Dissolution Of Partnership Firm

A court may order dissolution of a firm under several circumstances. First, when a partner becomes permanently incapable of performing his duties due to illness, insanity or disability, dissolution may be granted. Second, if a partner is guilty of misconduct that negatively affects the business, the court may intervene. Third, if a partner continuously breaches the partnership agreement or acts in a manner that makes business operations impossible, dissolution can be ordered. Fourth, continued losses or the business becoming illegal may also lead the court to dissolve the firm. Any two of these situations are acceptable.

Compulsory dissolution occurs automatically when certain events take place. First, if all or all except one partner become insolvent, the firm must be dissolved because the business cannot continue. Second, if the business becomes illegal due to changes in law, such as banning a particular trade, compulsory dissolution is required. Third, if an event occurs that makes the business impossible to carry on, such as destruction of essential assets, the firm must be dissolved. These circumstances do not require a court order, as dissolution happens by force of law. Any two such conditions are sufficient.

A bank overdraft is a liability and therefore it is not transferred to the bank account at dissolution. Instead, all liabilities, including bank overdraft, are transferred to the Realisation Account. The liability is settled by paying the overdraft amount through the bank account. Only cash and bank balances are transferred to the Realisation Account on dissolution. Since the overdraft represents money owed to the bank, it cannot be transferred into the bank account itself; it must be paid off during settlement.