IBS Partnership Act

CHAPTER 3

INDIAN PARTNERSHIP ACT 1932

4.1 THE NATURE OF PARTNERSHIP

[Sections 1-8]

 Originally, the law relating to Partnership was contained in and formed part of the Indian Contract Act, 1872 as
Chapter XI thereof. But, in 1932 Chapter XI of the Contract Act was repealed and in place was passed a
comprehensive legislation, the Indian Partnership Act.

Definition of partnership (Section 4)

 A Partnership is defined as "the relationship between persons who have agreed to share profits of a busi ness
carried on by all, or by any of them acting for all."

ESSENTIALS OF PARTNERSHIP
 Thus, the following elements must be present before partnership can be said to come into existence
(i) Partnership is an association of two or more persons.
(ii) Partnership must be the result of an agreement between two or more persons.
(iii) The agreement must be to carry on some business.
(iv) The agreement must be to share profits of the business.
(v) Business must be carried on by all or any of them acting for all.
 These elements are discussed below:

(i) Partnership is an association of two or more than two persons.

 There must be at least two sons who should join together to constitute a partnership, because one person
cannot become a partner with himself.
 It must be noted that the Partnership Act does not specify the minimum or the maximum number of
partners in a partnership firm. Since an association cannot be formed with persons less than two, hence it
is obvious that the minimum numbers of persons to constitute a valid partnership should be atleast two.
 It must be understood that the maximum number of partners in a partnership firm, the Act is silent. It is only
Section 11 of the Companies, 1956 that imposes a limit at 10 in case of banking business and 20 in case of
any other business.
NOTES – A firm is not a person in legal terms. As such, two partnership firms cannot enter into partnership.
The partners are personally liable for all the business obligations of the firm. [ Malabar Fishries v. Kerala AIR
1980 SC 176]

Ex-
1) A, B and C were three partners carrying on business of trading in automobile spare parts.
Subsequently, A and B retired from the firm and C continued the business. In this case, there is no
partnership as C alone is carrying on the business.
2) A and B, two brothers were living together with their farther C. On the death of their father, they
inherited certain properties, which they did not divide. They sold a garden and invested this amount in
a separate timber business. There was no partnership agreement, but it appeared that they intended
to share the profits of this timber business. The business failed and the question arose about the
distribution of liabilities. It was held that there was partnership and they must bear the liabilities as
partners. In this case, there was an implied agreement of partnership, which arose from the conduct of
the partners. [Abdul v. Century Wood Indus. AIR 1954 Mysore 33]

(ii) Partnership must be the result of mutual agency between two or more persons.
 Partnership can arise by contract only. An agreement to constitute partnership must fulfill all the essentials
of a valid contract. Also an agreement between the partners may be express or implied.
 The members of a Hindu Undivided Family (coparcenery) carrying on a family business cannot be regarded
as partners because coparceners or members of the family get a share in the business not by virtue of
agreement but by virtue of status, i.e., by birth in the family. The coparceners may however form a

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IIPM 55 CH. – 4 PARTNERSHIP ACT

partnership through an independent contract.

NOTE – The Hon`ble Supreme Court in Devji v. Magan Lal, AIR 1965 SC 139, observed that the true test of
partnership is the `Agency relationship` and not the sharing of profits.

(iii) The agreement must be to carryon some business

 The term "business" means any trade, occupation or profession. Though the word "business" generally
conveys the idea of numerous transactions, a person may become partner with another even in particular
adventures or undertakings.
 Unless the persons join for the purpose of carrying on a business, it will not amount to a partnership.
 Thus, partnership does not exist between members of a charitable society or religious association or a
building scheme. Similarly, a club is not a partnership [Caldicott v. Griffiths (1853) 8 Ex Re. 898].

(iv) The agreement must be to share profits of the business

 Joint carrying on of a business alone is not enough; there must be an agreement to share profits arising
from the business. Sharing of profits also involves sharing of losses.
 But whereas the sharing of profits is an essential element of partnership, the sharing of losses is not. Thus,
a person may become a partner under a distinct understanding that he is not to share the losses, but to
share only the profits.
 Servant or agent who receives a share of profits as his remuneration, or the seller of good will of a business
who is given a share of profits as consideration for sale of the goodwill, are not partners.

Ex –
A, a surgeon and druggist, sold his practice to B along with the name and style under which A was carrying
on his practice. It was agreed that A would continue to attend his old profession and to the best efforts
introduce B to his patients, and to do every reasonable act for promoting B`s profession. And B allowed a
portion of the profits to A. It was held that A and B were not partners in the profession [ Rawilson v. Clarke
(1846) 153 ER 860]

(v) Business must be carried on by all or any of them acting for all.
 Partnership is based upon the idea of mutual agency. Every partner assumes a dual role-that of a principal
and of an agent. The foundation of the law of partnership is agency.
 It is, therefore, said, "the law of partnership is a branch of the law of principal and agent."
 Each partner is an agent binding the other partners who are his principals and each partner is again a
principal, who in turn is bound by the acts of the other partners.

'PARTNERS', 'FIRM' AND 'FIRM NAME'

(SECTION 4)

 Persons who have entered into partnership with one another are called individually "partners" and col lectively
"a firm" and the name under which their business is carried on is called the "firm name."
 In law, a "firm" is only a convenient phrase for describing the two or more persons who constitute the
partnership, and the firm has no legal existence apart from those persons.
 Thus, if A, B and C are partners in a firm, the firm really means A, B, and C taken together. Unlike a joint stock
company, which is a legal entity, a firm has no separate existence apart from its members. A firm is not a body
corporate. The rights and obligations of the firm are in fact the rights and obligations of the individuals
composing the firm. The legal position of a firm is that it cannot possess property and, therefore, it cannot be a
debtor or a creditor. The rights which a partner enjoys, and the duties which he owes, are enjoyed against and
owed to the other partners, and not to the firm; and if an action between the partners be necessary to enforce
such rights and duties, the individual partners and not the firm are the parties to the action.
 Firm Name - Partners may choose any name as their firm's name provided it does not go against the rules
relating to trade name or goodwill. That is to say, the name adopted should not be such as it will mislead the
public into confusing them with a firm of repute already in existence.
 Further, a firm name shall not contain any of the following words, namely:
'Crown', 'Emperor', 'Empress', 'Empire', 'Imperial', 'King', 'Queen', 'Royal', or word expressing or implying the
sanction, approval or patronage of Government except with the written consent of the Government.

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4.2 PARTNERSHIP DISTINGUISHED FROM CERTAIN SIMILAR ORGANISATIONS

Partnership and Co-ownership

 Co-ownership means joint ownership. A and B jointly purchase a house. They are co-owners but not
necessarily partners.
 The following points of distinction between the two may he noted:

Partnership Co-ownership
1. It arises from contract. 1. It may, besides contract, arise by status, e.g. A
and B inherit a house from their father.
2. It always implies a business. 2. It may exist without any business.
3. It involves sharing of profits and losses. 3. It does not always involve the sharing of profits or
losses because. it may exist without any business.
4. Each partner is the agent of other partners. 4. A co-owner is not the agent of the other co-
5. A partner cannot transfer his interest without the owners.
consent of all other partners. 5. A Co-owner may transfer his interest to a third
6. A partner can claim a share in the surplus assets of party without the consent of other co-owners.
the firm, but not a share in the proper ties of the 6. A co-owner can claim division of the joint prop erty
firm in specie. In specie.

PARTNERSHIP AND CLUB

 A club is an association of a peculiar nature. The objective of such an organisation is not the acquisition of
profits, but the promotion of some beneficial or social object, such as promotion of health or providing
recreation for its members.
 A club differs from partnership inasmuch as there is no business and thus no motive of earning profits and
sharing them. A member of a club is not liable to a creditor of the club, except to the extent to which he took
part in the contract concerned which gave rise to the liability. [In re St. Jame 's Club 1862,2 De G. Mac. 6,
383].
 A member of a club is not the agent of the other members and the death or resignation of a member does not
affect its existence.

PARTNERSHIP AND COMPANY

 Distinction between a partnership and a company incorporated under the Companies Act 1956, is as follows:

Partnership Company
1) Legal status. A partnership firm has no existence 1) A company is a separate legal entity distinct from
apart from its members. [Indian Cotton Co. v. its members. [Salomon v. Salomon & Co. Ltd.].
Raghunath.].
2) Mutual Agency. Partnership is founded on the idea 2) A member of a company is not an agent of other
of mutual agency: every partner is an agent of the members.
rest of the partners.
3) Liability of Members. Liability of a partner is 3) Liability of member or shareholder of limited
unlimited, i.e., even his own personal assets are company is limited to' the extent of the amount
liable for the debts of the firm. remaining unpaid on shares held by him or the
amount of guarantee as mentioned in the
Memorandum of Association of the company.
4) Transfer of Interest. A partner cannot transfer his 4) A shareholder, subject to restrictions contained in
interest without the consent of all other partners. the Articles, can freely transfer his share.
5) Duration of Existence. Unless there is a contract to 5) A company enjoys a perpetual succession. Death
the contrary, death, retirement or insolvency of a or retirement or insolvency of a member does not
partner results in the dissolution of the firm. affect the existence of the company.
6) Minimum Membership. The minimum number of 6) The minimum number required to form a company
persons required to form a partnership is 2. is 2 in the case of private companies and 7 in case
7) Maximum membership. A partnership cannot be of public companies.
formed with persons exceeding 20. The number is 7) There is no limit to the maximum number of

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limited to 10 in case of banking business. members in case of a public company. However, a

private company cannot have more than 50
members.
8) Audit. The audit of the accounts of a firm is not 8) The audit of the accounts of a company is
compulsory. obligatory, i.e., a legal necessity.

PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS.

 The principal differences between a Partnership and a Joint Hindu Family business are as following:-
Partnership Joint Hindu Family Business
1) Creation. Partnership is essentially the result of an 1) A Hindu Family is the result of status.
agreement between the parties.
2) Admission. In a partnership, new partner can be 2) In Joint Hindu Family business a person becomes
admitted only with the consent of all the existing a member merely by his birth.
partners.
3) Female Members. A female can join partnership 3) A female member cannot become a member of a
business as a full-fledged partner. Joint Hindu Family business.
4) Minor Members. A minor cannot be member of a 4) Minors, in case of Joint Hindu Family, are
firm except that he may be admitted to the benefits members of the family from the date of their birth.
of an already existing partnership firm.
5) Death of a Member. Death of a partner generally 5) The death of a member of a Joint Hindu Family
dissolves the firm. leaves the firm unaffected. .
6) Mutual Agency. Every partner is an agent of the 6) It is the Karta who has the authority to contract and
rest of the partners and, therefore, his acts bind bind the family other coparceners cannot do so.
the firm. 7) Only Karta is liable unlimitedly, the liability of other
7) Liability. Every partner is liable to an unlimited co-parceners is limited to the extent of their share
extent. in the profits of the family business.

ILLEGAL PARTNERSHIP
 A partnership may be illegal in either of two ways;
(1) By being formed to carry on an illegal business, e.g., to carryon a business of illicit liquor. Such an illegal
partnership can, however, be sued [Bhahmaya v. Hamiah 43 Mad. 141].
(2) Where the number of partners exceed the maximum limit - This has reference to Section 11 of the Indian
Companies Act, 1956 which provides that an association of more than 10 persons in case of banking and
of more than 20 persons for other business.

PARTNERSHIP-AT-WILL
(Section 7)
 A partnership is called a partnership-at-will
(1) When the partnership is not for a fixed period of lime and
(2) It can be dissolved at any time by any of the partners notifying his willingness to do so.

PARTICULAR PARTNERSHIP
(Section 8)

 A particular partnership is one, which is formed for a particular adventure or a particular undertaking.
 Such a partnership is usually dissolved on the completion of the adventure or undertaking.
 Ex- two auditors engaged in a particular audit may be regarded as partners in that audit. [Robinson v. Ander-
son.]

4.3 REGISTRATION OF FIRMS

[Sections 58-59]

Procedure
 A partnership firm may be registered at any time by sending by post, or delivering to the Registrar of Firms of
the area in which any place of business of the firm is situated or proposed to be situated, a statement in the

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prescribed form and accompanied by the prescribed fee stating:

(1) the firm name,
(2) the place or principal place of business of the firm,
(3) the names of any other places where the firm carries on business,
(4) the date when each partner joined the firm,
(5) the names in full and addresses of the partners and
(6) the duration of the firm.
 The statement must be signed by all the partners, or by their agents specially authorised in that behalf, and
duly verified.
 When the Registrar is satisfied that the relevant provisions of the Partnership Act have been duly complied
with, he registers the firm by recording an entry of the statement in a register called the Register of Firms, and
shall file the statement.
 When an alteration is made in the name of the firm or in t4e location of its principal place of business, the
information of such variation shall be sent to the Registrar.
 It should be noted that registration of a firm is not compulsory.

Effect of non-registration
 The consequences of non-registration of a firm as follows:
1. A partner of an unregistered firm cannot file a suit against the firm or any partner, so as to enforce a right
(a) arising from contract, or (b) conferred by the Partnership Act.
Thus, if a partner of an unregistered firm is not paid his share of profits, he cannot claim it through a suit in
the court of law.
2. No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a
right arising from a contract. (Note that suit for recovery of money can be filed against the unregistered firm
in the name of individual partners).
Ex-
1) An unregistered firm supplies to X goods worth Rs. 10,000. X refuses to pay the money. The firm shall
have no legal remedy against X.
2) `A & Co.` an unregistered firm borrowed Rs. 10,000 from B, a moneylender. The firm has also
supplied certain goods worth Rs. 1,000 to B on credit. On firm’s refusal to repay the loan, B filed a suit
against it for the recovery of amount of loan. In this case, the firm cannot say that Rs. 1,000 owed by
B to the firm should be set-off against B`s claim of Rs. 10,000 against the firm.
3) A and B purchased a taxi and they were plying it in partnership. The firm was, however unregistered.
The business continued for one year, and then A sold the taxi without the consent of B and did not pay
anything to him. B filed a suit against A to recover his share in the sale proceeds. A defended the suit
on the ground that the firm was not registered. It was held that the business was closed on the sale of
the taxi, and the suit was maintainable as it was for the realization of assets of a dissolved firm [ S
Ahmed Khan v. Turup Mohd. Hayat AIR 1953 Mysore 4]

4.4 TYPES OF PARTNERS

1. Partner by Holding Out, or by Estoppel

 Anyone who by words spoken or written or by conduct represents himself, to be a partner in a firm, is liable
as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm.
Such a partner is called 'partner by holding out' or 'partner by estoppel'.
Ex-
1. A partner retires from a firm but does not give notice of his retirement. He is a 'partner by holding out'.
2. X induces Y to believe that he (X) is a partner of a firm, S & Co. and Y believing that X is a partner gives
credit to S & Co. X will be responsible for compensating Y. He will not be heard to say that he is not a
partner of S & Co.

2. Dormant or Sleeping Partner.

 A "dormant" or "sleeping" partner is one who does not take an active part in the business of the firm. Such a
partner is liable like any other partner of the firm.
 The moment such a sleeping partner is discovered to be a partner, he can be made liable.

3. Nominal Partner
 A nominal partner, as the title suggests, is partner only in name. Thus, where a person's name is used, as if

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he were a partner of the firm, though actually he is not, he will be called as a "Nominal partner."
 Such a partner is not entitled to share the profits of the firm but is liable for all acts of the firm as if he were
a real partner.

4. Sub-Partner
 A sub-partnership comes into existence when one of the partners agrees to share the profits derived by him
from the firm with a stranger. That stranger is called a 'sub-partner'.
 A sub-partner is not a partner in the eyes of law and, therefore, has no rights against the firm. He is also not
liable for the debts of the firm.

5. Working Partner
 A partner, because of his special qualifications, may be assigned the management and control of the
business. Such a partner is commonly known as a "working partner."
 A working partner normally receives a fixed amount of salary, besides his share in the profits of the firm.
Other partners, however, remain liable to the third parties for all his acts.

6. Incoming Partner
 No person can be introduced as a partner into a firm without the consent of all the existing partners.
 Thus, a person who is admitted as a partner into an already existing firm with the consent of all the existing
partners is called as "incoming partner."
 An incoming partner does not become liable for any act of the firm done before his admission as a partner.
However, where he specifically agrees to bear the past liabilities, he will be liable to the other partners for
the same. Third parties, however, cannot hold him liable since there is no privity of contract between the
new partner and the creditors.

7. Outgoing Partners
 A partner who leaves a firm in which the rest of the partners continue to carry on business is called a retired
or outgoing partner. A partner may retire:
1. with the consent of all the other partners;
2. in accordance with an express agreement by the partners; or
3. where the partnership is at will, by giving notice in writing to all the other partners of his intention to
retire .
 A retiring partner continues to remain liable to third parties for all acts of the firm until public notice is given
of his retirement. Such notice may be given either by the retiring partner or by any member of the
reconstituted firm.
 A partner who retires from a firm does not cease to be liable for the debts or obligations of the incurred
before his retirement. A retiring partner will also be liable to third parties for transactions of the firm begun
but unfinished at the time of his retirement.
 Though, a partner may retire, he cannot be expelled. It may be noted that such a power may, however, be
conferred partners by contract and shall be exercised in good faith in the interest of the firm.

MINOR AS A PARTNER
[SECTION 30]

 Partnership, being a contract, a minor cannot enter into partnership, he being incapable of contracting. An
agreement with or by a minor is void-ab-initio. However, if all the partners agree, a minor may be admitted to
the benefits of an already existing firm.

4.5 RIGHTS, DUTIES AND LIABILITIES OF PARTNERS

RIGHTS OF A PARTNER
It must be understood that the following rights conferred upon a partner are subject to contract amongst
the partners:
1. Right to take part in the conduct of business;
2. Right to express his opinion on any matter. [but in case of difference of opinion regarding ordinary matters of
the business, he is bound by the majority decision. However, no change can be made in the nature of the
business without the consent of all the partners];
3. Right to have access to and inspect and copy any of the books, of the firm;
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4. Entitled to share equally in the profits;

5. A joint owner of the property of the firm including also the goodwill of the business;
6. Right to do, in an emergency, all such acts as are reasonably necessary to protect the firm from loss;
7. Entitled to claim interest @ 6 per cent per annum on any amount advanced by him beyond the amount of
capital that he agreed to subscribe;
8. Entitled to be indemnified by the firm in respect of liabilities incurred by him in the ordinary course of business;
9. Right not to be expelled;
10. Right to resist the introduction of a new partner. No new partner can be introduced into the firm unless all the
partners consent thereto;
11. Right to retire;
12. Right to carry on a competing business; and
13. Right as an outgoing partner, in certain cases to share subsequent profit.

Implied authority of a partner

 A partner's authority may be express or implied.
 It is "express", when it is fixed between the partners by mutual agreement. The agreement may, however, be
verbal or written.
 It is implied when the law impliedly gives certain powers to a partner, i.e., the law presumes that every partner
has power to do certain acts. The partners may however by a contract amongst them, restrict the implied
authority of any partner.
 Implied authority of a partner may be: -
1. Such acts which are common in the type of the business carried on by the firm; and
2. Such acts which are done by the partner in the usual course of business of the firm.
Ex –
In the case of a trading firm, a partner can borrow money on behalf of the firm [Saremal v. Kapurchand, 48
Bom. 176]. In the case of non-trading firm, there shall have to be a specific power to a partner to borrow for the
firm.
 Following are not the implied powers: -
1. submitting of a dispute relating to the business of the firm.
2. withdrawal of a suit or proceeding filed on behalf of the firm.
3. admission of any liability in a suit.
4. transfer of any immovable property belonging to the firm.

DUTIES OF A PARTNER

1. General Duties of Partners

 Partners are bound
(a) to carry on the business of the firm to the greatest common advantage,
(b) to be just and faithful to each other, and
(c) to render true accounts and full information of all things affecting the firm to any partner or his legal
representative.

2. Duty to Indemnify for loss caused by fraud.

3. To attend diligently to his duties in the conduct of the firm's business without any remuneration
4. If restrained by an agreement with other partners, a partner has a duty not to carryon any business other than
that of the firm while he is a partner.
5. If a partner carries on any business competing with that of the firm, he shall account for and pay to the firm all
profits made by him in that business.
6. To account for any profit, including secret profit, derived by a partner from any transaction of the firm, or from the
use of the property, or business connection of the firm or the firm name.
7. Not to assign his share.
8. To contribute equally to the losses of the firm. (The partners may however contract otherwise).
9. To indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm

Ex-
1) A and B were partner in a business. The firm was carrying on the business of supplying meat to the
Government. Subsequently it was found that B was also engaged with some other persons in supplying
meat to the Government, and earned personal profits. It was held that B was bound to account to the firm

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for profits so made by him. In this case, B earned personal profits by carrying on a business competing
with that of the business of the firm [Loch v. Lyman (1854) 4 Ir. Ch. 188]
2) A and B owed a partnership. A made considerable personal profits by making various contracts. It was
held that A was liable to account for such profits as these were made from the use of partnership property.
The reason for the same is that the partnership property belongs to all the partners. It is therefore the duty
of every partner to use the partnership property strictly and solely for the business of the firm. He cannot
use the same for his own use. [Gardner v. Muccutcheon, 4 Beas 534 (1842); 55 RR 154]
3) A, B and C were partners in a printing business. At the commencement of the partnership, all of them
purchased one printing machine each, for the common use of the firm business. In this case, the printing
machines are the partnership property as they are originally brought into the common stock of the firm.
4) A and B were carrying on a `tent house` business in partnership with each other. After sometime, they
purchased 1,000 chairs and 400 tables fro the expansion of their business. In this case, these chairs and
tables are the partnership property as they are purchased by the firm for the purpose of partnership
business.
5) A and B were partners in a transport business. A bought two trucks in his own name but with the money of
the partnership business. In this case, the trucks are the partnership property as they are purchased with
the money belonging to the firm.
6) A was the owner of a cotton mill. He entered into partnership with B and C. The business of the firm was
carried on at A`s mill. However, the value of assets of the mill was credited to A`s capital account and he
was also allowed interest on it. Subsequently, the mill was enlarged and improved by the firm and also a
new building was constructed on the land acquired by the firm. It was held that the mill had become the
property of the firm. [Robinson v. Ashtan 1875) 20 Eq. 25; 44 LIC Ch.

LIABILITIES OF A PARTNER
 Liabilities of a partner stem from not complying with his duties under the Partnership Act.
 Thus, a partner shall be liable
(i) for not carrying on the business of the firm to the greatest common advantage;
(ii) for not being just and faithful to other partners and
(iii) for failure to render true accounts and full information of all things affecting the firm to any partner or his
legal representative.
 Liable to indemnify the firm for any loss caused by his fraud or willful neglect in the conduct of the business of
the firm.
 Liable to account for any profit, including secret profit, derived by a partner from any transaction of the firm, or
from the use of the property or business connection of the firm or the firm name.
 Liable to contribute equally towards the losses of the firm. (This is subject to contract). .

Ex –
1) A and B were partners in a firm. They wee carrying on the business of buying and selling the wine. C, a
wine merchant, employed the firm of A and B for buying and selling the wine for him on the commission
basis. C gave a sum of money to the firm, for the purpose. A, the active partner of the firm, gave to C the
false accounts of purchase and sale of wine and misappropriated the money. It was held that the firm was
liable to pay the money to C. [Rapp v. Lathm 2 B & A 795; (11919) 21 RR 495]
2) A and B were partners as solicitors. C a client of the firm gave some money to A for investing in a specific
security. A did not invest the money but misappropriated it to his own use. C fled a suit against the firm for
the recovery of the money given to A. It was held that the firm was liable to make good the loss suffered by
C as it was in the ordinary course of solicitors business to receive money. [Blair v. Bromley (1847) 2 Ph
354]
3) A was carrying on his business under the name of `A, B & Co.` in fact, B was a manager in A`s business
and not his partner. C, a trader believing B to be the partner in the business, supplied certain goods to the
firm on credit. But A failed to pay the price of the goods. C filed a suit against both A and B for the
recovery of the price of the goods. It was held that B was also liable for the price. In this case, by
permitting his name to be used in the title of the firm, B had made a representation that he was a partner in
the firm. And thus, he was liable to those who gave credit to the firm on the faith of that he was a partner in
the firm.[Bevan v. National Bank Ltd. (1906) 27 TLR 65]

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4.6 DISSOLUTION OF PARTNERSHIP

[Sections 39-44]

What is dissolution
 The dissolution of firm means the discontinuance of the jural relation between all the partners of the firm. Thus
dissolution of firm amounts to the break up of the relation of partnership between al the partners.

 A firm may be dissolved:

1. By Mutual Agreement
 A firm may at any time be dissolved with the consent of all the partners, or in accordance with a contract
between the partners.

2. By Notice
 Where the partnership is at will, it may be dissolved by giving notice in writing to the other partners of his
intention to dissolve the firm.
 The notice must
(1) state the intention to dissolve the firm and
(2) be in writing.
 The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is
mentioned then from the date of communication of the notice. Filing a suit for dissolution is not a notice as
required by the Section. The date of dissolution in such a case will be the date of passing of the
preliminary decree for dissolution.6
Ex –
A and B were partners in a firm. The partnership deed provided that the firm can be terminated (dissolved) ` by
mutual agreement only`. After sometime, A gave a notice of dissolution to B. It was held that the firm cannot be
dissolved by the notice of dissolution. The reason for the same is that in this case, firm is not `at will` as the mode
of dissolution is provided in the partnership deed itself. [Moss v Elphic (1910) 102 LT 639]

3. Dissolution By Operation of Law

 Dissolution of partnership by operation of law, also called as compulsory dissolution of firm, results

Grounds for dissolution by court

 If a partner has become of unsound mind.
 Permanent incapacity of a partner.
 Misconduct of a partner affecting the business.
 Willful and persistent disregard of partnership agreement by a partner.
 Transfer of interest or share by a partner.
 Where the business cannot be carried on except at loss.
 Just and Equitable, e.g., deadlock in management.
Ex –
A and B were carrying on a banking business in partnership. A had committed adultery with several women in the
city and his wife has left him on this ground. B applied to the court for the dissolution of the firm on this ground. But
the court rejected B`s application and held that the firm cannot be dissolved on this ground. The reason for the
same is that the misconduct of A does not have any adverse effect on their business as bankers [Snow v Milform
(1868) 18 LT 142]

4. By the Happening of Certain Contingencies (also called Optional Dissolution)

 Partnership will stand dissolved on the happening f any of the following events:
(a) if the firm is constituted for a fixed term; on the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings; on the completion thereof;
(c) on the death of a partner;
(d) on the adjudication of a partner as an insolvent.
Ex –
A and B were carrying on the business of importing sugar from certain countries. Subsequently, the import of
sugar was banned by the Government. In this case, the firm is dissolved as the business of the firm has become
unlawful

LECTURES BY PROF. S N GHOSH

IIPM 63 CH. – 4 PARTNERSHIP ACT

5. Dissolution by Court
 At the suit of a partner, the court may dissolve a firm on any of the grounds mentioned above.

.
CONSEQUENCES OF DISSOLUTION

1. Right to enforce Winding-up

 On a partnership being dissolved, any partner or his representative has a right against the other partners to
have
(1) the property of the firm applied in payment of debts of the firm and
(2) to have the surplus distributed amongst the partners or their representatives according to their
respective rights.
 The right of a partner is often called a partner's lien.
 The word "lien, as used here is not to be interpreted in its technical sense, it is only a convenient mode of
referring to the right" [Rabu v. Gokuldas, 1930 Mad. 393].

2. After dissolution, a partner cannot bind the firm in any case, except:
(a) insofar as it may be necessary to wind up affairs of the firm, and
(b) to complete transaction begun but unfinished at the time of dissolution.
A partner who has been adjudged an insolvent cannot bind the firm in any case after the adjudication has been
passed.

3. If any partner earns any profit from any transaction connected with the firm after its dissolution, he must share it
with the other partners and the legal representatives of the deceased partners.
Further, where a partner has paid a premium on entering into partnership for a fixed term, and the firm is
dissolved before the expiration of that term, he shall be entitled to repayment of the premium or of such part
thereof as may be reasonable (regard being had to the terms and to the length of time during which he was a
partner).
Exception
(I) the dissolution is due to the death of a partner; or
(2) to his own misconduct; or
(3) the dissolution is in pursuance of an agreement containing no provision for the return of the pre mium or any
part of it.

Restraint of trade by Buyer of Goodwill

Partners may, upon or in anticipation of dissolution of the firm, make an agreement that some or all of them will
not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an
agreement shall be valid if the restrictions imposed are reasonable.

SETTLEMENT OF ACCOUNTS
 Usually the "Deed of partnership" contains an accounting clause according to which the final accounts between
the partners are settled.
 Where there is no such agreement or no such provision is provided, the Partnership Act states :-
1. Losses, including losses on capital must be paid, first from profits, next out of capital and lastly, if
necessary, by contribution of each partner in proportion to his share in profits;
2. The assets of the firm, including sums contributed by partners to make up deficiency of capital shall be
applied:
(a) in paying debts of the firm to outsiders;
(b) in paying each partner rateably, for advances made by him to the firm as distinct from capital;
(c) in paying each partner, ratebly, amount due for capital contribution; and
(d) the residue in paying each partner in accordance with his share in the profits of the firm.
3. If a partner becomes insolvent or otherwise cannot pay his share of the contribution, the solvent partners
must share rateably the available assets (including their own contribution to the capital deficiency) i.e., the
available assets will be distributed in proportion to their original capital.
This is called the Rule in Garner v. Murray Gift. 442. 12. (1904) 1 Chapter 57.
Limitation - The period for suit for accounts on dissolution is 3 years. If a partner fails to bring such a suit
against one partner within the period, the whole claim is barred against the remaining partners also.

LECTURES BY PROF. S N GHOSH

IIPM 64 CH. – 4 PARTNERSHIP ACT

Payment of Partnership Debts

 Where there are joint debts from the firm, and also separate debts due from any partner – the property of the
firm shall be applied as follows: -
(i) payment of the debts of the firm, and if there is any surplus, then
(ii) the share of each partner shall be applied in payment of his separate debts or paid to him.
 The separate property of any partner shall be applied first in the payment of his separate debts and the surplus
(if any) in the payment of the debts of the firm.

Sale of Goodwill after Dissolution

 The goodwill shall be included in the assets and it may be sold either separately or along with other property of
the firm. The partnership agreement may contain different provision.
 A partner may carry on a business competing with that of the buyer and he may advertise such business.

Ex-
A, B and C were partners in a firm. They contributed the capital Rs. 40,000, Rs. 20,000 and Rs. 5,000 respectively
making a total capital of Rs. 65,000. They agreed to share equally the profits and losses of the firm. On dissolution
of the firm, it was found that after satisfying the outside debts and liabilities of thee firm, the assets were only Rs.
20,000. In this case, the deficiency of capital is Rs. 45,000 (Rs. 65,000-Rs.20, 000). This being the losses, each
partner has to contribute Rs. 15,000 to make up the deficiency. After this is done, the assets then available are Rs.
65,000 arrived at as Rs. 20,000 (assets after paying the outside liabilities)+ Rs. 45,000 (the contribution made by
the partners). This will be distributed among the partners according to the contribution towards the capital. So that
each will suffer a total loss of Rs. 15,000. However, in actual practice it will not be necessary for A and B to pay Rs.
15,000 each in cash. But the matter will be worked out on the basis of notional adjustment. In this adjustment, C
whose capital was only Rs. 5,000. Now out of Rs. 30,000 (Rs. 20,000 of assets and Rs. 10,000 paid by C), A and
B will get Rs. 25,000 and Rs. 5,000 respectively. In the way the total loss suffered by A B and C will be Rs.
15,000 each.

LECTURES BY PROF. S N GHOSH