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Business Law & Ethics PDF Notes

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371 views11 pages

Business Law & Ethics PDF Notes

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dtula0259
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We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |1

The Indian Partnership Act, 1932


Introduction | Types of Partners & Partnership | True
Test of Partnership | Legal Status of Minor
1.1
Introduction

 The law relating to partnership was earlier contained in Chapter XI of the Indian contract Act, 1872.

 Later on, all the provisions relating to partnership separated

into a new act, after receiving the assent from Governor-

General on 8th April,1932.

 This act came into force from 1st October, 1932, except

Section 69.

 The Partnership Act is nothing, it is just an extension of law of agency.

What is Partnership?
As per Section-4, Partnership is the relation between persons who have agreed to share the profits

of a business carried on by all or any one of them acting for all.

Thus a partnership consists of three essential elements:

(i) It must be a result of an agreement between two or more persons.

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

(iii) The business must be carried on by all or any of them acting for all.

All these essentials must coexist before a partnership can come into existence.

Types of Partnership

1. Partnership at will:

 In case of partnership at will the duration of partnership is not fixed or determined in a

contract made between partners.

 Such a partnership can be dissolved by any partner giving notice in writing to all the other

partners of his intention to dissolve the partnership.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |2

2. Specific Partnership:

This partnership is made for a fixed time period and after the completion of such time period, such

partnership firm will dissolve.

3. Particulars Partnership:

This partnership is created for completing a particulars task or contract or for a particular venture

or undertaking.

4. General Partnership:

In case of General Partnership, the Liability of all the partners is unlimited. Which means the

Creditors of such partners can recover the dues in full, from any of the partners by attaching their

personal property, if firm’s assets are found to be inadequate to pay off its debts. In India, all

Partnership are of General Partnership.

But in case of minor, the liability of minor in case of General partnership will be limited up-to the

amount of his share in capital and profit sharing.

True Test of Partnership

The Indian Partnership Act 1932 clearly defines a partnership. But how can we decide if a given

association of persons is truly a partnership or not?

So the Act has also given us a litmus test to determine if a firm is a partnership. This is known as the True

Test of a Partnership.

The true test of a partnership is a way for us to determine whether a group or association of persons is

a partnership firm or not. It also helps us recognize the partners of the firm and separate them from

the third parties.

Let us take a look at the three important aspects of a true test of a partnership, namely

agreement, profit sharing and mutual agency.

1] Agreement/Contract between Parties

For there to be a partnership between two or more persons there has to

be an agreement of partnership between them. The partnership

cannot arise family status or any operation of law. There has to be a

specific agreement between the partners.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |3

Author Note
So if family members of a HUF are running a business together this is not a partnership. Because

there is no agreement of partnership between them. The members of HUF are born into the HUF,

so they cannot be partners.

2] Profit Sharing

Sharing of profits is an aspect of the true test of a partnership.

However, profit sharing is only a prima- facie evidence of a

partnership. The Act does not consider profit sharing as a

conclusive evidence of a partnership.

This is because there are cases of profit sharing that are still

contradictory to a partnership. Let us see some such cases:-

 Sharing of profits/ gross receipts from a property that two

or more persons own together or have a joint interest in is not a partnership

 A share of profits given to an agent or servant does not make him a partner

 If a share of the profit is given to a widow or child of a deceased partner does not make them

partners

 Part of the profits shared with the previous owner as a part of goodwill or as a form of

consideration will not make him a partner.

3] Mutual Agency

This is the truest test of a partnership, it is the cardinal principle of a partnership and treated as the

“Conclusive Evidence”.

 So if a partner is both the principle as well as an agent of

the firm we can say that mutual agency exists. This means

that the actions of any partner/s will bind all the other partners

as well.

 So whenever there is confusion about the existence of a

partnership between people we check for the presence of a mutual agency.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |4

 If such an agency exists between the parties who run a business together and share

profits it will be deemed that a partnership exists.

BASE DEFINER:-
A, B and C are Partners in a Firm. D, an outsider, deals with the Firm through A. As between A, B and C, A
is the agent of B and C. As such A, B, and C can all sue D. D can also sue A, B and C.

MINOR’s POSITION IN PARTNERSHIP

A minor cannot become a partner in partnership firm but he can be admitted for the benefits of the

firm with the consent of all the partners.

Rights:

 A minor has a right to claim his agreed share of the profits in

firm.

 Minor can access and inspect and can take copy of the

accounts of the firm.

 He can sue the partners for accounts or for payment of his

share but only when severing his connection with the firm, and

not otherwise.

 On attaining majority, minor has a right to decide within 6 months to become a partner or not

to become a partner and if he decide to become a partner in partnership firm then his share in profits

and loss will remain same.

Liabilities:

 The liability of minor is limited up to the extent of his share in profits of the firm.

 Minor has no personal liability for the debts of the firm incurred during his minority.

 Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests

in the Official Receiver/Assignee.

 Minor has to decide within 6 months on attaining the majority that whether he wants to become

a partner in a firm or not and if he does not decide then he automatically becomes the partner in

the firm.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |5

 If a minor becomes partner in a firm then he shall be personally liable to third parties for all acts

of the firm done since he was admitted to the benefits of partnership

 His rights and liabilities continue to be those of a minor up to the date of giving public notice.

His share shall not be liable for any acts of the firm done after the date of the notice.

TYPES OF PARTNERS

1. Active/Actual/Ostensible Partner: It is a person:

 Who has become a partner by agreement, and

 Who actively participates in the conduct of the partnership.

 Active partner is required to give a public notice of his retirement.

2. Sleeping or Dormant partner: It is a person :

 Who is a partner by agreement, and

 Who does not actively take part in the conduct of the partnership business

 Dormant Partner share profits and losses and is also liable towards third party.

 Dormant partner is not required to give public notice of his retirement.

3. Nominal Partners: Nominal Partner is one who lends his name to the firm.

 He does not share the profits of the firm and does not have any real interest in the firm.

 He does not make any investment in the firm and also does not take part in the conduct of the

business.

 However, nominal partner is liable toward third parties for all acts of the firm.

4. Partner in profits only:

 This partner is entitled to share the profits of the firm but he is not liable to share the losses of

the firm.

 Such partner is liable to the third parties for all acts of the profits only.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |6

5. Sub-Parmer: When a partner agrees to share his share of profits in a partnership firm with an

outsider, such an outsider is called a sub-partner.

 Sub-partner is not the partner of the partnership firm but he is the partner of a partner.

 Such sub-partner does not hold any rights against the firm nor liable for the debts of the firm.

6. Incoming Partner: A new partner in an existing firm is called incoming partner.

 New partner can be admitted into the firm with the consent of all the partners.

 Incoming partner is not liable for any act of the firm done before his admission as a partner.

7. Outgoing partner: A retiring partner is called outgoing partner.

 Retiring outgoing partner remains liable towards third parties until public notice of his

retirement is given.

8. Partner by Holding out or Estoppel: When a person is actually not a partner of a partnership firm

but he represents himself as a partner through his conduct then such person is called as partner by

holding out or estoppel.

When a person (i) represents himself, or (ii) knowingly permits himself, to be represented as a

partner in a firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the

faith of such representation has given credit to the firm.

BASE DEFINER:-1

X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A

remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After

expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit

against X and A for the recovery of price. Here in the given case, A, the Manager is also liable for

the price because he becomes a partner by holding out.

Prof. NITIN BHARDWAJ


BUSINESS LAW & Ethics The Indian Partnership Act,1932 Page |7

Author Note
If a partner retire form a partnership firm without giving the notice of his retirement then such

partner is liable as a partner by holding out towards creditors until public notice of his retirement

is given.

BASE DEFINER:-1
A partnership firm consisting of P, Q, R and S. S retires from the firm without giving public notice
and his name continues to be used on letterheads. Here, S is liable as a partner by holding out to
creditors who have lent on the faith of his being a partner.

Prof. NITIN BHARDWAJ

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