Indian Partnership Act

Effects of Dissolution

After the dissolution of a company, the firm stops carrying on business. They do not accept any new business either. But the firm does not automatically wrap up all their business overnight. The whole process of winding up takes time. So let us see what the effects of dissolution of a company are.

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Effects of Dissolution of Company

Continuing Authority of Partners

The partners need to wind up the business. For this, they need to carry out some functions, perform some acts etc. The partners will continue to have the authority to perform such acts as necessary. And the firm is bound by these actions of the partners. Insolvent partners, partners of unsound mind etc. are the exceptions here.

Also, according to Section 46 of the Act, every eligible partner has a lien over the assets of the firm. So a partner has the authority to forbid any unfair distribution of assets or funds by getting an injunction.

However, these authorities are only for all actions and transactions regarding the winding up of the business. It is not for any new transactions or business of the firm.

dissolution of company


Continuing Liabilities of Partners

Public notice of the dissolution of the firm has to be given by the firm. If such a notice is not given, all the partners continue to be liable for the actions of the other partners with respect to the firm.

For example, if one partner enters into a contract with the third party after the firm was dissolved but no public notice was given, the partners will be liable to perform this contract or bear the losses.

Right to Return of Premium

In certain cases, a partner has to pay a premium to the partners to be introduced in the firm. But if a partnership for a fixed term is terminated before the fixed period then the partner can demand that a proportionate portion of this premium be paid back to him. This will not apply if

  1. The dissolution was by mutual consent
  2. Caused by the misconduct of the partner that paid the premium
  3. Death of a partner

(source – talk business)

Settlement of Accounts

Section 48 deals with the settlement of accounts after the dissolution of the partnership firm. Let us see the rules,

1] The losses of the firm and the deficiencies of the capital will be first paid out, particularly from undistributed profits. If these fall short, then we shall utilize capital accounts and lastly, the partners will contribute the funds in their share profit ratios.

2] The assets of the firm and the contributions of the partners will be applied in the following order,

  1. Payment to creditors (outside creditors only)
  2. Repayment of Loans and advances of partners
  3. Payment of partner’s capital accounts
  4. Then divide remaining profits in the profit sharing ratio

3] If one of the partners is insolvent, then the settlement is done in the following way as per the case study of Garner vs. Murray

  1. Solvent partners contribute their share of the deficiency if any
  2. The assets of the firm are distributed only amongst the solvent partners
  3. The deficiency of the insolvent partner is distributed among the solvent partner, specifically in their capital ratios

Solved Example on Dissolution of Company

Question: A agreed to join the firm but had to pay a premium. The firm was subsequently dissolved due to the death of another partner. Does A have the right to be paid back his premium as one of the effects of dissolution?

Answer: No, in this case, dissolution of a company due to the death of the partner, A does not get a proportionate portion of his premium back.

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