Procedure for Dissolution of Partnership Firm

Lokik Harit

Lokik Harit

Published on: Jun 10, 2025

Priya Gandhi

Updated on: Jun 10, 2025

★★★★★(1 Rating)

36

Introduction:

Dissolution of a partnership firm refers to the cessation of the firm’s business operations and the termination of its legal existence. Such dissolution of a registered Partnership firm is governed by the Indian Partnership Act, 1932, which occurs when all partners agree to end their partnership or when a specific legal condition requires so.

Following are the types of Dissolution:

1. Dissolution by Agreement [Section 40]:When partners mutually agree and decide to dissolve the firm.
2. Compulsory Dissolution [Section 41]: Occurs if the firm’s business becomes unlawful or when all partners but one becomes insolvent.
3. Dissolution on the happening of certain contingencies [Section 42]: Is triggered by events such as:
   • Expiry of the partnership term
   • Completion of the undertakings for which the firm was formed
   • Death or insolvency of a partner.
4. Dissolution by Notice of partnership at will [Section 43]: In cases of partnership at will a partner can dissolve the firm by serving a written notice to other partners.
5. Dissolution by Court [Section 44]: A partner may seek Court intervention for dissolution on grounds such as misconduct or incapacity of a partner and breach of partnership agreement. In cases of disputes or legal grounds, one or more partners may approach the Court on the following grounds:
   • Misconduct or incapacity of partner
   • Breach of partnership agreement
   • Unlawful business operations of the firm

Applicable Provisions:

Section 40, 41, 42, 43, 44, 45, 48, 49 and 63 of Indian Partnership Act, 1932

Mandatory Requirements:

1. Partners must unanimously agree to dissolve the firm unless otherwise specified in the partnership agreement/deed.
2. In case of partnerships at will, a written notice is mandatory to initiate dissolution.
3. Settle all debts and liabilities post dissolution.
4. Decree by the Court in case of dissolution.

Procedure:

1. Decision to Dissolve and Notice of Dissolution:
   • At first place decision to dissolve partnership would be taken either by:
     • Mutual consent
     • By agreement in accordance with partnership deed
     • Compulsory dissolution on account of death, insolvency or illegality of business
     • Court’s order if a partner becomes mentally incapable or guilty of misconduct.
   • In case of partnership at will, the partner wishing to dissolve the firm must notify the remaining partners.
2. Settlement of Accounts:
   • Prepare a final balance sheet to determine the firm’s assets and liabilities.
   • Accounts shall be settled in the following order:
     • Payment of Debts: Third party creditors are paid first
     • Payment of firm’s debts and separate debts : If the firm or any partner owes debts, the firm’s assets will be liquidated to settle the liabilities. If the firm’s assets are insufficient, the partners’ share will be used to cover the shortfall.
     • Partner Contributions: Repay any advances or loans made by partners to the firm
     • Capital Accounts: Return capital paid by each partner
     • Profit or loss sharing: Distribute any remaining profits or losses among partners according to their agreed ratios.
3. Intimation to the Registrar:
   Intimate the Registrar of firms, of such dissolution within a period of 90 days. The form and procedure for which varies from state to state in accordance with the partnership rules of the particular state in which the firm has been registered.
4. Publish Public Notice of Dissolution:
   Any partner of the firm may publish a public notice in the Official Gazette and a local newspaper to inform:
   • Creditors
   • Customers
   • General public
   About the dissolution of the firm and avoid future liabilities.
5. File Necessary Cancellation of Registration Application under following Acts:
   • Goods and Services Act
   • Shops & Establishment Act
   • Trade Licenses
   • EPF
   • ESI
   • Other Labour Laws
   • Industry Specific Laws
   • PAN and TAN (if applicable).