After reading this article you will learn about the mode of dissolution of partnership firm and settlement of accounts thereof.

According to Section 39 of the Partnership Act, 1932, “The dissolution of partnership between all the partners of a firm is called dissolution of the firm.” The Indian Partnership Act, 1932 recognises the difference between ‘dissolution of partnership’ and ‘dissolution of firm’.

Dissolution of a firm involves the complete breakdown of partnership relation. In the dissolution of partnership firm, the partners may by agreement provide for the continuance of the firm after its dissolution by death, lunacy or insolvency of any partner. In such cases the firm is reconstituted without any dissolution.

Thus dissolution of firm does involve the dissolution of partnership while the dissolution of partnership does not necessarily involve dissolution of the firm.

Modes of Dissolution of a Firm:

Following are the modes of a dissolution of a partnership firm:

1. Dissolution by Agreement:


A firm may be dissolved:

(i) With the consent of all the partners.

(ii) In accordance with a contract between the partners.

2. Compulsory Dissolution:


A firm is compulsorily dissolved:

(i) By the adjudication as insolvent of all the partners or of all partners except one.

(ii) By the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.

3. Dissolution on the Happening of Certain Contingencies:

Subject to the contract between the partners, a firm can be dissolved by:


(i) The death of a partner.

(ii) The insolvency of a partner,

(iii) The retirement of a partner,

(iv) The completion of the adventure,


(v) The expiry of the term fixed.

4. Dissolution by Notice of Partnership at will:

If the partnership is ‘at will’ then any partner can get the firm dissolved by giving notice in writing to other partners of the firm.

5. Dissolution by Court:

The court may order the dissolution of the firm at the suit of a partner in any of the following ways:

(i) Where a partner of the firm has become of unsound mind.


(ii) Where a partner of the firm has become permanently incapable of performing his duties as a partner.

(iii) Where a partner commits willful or persistent breaches of agreement.

(iv) Where a partner is guilty of misconduct,

(v) Where the business of a firm cannot be carried on save at a loss,


(vi) Where a partner has transferred the whole of his interest in the partnership to an outsider.

(vii) Where on any other ground the court is satisfied that it is just and equitable that the firm may be dissolved.

Settlement of Accounts on Dissolution:

On the dissolution of the partnership firm, the firm’s assets are realised and liabilities are discharged. Section 48 deals with the mode of settlement of accounts between the partners after the dissolution of the firm.

The accounts of a firm on the dissolution must be settled according to the following rules:

1. Losses suffered by the firm shall be paid:


(i) Out of profit.

(ii) Out of capital.

(iii) If necessary by the partners individually in the proportion in which they were entitled to share profits.

2. Assets of the firm are to be distributed in the order given below:

(i) In paying the debts due to third parties.

(ii) In paying the partners rateably advances made by them to the firm.

(iii) In paying the partners rateably is due to them on account of capital.


(iv) If there is any surplus in the firm, it will be divided between the partners proportionately.