A partnership firm may be dissolved on the happening of certain contingencies, even if there is no agreement between the partners to that effect. These contingencies are listed in Section 42 of the Indian Partnership Act, 1932. They are:
- When the firm is constituted for a fixed term, by the expiry of that term. For example, a firm is formed to build a bridge and the contract specifies that the firm will be dissolved once the bridge is built. In this case, the firm will be dissolved automatically on the expiry of the fixed term, even if all the partners agree to continue the business.When the firm is constituted to carry out one or more adventures or undertakings, by the completion thereof. For example, a firm is formed to export goods to a foreign country. Once all the goods have been exported, the firm is dissolved automatically.By the death of a partner. The death of a partner does not automatically dissolve the firm. The remaining partners may decide to continue the business. However, if all the partners agree to dissolve the firm, then it will be dissolved.By the adjudication of a partner as an insolvent. An insolvent person is someone who is unable to pay his or her debts. If a partner is adjudicated as an insolvent, the firm is dissolved automatically.By the permanent incapacity of a partner to carry on the business of the firm. Permanent incapacity means that the partner is unable to perform his or her duties as a partner due to a physical or mental disability. If a partner becomes permanently incapacitated, the firm may be dissolved by the other partners.By the happening of any other event which makes it unlawful for the business of the firm to be carried on. For example, if the business of the firm is prohibited by law or if the firm is carrying on the business in a way that is illegal, then the firm may be dissolved.
Multiple Choice Questions
- Which of the following is not a ground for dissolution of a firm on the happening of certain contingencies?
- Death of a partner.Adjudication of a partner as an insolvent.Permanent incapacity of a partner to carry on the business of the firm.Merger of the firm with another firm.
The answer is merger of the firm with another firm. Merger of a firm with another firm does not lead to dissolution of the first firm. The first firm continues to exist as a subsidiary of the second firm.
- A firm is constituted to build a bridge and the contract specifies that the firm will be dissolved once the bridge is built. However, the partners agree to continue the business after the bridge is built. Can the firm continue to exist?
Yes, the firm can continue to exist even if the partners agree to continue the business after the happening of the contingency. However, the partners must make a new agreement to continue the business.
- A partner becomes permanently incapacitated and the other partners do not want to continue the business. What will happen to the firm?
The firm will be dissolved. The other partners cannot force the incapacitated partner to continue the business.Answers
- Merger of the firm with another firm.Yes.The firm will be dissolved.