Dissolution of a firm takes place on the happening of certain contingencies. Choose them from the following:
(A) By the death of a partner
(B) By the adjudication of a partner as an insolvent
(C) When the business of the firm becomes illegal
(D) If constituted for a fixed term, by the expiry of that term
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
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(A) By the death of a partner: This is a specific contingency. Unless there is a contract to the contrary, a firm is dissolved upon the death of a partner.
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(B) By the adjudication of a partner as an insolvent: This is also a contingency. If a partner is declared insolvent, the firm is dissolved as of the date of adjudication.
- (C) When the business of the firm becomes illegal: This is classified as Compulsory Dissolution. It is not considered a "contingency" (an event that might happen and is often subject to a contract), but rather a legal mandate. Once a business becomes unlawful, the law does not allow it to continue under any circumstances, making the dissolution mandatory rather than contingent
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(D) If constituted for a fixed term, by the expiry of that term: This is the third standard contingency. If the partnership was created for a specific time, it ends when that time is up.
NCERT: " On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent
Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership, e.g., when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India.