ICAI Notes- Unit 3: Registration and Dissolution of a Firm | Business Laws for CA Foundation PDF Download

 Page 1


  
 
BUSINESS LAWS  
 4.56 
LEARNING OUTCOMES 
UNIT – 3: REGISTRATION AND DISSOLUTION OF A 
FIRM 
 
After studying this unit, you would be able to understand- 
? About mode of getting a firm registered with the authorities. 
? The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties. 
? The effect of non-registration on rights of partners and the third 
parties. 
? The various circumstances when a firm is dissolved. 
? The consequences and the effects of the dissolution upon rights and 
liabilities of various parties. 
 
 
 
 
 
 
 
 
Registration and dissolution of a firm
Mode of effecting 
Registration                                                          
Consequences of 
Non-registration
Dissolution of 
firm
Dissolution without the intervention 
of court (Section 40 to 43)
Dissolution by 
Agreement 
(Section 40)
Dissolution by 
operation of Law 
or compulsory 
dissolution
 (Section 41)
Dissolution on the 
happening of certain 
contingencies (Section 
42)
Dissolution by 
notice (Section 
43)
Dissolution by 
court (Section 44)
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


  
 
BUSINESS LAWS  
 4.56 
LEARNING OUTCOMES 
UNIT – 3: REGISTRATION AND DISSOLUTION OF A 
FIRM 
 
After studying this unit, you would be able to understand- 
? About mode of getting a firm registered with the authorities. 
? The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties. 
? The effect of non-registration on rights of partners and the third 
parties. 
? The various circumstances when a firm is dissolved. 
? The consequences and the effects of the dissolution upon rights and 
liabilities of various parties. 
 
 
 
 
 
 
 
 
Registration and dissolution of a firm
Mode of effecting 
Registration                                                          
Consequences of 
Non-registration
Dissolution of 
firm
Dissolution without the intervention 
of court (Section 40 to 43)
Dissolution by 
Agreement 
(Section 40)
Dissolution by 
operation of Law 
or compulsory 
dissolution
 (Section 41)
Dissolution on the 
happening of certain 
contingencies (Section 
42)
Dissolution by 
notice (Section 
43)
Dissolution by 
court (Section 44)
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
4.57 THE INDIAN PARTNERSHIP ACT, 1932 
3.1  REGISTRATION OF FIRMS 
APPLICATION FOR REGISTRATION (SECTION 58): (1) The registration of a firm may be 
effected at any time by sending by post or delivering to the Registrar of the area in which any 
place of business of the firm is situated or proposed to be situated, a statement in the 
prescribed form and accompanied by the prescribed fee, stating- 
(a) The firm’s name  
(b) The place or principal place of business of the firm, 
(c) The names of any other places where the firm carries on business,  
(d) the date when each partner joined the firm,  
(e) the names in full and permanent addresses of the partners, and   
(f) the duration of the firm.  
The statement shall be signed by all the partners, or by their agents specially authorised in 
this behalf. 
(1) Each person signing the statement shall also verify it in the manner prescribed. 
(2) A firm name shall not contain any of the following words, namely:- 
 Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words 
expressing or implying the sanction, approval or patronage of Government  except 
when the State Government signifies its consent to the use of such words as part of 
the firm-name by order in writing.  
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of Section 
58 have been duly complied with, he shall record an entry of the statement in a Register called 
the Register of Firms and shall file the statement. Then he shall issue a certificate of 
Registration. However, registration is deemed to be completed as soon as an application in 
the prescribed form with the prescribed fee and necessary details concerning the particulars 
of partnership is delivered to the Registrar. The recording of an entry in the register of firms 
is a routine duty of Registrar. 
Registration may also be effected even after a suit has been filed by the firm but in that case 
it is necessary to withdraw the suit first and get the firm registered and then file a fresh suit. 
LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): If the statement in 
respect of any firm is not sent or delivered to the Registrar within the time specified in sub-
section (1A) of section 58, then the firm may be registered on payment, to the Registrar, of a 
penalty of one hundred rupees per year of delay or a part thereof. 
© The Institute of Chartered Accountants of India
Page 3


  
 
BUSINESS LAWS  
 4.56 
LEARNING OUTCOMES 
UNIT – 3: REGISTRATION AND DISSOLUTION OF A 
FIRM 
 
After studying this unit, you would be able to understand- 
? About mode of getting a firm registered with the authorities. 
? The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties. 
? The effect of non-registration on rights of partners and the third 
parties. 
? The various circumstances when a firm is dissolved. 
? The consequences and the effects of the dissolution upon rights and 
liabilities of various parties. 
 
 
 
 
 
 
 
 
Registration and dissolution of a firm
Mode of effecting 
Registration                                                          
Consequences of 
Non-registration
Dissolution of 
firm
Dissolution without the intervention 
of court (Section 40 to 43)
Dissolution by 
Agreement 
(Section 40)
Dissolution by 
operation of Law 
or compulsory 
dissolution
 (Section 41)
Dissolution on the 
happening of certain 
contingencies (Section 
42)
Dissolution by 
notice (Section 
43)
Dissolution by 
court (Section 44)
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
4.57 THE INDIAN PARTNERSHIP ACT, 1932 
3.1  REGISTRATION OF FIRMS 
APPLICATION FOR REGISTRATION (SECTION 58): (1) The registration of a firm may be 
effected at any time by sending by post or delivering to the Registrar of the area in which any 
place of business of the firm is situated or proposed to be situated, a statement in the 
prescribed form and accompanied by the prescribed fee, stating- 
(a) The firm’s name  
(b) The place or principal place of business of the firm, 
(c) The names of any other places where the firm carries on business,  
(d) the date when each partner joined the firm,  
(e) the names in full and permanent addresses of the partners, and   
(f) the duration of the firm.  
The statement shall be signed by all the partners, or by their agents specially authorised in 
this behalf. 
(1) Each person signing the statement shall also verify it in the manner prescribed. 
(2) A firm name shall not contain any of the following words, namely:- 
 Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words 
expressing or implying the sanction, approval or patronage of Government  except 
when the State Government signifies its consent to the use of such words as part of 
the firm-name by order in writing.  
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of Section 
58 have been duly complied with, he shall record an entry of the statement in a Register called 
the Register of Firms and shall file the statement. Then he shall issue a certificate of 
Registration. However, registration is deemed to be completed as soon as an application in 
the prescribed form with the prescribed fee and necessary details concerning the particulars 
of partnership is delivered to the Registrar. The recording of an entry in the register of firms 
is a routine duty of Registrar. 
Registration may also be effected even after a suit has been filed by the firm but in that case 
it is necessary to withdraw the suit first and get the firm registered and then file a fresh suit. 
LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): If the statement in 
respect of any firm is not sent or delivered to the Registrar within the time specified in sub-
section (1A) of section 58, then the firm may be registered on payment, to the Registrar, of a 
penalty of one hundred rupees per year of delay or a part thereof. 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 4.58 
3.2 CONSEQUENCES OF NON-REGISTRATION 
 (SECTION 69) 
Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty 
for non-registration of firms. But the Indian Partnership Act does not make the registration of 
firms compulsory nor does it impose any penalty for non-registration. However, under 
Section 69, non-registration of partnership gives rise to a number of disabilities which we 
shall presently discuss. Although registration of firms is not compulsory, yet the consequences 
or disabilities of non-registration have a persuasive pressure for their registration. These 
disabilities briefly are as follows: 
(i) No suit in a civil court by firm or other co-partners against third party: The firm 
or any other person on its behalf cannot bring an action against the third party for 
breach of contract entered into by the firm, unless the firm is registered and the 
persons suing are or have been shown in the register of firms as partners in the firm. 
In other words, a registered firm can only file a suit against a third party and the 
persons suing have been in the register of firms as partners in the firm. 
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by 
a third party, then neither the firm nor the partner can claim any set-off, if the suit be 
valued for more than 
`
 100 or pursue other proceedings to enforce the rights arising 
from any contract. 
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A 
partner of an unregistered firm (or any other person on his behalf) is precluded from 
bringing legal action against the firm or any person alleged to be or to have been a 
partner in the firm. But, such a person may sue for dissolution of the firm or for 
accounts and realization of his share in the firm’s property where the firm is dissolved. 
(iv)   Third party can sue the firm: In case of an unregistered firm, an action can be brought 
against the firm by a third party. 
Exceptions: Non-registration of a firm does not, however effect the following rights: 
1.  The right of third parties to sue the firm or any partner. 
2. The right of partners to sue for the dissolution of the firm or for the settlement of the 
accounts of a dissolved firm, or for realization of the property of a dissolved firm. 
3. The power of an Official Assignees, Receiver of Court to release the property of the 
insolvent partner and to bring an action. 
4. The right to sue or claim a set-off if the value of suit does not exceed 
`
 100 in value. 
© The Institute of Chartered Accountants of India
Page 4


  
 
BUSINESS LAWS  
 4.56 
LEARNING OUTCOMES 
UNIT – 3: REGISTRATION AND DISSOLUTION OF A 
FIRM 
 
After studying this unit, you would be able to understand- 
? About mode of getting a firm registered with the authorities. 
? The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties. 
? The effect of non-registration on rights of partners and the third 
parties. 
? The various circumstances when a firm is dissolved. 
? The consequences and the effects of the dissolution upon rights and 
liabilities of various parties. 
 
 
 
 
 
 
 
 
Registration and dissolution of a firm
Mode of effecting 
Registration                                                          
Consequences of 
Non-registration
Dissolution of 
firm
Dissolution without the intervention 
of court (Section 40 to 43)
Dissolution by 
Agreement 
(Section 40)
Dissolution by 
operation of Law 
or compulsory 
dissolution
 (Section 41)
Dissolution on the 
happening of certain 
contingencies (Section 
42)
Dissolution by 
notice (Section 
43)
Dissolution by 
court (Section 44)
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
4.57 THE INDIAN PARTNERSHIP ACT, 1932 
3.1  REGISTRATION OF FIRMS 
APPLICATION FOR REGISTRATION (SECTION 58): (1) The registration of a firm may be 
effected at any time by sending by post or delivering to the Registrar of the area in which any 
place of business of the firm is situated or proposed to be situated, a statement in the 
prescribed form and accompanied by the prescribed fee, stating- 
(a) The firm’s name  
(b) The place or principal place of business of the firm, 
(c) The names of any other places where the firm carries on business,  
(d) the date when each partner joined the firm,  
(e) the names in full and permanent addresses of the partners, and   
(f) the duration of the firm.  
The statement shall be signed by all the partners, or by their agents specially authorised in 
this behalf. 
(1) Each person signing the statement shall also verify it in the manner prescribed. 
(2) A firm name shall not contain any of the following words, namely:- 
 Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words 
expressing or implying the sanction, approval or patronage of Government  except 
when the State Government signifies its consent to the use of such words as part of 
the firm-name by order in writing.  
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of Section 
58 have been duly complied with, he shall record an entry of the statement in a Register called 
the Register of Firms and shall file the statement. Then he shall issue a certificate of 
Registration. However, registration is deemed to be completed as soon as an application in 
the prescribed form with the prescribed fee and necessary details concerning the particulars 
of partnership is delivered to the Registrar. The recording of an entry in the register of firms 
is a routine duty of Registrar. 
Registration may also be effected even after a suit has been filed by the firm but in that case 
it is necessary to withdraw the suit first and get the firm registered and then file a fresh suit. 
LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): If the statement in 
respect of any firm is not sent or delivered to the Registrar within the time specified in sub-
section (1A) of section 58, then the firm may be registered on payment, to the Registrar, of a 
penalty of one hundred rupees per year of delay or a part thereof. 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 4.58 
3.2 CONSEQUENCES OF NON-REGISTRATION 
 (SECTION 69) 
Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty 
for non-registration of firms. But the Indian Partnership Act does not make the registration of 
firms compulsory nor does it impose any penalty for non-registration. However, under 
Section 69, non-registration of partnership gives rise to a number of disabilities which we 
shall presently discuss. Although registration of firms is not compulsory, yet the consequences 
or disabilities of non-registration have a persuasive pressure for their registration. These 
disabilities briefly are as follows: 
(i) No suit in a civil court by firm or other co-partners against third party: The firm 
or any other person on its behalf cannot bring an action against the third party for 
breach of contract entered into by the firm, unless the firm is registered and the 
persons suing are or have been shown in the register of firms as partners in the firm. 
In other words, a registered firm can only file a suit against a third party and the 
persons suing have been in the register of firms as partners in the firm. 
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by 
a third party, then neither the firm nor the partner can claim any set-off, if the suit be 
valued for more than 
`
 100 or pursue other proceedings to enforce the rights arising 
from any contract. 
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A 
partner of an unregistered firm (or any other person on his behalf) is precluded from 
bringing legal action against the firm or any person alleged to be or to have been a 
partner in the firm. But, such a person may sue for dissolution of the firm or for 
accounts and realization of his share in the firm’s property where the firm is dissolved. 
(iv)   Third party can sue the firm: In case of an unregistered firm, an action can be brought 
against the firm by a third party. 
Exceptions: Non-registration of a firm does not, however effect the following rights: 
1.  The right of third parties to sue the firm or any partner. 
2. The right of partners to sue for the dissolution of the firm or for the settlement of the 
accounts of a dissolved firm, or for realization of the property of a dissolved firm. 
3. The power of an Official Assignees, Receiver of Court to release the property of the 
insolvent partner and to bring an action. 
4. The right to sue or claim a set-off if the value of suit does not exceed 
`
 100 in value. 
© The Institute of Chartered Accountants of India
 
 
    
 
4.59 THE INDIAN PARTNERSHIP ACT, 1932 
5.  The right to suit and proceeding instituted by legal representatives or heirs of the 
deceased partner of a firm for accounts of the firm or to realise the property of the 
firm. 
Example 1: A & Co. is registered as a partnership firm in 2017 with A, B and C partners. In 
2018, A dies. In 2019, B and C sue X in the name and on behalf of A & Co. without fresh 
registration. Now the first question for our consideration is whether the suit is maintainable.
As regards the question whether in the case of a registered firm (whose business was carried 
on after its dissolution by death of one of the partners), a suit can be filed by the remaining 
partners in respect of any subsequent dealings or transactions without notifying to the 
Registrar of Firms, the changes in the constitution of the firm, it was decided that the 
remaining partners should sue in respect of such subsequent dealings or transactions even 
though the firm was not registered again after such dissolution and no notice of the partner 
was given to the Registrar.  
The test applied in these cases was whether the plaintiff satisfied the only two requirements 
of Section 69 (2) of the Act namely, 
(i) the suit must be instituted by or on behalf of the firm which had been registered; 
(ii) the person suing had been shown as partner in the register of firms. In view of this 
position of law, the suit is in the case by B and C against X in the name and on behalf 
of A & Co. is maintainable. 
Now, in the above example, what difference would it make, if in 2019 B and C had taken 
a new partner, D, and then filed a suit against X without fresh registration? 
Where a new partner is introduced, the fact is to be notified to Registrar who shall make a 
record of the notice in the entry relating to the firm in the Register of firms. Therefore, the 
firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It 
was pointed out that in the second requirement, the phrase “person suing” means persons in 
the sense of individuals whose names appear in the register as partners and who must be all 
partners in the firm at the date of the suit. 
3.3  DISSOLUTION OF FIRM (SECTIONS 39 - 47) 
According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership 
between all partners of a firm is called the ‘dissolution of the firm’.  
Thus, the dissolution of firm means the discontinuation of the legal relation existing between 
all the partners of the firm. But when only one or more partners retires or becomes 
incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, 
i.e. the relationship between such a partner and other is dissolved, but the rest may decide to 
© The Institute of Chartered Accountants of India
Page 5


  
 
BUSINESS LAWS  
 4.56 
LEARNING OUTCOMES 
UNIT – 3: REGISTRATION AND DISSOLUTION OF A 
FIRM 
 
After studying this unit, you would be able to understand- 
? About mode of getting a firm registered with the authorities. 
? The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties. 
? The effect of non-registration on rights of partners and the third 
parties. 
? The various circumstances when a firm is dissolved. 
? The consequences and the effects of the dissolution upon rights and 
liabilities of various parties. 
 
 
 
 
 
 
 
 
Registration and dissolution of a firm
Mode of effecting 
Registration                                                          
Consequences of 
Non-registration
Dissolution of 
firm
Dissolution without the intervention 
of court (Section 40 to 43)
Dissolution by 
Agreement 
(Section 40)
Dissolution by 
operation of Law 
or compulsory 
dissolution
 (Section 41)
Dissolution on the 
happening of certain 
contingencies (Section 
42)
Dissolution by 
notice (Section 
43)
Dissolution by 
court (Section 44)
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
4.57 THE INDIAN PARTNERSHIP ACT, 1932 
3.1  REGISTRATION OF FIRMS 
APPLICATION FOR REGISTRATION (SECTION 58): (1) The registration of a firm may be 
effected at any time by sending by post or delivering to the Registrar of the area in which any 
place of business of the firm is situated or proposed to be situated, a statement in the 
prescribed form and accompanied by the prescribed fee, stating- 
(a) The firm’s name  
(b) The place or principal place of business of the firm, 
(c) The names of any other places where the firm carries on business,  
(d) the date when each partner joined the firm,  
(e) the names in full and permanent addresses of the partners, and   
(f) the duration of the firm.  
The statement shall be signed by all the partners, or by their agents specially authorised in 
this behalf. 
(1) Each person signing the statement shall also verify it in the manner prescribed. 
(2) A firm name shall not contain any of the following words, namely:- 
 Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words 
expressing or implying the sanction, approval or patronage of Government  except 
when the State Government signifies its consent to the use of such words as part of 
the firm-name by order in writing.  
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of Section 
58 have been duly complied with, he shall record an entry of the statement in a Register called 
the Register of Firms and shall file the statement. Then he shall issue a certificate of 
Registration. However, registration is deemed to be completed as soon as an application in 
the prescribed form with the prescribed fee and necessary details concerning the particulars 
of partnership is delivered to the Registrar. The recording of an entry in the register of firms 
is a routine duty of Registrar. 
Registration may also be effected even after a suit has been filed by the firm but in that case 
it is necessary to withdraw the suit first and get the firm registered and then file a fresh suit. 
LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): If the statement in 
respect of any firm is not sent or delivered to the Registrar within the time specified in sub-
section (1A) of section 58, then the firm may be registered on payment, to the Registrar, of a 
penalty of one hundred rupees per year of delay or a part thereof. 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 4.58 
3.2 CONSEQUENCES OF NON-REGISTRATION 
 (SECTION 69) 
Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty 
for non-registration of firms. But the Indian Partnership Act does not make the registration of 
firms compulsory nor does it impose any penalty for non-registration. However, under 
Section 69, non-registration of partnership gives rise to a number of disabilities which we 
shall presently discuss. Although registration of firms is not compulsory, yet the consequences 
or disabilities of non-registration have a persuasive pressure for their registration. These 
disabilities briefly are as follows: 
(i) No suit in a civil court by firm or other co-partners against third party: The firm 
or any other person on its behalf cannot bring an action against the third party for 
breach of contract entered into by the firm, unless the firm is registered and the 
persons suing are or have been shown in the register of firms as partners in the firm. 
In other words, a registered firm can only file a suit against a third party and the 
persons suing have been in the register of firms as partners in the firm. 
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by 
a third party, then neither the firm nor the partner can claim any set-off, if the suit be 
valued for more than 
`
 100 or pursue other proceedings to enforce the rights arising 
from any contract. 
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A 
partner of an unregistered firm (or any other person on his behalf) is precluded from 
bringing legal action against the firm or any person alleged to be or to have been a 
partner in the firm. But, such a person may sue for dissolution of the firm or for 
accounts and realization of his share in the firm’s property where the firm is dissolved. 
(iv)   Third party can sue the firm: In case of an unregistered firm, an action can be brought 
against the firm by a third party. 
Exceptions: Non-registration of a firm does not, however effect the following rights: 
1.  The right of third parties to sue the firm or any partner. 
2. The right of partners to sue for the dissolution of the firm or for the settlement of the 
accounts of a dissolved firm, or for realization of the property of a dissolved firm. 
3. The power of an Official Assignees, Receiver of Court to release the property of the 
insolvent partner and to bring an action. 
4. The right to sue or claim a set-off if the value of suit does not exceed 
`
 100 in value. 
© The Institute of Chartered Accountants of India
 
 
    
 
4.59 THE INDIAN PARTNERSHIP ACT, 1932 
5.  The right to suit and proceeding instituted by legal representatives or heirs of the 
deceased partner of a firm for accounts of the firm or to realise the property of the 
firm. 
Example 1: A & Co. is registered as a partnership firm in 2017 with A, B and C partners. In 
2018, A dies. In 2019, B and C sue X in the name and on behalf of A & Co. without fresh 
registration. Now the first question for our consideration is whether the suit is maintainable.
As regards the question whether in the case of a registered firm (whose business was carried 
on after its dissolution by death of one of the partners), a suit can be filed by the remaining 
partners in respect of any subsequent dealings or transactions without notifying to the 
Registrar of Firms, the changes in the constitution of the firm, it was decided that the 
remaining partners should sue in respect of such subsequent dealings or transactions even 
though the firm was not registered again after such dissolution and no notice of the partner 
was given to the Registrar.  
The test applied in these cases was whether the plaintiff satisfied the only two requirements 
of Section 69 (2) of the Act namely, 
(i) the suit must be instituted by or on behalf of the firm which had been registered; 
(ii) the person suing had been shown as partner in the register of firms. In view of this 
position of law, the suit is in the case by B and C against X in the name and on behalf 
of A & Co. is maintainable. 
Now, in the above example, what difference would it make, if in 2019 B and C had taken 
a new partner, D, and then filed a suit against X without fresh registration? 
Where a new partner is introduced, the fact is to be notified to Registrar who shall make a 
record of the notice in the entry relating to the firm in the Register of firms. Therefore, the 
firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It 
was pointed out that in the second requirement, the phrase “person suing” means persons in 
the sense of individuals whose names appear in the register as partners and who must be all 
partners in the firm at the date of the suit. 
3.3  DISSOLUTION OF FIRM (SECTIONS 39 - 47) 
According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership 
between all partners of a firm is called the ‘dissolution of the firm’.  
Thus, the dissolution of firm means the discontinuation of the legal relation existing between 
all the partners of the firm. But when only one or more partners retires or becomes 
incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, 
i.e. the relationship between such a partner and other is dissolved, but the rest may decide to 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 4.60 
continue. In such cases, there is in practice, no dissolution of the firm. The particular partner 
goes out, but the remaining partners carry on the business of the firm, it is called dissolution 
of partnership. In the case of dissolution of the firm, on the other hand, the whole firm is 
dissolved. The partnership terminates as between each and every partner of the firm. 
Dissolution of Firm Vs. Dissolution of Partnership 
S. No.  Basis of Difference  Dissolution of Firm  Dissolution of Partnership  
1. Continuation of 
business  
It involves discontinuation of 
business in partnership.  
It does not affect 
continuation of business. It 
involves only reconstitution 
of the firm.  
2. Winding up  It involves winding up of the 
firm and requires realization 
of assets and settlement of 
liabilities.  
It involves only 
reconstitution and requires 
only revaluation of assets 
and liabilities of the firm.  
3. Order of court  A firm may be dissolved by the 
order of the court.  
Dissolution of partnership is 
not ordered by the court. 
4. Scope It necessarily involves 
dissolution of partnership.  
It may or may not involve 
dissolution of firm.  
5. Final closure of 
books  
It involves final closure of 
books of the firm.  
It does not involve final 
closure of the books of the 
firm. 
Modes of Dissolution of a firm (Sections 40-44) 
The dissolution of partnership firm may be in any of the following ways: 
1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY 
DISSOLUTION: 
It consists of following four types: 
(i)  Dissolution by Agreement (Section 40): 
 Section 40 gives right to the partners to dissolve the partnership by agreement 
with the consent of all the partners or in accordance with a contract between 
the partners. ‘Contract between the partners’ means a contract already made. 
(ii)  Compulsory dissolution (Section 41): 
 A firm is compulsorily dissolved  
? by the adjudication of all the partners or of all the partners but one as 
insolvent; or 
© The Institute of Chartered Accountants of India