Which of the following indicate the situation of compulsory dissoluti…

Which of the following indicate the situation of compulsory dissolution?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → When the business of the firm becomes illegal

Compulsory dissolution happens by force of law, without any choice of the partners: when all partners (or all but one) become insolvent, or when the business becomes illegal or unlawful for the partners to carry on.

Why the other options are incorrect

Option (1) When a partner becomes insane — Incorrect. Insanity is a ground on which the court may order dissolution on a partner’s suit; it does not dissolve the firm by itself.
Option (2) On the death of a partner — Incorrect. Death dissolves the firm only on the happening of a contingency, subject to the contract between partners; the others may agree to continue.
Option (4) When a partner becomes permanently incapable of performing his duties as a partner — Incorrect. This too is a ground for dissolution by the court, not compulsory dissolution.

NCERT (2026-27 edition):
Dissolution of a Firm – “… 2. 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.”

NCERT (2026-27 edition):
Dissolution of a Firm – “… 3. 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; …”

NCERT (2026-27 edition):
Dissolution of a Firm – “… 5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds: (a) when a partner becomes insane; (b) when a partner becomes permanently incapable of performing his duties as a partner; …”

Which of the following indicate the situation of compulsory dissolution?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → When the business of the firm becomes illegal

Why the other options are incorrect

Option (1) When a partner becomes insane — Incorrect. Insanity is a ground on which the court may order dissolution on a partner’s suit; it does not dissolve the firm by itself.
Option (2) On the death of a partner — Incorrect. Death dissolves the firm only on the happening of a contingency, subject to the contract between partners; the others may agree to continue.
Option (4) When a partner becomes permanently incapable of performing his duties as a partner — Incorrect. This too is a ground for dissolution by the court, not compulsory dissolution.