Dissolution of Partnership

The term “Dissolution of Partnership“ refers to the change in the relationship among partners due to which one or more partners cease to be partners, while the firm may continue with the remaining partners. It is different from dissolution of a firm, which completely ends the existence of the partnership firm.

Meaning of Dissolution of Partnership:

Dissolution of partnership occurs when there is a reconstitution of the firm without ending its overall business operations. It is a change in the structure of the partnership due to:

• Admission of a new partner

• Retirement or death of an existing partner

• Insolvency of a partner

• Change in profit-sharing ratio

The firm continues to exist, but the partnership agreement among the partners changes.

Legal Definition (Section 4):

According to Section 4 of the Indian Partnership Act, a partnership is “the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.”

When this relationship is altered—without completely closing the business—the partnership is said to be dissolved, though the firm may still exist in a reconstituted form.

Causes of Dissolution of Partnership:

• Admission of a New Partner

When a new partner joins the firm, the existing partnership comes to an end, and a new partnership is formed. This is a common cause of dissolution and reconstitution.

• Retirement of a Partner

When a partner retires voluntarily or by agreement, the original partnership dissolves. The remaining partners may continue the firm under a new agreement.

• Death of a Partner

Unless otherwise agreed in the partnership deed, the death of any partner leads to dissolution of the existing partnership. The surviving partners may form a new partnership and carry on the business.

• Insolvency of a Partner

If a partner is declared insolvent by a competent court, the partnership is dissolved unless there is an agreement to the contrary. An insolvent partner cannot continue in a contract-based relationship.

• Expiry of Term or Completion of Project

In a partnership created for a specific duration or particular venture, dissolution takes place automatically at the end of the period or completion of the project. The firm can then be reconstituted if partners agree.

• Change in Profit-Sharing Ratio

A change in the profit-sharing ratio of partners is considered a reconstitution of the partnership, implying dissolution of the old partnership and formation of a new one, unless otherwise agreed.

Effects of Dissolution of Partnership:

• The firm continues to exist unless the firm itself is dissolved.

• The rights and liabilities of the continuing partners are redefined.

• The partnership deed is revised, and a new agreement is formed.

• Capital accounts may need adjustment based on the new structure.