Partnership

Dissolution

Easy

When the business of the partnership firm becomes illegal, it leads to dissolution of the firm under ___________?

Compulsory dissolution

Dissolution by the Court

Dissolution by agreement

Dissolution on the happening of certain contingencies

✅ Correct Option: 1

When the business of a partnership firm becomes illegal or unlawful, the firm is dissolved automatically by operation of law. This falls under Compulsory Dissolution as per Section 41 of the Indian Partnership Act, 1932.

Under compulsory dissolution, a partnership firm is dissolved mandatorily in the following situations:

• When all partners or all partners except one become insolvent

• When the business of the firm becomes illegal

• When an event occurs making it unlawful for the partners to carry on business in partnership (e.g., if partners of different countries go to war)

When the business becomes illegal, there is no choice or discretion involved. The firm must be dissolved immediately. This is different from:

Dissolution by Court → requires filing a suit and court's order based on specific grounds like misconduct, incapacity, or persistent breach
Dissolution by Agreement → requires mutual consent of all partners
Dissolution on happening of certain contingencies → includes expiry of term, completion of venture, death or insolvency of a partner (where the agreement may provide for continuation)

Since illegality leaves no room for the firm to continue operations lawfully, the dissolution is automatic and compulsory by law.

2026: 29 May Shift 1

Creditors are transferred to __________ on the dissolution of the firm.

2025: 4 June Shift 2

According to section .......... of the Partnership Act, 1932, the dissolution of partnership between all the partners of a firm is called the dissolution of the firm.

2025: 24 May Shift 1

Which of the following statements truly makes the distinction between Dissolution of Partnership and Dissolution of Firm:

(A) In dissolution of partnership, business is not terminated, while in dissolution of firm business is terminated.

(B) The Court intervenes in dissolution of Partnership because a partnership is not dissolved by mutual agreement. A firm can not be dissolved by court order.

(C) Economic relationships between partners continue in a changed form in dissolution of partnership. Economic relationships between the partners come to an end at the dissolution of the Firm.

(D) Dissolution of Partnership doesn't require permanent closure of books, while in Dissolution of firm books are closed.

Choose the correct answer from the options given below:

2022: 16 July Shift 2

At the time of dissolution of their firm, Ahmed and Subhash, who are partners of that firm, agreed that Ahmed will pay realization expenses for a fixed remuneration of Rs.12,000. The actual expenses were Rs. 16,000. The Journal entry to be passed is

2025: 31 May Shift 1

Unrecorded liabilities when paid are shown in:

2025: 31 May Shift 1

After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of any information regarding their payment, such liabilities are treated as:

When the business of the partnership firm becomes illegal, it leads to dissolution of the firm under ___________?

Solution

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