ASSIGNMENT DISSOLUTION OF PARTNERSHIP

TOPIC FIRM

SUBJECT Contract Law II

NAME Namrata Pawan Thakur

CLASS FY LLB, 2021-22, II Sem

ROLL NUMBER 54

DATE OF 17th June 2022

SUBMISSION

Submitted to Adv. Anaheeta Balsara

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 Dissolution of Partnership

In

Contract Law II

Name Namrata Pawan Thakur

Roll Number 54

Class FY LLB, 2021-22, II Sem

Date 17th June 2022

Submitted to Adv. Anaheeta Balsara

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 ACKNOWLEDGEMENT

I would like to thank Adv Jignesh Shah (High Court) - my mentor, and my lawyer, who
has always been my guide and support for the last 5 years and encouraged me to pursue
studies in Law.

Am grateful to and thank Justice P.D Kode for encouraging me to be a lawyer and work
for the Legal Aid sector; Adv Apoorv Singh (High Court), my criminal lawyer, for
pushing me to work on loop holes and understanding forgery and criminal law.

All of them were ever ready to clear my doubts and help me with all the necessary
information and books. I would also like to express my gratitude to all those who played a
role directly and indirectly in the completion of this assignment.

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 INDEX

Sr.No Particulars Page Nos

1. Introduction 1
What is a contract?
What is partnership?
What is partnership firm?
What is dissolution of a partnership firm?
Section 39 of the Indian Partnership Act, 1932
Key Takeaways
2. Partnership Firms: Advantages and 3
Disadvantages
3. 5 Essential Elements of a Partnership Firm 5
4. Differences between dissolution of partnership 8
and dissolution of a firm
5. Dissolution of partnership vs Dissolution of a 9.
partnership firm
6. Consequences of dissolution of a partnership 12
firm
7. Case Law 1 14
8. Case Law 2 15
9. Illustrations 17
10. Conclusion 18
11. Suggestions 19
12. References 20

Introduction

Before we discuss the dissolution of a partnership firm, let’s first understand a few basic
things about partnership and partnership firms

What is a contract?

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Contract, in the simplest definition, a promise enforceable by law. The promise may be to
do something or to refrain from doing something. The making of a contract requires the
mutual assent of two or more persons, one of them ordinarily making an offer and another
accepting.

What is partnership?

Section 4 of the Indian Partnership Act,1932 defines partnership. As it is the relation
between the partners who entered into a business and share all the profit and losses.
Under the partnership deed, all the profit and losses are shared accordingly. Partnership
deed is an agreement between the partners in which all the terms and conditions are
outlined.

Therefore, by a bare reading of the definition of a partnership, we can list out the
important ingredient of a partnership as:

1. It deals with the relationship with the partners and there should be more than one
person for a partnership to be formed.
2. It arises out of a contract and the partners agree to share profits in agreed proportions.
3. The business will be carried on by all or any of them acting for all.

Section 4 also provides that persons who have entered into the partnership are called the
partners and they are collectively constitute partnership firm.

What is partnership firm?

The persons who own the partnership business are individually called ‘partners’ and
collectively they are called as ‘firm’ or ‘partnership firm’. The name under which
partnership business is carried on is called ‘Firm Name’. In a way, the firm is nothing but
an abbreviation for partners.

What is dissolution of a partnership firm?

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It means when the partnership between all the partners dissolved, then it is called
dissolution of the partnership firm. After the dissolution of the firm, the partners have
certain rights and liabilities as per the Indian Partnership Act, 1932, which provides the
consequences of the dissolution of the firm. In a partnership firm, there are more than two
partners. This process includes the disposing of all the assets and settlement of all the
accounts and liabilities of all the partners. 

Section 39 of the Indian Partnership Act, 1932

As per Section 39 of the Indian Partnership Act, 1932, the dissolution of a partnership

refers to the process of terminating the professional relationship between the partners
involved in the business due to various circumstances. This termination also puts an end
to and divides all the assets, liabilities, debts, accounts, and shares related to the
partnership among the partners in the form of a settlement deed. The main thing that
highlights this Section is that even though the process of dissolving a firm and dissolving
a partnership looks similar, they are completely different. 

Key Takeaways

 The terms partner and partnership are defined under Section 4 of the Partnership
Act. Dissolution of partnership firm is different for from dissolution of a
partnership.
 Dissolution of a partnership firm is defined under Section 39 of the Act.
 Section 40 to Section 44 of the Act deals with different modes and grounds for
dissolution of a partnership firm.

Partnership Firms: Advantages and Disadvantages

ADVANTAGES:

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1. Easy Formation:
Partnership is a contractual agreement between the partners to run an enterprise. Hence, it
is relatively ease to form. Legal formalities associated with formation are minimal.
Though, the registration of a partnership is desirable, but not obligatory.

2.  More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds.
Partnership overcomes this problem, to a great extent, because now there are more than
one person who provide funds to the enterprise. It also increases the borrowing capacity
of the firm. Moreover, the lending institutions also perceive less risk in granting credit to
a partnership than to a proprietorship because the risk of loss is spread over a number of
partners rather than only one. .

3.  Combined Talent, Judgement and Skill:

As there are more than one owner in partnership, all the partners are involved in decision
making. Usually, partners are pooled from different specialized areas to complement each
other. For example, if there are three partners, one partner might be a specialist in
production, another in finance and the third in marketing. This gives the firm an
advantage of collective expertise for taking better decisions. Thus, the old maxim of “two
heads being better than one” aptly applies to partnership.

4.  Diffusion of Risk:

You have just seen that the entire losses are borne by the sole proprietor only but in case
of partnership, the losses of the firm are shared by all the partners as per their agreed
profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that
in case of proprietorship.

5.  Flexibility:
Like proprietorship, the partnership business is also flexible. The partners can easily
appreciate and quickly react to the changing conditions. No giant business organization
can stifle so quick and creative responses to new opportunities.

6.  Tax Advantage:

Taxation rates applicable to partnership are lower than proprietorship and company forms
of business ownership.

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DISADVANTAGES:

1.  Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the
partners’ personal assets may be at risk if the business cannot pay its debts.

2.  Divided Authority:

Sometimes the earlier stated maxim of two heads better than one may turn into “too many
cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned
individual area. But, in case of areas like policy formulation for the whole enterprise,
there are chances for conflicts between the partners. Disagreements between the partners
over enterprise matters have destroyed many a partnership.

3.  Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there
remains uncertainty in continuity of partnership.

4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him
bind all the partners. At times, an incompetent partner may lend the firm into difficulties
by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne
by other partners also. Choosing a business partner is, therefore, much like choosing a
marriage mate life partner.

5 Essential Elements of a Partnership Firm

1. Contract for Partnership

Partnership is the result of a contract. It does not arise from status, operation of law or
inheritance.

Illustration:

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At the time of death of the father, who was a partner in the partnership firm, the son
can claim share in the partnership property but cannot become a partner unless he
enters into a contract for the same with other persons concerned.

Similarly, the members of a family carrying on a family business cannot be called

partners for their relation arises not from any contract but from status. Thus, a
“contract” is the very foundation of partnership.

2. Maximum No. of Partners in a Partnership is 20

Since partnership is the result of a contract, at least two people are necessary to
constitute a partnership. The Indian Partnership Act, 1932 does not mention anything
about the maximum no. of partners in a partnership firm but as per the Companies
Act, a partnership consisting of more than 10 persons for a banking business and more
than 20 persons for any other business would be considered as illegal. Hence, these
should be regarded as the maximum limits to the number of partners in a partnership
firm.

Illustration:

Only, the persons competent to contract can enter into a contract of partnership.
Persons may be natural or artificial. A Company may, being an artificial legal person,
enter into a contract of partnership, if authorized by its Memorandum of Association
to do so. There could even be a partnership between 2 companies (Steel bros & Co.
Ltd. Vs Commissioner of Income Tax)

A partnership firm, since it is not recognized as a legal person having a separate legal
entity from that of its partners cannot enter into contract of partnership with another
partnership firm or individuals

When a partnership firm (under a firm name) enters into a contract of partnership with
another partnership firm or individual, in that case, in the eyes of the law the members
of the firms or firm become partners in their individual capacity.

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3. Carrying on of Business in a Partnership

The third essential element of a partnership is that the parties must have agreed to
carry on a business.  The term “business” is used in its widest sense and includes
every trade, occupation or profession. Therefore, if the purpose us to carry on some
charitable work, it will not be a partnership.

Similarly, if a number of persons agree to share the income of a certain property or to

divide the goods purchased in bulk amongst them, there is no partnership, and such
persons cannot be called partners because in neither case they are carrying on a
business.

Illustration:

A and B jointly purchased a tea shop and incurred additional expenses for purchasing
pottery and utensils for the job, contributing the money in equal proportions and then
leased out the shop on rent which was shared equally by them , it was held that they
are only co-owners and not partners as they never carried on any business.

4. Sharing of Profits

To constitute a partnership, it is not essential that the partners should agree to share
the losses. It is open to one or more partners to agree to bear all the losses of the
business.

Moreover, the manner in which the profits/losses are to be shared should be expressly

stated in the partnership deed. In the absence of this being mentioned in the
partnership deed, the provisions of the Partnership Act, 1932 would apply which state
that the profits/losses should be distributed equally among all partners.

However.  it must be noted that although a partner may not share in the losses of a
business, yet his liability towards the outsiders shall be unlimited. In case the partners
intent to limit their liability towards the outsiders, a new concept of partnership i.e.,

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Limited Liability Partnerships have been introduced in India. In a Limited Liability
Partnership, the liability of the partners towards the outsiders is limited.

5. Mutual Agency in a Partnership

The fifth element in the definition of partnership provides that the business must be
carried on by all the partners or any (one or more) of them acting for them all, i.e.
there must be a mutual agency.

Thus, every partner, is both an agent and principal for himself and other partners, i.e.
he can bind by his acts the other persons and can be bound by the acts of other
partners. The importance of the element of mutual agency lies in the fact that it
enables every partner to carry on the business on behalf of others.

Differences between dissolution of partnership and dissolution of a firm

Partnership Firm

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  The process of ending a legal  The process of dissolving all the
relationship between a partner partnerships of the company/
and the rest of the partners in a enterprise/ firm which results in
company/ enterprise/ firm. dissolving the firm is known as
 When a partnership is dissolved, dissolving a firm.
other partners of the firm may or  When a firm is dissolved, all the
may not continue the business. business-related activities are stopped.
 Court intervention is not needed.  Courts can help the partners dissolve
 There is no closure needed in the the firm.
books as the business does not  The books need closure as the business
cease if a partnership ends. ceases.
 The dissolution of a partnership  The dissolution of a firm also results in
does not necessarily result in the the dissolution of partnerships.
dissolution of the firm.

Dissolution of partnership vs Dissolution of a partnership firm

Dissolution of partnership:

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Before exploring into dissolution of a partnership firm, it is important to bring out the
difference between dissolution of a partnership firm and a partnership.

If the partnership firm is dissolved, the operation comes to a halt making and the
relationship between the partners is terminated.

In case of dissolution of partners, the existing agreement is terminated, and a new

partnership agreement is drawn. Termination of a partnership may happen due to the
following:

1. Introduction of a partner
2. Retirement of a partner
3. Removal of a partner
4. Bankruptcy of a partner
5. Changing in profit sharing

Partners can dissolve a partnership while not dissolving the firm. Hence, dissolution of
partnership results in alteration of the partnership agreement whereas, dissolution of a
firm results in halting of business.

Dissolution of partnership firm:

As per the Indian Partnership Act, 1932, all the terms and conditions must be abided by
any partner who wishes to end the partnership. Listed below are the provisions are given
in this Act which states the different ways through which one can end a firm:

Ways of dissolution

 Section 40 defines dissolution by agreement.

 Section 41 defines compulsory dissolution
 Section 42 defines dissolution on the happening of certain events
 Section 43 defines dissolution by notice of partnership at will.
 Section 44 defines dissolution by court

Let us understand these sections in-depth:

Section 40- Dissolution by agreement: it means a firm can be dissolved with the
agreement in which the consent of all the partners are mentioned and by the mutual

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consents of all the partners to dissolve the firm. Without the interruption of the court, one
can dissolve it simply.

Section 41- Compulsory dissolution: compulsory dissolution can be because of many

reasons.

 If all the partners become insolvent or if all the partners except one become
insolvent then the firm will be dissolved.

 If partners are carrying out a business of unlawful activities like drugs, selling
illegal products, etc then it will be dissolved.

Section 42- Dissolution on the happening of a certain event: under these events a firm can
dissolve.

 If the partnership is done for a particular period of time and when that period
expires then the firm dissolves.

 Dissolution can also take place due to the death of the partner but if other
partners want to continue they can.

 If the partners of the firm are insolvent or one partner then the dissolution takes
place.

 If the partnership is created for a specific adventure or undertaking and if that

objective is done then the firm will dissolve.

Section 43- Dissolution by notice of partnership at will: the firm can be dissolved by any
partner by giving notice in writing to all the other partners and that notice must be well
communicated to all the partners by which the firm can dissolve.

Section 44- Dissolution by court- the dissolution can be done in a formal manner by
suing the other partners and the grounds on which court can dissolve the firm are:

 When one of the partners becomes unsound in that case the other partners can
file a suit and bring the case to the court to dissolve the firm.

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 When the partner is unable to perform his duties permanently due to which the
other partners file a case and dissolve the firm. The reason for the incapability
of work can be imprisonment for a longer time.

 If the partner commits such an act that brings guilt and affects the reputation of
the firm due to which firm faced losses then in that case court may order to
dissolve the firm.

 If the partner breaches the agreement of the firm then the court may order for
the dissolution of the firm. As it is the most important document of any firm.

 If the partner transfers his full interest to the third party and allowed his share
to be charged under the provision of rule 49 of Order XXI of the First
Schedule to the Code of Civil Procedure, 1908 (5 of 1908) and allow it to be
sold in the recovery area of land revenue because of the partner than the court
can order for dissolution of the firm.

 If the firm is facing a continuous loss, then the court can order for the
dissolution of the firm.

Consequences of dissolution of a partnership firm

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  Rights after dissolution

After the dissolution of the firm, all the partners or his representative are entitled to the
property of the firm as applied in the payment of debts and liabilities of the firm and the
surplus to be distributed among all the partners of the firm.

 Liabilities after dissolution

The partners of the firm are liable to the third party for any act done by any of them
unless they give public notice of the dissolution of the firm. 

The partner who dies, retries, becomes insolvent or that of a person who the third party is
not aware of being the partner of the firm, is not liable under this section.

In simple words, the third party who doesn’t know about the dissolution of the firm is
protected.

 Settlement of accounts after the dissolution of the firm

The firm will pay all the losses including the deficiency of the capital out of the profit and
then from the partner’s capital and by the partners individually in their profit-sharing
ratio.

The firm applies its assets including any contribution to make up the deficiency for
paying to the third party and then for paying any loan or advances by the partner and
lastly for paying back their capitals and if any surplus left after all this then it will be
divided between the partners in their profit-sharing ratio.

 Return of premium after dissolution

At the time of entering into a partnership firm, the partner has to pay an amount as
premium. So when the firm dissolves before the time period due to any reason, then he is
entitled to the repayment of premium. 

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The term upon which he becomes a partner and to the length of the time during which he
was a partner such part will be repaid unless the dissolution is mainly due to his own
misconduct, or the dissolution is in pursuance of an agreement containing no provision
for the return of the premium or any part. 

 Agreements in restraint of trade 

When one party agrees with the other party to restrict his liberty to carry on the specific
trade even in the present or in the future. Partners in anticipation of the dissolution of the
firm make an agreement that some or all the partners will not carry any business similar
to that of the firm even for a specific period or within specific local limits.

 Sale of goodwill after dissolution

There are certain ways for sale of goodwill after dissolution: 

1. When the accounts of the firm are settled after the dissolution, the goodwill
shall be subject to the contract between the partners be included in the assets or
it will be sold separately or along with the other property of the firm.

2. Rights of the buyers and sellers of goodwill:

 When the goodwill of the firm is sold after the dissolution, a partner may be
competing with that of the buyer but the subject to the agreement between
them, he may not use the firm’s name, he may not present himself on carrying
on the business firm or he may not ask the customs of persons carrying the
firm before dissolution.

 Any partner upon the sale of goodwill makes an agreement with the buyer that
such partners may not carry on such business similar to that of the firm within
a specified period or within a specified local time.

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Case Law 1

Mohinder Nath & Ors. vs Sh. Narender Nath & Ors. on 1 April, 1998

Equivalent citations: 1998 IIIAD Delhi 1, 72 (1998) DLT 785, 1998 (45) DRJ 296,
1998 RLR 333

Facts:

In this case, the appellant and respondent (1) are the real brothers and were partners in a
partnership firm. Each one of the said parties had a 15% share in the firm and the
remaining 40% was held by their mother. The plaintiff/respondent no.1 filed the suit for
dissolution of the firm and for rendition of accounts. 

The mother of the parties holding 40% share was not made a party in the suit and on
objection having been taken by the respondent that the suit was not maintainable, the
plaintiff made an application before the Judge for impeding the mother as one of the
defendants.

The plaintiff made an application before the learned Single Judge for impleading the
mother as one of the defendants. However, before the application could be decided, the
mother of the parties expired. 

Judgement:

The judge said that the partnership was at will and the same stood dissolved from the date
of service of notice of the suit on the defendants. 

The Court also held that the entitlement of the plaintiff to the 15% share in the firm was
not disputed and the Court was, therefore, satisfied that the plaintiff was entitled to the
appointment of the receiver and consequently an Advocate was appointed the receiver to
take charge of the business and all the assets of the firm and at last court said that the
parties will bear their own costs.

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Case Law 2

N. Guruva Reddy vs The District Registrar, ... on 2 August, 1976

Equivalent citations: AIR 1976 AP 417

Fact:
 Guruva Reddy, son of Chenchu Rami Reddy and other six persons and legal heirs
of Smt. P. Sri Devamma was carrying a partnership business.
 The legal representative and five other partners show their desire to retire from the
partnership. 
 The dissolution was executed on the stamp paper.
 A deed of dissolution of partnership was executed on January 3, 1973.
 According to the deed of dissolution, the partnership was dissolved with effect
from September 6, 1973
 After the document was executed, it was presented for registration in accordance
with the provisions of the Indian Registration Act to the Joint Sub Registrar,
Khairatabad, Hyderabad, who impounded it as insufficient stamped and referred
the matter to the District Registrar, Hyderabad. 

Judgement:

 It was held by the Division Bench of Calcutta High Court that the document under
consideration was both an agreement for dissolution of a partnership as well as a bond
and hence it was chargeable under Section 5 of the Indian Stamp Act with an aggregate of
duties with which two such separate instruments would be chargeable.

It is common ground that, if this deed is held to be a deed of dissolution of partnership

simpliciter, the amount of stamp duty payable in respect of this document is Rs. 32-50 p,
which is the amount with which it was stamped in the first place. If, however, it is held to
be a mortgage deed, then the amount of stamp duty payable would be much higher than
the amount payable on the deed of dissolution and if it is held to be a composite deed
providing both for dissolution of partnership as well as creating a charge, then, by virtue
of Section 6 of the Stamp Act, the amount of stamp duty payable would be the amount

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payable as on a mortgage deed. It is clear from a reading of the definition in Section
2 (17) that the deed creating a charge in favour of another person is mortgage deed for the
purpose of the Indian Stamp Act.

In the end, it was said that a charge was created in favor of the partners in the respective
amount, which are payable under the deed of the dissolution.

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Illustrations
1. When the firm consists of A, B and C and A retires, there is dissolution of
partnership between A and others but partnership as between B and C is
not dissolved. In such a case, there is dissolution of partnership between
some of the partners only, but there is no dissolution of the firm.
2. When in a firm consisting of A,B and C all of them cease to be partners
with one another, it amounts to dissolution of the firm.
3. Two partners reside and carry on trade in two different countries. If war
breaks between these two countries and the further commercial intercourse
between the two partners thereby becomes against public and thus
unlawful, there is compulsory dissolution of the firm.
4. In Nowell v Nowell (1869 L.R. 7 Equity Cases 538), A and B have
contributed unequal amount of 1929 pounds and 29 pounds towards the
capital. They had agreed to share the profits and losses equally. A
deficiency of 500 pounds in capital having arisen, it was held that the same
was to be shared equally between A and B.
5. When losses are to be shared equally : , A,B and C contributed a capital of
Rs. 25,000/-, Rs. 20,000/- and Rs. 5,000/- respectively, but they share the
profits and losses equally. The total capital is Rs. 50,000/-. If the assets
realize Rs. 20,000/- only, there is deficiency of capital to the extent of Rs.
30,000/- Each partner is bound to contribute Rs. 10,000/- for the loss.
After the partners make good this deficiency, total amount of Rs. 50,000/-
will be available and that will be utilized for the return of capital
contributed by the partners.

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Conclusion

The Indian Partnership Act, 1932 provides provisions regarding the dissolution of the
firm. This act helps the people who want to dissolve the firm so that no one can take the
wrong advantage for the same. 

With the dissolution of the firm, you have certain consequences regarding the same as
you have to close the books of account, all the liabilities must be settled by the partners
and the profit and losses will be shared by the partners as per the terms of the agreement. 

It can be derived from the above explanation of dissolution of the partnership that with
the dissolution of the relationship between the partners they have certain rights and
responsibilities which they need to fulfil, and one can claim for it with the help of the
Indian Partnership Act, 1932 as it gives certain provision regarding the same.

The act clearly provides grounds for dissolution of the partnership, so that nobody can
take advantage of the same and it also helps to maintain a good environment in the firm.

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Suggestions

 When a firm decides to dissolve, it can keep these points in mind

 Appoint an auditor for asserting the assets of the firm, both movable and
immovable
 Appoint a valuator for fixing the valuation of the assets of the firm , both movable
and immovable
 Distribute the assets of the firm in proportion with the ratio of each partner
 Enter a formal agreement for dissolution of firm with suitable stipulation,
conditions, restrictions, etc.
 Apply to the registrar of firms for the closing of the firm
 Closing of bank accounts

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References

Webliography

CA Karan Batra, founder of https://www.charteredclub.com/partnership-firm/

Divya. R, May 25, 2020, Consequences of dissolution of partnership firms

https://blog.ipleaders.in/consequences-of-dissolution-of-partnership-firms/

https://indiankanoon.org/doc/1718474/

Prahalad B , 22 October 2021 , Dissolution of partnership firm,

https://www.lawyersclubindia.com/articles/dissolution-of-partnership-firm-
section- 39-44-of-the-partnership-act-1932--14404.asp

Sneha. M, March 16, 2022, Difference between the dissolution of a partnership and
dissolution of a firm, https://blog.ipleaders.in/difference-between-dissolution-
partnership-dissolution-firm/

Bibliography
CL Gupta, Law of Partnership – including Limited Liability partnership by Justice Palok
Basu, Fifth Edition, 2016

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