Dissolving is usually the easy part. Settling the accounts is where partnerships actually fight.
The routes to dissolution
- By agreement. A dissolution deed recording the date, how assets and liabilities are divided, who keeps the firm name and goodwill, who collects the receivables, and mutual releases. This is the cheapest and cleanest exit.
- By notice, where the firm is a partnership at will. Any partner may dissolve by giving written notice to all the others, and dissolution takes effect from the date mentioned or the date of communication.
- By operation of law: insolvency of a partner, expiry of the term, or completion of the venture.
- By the court under Section 44: a partner of unsound mind, permanent incapacity, conduct prejudicially affecting the business, wilful and persistent breach of the agreement, transfer of the whole interest, the business running only at a loss, or any other just and equitable ground.
Settlement of accounts
Section 48 sets the order in which the money goes: losses are paid first out of profits, then capital, then by the partners individually in their profit-sharing ratio; and assets are applied first to outside debts, then to repay advances made by partners, then to repay capital, and only then is the residue divided in the profit-sharing ratio. Getting this order wrong is the source of most disputes.
If the firm is not registered, you have a serious problem
Section 69 of the Indian Partnership Act, 1932 bars a partner of an unregistered firm from suing the firm or other partners to enforce a right arising from the contract. There is a carve-out: a suit for dissolution of the firm and for accounts of a dissolved firm is expressly permitted. So you can still get out and get an accounting, but you cannot sue on the partnership contract generally, and the firm cannot sue outsiders to enforce contracts. Register the firm.
Section 69 of the Indian Partnership Act, 1932 bars a partner of an unregistered firm from suing the firm or other partners to enforce a right arising from the contract. There is a carve-out: a suit for dissolution of the firm and for accounts of a dissolved firm is expressly permitted. So you can still get out and get an accounting, but you cannot sue on the partnership contract generally, and the firm cannot sue outsiders to enforce contracts. Register the firm.
Practical steps whichever route you take
- Give public notice of dissolution or retirement, otherwise a retiring partner remains liable to third parties who deal with the firm without notice.
- Close or change signatories on bank accounts, GST registration, licences and the Shops and Establishments registration.
- Deal expressly with goodwill, the firm name, client lists, and ongoing contracts.
- For an LLP, the process is under the LLP Act and its rules, not the 1932 Act.