[DISSOLUTION OF THE FIRM] December 10, 2010

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DISSOLUTION OF THE FIRM

Dissolution of partnership firm means discontinuation of the legal relationship existing between
each and every partners of the firm.

Following are the circumstances under which dissolution of the partnership firm takes place:-
(1) As a result of an agreement between all the partners.
(2) When all the partners or all the partners except one become insolvent or die.
(3) When the business of the firm becomes unlawful.
(4) Subject to an agreement between the partners, upon achievement of a specific purpose,
completion of the specified time, death or insanity of any of the partners.
(5) By any of the partners giving notice to the other partners in the case of partnership at will.
(6) By the interference of the court :-
(a) When a partner becomes of unsound mind.
(b) Permanent incapacity of a partner to carry out his duties diligently.
(c) Continuous misconduct of breach of trust committed by any partner.
(d) When the business cannot be carried out except at loss.
(e) If any other conditions exist and are considered reasonable by the court of Law for
dissolution.

Note: Dissolution of a partnership firm is compulsory in case of following cases:
A. by the adjudication of all the partners or of all the partners but one as insolvent, or
B. by the happening of any event which makes the business of the firm unlawful





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EFFECTS OF DISSOLUTION OF THE FIRM

1. PARTNERS RIGHT TO ENFORCE WINDING UP :-
The partners of a dissolved firm have the right to enforce winding up proceedings on the
other partners if they refuse to do so.
2. CONTINUING AUTHORITY OF THE PARTNERS OF A DISSOLVED FIRM :-
The partners of a dissolved firm have the authority to make the other partners liable by
their acts till all the winding up proceedings are complete.
3. SETTLEMENT OF ACCOUNTS IN THE CASE OF DISSOLUTION AND
WINDING UP THE PARTNERSHIP FIRM :-

The rules applicable:
(a) All liabilities including deficiency in capital shall be first paid out of profits then out of
capital and finally by the contributions made by the partners from there personal property
in profit sharing ratio.
(b) The assets of the firm shall be utilized in payment of the liabilities in the following order.
Liability of the outsiders settled first, advances other than the capital contributed by the partners
paid second and finally the payment would be made towards partners capital.

4. GIVING NOTICE :
The partners of dissolved firm should give public notice to that effect otherwise they
continue to remain liable for the acts of the firm to the third parties till such a notice is given.







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Important MCQs on Dissolution of firm.

Q.1. According to Indian Partnership Act, the dissolution of firm means dissolution of
partnership between

(a) Minority partners of the firm
(b) All the partners of the firm
(c) Majority of partners of the firm
(d) Some of the partners of the firm

Q.2. In case of dissolution of partnership firm

(a) Assets are realized and liabilities are paid off
(b) The legal relations between all but one of the partners come to an end
(c) The business of the firm is closed down
(d) happens both as per clause (a) and (c).

Q.3. Dissolution of partnership means

(a) Change in the composition of firm
(b) Change in the relations between the partners
(c) Discontinuation of the business of the firm
(d) Either clause (a) or (b).





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Q.4 On dissolution the partners remain liable to till

(a) Public notice is given
(b) The registrar strikes off the name
(c) Accounts are settled
(d) Partners dues are paid off
Q.5. A partnership may be dissolved

(a) On expiry of the term.
(b) On completion of the venture
(c) Death of a partner
(d) In all the above contingencies subject to a contract to the contrary
Q.6. Dissolution by agreement among partners is dealt with under Section of the partnership
Act

(a) 41
(b) 40
(c) 43
(d) 42

Q.7. When joint Debts are due from firm and also separate debts are due from partners, the
Firms property shall be applied first in paying the firms debts it is
(a) Partly true
(b) True
(c) Partly false
(d) False

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Q.8. Which of the following do not constitute ground for dissolution by Court?
(a) Insanity of the partner
(b) Admission of minor to the benefits of partnership.
(c) Heavy losses of the Firm
(d) Incapacitation of partner

Q.9. Section 46 of the partnership Act dealt with ..
(a) Dissolution of Firm
(b) Right of partners to have business would up after dissolution.
(c) Registration of Firms
(d) Dissolution by the court

Q.10. Under Section 40, i.e. dissolution by agreement the fact of dissolution need not be
evidenced by a document, i.e. no dissolution deed is required. It is
(a) False
(b) Partly True
(c) True
(d) None of the above.

Q.11. At the time of dissolution of Firm, the surplus left after settlement of the debts and
liabilities of the Firm shall be
(a) Credited to the Reserve Account.
(b) Distributed among the partners equally
(c) Credited to the capital Account.
(d) Distributed among the partners according to their rights
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Q.12. When a partnership Contract is rescinded on grounds of fraud or misrepresentation, the
party entitled to rescind, is also entitled to be indemnified by the partners guilty of such fraud or
misrepresentation against all debts of the Firm. It is
(a) Partly True
(b) Partly false
(c) True
(d) False

Q.13. Loss arising out of partners insolvency shall be made up by the solvent partners by-
(i) Bringing in cash equal to their respective shares of the loss on realization and
(ii) Bearing the loss in the ratio of their last agreed capitals statement is .
(a) Partly True
(b) True
(c) False
(d) Partly false

Q.14. Joint Debts are due from Firm and also separate debts are due from partners, any surplus
left after settlement of the Firms debts shall not be paid to the partner directly, but the share of
each partner shall only be applied in the payment of his separate debts. It is ..
(a) Partly True
(b) True
(c) False
(d) Partly false


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Q.15. The right of a partner or his representative to restrain other partners or representatives
from the use of firm name or firm property upon dissolution of Firm can be restricted by
agreement between partners. It is .
(a) False
(b) Partly false
(c) True
(d) Partly True

Q.16. When Under Sec. 45 public Notice of dissolution is not given, the partner who retires
from the Firm and who is not known to the person dealing with the Firm to be a partner,
continues to be liable for any act done by any of the partners which w ould have been the act
of the Firm if done before dissolution. It is
(a) True
(b) Partly false
(c) Partly True
(d) False

Q.17. When a partners Capital Account has a debit balance and he is unable to bring in
necessary cash to make up the deficiency, it is called ..
(a) Loss arising out of partners insolvency.
(b) Loss on Dissolution of Firm
(c) Loss arising out of piecemeal distribution of assets
(d) Loss on Dissolution of partnership.




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Q.18. A suit for dissolution of firm on the grounds that a partner has become permanently
incapable of performing his duties as a partner, can be brought by
(a) The partner who has become so incapable
(b) Any other partner
(c) Next friend of the partner who has become so incapable
(d) Any of the above.

Q.19. Public notice of dissolution u/s 45 may be given by
(a) Any partner
(b) Registrar of firms
(c) All partners
(d) The firm

Q.20. When public notice of dissolution is not given under Section 45, the estate of a partner who
dies, continues to be liable for any act done by any of the partners which would have been the act
of the firm if done before dissolution it is
(a) True
(b) False
(c) Partly True
(d) Partly false