Dissolution Deed of Partnership Firm Format – Download Legal Draft (PDF)

Dissolving a partnership firm refers to closing down the business that operates under the firm’s name. This involves settling all liabilities by selling the firm’s assets or transferring them to a specific partner and clearing all accounts related to the business.

Any profit or loss is divided among the partners based on the profit-sharing ratio specified in the partnership deed.

Dissolving a partnership firm is not the same as dissolving a partnership. In the case of dissolving a firm, the business ceases to exist under that name and cannot continue operations in the future. However, dissolving a partnership means the current partnership agreement ends due to mutual consent or a particular event, but the firm may continue if the remaining partners decide to form a new partnership agreement.

Ways of Dissolving a Partnership Firm

A partnership firm can be dissolved in several ways, including:

Mutual Agreement
This is the simplest method of dissolution, where all partners mutually agree to close the firm. The partners may either give mutual consent or sign an agreement to dissolve the partnership.

Compulsory Dissolution
A firm may be dissolved compulsorily in the following situations:

• When all partners, or all except one, are declared insolvent.
  
• When the firm is involved in illegal or unlawful activities, such as dealing in drugs or banned products, conducting business with enemy nations, or engaging in activities harmful to the interests of the country.

Dissolution Based on Certain Contingent Events

A partnership firm may be dissolved when specific events occur:

• Expiry of fixed term: If the partnership was formed for a fixed duration, it will be dissolved automatically once that period ends.
  
• Completion of a specific task: When a partnership is created for a particular task or objective, it dissolves automatically after the task is completed.
  
• Death of a partner: If the firm has only two partners and one passes away, the firm is automatically dissolved. In cases where there are more than two partners, the remaining partners may choose to continue the business. In such situations, only the existing partnership ends, and the remaining partners can form a new agreement.
  

Dissolution by Notice

In a partnership at will, any partner can dissolve the firm by giving prior notice. The notice must specify the date from which the dissolution will take effect.

Dissolution by Court

If a partner becomes mentally unfit, behaves improperly with other partners, or violates the terms of the partnership agreement, the other partners may approach the court for dissolution. However, the court can dissolve the firm only if it is registered with the Registrar of Firms. Therefore, an unregistered partnership firm cannot be dissolved through court intervention.

Transfer of Interest or Equity to a Third Party

If any partner transfers their control, interest, or equity in the firm to a third party without consulting the other partners, the remaining partner(s) may choose to dissolve the firm.

Partners’ Liability to Third Parties

Until a public notice of dissolution is issued, all partners remain responsible for any actions taken by any partner that would have been considered an act of the firm if done before dissolution.
A partner who has retired or been declared insolvent is not liable for any actions taken after their retirement or insolvency. Similarly, the legal heirs of a deceased partner are not responsible for acts carried out by the remaining partners after the partner’s death.

Settlement of Accounts

The accounts of the firm are settled in the following manner:

• Losses are first covered from the profits of the firm. If profits are insufficient, they are adjusted against the partners’ capital, and if still unpaid, the remaining losses are divided among partners according to their profit-sharing ratio.
  
• The assets of the firm and capital contributed by the partners are applied in this order:
  
  • Payment of debts owed to third parties.
    
  • Repayment of any loans taken from partners.
    
  • Return of capital to partners based on their capital contribution ratio.
    
  • Any remaining balance is divided among partners in their profit-sharing ratio.
    
• After realization, all assets are sold, and the proceeds are used to clear liabilities. Partners may also take over assets or liabilities, and corresponding adjustments will be made in their capital accounts.
  

Premium Refund on Premature Dissolution

If a partner has paid a premium to enter into a partnership for a fixed duration and the firm is dissolved before this term ends, the firm must return the premium, subject to the following conditions:

• The dissolution is not due to the death of a partner.
  
• The dissolution is not caused by misconduct of the partner claiming the refund.
  
• Dissolution is happening based on an agreement that does not include any clause denying full or partial repayment of the premium.

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