A firm is dissolved compulsorily in the following cases: (A) When all…

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
(C) Change in existing profit sharing ratio among partners
(D) When some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership.

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

Compulsory dissolution happens by law, whatever the partners wish, when the firm can no longer lawfully or legally go on.

(A) When all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract; Correct. Insolvent partners cannot contract, so the firm cannot carry on.

(B) When the business of the firm becomes illegal Correct. A firm cannot carry on a business the law forbids.

(C) Change in existing profit sharing ratio among partners Incorrect. A change in the ratio only reconstitutes the partnership; the firm continues.

(D) When some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership. Correct. For example, a partner becoming an alien enemy on a declaration of war makes the partnership unlawful.

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 Partnership – “As stated earlier dissolution of partnership changes the existing relationship between partners but the firm may continue its business as before. The dissolution of partnership may take place in any of the following ways: (1) Change in existing profit sharing ratio among partners; (2) Admission of a new partner; (3) Retirement of a partner; (4) Death of a partner; (5) Insolvency of a partner; (6) Completion of the venture, if partnership is formed for that; and (7) Expiry of the period of partnership, if partnership is for a specific period of time; …”