Compulsory Dissolution of a Firm

Compulsory dissolution occurs when a partnership firm is legally required to cease operations due to specific circumstances. According to partnership law, this happens in the following situations:

1. When All Partners Except One Become Insolvent

If all partners except one become insolvent (unable to pay debts), the firm cannot continue as a partnership requires at least two competent partners. The remaining solvent partner cannot carry on the business alone.

2. When the Firm's Business Becomes Unlawful

If the business activities become illegal due to changes in law or circumstances (e.g., new regulations prohibiting the trade), the firm must dissolve as it cannot legally operate.

3. When All Partners Become Insolvent

If every partner is declared insolvent, the firm lacks any legally competent person to manage the business and must dissolve.

Since all three scenarios lead to compulsory dissolution, the correct answer is "All of the above."

Related Topics

Partnership Dissolution: The process of ending a partnership firm, which can be voluntary (by agreement) or compulsory (by law).

Insolvency: A financial state where an individual or entity cannot meet debt obligations, which can trigger dissolution.

Business Legality: The requirement that all business activities must comply with current laws; unlawful operations force dissolution.

Key Formulae/Principles

No mathematical formulae apply, but the legal principles are:

• Partnership Act provisions for compulsory dissolution
• Insolvency laws affecting partner capacity
• Legal compliance requirements for business operations