Which of the following indicate the situation of compulsory dissolution.
Which of the following indicate the situation of compulsory dissolution.
Solution
Compulsory dissolution occurs when the partnership firm is dissolved by operation of law and the partners have no choice but to dissolve the firm.
When the business of the firm becomes unlawful or illegal, the partnership must be dissolved compulsorily. This is because:
- The law prohibits carrying on illegal business
- Partners cannot continue the firm even if they want to
- It is a mandatory dissolution under Section 41 of the Indian Partnership Act, 1932
The other options represent situations of dissolution by operation of law, but they are not compulsory:
Option 1 & 4: When a partner becomes insane or permanently incapable, the firm may be dissolved, but the remaining partners can choose to continue the partnership by mutual agreement.
Option 2: On death of a partner, the partnership is dissolved, but the legal heirs and remaining partners can agree to reconstitute the firm and continue the business.
In all these cases, there is an element of choice available to the parties involved. However, when the business becomes illegal, dissolution is mandatory and unavoidable - making it a case of compulsory dissolution.