INDIAN PARTNERSHIP

ACT,1932
UNIT - IV
INTRODUCTION:

Partnership results from a contract and is governed by the Partnership Act 1932. It contains 74
sections.

The partnership is also governed by the general provision of the Indian Contract Act on such
matters where the Partnership Act is silent.

The rules of contract regarding the capacity to contract, offer, acceptance, etc will also be
applicable to the partnership. But the rules regarding the status of minors will be governed by
the Partnership Act, of 1932.

The partnership is one of the specific contracts which were a part of the Indian Contract
Act,1872. In 1930, however, the provisions relating to partnership contracts were repealed and
a separate Act called the Indian Partnership Act, 1932 was passed which is in force till today.
It extends to the whole of India. t has come into force on the 1st day of October 1932.
The partnership is formed as a result of an agreement between two or more persons who have
agreed to share the profits of a business carried by all or any of them acting for all. Hence the
general principles of law of contracts and agency (as contained in the Indian Contract
Act,1872) also apply to partnerships except where the Act specifically provides to the
contrary.

The Act mainly contains the provisions relating to the formation of partnership the rights,
duties and liabilities of partners, and the procedure for its and various types of partners
including the position of a minor partner the procedure for its dissolution, etc.
Definition:

Sec 4 defines “partnership”, “partner”, “firm” and “firm name”:

“Partnership” is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.

Persons who have entered into a partnership with one another are called individually
“partners”

and collectively “a firm”,

and the name under which their business is carried on is called the “firm name”
Therefore, follows that 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) Agreement between the parties. An agreement may be oral or in writing. It may be
express or implied.

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

All these essentials must co-exist before a partnership can come into existence.
NATURE OF A PARTNERSHIP FIRM:

A partnership firm is not a person in the eyes of law [except under Section 2(31) of the Income
Tax Act, 1961].
It has no separate legal entity apart from the partners constituting it. Thus, firms themselves
cannot enter into a contract for partnership though their partners can.

According to Section 6- Test to determine the Partnership

"In determining whether a group of persons is or is not a firm, regard shall be had to the real
relation between the parties as shown by all relevant facts taken together." The real relation
between the partners can be ascertained as under:
i. If there is an express contact: The real relation is ascertained from the terms of partnership
contact.
ii. If there is no express contract: The real relation is ascertained from all the relevant factors
such as contract of parties, books of accounts, statement of employees etc.
Mode for determining the existence of a partnership: Sec 5 and 6

Section 5 lays down that the relation of partnership arises from contract and not from status
Section 6 is based on the principle laid down in an important case of Cox v. Hickman (1860).
The analysis of this section reveals that the following is the true test of partnership:
(a) The partnership is determined from the real relation between partners and such relation
must show the existence of mutual agency relationship, and
(b) The sharing of profit is prima facie evidence but not a conclusive test of partnership.
A group of persons shall be regarded as a partnership if the real relation between the partners
shows that all essential elements of partnership are present.

The two cases where the partnership relation does not exist:
• Joint owners of some property sharing profits or gross returns arising from the property
(Sec 6 explanation 1).
• Persons sharing the profits but not having mutual agency (Sec 6 explanation 2). The sharing
of profits is prima facie evidence.
• Money lender (who has lent money to the firm) who receives a share of profits:
• Widow or child of a deceased partner sharing profits
The death of the partner the widow or child of the deceased partner may be given a share of
profits according to terms and conditions of the contract. Merely sharing profits such widow
or child doesn’t become a partner in the firm.

Holme v. Hammond, in this case, court, held that executors of a deceased partner who shares
profit had not become partners and therefore they couldn’t make liable.

• a servant or an agent who receives a share of profits as part of his remuneration.

• The seller of the goodwill sharing the profits. seller of goodwill also may be entitled to the
share in the profits in the form of consideration for the sale of goodwill, such person doesn’t
become a partner.
Sharing of Profits is not the only evidence for partnership / who are not partners?
• Members of HUF carrying on family business together are not partners.
• Burmese Buddhist husband and wife carrying on a business.
Example:

1. A joint owner of a property sharing its return with the other owner does not make joint
owners partners.

2. A a trader, owed money to X, Y & Z. He agreed to pay X Y & Z out of the profits of his
business. Even if X, Y, and Z will get their money from the property of A, it does not make
them the partner of A.

MAXIMUM LIMIT ON NUMBER OF PARTNERS:

• In case of a partnership firm carrying on a banking business-maximum10 members

• In case of a partnership firm carrying on any other business-maximum 20 member.
• If the number of partners exceeds the aforesaid limit, the partnership firm becomes an
illegal association.
RELATION OF PARTNER TO ONE ANOTHER: Sec 9

The relation of partners to one another is of the utmost good faith. It provides that every
partner is an agent of each other, therefore, the contract entered by one of the partners will
bind all the partners. Thus, the relation of partners to one another is based on mutual trust and
confidence.
• Bound to carry on the business – mutual agency(Sec 12)
• To be just and faithful to each other (uberrrimae fidei)
• To render true accounts
• render full information.

Bentley v. Craven, There was a partnership in a sugar refinery firm. One of the partners was
skilled in buying and selling sugar. Therefore, he was entrusted with the task of buying and
selling sugar. However, the partner sold the sugar from his own stock and thus, gained profit.
When the partners discovered this fact, they brought an action to recover profits earned by the
partner. It was held by the court that the partner can not make secret profits and therefore, the
firm was held entitled for profits earned by the partner.
 PARTNERSHIP AND CO-OWNERSHIP
Co-ownership means joint ownership of some property. The two or more persons who own some property jointly
arc called co-owners. As per Explanation I to Section 6, the joint owners of some property sharing profits or gross
returns arising from the property do not become partners.
PARTNERSHIP CO-OWNERSHIP
It arises from an agreement. It may or may not arise from agreement
It is formed to carry on a business. It may or may not involve carrying on a business
It involves profit or loss It may or may not involve profit or loss.
Partners have a mutual agency relationship. Co-owners do not have a mutual agency relationship.
The persons who form partnership are called partners The persons who own some property jointly are called co-
owners.
The maximum limit of partners is 10 for a banking business There is no maximum limit of co-owners
and 20 for any other business.
A partner cannot transfer his share to a stranger without the A co-owner can transfer his share to a stranger without the
consent or other partner consent of other co-owners
A partner has no right to claim partition of property but he can A co-owner has the right to claim partition of property.
sue the other partners for the dissolution of the firm and
accounts.
A partner has a lien on the partnership property for expenses A co-owner has no such lien.
incurred by him on behalf of the firm.
PARTNERSHIP AND HINDU UNDIVIDED FAMILY (HUF)

According to the Hindu Law, "Hindu undivided family is a family which consists of all persons
lineally descended from a common ancestor and includes their wives and unmarried daughters."
Three successive generations in the male line (son, grandson, and great-grandson) who inherit the
ancestral property are called 'Coparceners’.

The property which a man inherits from any of his three immediate mule ancestors (i.e., his
father, grandfather, and great grandfather), is called 'ancestral property.
 PARTNERSHIP HINDU UNDIVIDED FAMILY
It arises from an agreement It arises by status or operation of law
It is governed by the Indian Partnership Act. It is governed by customary practice
1932.
Death of the partners dissolves the partnership Death of a member does not dissolve the family
A new partner can be admitted only with the By birth member will be added to the family
permission of the other partners
Partners have authority to borrow, and bind Only the manager has authority to borrow and
other partners by their acts bind the other members
All partners are personally liable for the debts Only the manager is personally liable for the
of the firm debts of the family firm.
The liability of partners is unlimited The liability of members of a joint Hindu
family (except the Karta) is limited
Minor cannot be a partner(although he can be A minor can be a member of joint Hindu family.
admitted to the benefits of a partnership)
 Partnership and Company
A partnership is not a distinct legal person A company is a distinct legal person
Creation of partnership is a matter of agreement between Creation of a company involves legal formalities
the parties
A partner cannot transfer his interest without the consent Shares of the public company is freely transferable
of other partners
Every partner is an agent of the other partners A shareholder is not the agent of the other shareholders
A partner’s liability for debts of the firm is unlimited A shareholder’s liability is limited
A partner cannot contract with his firm A shareholder can contact with his company
Partners can make private arrangements between Arrangements in regard to companies are regulated by
themselves law
The maximum number of partners can be 20 and 10 in There is no maximum number of shareholders laid down
case of banking business by the law in a company
Death or retirement of a partner dissolves a firm Death or retirement of shareholders does not dissolve the
company
Property may be the common property of partners Property belongs to the company and not to its members
Restrictions among partners do not affect third party Restrictions contained in MOA and AOA of a company
affects third party.
A firm cannot sue and be sued in its own name A company can sue and be sued in its own name
Decree against a firm can be executed against the Decree against a company cannot executed against the
partners shareholders
Registration is optional Registration is compulsory
Each partner represents the other partners so as to bind There is no agency relation-ship among members of a
and be bound to others. company as they do not bind each other with their
actions.
KINDS OF PARTNERS

1. Working partner or Active partner

• Active partner contributes capital and also takes an active part in the management of
the firm.
• He bears unlimited liability for the firm’s debts.
• He is known to outsiders.
• He shares the profits of the firm.
• He is a full-fledged partner.

2. Sleeping or dormant partner

• Only contributes capital;
• Does not take an active part in the business;
• He shares in the profits or losses of the firm;
• His liability is unlimited;
• He is not known to the outsiders.
• A sleeping partner can retire from the firm without giving any public notice
3. Secret partner
• Secret partner contributes capital;
• Takes an active part in the business;
• He shares in the profits or losses of the firm;
• His liability is unlimited;
• his connection with the firm is not known to the outside world.

4. Limited partner
• The liability of such a partner is limited to the extent of his share in the capital and
profits of the firm.
• He does not take an active part in the business;
• The firm is not dissolved in the event of his death, lunacy, or bankruptcy.
5. Partner in profits only
• Partners in profit only share in the profits of the firm but not in the losses;
• His liability is limited;
• He is not allowed to take an active part in the business;
• Such a partner is associated with his money and goodwill.

6. Nominal Partner
• Nominal partner only lends his name and reputation for the benefit of the firm.
• He represents himself or knowingly allows himself to be represented as a partner
• Such a type of partner neither contributes capital nor takes part in the management
of the business.
• He does not share in the profits or losses of the firm.
• He becomes liable to outsiders for the debts of the firm.
Minor partner Sec 30
• With the consent of all the partners for the time being
• He is entitled to the benefits of the partnership as agreed
• He is entitled to agreed shares of the property
• He will be admitted through an agreement
• The agreement executed through his guardian with other partners
• He is not liable for the losses of the firm
• Right to have access to the books of accounts
RIGHTS OF A PARTNER SEC 12 AND 13

The mutual rights and duties of the partners of a firm depend upon the particular terms of their
partnership deed. Subject to such agreement, the law considers the following rights on the
partner:
1. Right to take part in the business (sec 12(a))
2. Right to have access to the books (sec 12(d))
3. Majority rights (sec 12(c))
4. Right to profits (sec 13(b))
5. Right to interest (sec 13(c) and (d))
6. Right to indemnity (sec 13(e))
7. No right to remuneration (sec 13(a))
Duties of partners

• To act in good faith.

• To Indemnify for Loss.
• To Attend to his duties diligently.
• Not to Claim Remuneration.
• To Indemnify for Willful Neglect.
• To Share Losses.
• To Hold and Use Property of the Firm.
• To Account for Private Profits.
• To Account for the Profits of a Competing Business.
• To Act within Authority.
• Not to Assign his Rights.
Admission of partners Sec 30 and 31

With the admission of a new partner, there is a reconstitution of the partnership firm and all the
partners get into a new agreement for carrying out the business of the firm. As per
the Partnership Act, 1932, a new partner can be admitted into the firm with the consent of all
the existing partners, unless otherwise agreed upon.

The following conditions led to the addition of a new partner:

• When the firm is in an expansion mode and requires fresh capital.

• When the new partners possesses expertise which can be beneficial for the business
expansion of the firm.
• When the partner in question is a person of reputation and adds goodwill to the firm.
Rights of newly introduced partner

When a new partner is admitted into the firm, the structure of the firm undergoes
reconstruction and a new agreement is made with him for carrying on the firm’s business.

Upon admission, a new partner acquires the following rights:

1.Right to share the assets of the partnership firm; and
2.The right to share the profits of the partnership firm.

Liability of a new partner

subject to any expressed or implied agreement, a new partner does not become liable for any
act of the firm done prior to his introduction, merely because of his introduction as a partner.
Retirement of partner sec 32

According to Section 32(1) of this Act, a partner of a partnership firm may retire:

• With the consent of all the other partners of that partnership firm,
• In accordance with an expressed agreement in this regard by the other partners of the
partnership firm, or
• In case of partnership at will, by serving written notice to all the other partners of the firm
conveying his intention of retiring.
However, a retired partner is not liable to any third party who deals with the firm lacking the
acknowledgment of his partnership.

In Vishnu Chandra v. Chandrika Prasad; the Supreme Court held that a partner is capable
of retiring from the ongoing partnership without dissolving the firm. Also, a partner’s right to
retirement has to be determined from the agreement terms.
Rights of an outgoing or retiring partner

Section 36 of the Indian Partnership Act enumerates the rights of an outgoing or retiring
partner.
According to this section, an outgoing partner may continue a business competing against that
firm and may also advertise such business, but depending upon contract to the contrary, he may
not:

• use the name of that firm,

• claim himself as a representative of the firm’s business, or
• solicit the firm’s customers, dealing with the firm, prior to his cessation as a partner of that
firm.

According to Section 37; during retirement, the retiring partner can reclaim his or her capital
share contributed to the firm through the settlement of an account with the continuing partners.
Liability of an outgoing or retiring partner

• According to Section 32(2); a retiring partner may be discharged from any liability towards
any third party or for any act of the firms done prior to his retirement based upon any
agreement on his part with that third party and other partners of the reconstituted firm. Also,
such an agreement may be implied by a deal between such a third party and the reconstituted
firm succeeding in his acknowledgment of the partner’s retirement.

• According to Section 32(3); until any public notification is made in the promulgation of such
retirement, the retired partner along with the other partners of the firm continue to be liable
towards the third parties for any act done by them which would have been considered an act
of the done if had been done prior to the retirement.

• According to Section 32(4); the aforementioned public notification can be made by the
retired partner or any partner of the reconstituted firm.
Expulsion of a partner

According to Section 33, a partner may not be expelled from a firm by the majority of the
partners, except in the exercise of bonafide powers conferred through a contract between the
partners in the interest of the firm.

Also, an expelled partner is subject to the same rights and liabilities as if he were a retired
partner.

However, in case of expulsion against the provision of Section 33, such expulsion shall be
deemed irregular and shall be ineffective against the expelled partner. In such a situation, the
expelled partner is entitled to his reinstatement as a partner or claim a refund for his or her
share of capital or profits in the firm.
Insolvency a partner

According to Section 34 of this Act; when a partner has been adjudicated as an insolvent, he
thereby ceases to be a partner of that firm, commencing from the date of the adjudication order,
irrespective of the dissolution of the firm.

In case a firm is not dissolved because of some contract between the partners after a partner’s
insolvency, the estate of the insolvent partner is not liable for any act of the firm and similarly,
the firm is not liable for any act of the insolvent done after the date of the adjudication order.

Liability of estate of the deceased partner

According to Section 35 of this Act, in case of the existence of a contract preventing the
dissolution of a firm after the death of one of the partners, then the estate of the deceased
partner shall not be liable to any act of the firm done in succession to his death.
DISSOLUTION OF FIRM SEC 39 T0 55

Section 39 of the Indian Partnership Act, 1932 defines the dissolution of the partnership firm. It
defines the dissolution of partnership between all the partners of a firm is called the dissolution
of the firm.

The Indian Partnership Act, 1932 defines dissolution in different ways. Section 40 to 44 states
dissolution of the partnership firm.

Dissolution of a partnership firm can be done in 2 ways:

• Dissolution without the intervention of the court(section 40-43)
• Dissolution by the Court (Section 44)
Section 40 – Dissolution by agreement

A firm may be dissolved with the consent of all the partners or in accordance with a contract
between the partners. The firm may be dissolved by the consent of all the partners or by
entering into an agreement to dissolve the firm. This is one of the simple methods of dissolution
of a partnership firm and intervention of the court is not required in this.

Section 41-Compulsory Dissolution

A firm may be dissolved by the following point:

• Unlawful business: in case any unlawful activities are happening in the business of the
firm to be carried on or for the partners to carry it on in partnership, the firm may be
dissolved. Unlawful activities like selling of drugs, trading with alien countries, dealing
in illegal products etc.
Section 42 – Dissolution on the happening of certain contingencies

• Expiry of fixed-term
• If the firm was formed for a certain number of task
• Dissolution can also take place with the death of a partner.
• Adjudication of a partner as an insolvent.

Section 43- Dissolution by notice of partnership at will

Dissolution where the partnership is at will of the firm, which may be dissolved by any partner
by giving notice to all the other partners, his intention to dissolve the firm.

The firm is dissolved as a from the date mentioned in the notice as the date of dissolution or if
no date is mentioned , as from the date of the communication of the notice
SEC 44- DISSOLUTION BY THE COURT

the Court may dissolve a firm on the suit of a partner on any of the following grounds:

• Insanity/Unsound mind
If an active partner becomes insane or of an unsound mind, and other partners file a suit in the
court, then the court may dissolve the firm.
Two things to remember here:
• The partner is not a sleeping partner
• The sickness is not temporary

• Permanent Incapability
If a partner becomes permanently incapable of performing his duties as a partner, and other
partners file a suit in the court, then the court may dissolve the firm. Also, the incapacity
may arise from a physical disability, illness, etc.
• Misconduct

When a partner is guilty of conduct that is likely to affect prejudicially the carrying on of the
business and the other partners file a suit in the court, then the court may dissolve the firm.
Further, it is not important that the misconduct is related to the conduct of the business. The
court looks at the effect of the misconduct on the business along with the nature of the
business.

• Persistent Breach of the Agreement

A partner may willfully or persistently commit a breach of the agreement relating to

• the management of the affairs of the firm, or
• reasonable conduct of its business, or
• conduct himself in matters relating to a business that is not reasonably practicable for other
partners to carry on the business in partnership with him.
• Transfer of Interest
A partner may transfer all his interest in the firm to a third party. Now, if the other partners file
a suit against him in the court, then the court may dissolve the firm.

• Continuous/Perpetual losses
If a firm is running under losses and the court believes that the business of the firm cannot be
carried on without a loss in the future too, then it may dissolve the firm.

• Just and equitable grounds

The court may find other just and equitable grounds for the dissolution of the firm. Some such
grounds are:
• Deadlock in management: It occurs, when two process competing for two resources in
opposite order. It is a situation in which two computer programs sharing the same resources
are effectively preventing each other from accessing the resource resulting in both programs
ceasing to function.
• Partners not being in talking terms with each other
• Gambling by a partner on the stock exchange.
Registration of Firm

Under Section 58 of the Indian Partnership Act, 1932, a firm may be registered at any time (not
merely at the time of its formation but subsequently also) by filing an application with the
Registrar of Firms of the area in which any place of business of the firm is situated or proposed
to be situated.

Sec 58(1): Application of registration includes:

• The firm name
• The place or principal place of business of the firm
• The names of any other places where the firm carries on the business
• The date when each partner joined the firm
• The names in full and permanent addresses, of the partners and
• The duration of the firm
The statement shall be signed by all the partners or by their agents specially arganised in this
behalf

Sec 58(2): each person signing the statement shall verify it in the manner prescribed.
Sec 58(3):
The firm name should not contain the following words, namely:- Crown,
Emperor,Empress,Empire, King, Queen, Royal or words expressing or implying the section

Section 59: when the Registrar is satisfied that the provisions of sec 58 have been duly
complied with, he shall record an entry of the statement in the Register called register of
Firms, and file the statement.

Section 60: Recording of alterations in firm name and Principal place of business.

Section 61: Noting of closing and opening of branches.

Section 62: Noting of changes in names and addresses of partners

Section 63: Recording of changes in and dissolution of a firm/ recording of withdrawal of

minor
Sec 69: Effect of Non-registration

• No suit in a civil court by the firm or other co-partners against any third party
• No relief to partners for set-o­ff of claim
• An aggrieved partner cannot bring legal action against other partner or the firm
• A third party can sue the firm