Dissolution of Firms

• Dissolving a Firm: This involves closing the firm entirely, preventing future business under that name.

• Dissolving a Partnership: This involves terminating the existing partnership agreement. The firm may continue if remaining partners form a new partnership.

1. Mutual Agreement: Partners can mutually agree to dissolve the firm, either through a formal agreement or by mutual consent.

2. Compulsory Dissolution:

• Insolvency: If all or all but one partner are declared insolvent.

• Unlawful Activities: If the firm engages in illegal activities such as dealing in drugs or doing business with countries harmful to India's interests.

3. Contingent Events:

• Expiry of Term: If the partnership was formed for a fixed term.

• Completion of Task: If the partnership was formed for a specific purpose.

• Death of Partner: In a two-partner firm, the death of one partner automatically dissolves the partnership.

4. Notice: In a partnership at will, any partner can dissolve the partnership by giving notice.

5. Court Order: A court may dissolve the firm if a partner becomes mentally unstable, misbehaves, or violates the partnership agreement.

6. Transfer of Interest: If a partner transfers their interest to a third party without consent, the other partners may dissolve the firm.

1. Third-Party Liabilities: Partners remain liable for acts done by any partner before a public notice of dissolution is given.

2. Insolvency or Retirement: Partners who are insolvent or have retired are not liable for acts done after their insolvency or retirement.

3. Deceased Partner's Heirs: The legal heirs of a deceased partner are not liable for acts done by other partners after the partner's death.

1. Losses: Losses are first settled from profits, then from partner capital, and finally divided among partners according to their profit-sharing ratios.

2. Assets and Capital: Assets and contributed capital are applied in the following order:

   1. Third-party debts.

   2. Partner loans.

   3. Partner capital contributions.

   4. Remaining balance distributed according to profit-sharing ratios.

3. Realization: Assets are sold, and proceeds are used to pay liabilities. Assets or liabilities may be taken over by partners, adjusting their capital accounts accordingly.

By understanding these procedures and considerations, partners can navigate the dissolution process effectively and ensure a smooth transition.