Legal Implications of Dissolution Deeds

Dissolution of deeds are also known as Dissolution agreement or settlement agreement are legal document which are used in many contexts which include business, joint venture and other collaborators. It legally ends up or terminates the relationship between any parties which are involved in the business. For any partnership or company it is a process for terminating business by putting a termination to the legal existence of that company. It marks the end of the complete business, with no continuation or ongoing activity which means the business after the dissolution is not going to resume or continue the business and company would cease to exist as a legal entity.

Dissolution deed

Drafting and creating a partnership contract is a vital step in starting a formal relationship between the partners in a business. Also, Dissolution agreement are complex as it is a formal agreement for dissolution. This could be added up as a clause in the original partnership deed or a separate agreement for the same known as dissolution deed could be done. The Indian Partnership Act,1932 deals as with the dissolution of firm or Dissolution of Partnership Business. This is defines in Section 39 of the Partnership Act. Generally, when business is terminated all rights and liabilities are settled up, this is known as dissolution of firm/partnership. Also even after the business is dissolved there are some rights and liabilities which fall on partners. There are many legal implications of dissolution deeds.

Modes of Dissolution

There are many modes of dissolution which are given in the Indian Partnership Act, 1932 in Section 40 to 44.

Section 40 – Dissolution of Deeds By agreement

Partners can also mutually agree for dissolving the business and end all the transaction and business activities. So, by a mutual agreement all the partners which are involved in a partnership firm could be dissolved without any interruption of the court.

Section 41 – Dissolution of Deeds through Compulsory dissolution

Mandatory dissolution could occur for many reasons. If a business is doing any illegal or unlawful activity such as dealing in drugs or illegal products, etc. these businesses could be forced to dissolve. Also any or all the partner except one becomes an insolvent, then the business can not be carried forward, this will make the business to go under compulsory dissolution.

Section 42 – Dissolution of Deeds on happening of certain event 

If a partnership is started for a specific event or purpose and that event has occurred or purposed has been fulfilled then on happening of such event the partnership is dissolved. Also, as if a partnership agreement is entered for a certain period, then on completion of that period, the partnership would be dissolved. Dissolution in such happens only when a partner dies, but of any other partner is wishing to continue without the deceased partner they could continue.

Section 43 – Dissolution of Deeds by notice of partners at will 

As per this any partner who gives a valid notice of dissolution to all the partners could dissolve the business. This notice shall be communicated to all partners properly, and it shall consist of reason for any of such dissolution also.

Section 44 – Dissolution of Deeds by court

In case of formal matters, a partner could sue other partners also which can lead to dissolution. There can be various reasons for this,

• If any partner has became of unsound mind or is incapable of doing his duties and responsibilities.
• If any partner has done something which affects and harms the reputation of a firm.
• If a partner breaches the terms and condition of the partnership agreement.
• If any partner transfers the entire stake to a third party, allowing their share to be subjected to Rule 49 of Order XXI in the Code of Civil Procedure, 1908 which leads to a potential sale for land revenue recovery area, the court can order the dissolution of firm.
• If there is any continuous loss in business transaction of firm.

Terms of Partnership Dissolution Agreement:-

This Document acts as an important record of agreement reached between partners which covers different aspects of dissolution, which include:-

1. Distribution of Assets and Liabilities as to specify how partnership assets like the property and all liabilities are to be divided among all the partners. It includes the sharing of profits, loss, debts and any assets which are remaining.
2. Settling up debts are how they are to be settled whether by sale of asset, partners contribution or any other method.
3. Name and Branding of the business whether any of the partner could keep the name of the business, trademark or any element of branding which is associated with the dissolved partnership.
4. Non Competing clause which can restrict the partners from being engaged in same business activities or soliciting the partners client or employees.
5. Any dispute resolution in future between any partner which relates to dissolution of deed can specify how all the dispute are to be resolved this can be done through arbitration or mediation.
6. The rights of individual partner and all partner jointly and the responsibilities after the dissolution or while dissolving it can also be provided.
7. It shall also have the ground for dissolving like the reasons which lead to the dissolution.

Legal Implications of Dissolution of Deeds

There could be many legal implications and outcomes of Dissolution of the firm or the business. It can include these:-

1. Binding and Legally Valid

A properly drafted and executed Dissolution deep is binding on all parties which are involved in the business. It also gives clarity and legal protection to the parties involved. It means that it holds weight in the court of law and could be used as an evidence in enforcing the concurred terms. The legal validity of deed provide a sense of security and protection for the parties which involved as all such interests are protected by the agreed terms and which are legally binding and any such violations are actionable.

2. Enforcement of the agreement 

If there is any dispute which arises cause of non compliance or any breach of terms and conditions of that dissolution agreement, the parties could reach out the court and enforce such deed. The dissolution deed acts as a recourse for establishing and enforce the agreed terms and also act as an evidence.

Also when there is a breach of terms and acts upon something. All other parties which are concerned with this can act against this in the court of law by way of enforcing the deed.

3. Asset distribution

The assets are to be distributed equally for protecting the rights and interests of all parties. Dissolution deed also specify asset distribution and provides how the dissolution is to be done. This ensures that all assets are to be distributed according to the agreed terms which prevents conflicts and disputed about who is to get which asset. One of the most important legal implication is ensuring the distribution of assets which has to be done in order following the terms which are laid in the deed.

4. Protection of Interests

Dissolution deed also keep protecting the interest of the parties which are involved by mentioning the rights, responsibilities and limitations of partners post the dissolution. It helps in reducing any misunderstandings and disputes. Partners could rely on dissolution deed being a legally binding contract which protects the rights and interests, in that situation such legal action could be brought against the individual.

5. Prevents future claims 

It provides all necessary details and implication of a dissolution of deed in place, partners are less likely to make any unexpected claims against any other partner which means between each other or the dissolved partnership in future. By preventing any such claims, the dissolution deed provides the partner peace of mind knowing the terms of dissolution are binding and final in nature.

6. Employment and contracts

For the employees the deed shall outline in detail about the termination, if the employment is terminated or there is any transfer detail, such as severance package and yes all the details about the same. Also, this deed shall contain about how the agreements will be served and honored and then terminated. The future of the contract like the third parties such as service providers or the suppliers shall be addressed.

7. Compliance with regulatory requirements

All compliance implications like direct tax compliance, secretarial compliance, business compliance and such other compliance which have been clearly given shall be fulfilled. The process of such termination or transfer of any license or permit held by business shall be duly complied. Any other such requirement to government agencies or any other concerned party shall be addressed and compiled.

8. Notification to Stakeholders

The partners shall contact the customers in order to inform them about the dissolution of business. The vendors shall be notified about this, all outstanding payments and liabilities shall be cleared out . The employees shall also be communicated about the dissolution and all the details which are related to employment termination or the transfer. It ensures compliance with the legal requirements for notifying the relevant government authorities.

9. Record Keeping

Record keeping shall also be allotted which means as to who will retain business records and for how much time.

10. Non-Compete and Non-Disclosure Agreements

This deed implies a bar on parties from competing with the original business which is being dissolved. This prevents former partners from engaging in similar businesses or the activities which can compete with the dissolved business. Also, these Non Disclosure agreements protect sensitive information and intellectual property from being misused or disclosed. Any party violating will be liable for the same.

Conclusion

While Concluding it would be best to state that the any business which is in partnership regardless of any nature,  shall consider to have a dissolution deed. As it ultimately benefits them the reason being it provides and mentions for all the relatable happenings which can happen while closure of the business and hence provides a amicable solution for the same and helps in winding up the partnership with ease and without any hassle.