Compulsory Dissolution of a Firm

A partnership firm is dissolved compulsorily under the following circumstances:

  1. When all the partners or all but one partner become insolvent. Insolvent means unable to pay one’s debts. When all the partners or all but one partner become insolvent, the firm is dissolved automatically.
  2. When the business of the firm becomes illegal. This may happen if the business is prohibited by law or if the partners are carrying on the business in a way that is illegal.
  3. When some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership. For example, if a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India, then the business of the firm becomes unlawful and the firm is dissolved.

Multiple Choice Questions

  1. When does a firm get dissolved compulsorily?
    • When all the partners or all but one partner become insolvent.
    • When the business of the firm becomes illegal.
    • When some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership.
    • All of the above.

The answer is all of the above.

  1. Which of the following is not a ground for compulsory dissolution of a firm?
    • Insolvency of all the partners.
    • Illegality of the business.
    • Death of a partner.
    • Incapacity of a partner to continue the business.

The answer is death of a partner. Death of a partner does not lead to compulsory dissolution of the firm. The firm can continue to exist with the remaining partners.

  1. A firm is carrying on the business of exporting goods to a foreign country. The government of that country declares war against India. What will happen to the firm?

The firm will be dissolved compulsorily because the business of the firm has become illegal.

Answers

  1. All of the above.
  2. Death of a partner.
  3. The firm will be dissolved compulsorily.