Meaning and modes of dissolution

The essentials

Dissolution of partnership means a change in the relationship among partners, such as on admission, retirement, death or a change in ratio. The firm continues its business under a new agreement. Dissolution of the firm means the end of the partnership among all partners: the business closes, assets are sold, liabilities paid and accounts finally settled. Dissolution of the firm always dissolves the partnership, but not the other way round.

Key points

• By agreement: with the consent of all partners, or as per a contract between them.
• Compulsory: when all partners, or all but one, become insolvent, or when the business becomes illegal.
• On certain contingencies (unless agreed otherwise): expiry of the fixed term, completion of the venture, death or insolvency of a partner.
• By notice: in a partnership at will, any partner may give written notice of his intention to dissolve.
• By court: on a partner's suit, on grounds such as unsoundness of mind, permanent incapacity, misconduct, persistent breach of the agreement, transfer of a partner's whole interest, continuous losses, or any just and equitable ground.

Exam tips

Case questions describe a situation and ask which mode applies. Key words: "became illegal" means compulsory; "partnership at will" means notice; "mental illness" or "misconduct" means court.

Common mistakes

• Treating the death of a partner as automatic dissolution of the firm. Normally only the partnership is reconstituted unless the agreement says otherwise.
• Confusing a change of ratio (dissolution of partnership) with closure of the business (dissolution of the firm).