How does dissolution of partnership deed work:

If you are someone who is a part of a partnership firm then you surely know the need for a properly laid out partnership deed. The Dissolution of partnership deed is of equal importance like creating or enacting it. One needs to seek help from a good lawyer in this case to get the job done in the right manner. Dissolution of the partnership deed properly helps close out matters in the desired manner without any unnecessary losses on both sides. Let’s take a look at the nitigrities of formulating the exact definition of the dissolution of partnership deed of any partnership firm.

What does dissolution of partnership deed mean?

Dissolution partnership deed refers to discontinuation of the business under the name of the concerned partnership firm. In this case, all liabilities are finally discussed and settled by selling off assets or transferring them to a particular partner, settling all accounts that exist at that moment with the partnership firm.

Any profit or loss is transferred to partners according to their profit sharing ratio as mentioned in the standing partnership deed of the business.

Dissolving a partnership firm is not synonymous to dissolving a partnership. In the former case, the firm quits or drops its name and therefore cannot run any business in the future. But in case of dissolving a partnership, the existing partnership can be put to an end by consent or on the occurence of a certain event, but the firm can retain its existence if remaining partners enter into a freshly structured partnership agreement.

Methods to dissolve a partnership deed:

There are numerous ways in which you can proceed towards the dissolution of partnership deed of your firm. Listed below are the ways you can do it peacefully with the help of your lawyer.

Mutual dissolution of partnership deed:

This is the easiest way to dissolve a partnership deed because all partners have mutually agreed to close the partnership firm. Partners can provide consent mutually or can enter into an agreement for the dissolution of the partnership deed.

Compulsory dissolution of partnership deed: 

Any partnership deed may need to be dissolved compulsorily if:

  • If all partners or just except one partner are declared insolvent in any partnership deed.
  • If any firm carries out illegal activities like dealing in drugs or other banned products or does business with alien countries or other countries that may harm the interest of his or her resident country or engages in other such unlawful activities.

Dissolution of partnership deed depending on certain contingent events:

Upon occurrence of certain events, a firm can be required to get dissolved:

  • Expiry of the fixed-term– Partnership deed formulated for a stipulated time period will get dissolved once the term gets over.
  • Completion of the task concerned–At times, a partnership is formed for a certain task or purpose. Once the task is completed, the partnership will automatically be exhausted.
  • Death of either partner in the deed– If there are only two partners in a firm, and either of the partners die, the partnership deed will automatically get dissolved. If there are more than two partners involved, then the others may continue to run the firm. In such a situation, only the partnership deed will get dissolved, and other partners will have to enumerate a new one.

Dissolution of partnership deed by notice :

If a partnership deed is at will, any partner can end the partnership by sending an advance notice. This notice shall declare the date from which dissolution of the partnership deed will be effective.

Dissolution of partnership deed by Court :

If any of the partners become mentally unsound or misbehaves with the other partners or doesn’t abide by the clauses of the partnership deed, the other partners are free to file a case in the court to dissolve the firm. But a court can dissolve the firm only if it is registered with the Registrar of Firms. Hence an unregistered partnership firm can’t be dissolved by the court even on request of any partner.

Transfer of interest or equity to the third party:

If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partners are free to dissolve the firm.

Times when partners still liable to third parties:

Until and unless a public notice of dissolution of partnership deed is issued, the partners remain responsible for any act or step taken of the partners which would have been an act of the firm, if such act was done before resolution of the deed.

If any partner has already been declared insolvent or has retired from the firm, he will not be held responsible for any act done after his insolvency or retirement. The legal heirs of any deceased partner are also not held accountable for any act done by other partners after the death of the concerned partner.

Settlement of accounts:

Accounts of the firm are settled in the following order after the dissolution of partnership deed:

  • Losses of the firm will be paid out of the profits incurred, followed by the capital of the partners, and even pending accounts still stand, it will be divided among the partners in profit sharing ratios.
  • Assets of the firm and the capital contributed by the partners to set-off losses of the firm can be applied in the following manner-
    • Third party debts will be paid off to start with.
    • Followed by the loan amount taken by the firm from any partner will be reimbursed to that partner.
    • Capital contributed by each partner will be reimbursed to him or her according to the capital contribution ratio.
    • The remaining amount will be shared among the partners in question in their profit sharing ratios.
  • Upon realization, all assets will be sold off in the market, and the cash released from such a sale will be used for paying off the liabilities or standing debts. Assets or liabilities may also be taken over by the partners in which the respective partner capital accounts will be adjusted by the same amount.