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CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

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CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm : Dissolution of a partnership firm merely involves a change in the relation of partners; whereas the dissolution of firm amounts to a complete closure of the business. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm.

Download here CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

Dissolution of a Partnership firm may be effected in the following ways:

Dissolution without the intervention of the Court.

Dissolution by Court.

Dissolution without the intervention of Court:-

1. By Agreement (S.40):- A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration. A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.

2.        (i) Compulsory Dissolution (Sec.41):- In case, any of the following events take place then it becomes compulsory for the firm to dissolute:

Insolvency of Partners:- In case all the partners or all the partners except one become insolvent

(ii) Unlawful Business:- In case the firm’s business become unlawful on the happening of a subsequent event. e.g. trading with alien country

3. Dissolution on the happening of contingent event (S.42) A firm may be dissolved on the happening of any of the following contingent event:-

(i) Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically.

(ii) On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist, unless there is an agreement to the contrary.

(iii) Death of Partner:- Death of any of the partner dissolves the partnership.

(iv) Insolvency of Partner:- in the absence of a contract to the contrary, the insolvency of any of the partner may dissolve the firm.the rule shall apply even though the partnership has been constituted for a fixed term and the term has not yet expired or has been constituted for particular ventureand the same has yet not been completed.

(v) Resignation of Partner:- Resignation by any of the partners dissolves the partnership

4. Dissolution by notice (S.43) :-In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. Notice must be very clear and certain. A notice once given cannot be withdrawn without the consent of other partners. Banarsidas v. Kanshi Ram A.I.R. (1963) S.C. 1165 In those cases where a partner has given notice of dissolution at a time when dissolution will give him some advantage over the other partners, he may be held in the firm till the pending transactions are completed.

Dissolution by Court:-

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances.

(ii) Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner.where a partner is imprisoned for a long period of time the court may dissolve the partnership. Whitwell v. Arthur 1865 beva 140. [2]

(iii) Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm.

(iv) Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner.

(v) Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.

(vi) Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.

(vii) Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners. Havidatt singh v. Mukhe Singh A.I.R. 1973, J&K , 46

CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm : For a partnership firm to cease to exist, it needs to be dissolved. The process, known as dissolution of a partnership firm, involves the sale or disposal of all assets of the firm, final settlement of all of its liabilities, and the settling of the accounts. Any sum that remains in the business is then transferred to the partners in the profit-sharing ratio mentioned in the partnership feed.

Hence, the dissolution of a partnership firm is the decision of all partners collectively to terminate the business agreement made between them. There are many ways in which a partnership firm can be dissolved.

Dissolution by Mutual Consent

The best and the easiest way to dissolve a partnership firm is by mutual consent. When the contract that specifies the partnership comes to an end or the partners mutually agree, due to various business or personal reasons to end the partnership, they can produce an agreement for dissolving it.

It is essential for all the partners to agree mutually for dissolving partnerships through the Dissolution by Mutual Consent clause in the partnership agreement.

Dissolution by Notice

If the partnership business is at will, any one partner (or more) can, through a simple and advanced notice, dissolve a partnership. The notice should specify the date on which the dissolution comes into force. Such a dissolution can be initiated by any individual partner, after proper notice is issued.

Dissolution Due to Contingencies

There are certain clauses/situations wherein the partnership firm can be/is dissolved:

1.On account of the end of a project/endeavor which the firm was formed to undertake.
2.By the death of a partner.
3.By the adjudication of a partner as an insolvent or one or more partners.
4.By the expiry of a partnership period. Some firms are started with a clear view of the tenure for which the partnership will exist. Such partnerships will, naturally, come to an end once the period of partnership is complete.

The contingencies may vary depending upon the clauses specified in the agreement prepared at the time of forming the partnership. The agreement should specify the terms on which the dissolution may be undertaken under such circumstances.

Compulsory Dissolution

Certain occurrences can make the dissolution of a firm compulsory. For example, by occurrence of any event judged as illegal and thus, making it difficult for the partnership firm to continue its tenure

Dissolution by Court

A partnership business involves working with various individuals at a time. Even if they are friends and relatives, there are instances where one or more partner may find it not suitable for him or her under circumstances to continue. In these cases, the court may also dissolve the firm. Let us look at some of the reasons why or how the partnership firms can be dissolved through court cases. Do note, however, that for this to be possible, the partnership deed should be registered

Due to Mental Instability

When a partner becomes mentally unstable/incapacitated

A business venture cannot proceed in case a partner is unable to deal with the pressures of the job at hand because of mental instability. In such instances, the other partner/partners can file a case/request to dissolve the partnership firm.

Illness or incapacity of a partner due to medical or any other reasons can also result in dissolution of partnership through a court case. The partner, other than the one incapacitated/mentally unstable, needs to file the request for dissolution of partnership through the court.

Due to Misconduct

The other reason for dissolution by the court is misconduct. Any partner/partners in the partnership misbehaving with others or not heeding to the signed agreement of the partnership will find themselves ousted by their partners through a court case.

The agreement (if registered) that the partners sign is a legally binding one, and any partner who misses out on any particular clause, and even after giving warnings, are not heeding to it, can be made to face the court. The partnership firm may be dissolved through court interference in such instances.

Transfer of Equity/Interest

A partner may decide to dissolve the partnership through the court if the other individual in the partnership has transferred their interest/equity of the firm to a third party without consulting them.

Who is responsible after dissolution?

Although the liabilities of the partners cease to exist once the firm is dissolved, the partners are liable for any act/occurrence prior to the dissolution of the firm. Only partners who are incapacitated/adjudicated as insolvent/dead are exempt from the liability.

CBSE Class 12 Commerce Accounting For Partnership Firms Dissolution Of A Partnership Firm Notes

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