The Partnership Act is a comprehensive structure for contractual and partner partnerships and the basis for the most common form of small business organization.

The Indian Partnership Act enacted in the Year 1932 establishing the partnership law relating to the relationship between individuals who have decided to share the income of a business carried on by both or all of them working for both–makes it mandatory to have a partnership registered with the Registrar of Companies, unless the company is barred from exercising all right in a court.

This Act describes the partners ‘ relationship with each other and with other parties and lays down provisions concerning incoming and outgoing partners, the breakup of a business, etc.

A partner is the company’s representative for the company’s commercial intent. The act also provides for the company’s selling of goodwill following its dissolution and the buyer’s and the goodwill’s seller’s rights. The dissolution of partnership among all of a firm’s partners is called the company’s dissolution.

The Act acknowledges the distinction between a partnership company being dissolved and a pure partner’s retirement.

On dissolution, each partner is paid its share of income, if any, while on one partner’s retirement, death, or adjudication, dissolution does not automatically occur, because it may be a phrase in the partnership agreement that another partner will continue a firm.

While dissolution is something different from a partner’s retirement because one or more of the partners continue the business in a partner’s retirement.

Where the company is reconstituted immediately after the dissolution, and the business resumed by the partners, even though it remains dissolution with the same name and place.


Section 40: Dissolution by agreement: “A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.”

By Contract: Upon the consent of both partners, a company can be dissolved at any time. This applies to both cases, whether the company is at-will or for a set time. In the case of a partnership at will, a separation was held, as the partners chose not to carry on the firm’s business from an agreed date.

By Agreement: In compliance with a contract between the partners a company can be dissolved. The contract for dissolution may be contained either in the partnership act itself or in a separate agreement.

All of the above types of dissolution are given in the same section but differ. Partners can consent to dissolution whatever their previous agreements are. Yet they have to obey their subsisting arrangement in dissolution by contract, whether or not any of the partners give their consent.

Section 41: Compulsory Dissolution

“A firm is dissolved: –

(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 it unlawful for the business of the firm

to be carried on or for the partners to carry it on in partnership: Provided that, where more than one separate adventure or undertaking is carried on by the firm the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.”

Except that, if the firm carries out more than one separate adventure or undertaking, the illegality of one or more of them does not in itself cause the firm to collapse in favor of its legitimate adventures and undertakings.

Compulsory Dissolution: The two events listed in the section, namely the insolvency of all, or all but one, partners, or business illegality, are recognized as mandatory dissolution grounds because they are working to bring about such required dissolution that no agreement can be reached to the contrary.

Any number of clauses in the act will prohibit Section 41 from functioning. The 2 clauses referred to in the Section are: –

  • Insolvency: The sub-section is based on the obvious premise that to constitute a firm, there must be at least 2 individuals. As already seen, on adjudication as an insolvent partner he ceases to be an insolvent partner from the date on which he is adjudicated. Under Section 42(d), the adjudication of a sole partner acts as a breakup of a partnership in the absence of a contract to the contrary. However, the situation discussed by this Provision is where insolvent is adjudicated by the entire company, or by all but one of the partners. It is clear that the company is dissolved in conditions, so there is no possibility of contracting the other way around.
  • Prohibition of Business: Where a relationship holding a company in the British / Indian Territory is broken by 1 partner being an alien enemy and the Indian income made after the dissolution from the use of its property, payment, of course, being suspended during the war, the arrangement may be void but not unlawful. Under Section 30 of the Contract Act, an arrangement by way of Wager is null but not void.

We should infer that the company is dissolved when all partners stop carrying on the business of the partnership. Unless other partners dissociate from the firm and the remaining partners continue the company’s operations, the partnership will not be dissolved.

A company’s dissolution is distinct from a partner’s retirement since other or existing partners continue the company’s business in the latter situation and the firm is not dissolved. Therefore, the dissolution of the relationship between all a firm’s partners is called business dissolution.

Dissolving the partnership brings about a shift in partnership relationships but the partnership between partners does not end entirely. For the intent of realizing the company’s assets or property, the relationship continues.

Therefore, after the dissolution of a business, the power of each partner to attach the business and the other contractual rights and responsibilities of the partners shall continue, irrespective of the dissolution, to the degree that it may be appropriate to terminate the company’s affairs and to complete transactions initiated but not terminated at the time of dissolution.



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