves the ending of business between two or more groups of people. The dissolution of a partnership can be due to various reasons such as insolvency of a partner of the firm, change in existing partners, death of a partner, admission of a new partner, or simply the mutual agreement of the partners. There are different types of partnership and modes of ending it, too, as stated above.