Reasons for Dissolution of Partnership Business

The dissolution of a partnership may occur when one of the partners ceases to be a partner in the firm. Dissolution is distinct from the termination of the partnership and the “winding up” of the partnership business.

Although the term dissolution implies termination, dissolution is actually the begging of the process that ultimately terminates a partnership.

It is, in essence, a change in the relationship between the partners. Accordingly, if a partner resigns or is expelled, The partnership is considered legally dissolved.

Dissolution of the partnership business

Other causes of dissolution include the bankruptcy or death of a partner, an agreement of all partners to dissolve, or an event that makes the partnership business illegal.

For instance, if a partnership operates a gambling casino and gambling subsequently becomes illegal, the partnership will be considered legally dissolved. In addition, a partner may withdraw from the partnership and thereby cause dissolution.

If, however, the partner withdraws in violation of the partnership agreement, the partner may be liable for damages as a result of the untimely or unauthorized withdrawal.

Broadly there are three different models or ways in which the dissolution of a business may take place. They are:

1. Dissolution by the Court:

In case, any partner brings a suit against one or more of his co-partner, the court may dissolve the partnership on any of the following grounds:

  • If a partner becomes of unsound mind.
  • If a partner becomes permanently incapable of doing work.
  • If a partner frequently commits breaks of the partnership agreement.
  • If a partner has transferred the whole or part of his interest to a third party, which he cannot do according to law.
  • When the court is satisfied that the business cannot be carried on except at a loss.
  • If it appears to the court that a situation contrary to good faith and essence of the agreement between the partners has arisen.
Dissolution of Partnership
Dissolution of Partnership

2. Compulsory Dissolution:

It takes place under the following circumstances.

  • By the adjudication of all the partners or of all the partners but one as insolvent.
  • By the happening of an event that makes it unlawful for the business.

3. Dissolution on the happening of certain contingencies

  • When the partnership is for a fixed term, the business gets dissolved at the end of the period.
  • The completion of a particular adventure.
  • By the death of one or more of the partners, unless there is a contract to the contrary.
  • By the adjudication of a partner as insolvent.
  • By the retirement of a partner, the business will be dissolved if there is no agreement to the contrary.

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