Winding up of a Partnership Firm? - Learn HOW

The Section 4 of Indian Partnership Act, enacted in 1932, defines partnership as “the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all." There is an agreement that decides how profit and losses are divided between the partners in the partnership firm that can be oral or written while there should be a minimum of 2 persons and a maximum of 10 persons in the banking business and 20 persons in non-banking business to constitute a partnership firm.

While a partnership firm can be formed easily due to minor legal formalities, a contractual agreement, higher management, and lesser risk, it is always subject to misunderstanding, miscommunication, unlimited liability, and dissolution or winding up due to several reasons.

As defined under Section 39 of the Indian Partnership Act 1932, dissolution of partnership firm occurs when the partnership between all the partnership firms is dissolved. On dissolution, the partnership firm ceases to exist as a going concern. The partners no longer possess their right, and the relation among them changes, often reconstituting another new firm. The winding up of a partnership firm results in de-management of internal affairs, liquidation of assets and discharge of debt out of the realized proceeds. Sections 40 to 44 of the Indian Partnership Act 1932 deal with the dissolution of the partnership firm with or without the intervention of the court.

DISSOLUTION BY AGREEMENT

As provided under Section 40 of the Act, dissolution of a firm may be processed only with the consent of all the partners or in accordance with a contract between them. The partners may, by consent or by entering into an agreement, dissolve the firm. As one of the simplest methods of dissolution of partnership firm, a dissolution by partner’s agreement does not require the intervention of the court.

COMPULSORY DISSOLUTION

Section 41 of the Indian Partnership Act 1932 deals with dissolution in cases:

• When all partners or all except one partner become insolvent.
• When the business activity is carried on by the firm becomes unlawful.

DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES

Section 42 of the Act deals with the dissolution of the firm on the happening of certain events such as follows:

• When the term expires, if the contract of the firm is on a fixed term.
• On the completion of the task for which the firm was constituted.
• On the death of the partner provided the Continue Read....