Anonymous
Asked September 19, 2016

Partnership Firm: legal questions

  • 1 Answer
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I own a firm (factory) in partnership in which 30% I own, 30% my wife own and 40% my mother own. I am the active partner and 2 others are sleeping partners. We own all the machineries and land on factories name. Now my terms with my mother are not so good and she wants to give her share to my brother and is not willing to break the partnership. But I and my wife want to break the partnership and along with the capital, we also want equal share in land. What is the way out? Also its written in deed that our CA will make the final decision on how partnership would break, what shall I do in this case?

Answer 1

Hi, thank you for writing  to us. Here's our response. I hope this helps you in your case.

 

 

Dissolution of partnership firm can be done in following ways - 

 

1. By agreement where all the partners agree to dissolve the partnership firm. (Section 40)

 

Generally, under the section 40 of the Partnership Act, 1932 the dissolution of partnership is done on mutual consent. If all the partners agrees on dissolving the partnership firm then 

 

If there exists the Partnership Dissolution Agreement in the Partnership Deed then all the partners can dissolve the Partnership firm by Signing the Partnership Dissolution Agreement, they can finally dissolve the partnership firm. 

 

But this does not end just in an instant, the Partnership firm ends when all the assets and profits are distributed among the partners according the percentile of their shares. And also, the partnership firm can only be dissolved once all the remaining debts are cleared and terminating the legal existence of the partnership firm i.e., the business has been settled. 

 

Note: One can dissolve the Partnership firm even though the Partnership Dissolution Agreement does not exists. It is only aids the partners since the Dissolution Agreement consists of procedure to how to finally dissolve the Partnership firm.

 

If there's no Partnership Dissolution Agreement in the Contract then you can with all the other partners mutually dissolve the Partnership firm. 

 

2. Compulsory dissolution due to insolvency (Section 41)

 

Compulsory dissolution comes into picture when all the partners except one has become insolvent or all the partners have become insolvent. Or the working of the Partnership firm has become illegal. Also, if the number of partners has become more than 20 partners in ordinary business or more than 10 partners in case of banking then the Partnership firm shall be compulsorily be dissolved. 

 

3. Dissolution in case of contingencies (Section 42)

 

The dissolution of Partnership depends on certain conditions, those are - 

 

i) when a partner dies.

 

ii) when the Partnership deed has completed its fixed terms of period. 

 

iii) when one or more partners have been declared insolvent.

 

iv) when the Partnership firm has completed its decided ventures for which the firm was formulated.

 

4. Dissolution by Notice of Partnership at Will (Section 43)

 

Partnership at will means that the agreement of Partnership does not mentions the terms for such a Partnership firm. Therefore, in such cases, a single partner can voluntarily issue a notice to dissolve the Partnership firm. Hence, the Partnership firm will cease to exist. 

 

5. Dissolution by Court

 

Court will dissolve the Partnership firm if any of the conditions are satisfied and they are - 

 

i) when a partner becomes an insane person.

 

ii) when a partner becomes unable to discharge his or her duties either mental or physical.

 

iii) when a partner do any misconducts which will likely to affect the Partnership firm.

 

iv) when partner's actions make it impossible for other partners to discharge their duties.

 

v) when a partner has transferred his or her shares to a third party. 

 

vi) when the business or firm has been running on loses.

 

vi) when Court sees it to just and equitable to dissolve the Partnership firm. For example - consistent quarrels, deadlock in the management, absent in most of the meetings relating to the business or lack of cooperation among the partners. The Court, here have discretionary powers. 

 

 

 

In your situation where your mother is unwilling to dissolve the Partnership firm, you are left with only an optionto seek help from the Court under Order 20 Rule 15 of Code of Civil Procedure where one partner of the Partnership firm can file a suit to dissolve the Partnership firm to taking of partnership accounts. You can contend in the Court that you are the only active partner and others are the sleeping partners and also, the fact that your relationship with your mother is not right and hence, you want the Partnership firm to be dissolved.

 

If the Court sees it fit, it can give a preliminary decree before passing a final judgment, can declare the proportionate shares of the parties, decide the date on which the partnership shall stand dissolved. Asking to take accounts or any other miscellaneous acts. 

 

If the Court gives the judgment in your favour then all the assets of the firm will be distributed among the partners according to their percentile shares in the Partnership firms. 

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