Question

Women have been encouraged throughout the world to be entrepreneurs. Many reasons, some of them being to support themselves and their families; to attain the fulfillment of having started something on their own and to satisfy their desire for financial independence. Women not only create jobs for themselves and others, but also work toward growing their businesses, and constantly innovating new products and services. One such example was the partnership venture of Ms. Khazina, Ms. Noof, Ms. Razan and Ms. Kawther. This partnership firm was called as "Star nursery". Based in Al Hail since inception in 2014, this SME concentrated on providing various plants for gardening as well as plants for interior decoration in residential and commercial establishments. Women entrepreneurs are faced with multiple challenges like self-confidence, availability of time, family issues etc. In 2020, family issues started cropping up with Ms Kawther. She could not give her best in the company and was constantly being nagged and asked upon to quit. As the company could not afford to lose out on financial support being provided by Kawther, the company has plans to rope in a new partner Ms. Hajer. You are consultant in Muscat and are required to explain the settlement of financials and corrections taking place when one partners quits and the other joins. (5Marks).

Answer 1

Dissolution of Partnership Firm and Settlement of Accounts

Dissolution of partnership firm is a process in which relationship between partners of firm is dissolved or terminated. If a relationship between all the partners of firm is dissolved then it is known as dissolution of firm. In case of dissolution of partnership of firm, the firm ceases to exist. This process includes the discarding and disposing of all the assets of firm or and settlements of accounts, assets, and liabilities.

Dissolution of Partnership Firm

As we know that after the dissolution of partnership firm the existing relationship between the partner’s changes. But, the firm continues its activities. The dissolution of partnership takes place in any of the following ways:

1. Change in the existing profit sharing ratio.
2. Admission of a new partner
3. The retirement of an existing partner
4. Death of an existing partner
5. Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a partner in the firm.
6. On completion of a specific venture in case, the partnership was formed specifically for that particular venture.
7. On expiry of the period for which the partnership was formed.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here that the dissolution of partnership may not necessarily result in the dissolution of the firm.

But, dissolution of partnership firm always results in the dissolution of the partnership.

Settlement of Accounts

In a case where the partners do not have an agreement regarding the dissolution of the firm, the following provisions of the Indian Partnership Act 1932 will apply:

• The firm will pay the losses including the deficiency of capital firstly out of the profits, secondly out of the partner’s capital and lastly by the partners individually in their profit sharing ratio.
• The firm shall apply its assets including any contribution to make up the deficiency firstly, for paying the third party debts, secondly for paying any loan or advance by any partner and lastly for paying back their capitals. Any surplus left after all the above payments is shared by partners in profit sharing ratio.