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Corporate and Business Law (Global) · Partnerships

Dissolution and Winding Up of Partnerships

Updated 11 October 2026 · Fact-checked

Dissolution is the end of the partnership relationship. Winding up follows: assets are realised and applied to outside creditors first, then partners' loans, then partners' capital, and any surplus is shared in profit-sharing ratio. Partners remain liable for debts incurred before dissolution and for acts needed to wind up. Shortfalls are met by the partners.

Understand Dissolution and Winding Up of Partnerships

A partnership is a relationship between persons carrying on business in common with a view to profit. A general partnership is not a separate legal person in most jurisdictions, unlike an LLP or a company. So when the relationship ends, the business must be brought to a close in an orderly way.

Dissolution is the ending of the partnership relationship. Winding up is the process that follows: collecting assets, paying debts and sharing what is left. Dissolution can happen first, and the partnership continues only for the purpose of winding up.

The law differs between jurisdictions, as LW is a global paper. The exam tests the general principles, so learn the common rules and apply them to the facts given. These are the usual grounds for dissolution:

  • The agreed term expires, or the single venture or undertaking ends.
  • A partner gives notice, where the partnership has no fixed term (a partnership at will).
  • A partner dies or becomes bankrupt. In many jurisdictions this dissolves the firm by default, unless the agreement provides otherwise.
  • The business becomes illegal.
  • The court orders dissolution.

A court can order dissolution on just and equitable grounds. Typical examples are a partner's permanent incapacity, serious misconduct that harms the business, persistent breach of the agreement, the business being run only at a loss, or a total breakdown of trust. The exam gives facts and you decide whether a ground fits.

On winding up, assets are applied in a set order. Outside creditors come first. Then come advances or loans made by partners. Then partners get back their capital. Any surplus is shared in the profit-sharing ratio. If assets are too small, the loss is shared by the partners in the loss-sharing ratio, and each partner can be personally liable for the firm's debts. Partners remain liable for firm debts incurred before dissolution and for acts needed to wind up. A retiring partner stays liable to third parties who dealt with the firm and had no notice of the change, so notice matters.

Key formulas to remember

Order of application of assets
1. Outside creditors → 2. Partners' loans/advances → 3. Partners' capital → 4. Surplus shared in profit ratio
Learn this sequence exactly. Partners' loans rank before capital, which is the most tested point.
Loss on winding up
If assets < liabilities to creditors, the shortfall falls on partners in the loss-sharing ratio
Without agreement, losses are shared in the same ratio as profits, which is equal if the agreement is silent. Partners' liability to creditors is unlimited in a general partnership.
Ways a partnership ends
Expiry of term | Notice (at will) | Death or bankruptcy | Illegality | Court order
In many jurisdictions, death and bankruptcy dissolve the firm by default, unless the agreement provides otherwise.
Court grounds (just and equitable)
Incapacity | Misconduct | Persistent breach | Business only at a loss | Breakdown of trust
These are examples. The court looks at whether it is just and equitable to dissolve.

How to solve Dissolution and Winding Up of Partnerships questions

Use this method for any scenario or objective question on how a partnership ends and how it is wound up.

  1. 1Read the facts and identify whether the question is about dissolution (how it ends) or winding up (how assets are applied).
  2. 2Check the partnership agreement first. It can change the default rules, for example on death or bankruptcy.
  3. 3If it is dissolution, match the facts to a ground: expiry, notice, death or bankruptcy, illegality or court order.
  4. 4If a court is involved, ask whether the facts fit a just and equitable ground such as incapacity, misconduct or breakdown of trust.
  5. 5If it is winding up, list assets realised and rank the claims: creditors, partners' loans, capital, then surplus.
  6. 6Apply the order with numbers. Pay each class in full before moving to the next.
  7. 7If there is a shortfall, share it in the loss ratio and consider each partner's liability to creditors.
  8. 8State the conclusion clearly in one sentence and link it to the rule.

Quickest way: Rank and pay down the list

When to use it: Use this for objective questions asking who gets paid first, or how much each party receives on winding up.

  1. Write the four ranks in the margin: creditors, loans, capital, surplus.
  2. Take the cash available and subtract the creditors' claims first.
  3. Subtract partners' loans next, then capital.
  4. Share any remainder in the profit ratio.
  5. Pick the option that matches your total.

Common mistakes in Dissolution and Winding Up of Partnerships

  • Paying partners' capital before partners' loans.

    Students treat both as money the partner put in.

    Fix: A loan is a debt of the firm. It ranks before capital. Capital is repaid only after loans.

  • Treating dissolution and winding up as the same thing.

    The words are used loosely in everyday speech.

    Fix: Dissolution ends the relationship. Winding up is the process of realising assets and settling debts that follows.

  • Sharing a surplus by capital contributed.

    Students assume bigger capital means bigger share.

    Fix: The surplus is shared in the profit-sharing ratio, which is equal if the agreement is silent.

  • Assuming a partner's death or bankruptcy always dissolves the firm.

    The default rule is memorised without its condition.

    Fix: State that it dissolves the firm unless the partnership agreement provides otherwise.

  • Ignoring continuing liability to third parties.

    Students think liability ends on the date of dissolution.

    Fix: Partners stay liable for the firm's debts, and a retiring partner can remain liable to third parties who have not been told of the change.

  • Listing court grounds as a closed rule.

    Students memorise a list and apply it mechanically.

    Fix: Say the court may dissolve where it is just and equitable, then use the listed examples as illustrations that fit the facts.

Worked examples

Example 1

A partnership of Asha and Ben is wound up. Proceeds from selling all assets are $90,000. Creditors are owed $40,000. Asha lent the firm $10,000. Capital: Asha $30,000, Ben $20,000. Profits and losses are shared equally. How much does each partner receive?

Show the solution
  1. Add up all the claims on the firm: creditors $40,000 + Asha's loan $10,000 + capital $50,000 ($30,000 + $20,000) = $100,000.
  2. The realised assets are $90,000, so they are $10,000 short of total claims. That $10,000 is the loss on realisation.
  3. Share the loss in the loss-sharing ratio (equally): $5,000 each. Charge it to the capital accounts: Asha $30,000 − $5,000 = $25,000 and Ben $20,000 − $5,000 = $15,000.
  4. Now apply the order. Pay outside creditors first: $90,000 − $40,000 = $50,000 left.
  5. Repay Asha's loan next: $50,000 − $10,000 = $40,000 left for capital.
  6. Repay the adjusted capital: Asha $25,000 and Ben $15,000 total $40,000, which equals the cash left.
  7. Asha receives $25,000 capital plus her $10,000 loan = $35,000. Ben receives $15,000.
  8. Check: creditors $40,000 + loan $10,000 + Asha capital $25,000 + Ben capital $15,000 = $90,000, which equals the proceeds.

Answer: Asha receives $35,000 in total ($10,000 loan plus $25,000 capital). Ben receives $15,000.

Exam tips

  • Learn the payment order as a four-word chain and write it down at the start of any winding up question.
  • In Section B scenarios, check the partnership agreement clue. A sentence about what happens on death or bankruptcy changes the answer.
  • For court grounds, match the facts to one example and name it. Do not list all of them.
  • Objective questions score all or nothing. Check each number against the order before choosing an option.
  • In a written task, finish with a clear conclusion, for example who is paid, how much, and who bears the shortfall.

Practice questions from Partnerships

Dissolution and Winding Up of Partnerships in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dissolution and Winding Up of Partnerships: frequently asked questions

What is the difference between dissolution and winding up of a partnership?

Dissolution is the end of the partnership relationship. Winding up is the process after that, where assets are sold, debts are paid and any surplus is shared. The firm carries on only for winding up purposes.

In what order are assets paid out when a partnership is wound up?

Outside creditors are paid first. Partners' loans to the firm come next, then partners' capital. Any surplus is shared in the profit-sharing ratio.

When can a court dissolve a partnership?

A court can dissolve a partnership where it is just and equitable. Examples include a partner's permanent incapacity, serious misconduct, persistent breach of the agreement, the business running only at a loss, or a complete breakdown of trust.

Does a partner's death end the partnership?

Usually yes, unless the partnership agreement says otherwise. The same default applies to a partner's bankruptcy. Always check the agreement in the scenario.

What happens if the assets do not cover the debts?

The shortfall falls on the partners, normally in the loss-sharing ratio. In a general partnership, partners have unlimited liability to creditors, so creditors can pursue them personally.