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) when the business of the firm is earning a large amount of profit
(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 takes place by force of law, whatever the partners wish, when the partners can no longer lawfully carry on the business together.
(A) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract Correct. Insolvent partners cannot enter into contracts, and a firm with one or no competent partner cannot carry on business.
(B) when the business of the firm becomes illegal Correct. A partnership can exist only for a lawful business, so the firm must be dissolved once its business becomes illegal.
(C) when the business of the firm is earning a large amount of profit Incorrect. Earning profits is the purpose of the business; it is not a ground for dissolution of any kind.
(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 who becomes an alien enemy on a declaration of war can no longer lawfully be a partner, so the firm is dissolved.
NCERT (2026-27 edition):
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