Meaning:- When the relation between all the partners of the firm comes to an end, this is called dissolution of the firm.
Dissolution of partnership is different from the dissolution of firm. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end.
Modes of Dissolution:- A firm may be dissolved in any of the following ways:-
1. By Consent:- A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration.
2. By Agreement:- A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.
3. Compulsory Dissolution:- In case, any of the following events take place then it becomes compulsory for the firm to dissolute: –
(i) Insolvency of Partners:- In case all the partners or all the partners except one become insolvent.
(ii) Unlawful Business:- In case the firm’s business become unlawful on the happening of a subsequent event. e.g. trading with alien country.
4. Dissolution on the happening of contingent event:- A firm may be dissolved on the happening of any of the following contingent event:-
(i) Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically.
(ii) On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist.
(iii) Death of Partner:- Death of any of the partner dissolves the partnership.
(iv) Insolvency of Partner:- The insolvency of any of the partner may dissolve the firm.
(v) Resignation of Partner:- Resignation by any of the partners dissolves the partnership.
5. Dissolution By Notice:- In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him.
6. Dissolution by Court:- The court may order for the dissolution of the firm on the following grounds:-
(i) Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind.
(ii) Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner.
(iii) Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, then the court may order for the dissolution of the firm.
(iv) Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement and it becomes impossible to continue the business with such partner.
(v) Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.
(vi) Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.
(vii) Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners.