EDP (Lecture 18)

Dissolution of a firm

Dissolution of partnership implies termination of original partnership agreement or change in contractual relationship among partners. A partnership is dissolved due to the insolvency, retirement, incapability, death, expulsion etc of a partner or on the expiry/completion of the term of partnership. A partnership can be dissolved without dissolving the firm. In this dissolution the business of firm does not come to an end. The remaining partners can continue the business by entering into a new agreement. On the other hand dissolution of the firm implies dissolution between all the partners. The business of the partnership comes to an end. Its assets are realized and its liabilities are paid off. Dissolution of a firm always involves dissolution of a partnership but vice-versa is not always true.

Modes of dissolution of firm

1)     Dissolution by agreement- A partnership may be dissolved with the mutual consent of all the partners in accordance with the term of the agreement

2)     Dissolution by notice - In case of partnership at will a firm may be dissolved if any partner gives a notice in writing to other partners indicating his intentions to dissolve the firm. In such a case the dissolution taken place with effect from the date mentioned in the notice. If no date is mentioned the firm may be dissolved with effect from date of receiver of notice by other partners and when such a notice is given to other partners it cannot be withdrawn without their consent.

3)     Contingent dissolution - A firm may be dissolved on the happening of any of the following contingencies

i)       On the expiry of the term if its for a fixed period.

ii)     On the completion of the firm venture

iii)   On the death of a partner

iv)   When a partner becomes insolvent

4)     Compulsory dissolution- A firm stands automatically dissolved in the following cases

i)       When all partners or all but one partner is declared insolvent

ii)     When the business of the firm becomes unlawful due to the happenings of  the event

5)     Dissolution through court - The court may order the dissolution of a firm in the following cases

i)          when a partner becomes of an unsound mind

ii)        When a person becomes permanently incapable of performing his duties as a partner

iii)      When a partner is guilty of misconduct which is likely to effect the business of the firm

iv)      When a partner will fully and persistently commit breach of the partnership agreement

v)        When a partner unauthorizedly transfers the whole of his interest or share in the firm to the third person

vi)      When the business of the firm cannot be carried on except at a loss

vii)    When it is just equitable that the firm should be dissolved.

Merits and limitations

1)     Merits

a)     Ease of formation -a partnership is easy to form as no legal formalities are involved. an agreement is necessary and the procedure for registration is simple. Similarly a partnership can be dissolved easily at any time without under going any legal formalities besides registration of a firm is not essential and partnership agreement need not essentially in writing

b)     Larger financial resources - As a no. of person or partner contribute to all capital of the firm it is possible to collect larger financial resources therefore it has a greater credit worthiness by the partners or by any other sources. There is a greater scope for expansion or growth of business

c)     Specialization and balanced approach - The partnership firm enables the pooling of abilities and judgment of several person. Combined abilities of judgment result are more efficient management of business. Partners with complimentary skills may be chosen to avail of the benefits of the specialization. Judicious choice of partners with diversified skills ensures balanced decisions.

d)    Flexibility of operation - A partnership firm involves sufficient flexibility in its day-to-day activities. The nature and place of business can be changed whenever the partners desire so. The agreement can be altered and new partners can be admitted whenever necessary.

e)     Protection of minority interest - No basic changes in the rights and obligation of partners can be made without unanimous consent of all the partners.

f)      Personal incentives and supervisions - Partners have their interest in the business of the profit share. The share of profit can increase depending on the efficiency and commitment of the partners. Hence in partnership firm the partners tend to be more committed.

g)     Capacity of survival - The survival capacity is more therefore even if the partners dies or becomes insolvent the firm can continue by altering the business agreement.

h)     Better human and public relation - A partnership has many person involved of them some must be good in human and public relation. They represent the firm and due to their human and public relation capability they improve the image increase creditability and brings about an overall growth of firm.

i)       Business Secrecy - This is also maintained in other forms of business.  Important facts like profit sharing ratio are kept secret.

2)     Demerits

a)     Unlimited liability - As there are many partners and number can increase this implies capital input increase hence liabilities increases

b)     Limited resources - Investment of capital is according to agreement. If a partner wants he cannot increase his capital input without consent of others as increase from his part involves proportionate increase in capital input from others. Moreover no. of partners involved in a partnership has a maximum limit.

c)     Risk of implied agency - When a partner joins then he has to shoulder the responsibility and duties as and when necessary. This is not mentioned it is implied.

d)    Lack of harmony - Success of partnership depends on mutual understanding and co-ordination. Partners come from different background hence maintaining harmony would be a problem

e)     Lack of continuity - Contingency factors may cause disruption in the business. Therefore there is lack of continuity.

f)      Non-transferability of interest - A person cannot transfer his interest to any one nor even his family

g)     Public district  - As it is not necessary to register a partnership firm hence these unregistered firms lack public interest These firms have no legal entity

There are two legal terms known as sale and agreement to sell

Contract of sales Contract of sale is defined as a contract where by the seller transfer or agrees to transfer the property in goods to buyer for a price. This is as per section 5 clause 2 of the law [Section 5(2) ].

Sale is known as where under contract of sale the property of good is transferred from the seller to the buyer.

Agreement to sell where under a contract of sale the transfer of property of good is to take place at a future time or subject to same condition thereafter to the fulfilled is called the agreement to sell.

Essentials of sale

1)     Bilateral Contract - there must be two parties’ buyers and sellers who should be two different persons.

2)     Money consideration - this is termed, as price consideration for a sale of good must involve money called price. Where goods are exchanged for goods it is not sale but barter. But there is nothing to prevent consideration being partly in money and partly in goods.

3)     Goods - The subject matter of sale must be “Goods” meaning as per section 2 clause 7  “ Every kind of movable property other than actionable claims and money and includes stock and shares, growing crops, grass and attached to and forming part of the land - which are agreed to be served before sale or under the contract of the sale.

Ø  These goods include every kind of movable property as against actionable claim and money. Things like goodwill, trademark, patents, gas, water, etc all are goods

Ø  Things attached to earth can be subject matter of sale. Eg trees which provides on something, which is served fro the earth under the contract.

Ø  Goods include shares and stock as well money cant be subject matter of sale. Where is foreign coins can be subject matter of sale [dollar is sold]

4)     There must be transfer of general as well as compared to special property. Eg if ‘a’ owns certain goods he has general property in the goods. If ‘a’ pledges them with ‘b’ then ‘b’ has special property in them

5)     Contract of sale must have all essential elements of a valid contract

6)     Sale and contract of work and material - contract of sale is different from contract involving exercise of skill of labor

Distinction between sale and agreement to sell

1) Transfer of property sale has immediate effect of transferring property.	1) Transfer of property In it the property is to transfer or to pass at some future time or subject to fulfillment of some conditions
2) Risk Risk passes with delivery to buyer	2)     Risk Here seller remains owner $ runs all the risk.
3) Breach of contract by buyer I f buyer commits default the seller may sue him for price i.e to say for specific enforcement of contract	3) Breach of contract by buyer Sellers only remedy is to sue for damages for breach.
4) Nature of contract It is an executed contract	4) Nature of contract It is an executor contract.
5)Nature of right Makes the buyer owner of goods. He can exercise all property rights in respect of them. He acquires a jus-in-sern-  right against goods. The effect is that if seller refuses to deliver the goods buyer may sue for recovery of goods by specific performance.	5) Nature of right It is a contract pure & simple. Buyers rights are only personal rights against the seller. He can only sue for damages on breach $ not for recovery of goods.
6) Right of resale Seller can’t resell except in certain cases such as sale by seller in possession after sale under section 30 or sale by unpaid seller- the buyer does not get.	6) Right of resale The subsequent buyer who buys goods in good faith for value & without notice of prior agreement - gets a good title