We always assume that the dissolution of partnership is a mutual decision between partners. But that is not the case in all scenarios. At times only one of the partner wishes for a dissolution, and if it is a partnership for a fixed period he has to approach the courts for the same. Let us see how the dissolution of a partnership occurs in such cases.
Dissolution of Partnership by Court Order
Let us first understand that there are majorly two types of partnerships – partnership at will and partnership for a fixed period. Partnership at will gives full freedom for any partner to dissolve the firm after giving substantial notice. However, in a partnership for a fixed period, the firm cannot be dissolved unless all partners agree.
So if one or more of the partners wish to dissolve a fixed partnership they have to approach the courts. This remedy is available for all kinds of partnerships but is practically used by partners in a partnership for a fixed period.
According to section 44 of the Indian Partnership Act, a partner can approach the court asking for the dissolution of the firm. As per the discretion of the court, it may order a dissolution under certain circumstances. Let us take a look at these,
1] Partner of Unsound Mind
The insanity (temporary or permanent) does not automatically dissolve the partnership. However, the guardian of the unsound partner or any other partner can file a suit with the court for dissolution of a partnership firm. The dissolution will be effective from the date of the court order.
Browse more Topics under Indian Partnership Act
- Elements of a Partnership
- True Test of a Partnership
- Partnership Deed
- Partnership Property
- Types of Partners
- Minor admitted to Partnership
- Relations of Partners to One Another
- Relations of Partners to Third Party
- Dissolution of a Partnership
- Effect of Dissolution
- Goodwill of a firm
- LLP Agreements
2] Incapacity of Partner
If a partner has become incapable in a permanent capacity, for example blind, paralytic etc. then the court will dissolve the firm if a suite is filed by any partner.
3] Misconduct by Partner
If the misconduct of a partner is adversely affecting the business and their reputation, then the court will consider dissolving the firm in response to a suit filed by any other partner of the firm. For example, the gambling addiction of one particular partner is adversely affecting a firm, the court can order the dissolution of the firm.
4] Breaching of Agreement
If one of the partners is persistently breaching the partnership agreement then the other partners can approach the court. One point to note is that the partner must be repeatedly breaching the contract, and continues to do so even after warnings. An on-off breach does not warrant the action. But persistent breaching will result in the court ordering the dissolution of the firm.
5] Transfer of Share by Partner
A partner cannot transfer his shares and interests of the firm to another party without the permission of all the partners of the firm. He cannot admit a new partner in the partnership in the firm in such a manner. So if he has sold his rights/interests the other partners can approach the court and file for dissolution of the firm.
If the business is operating at a loss and the courts are convinced that the business cannot turn a profit, it will dissolve the firm.
7] Any Other Just Cause
The list given in Section 44 is not exhaustive. There can be other reasons for the dissolution of the firm. If the court is convinced the cause in the suit is justifiable and equitable, it will dissolve the firm. For example, if there is a deadlock between partners that is not showing signs of respite, the court can dissolve the firm.
Solved Question Dissolution of Partnership
Question: The remedies of section 44 are only available for partnership for a fixed term. True or False?
Ans: False. Section 44 is applicable to all types of partnerships. The practical usage is generally more applicable and suitable to the partnership for a fixed term. However, this does not exclude the other partnership from approaching the courts for dissolution of the firm.