Dissolution of Partnership Firm – Modes & Accounting

Introduction

There is a big difference between "Dissolution of Partnership" and "Dissolution of Firm".

• Dissolution of Partnership: Changes in relationship (e.g., Admission, Retirement). The business continues.
• Dissolution of Firm: The business involves winding up. Assets are sold, liabilities paid, and the firm ceases to exist.

Section 39 of the Indian Partnership Act, 1932 defines dissolution of a firm as "the dissolution of partnership between all the partners of a firm."

1. Modes of Dissolution

A firm can be dissolved in the following ways:

A. Without Interference of Court

1. By Mutual Agreement: All partners agree to close.
2. Compulsory Dissolution:
   • When all partners (or all except one) become insolvent.
   • When the business becomes illegal (e.g., ban on liquor trade).
3. On Happening of Events:
   • Expiry of fixed term.
   • Completion of specific venture (e.g., building a bridge).
   • Death of a partner (unless deed says otherwise).
4. By Notice: In "Partnership at Will", any partner can give notice of dissolution.

B. By Order of Court (Section 44)

A partner can file a suit for dissolution if:

• A partner becomes of unsound mind.
• A partner becomes permanently incapable.
• A partner is guilty of misconduct.
• The firm is running at continuous losses.

2. Settlement of Accounts (Section 48)

When a firm is dissolved, the money realized from assets (and contributions from partners if needed) is applied in the following specific order:

1. Outside Debts: Pay secured and unsecured creditors (Bank Loan, Suppliers).
2. Partner's Loan: Pay off loans given by partners to the firm.
3. Partner's Capital: Pay off the capital balances of partners.
4. Surplus: If any money is left, divide among partners in Profit Sharing Ratio.

3. Difference: Revaluation vs Realisation

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Exam Notes: Writing the Answer

Question: "Distinguish between Dissolution of Partnership and Dissolution of Firm." (5 Marks)

Model Answer:

1. Relationship: In dissolution of partnership, the relation changes but continues. In dissolution of firm, the relation ends completely.
2. Business: Business continues in the former; business stops in the latter.
3. Books: Books of accounts are not closed in the former (Revaluation A/c prepared). Books are closed in the latter (Realisation A/c prepared).
4. Nature: Dissolution of partnership is voluntary. Dissolution of firm can be voluntary or compulsory (Court order).

Summary

• Firm Disolves: Business ends.
• Sec 48: Order of payment (Outsiders -> Partner Loan -> Partner Capital).
• Court: Can intervene if a partner goes mad or firm faces perpetual loss.
• Insolvency: If all partners are insolvent, firm MUST dissolve.

Quiz Time! 🎯

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