In business, the relationship between a certain set of individuals is a partnership. Any change in these individuals dissolves the partnership and may result in the formation of a new partnership; however, in certain instances, the partnership could dissolve without the formation of a new one. Whether a new partnership is formed depends on the circumstances and varies from case to case.
In this article, reasons for partnership dissolution, we look at the reasons why a partnership might dissolve.
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What are the reasons for a partnership dissolution?
There are a number of reasons a partnership might dissolve and these can include:
- The mutual agreement of the partners, which may be an ad hoc agreement or a specific partnership agreement clause (where, for example, it was agreed that the partnership would be dissolved after a particular date, or after a certain event). This agreement could be assumed rather than explicit.
- By the service of a notification by a partner where the partnership agreement permits such an action.
- The exercise of a specific power in the partnership agreement, such as when the agreement permitted a majority of partners to seek dissolution.
- The exercise of a legislative authority.
- One of the statutory occurrences (such as a partner’s death or bankruptcy) unless there is a contrary agreement.
- Fraud, misrepresentation, rescinding a contract, or engaging in illicit behaviour.
- By court order (for instance, following the mental incapacity or other illness of a spouse)
- Where the enterprise can only be operated at a loss.
Dissolution of a partnership in the absence of a formal partnership agreement
In the absence of a partnership agreement or if the agreement does not address dissolution, the Partnership Act of 1890 will govern.
A partnership is immediately dissolved if any of the following occur, according to the Act:
- A partner dies or becomes bankrupt.
- The court orders the partnership to dissolve.
- It’s illegal to carry on the partnership’s business.
- The partnership was formed for a pre-agreed fixed term and that term has expired.
- The partnership was created to do a specific thing or achieve a specific goal, and the project is complete.
- A partner gives notice to dissolve the partnership to the other partners. The notice is effective immediately and need not include an explanation.
Dissolving a partnership if there is a partnership agreement in place.
If the partners have a partnership agreement, they might stipulate the conditions under which they wish to terminate the partnership. They can also determine how the business will continue if one partner departs, dies, or declares bankruptcy. A agreement permits the procedure to be precisely stated and decreases the likelihood of disagreements.
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