Can a partnership firm compulsorily dissolved?

Hello,

Partnership have terms and conditions mentioned in the agreement. Any partner can have other businesses as per his wishses unless there are any restriction. 

As and when the activity carried on by the partnership firm becomes illegal, it shall discontinue the business under partnership or amend the partnership deed by removing said business activity from the clause.

If the business numerous business activities are independent to each other i.e. the other activities are not dependent on the illegal activity, it can be continued.

However, if other activities are associated or dependent on illegal activity, the activities shall be discontinued by the firm. In this situation, the firm shall dissolve or change the business activities in the deed with necessary alternation in business structure.

In any case, one shall not carry on any illegal activity under the partnership firm.

A partnership firm may be dissolved under the following circumstances:

1. Dissolution by Agreement (Section 40) of Indian Partnership Act, 1932.

2. Dissolution by Notice (Section 43) of Indian Partnership Act, 1932.

3. Compulsory Dissolution (Section 41) of Indian Partnership Act, 1932.

The activities of the firm may become illegal under the changed circumstances. If government enforces prohibition policy, then all the firms dealing in liquor will have to close down their business because it will be an unlawful activity under the new law. Similarly, a firm may be trading with the businessmen of another country. The trading will be lawful under present conditions.

After some time a war erupts between the two countries, it will become a trading with an alien enemy and further trading with the same parties will be illegal. Under new circumstances the firm will have to be dissolved. In case a firm carries on more than one type of business, then illegality of one work will not amount to dissolution of the firm. The firm can continue with the activities which are lawful.

Regards,

Anaita Vas

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S.41 of IPA provides for compulsory dissolution and states that “A firm is dissolved (a) by the adjudication of all the partners or of all the partners but one as insolvent, or (b) 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:

Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings”

Therefore, illegality of one of the ventures does not cause dissolution of the firm for other operations and it continues to operate.

If one is concerned about such illegality, he/ she could think of retiring, in which case partnership will dissolve if it’s a two-partner firm or if the agreement of partnership provides that it will dissolve upon retirement of any one partner.  In other cases, one of the partners will retire and firm will continue to operate.  There are other ways of protecting oneself from liability possibly arising from illegal activities of one of the ventures of the firm.