Partnership act- Manik Chaubey.pdf…………..

Business laws
Indian Partnership Act, 1932

Introduction to Topic
 One of the forms in which business can be carried on is
‘partnership’, where two or more persons join together to form
the partnership and run the business. In order to govern and
guide partnership, the Indian Partnership Act, 1932 was
enacted.
 Since public at large would be dealing with the partnership as
customers, suppliers, creditors, employees or any other
capacity, it is also very important for them to know the legal
consequences of their transactions and other actions in relation
with the partnership.

 The law relating to partnership was in
sections 239 to 266 of the Indian contract
Act 1872. These sections have been
replaced to other act name Indian
Partnership Act.
 It came into the force on 1stOctober, 1932
except section 69, which came into the
force one year later.

 This act is specially meant for
governing business of partnership in
India. The act mainly contain
necessary provisions relating to the
formation of the partnership, the
rights, duties and liabilities of partners
and the procedure of its dissolution.

Features of Partnership Act, 1932
 Indian Partnership Act, 1932 is a Central Act. (made
by Parliament)
 This Act deals with special type of contract.( contract
of partnership)
 Provisions regarding contract of partnership were
earlier contained in the Indian Contract Act, 1872.
 This Act extends to the whole of India except the
state of Jammu and Kashmir.
 This Act came in to force on 1.10.1932, except
section 69 which came into force on the 1st Day of
October, 1933.

Meaning & Definition of
‘Partnership’

 Simply speaking, a partnership is an
association of persons who conduct some
business activity and agree to share
profits earned out of it.
 Acc to Indian Partnership Act:
Partnership is the relation
between two or more persons who have
agreed to share the profit of a business
carried on by all of them or any of them
acting for all.

Thus, Partnership is the name of legal
relationship between/among persons who
have entered in to the contract of
partnership.

Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’
 Section 4 of Indian Partnership Act, 1932
provides that:
Persons who have agreed into partnership with
one another are called individually
‘PARTNERS’ and collectively ‘FIRM’ and the
name under which their business is carried on is
called the ‘FIRM NAME’
“Partnership is thus, invisibility which binds the
partners together and firm is the visible form of
those partners who are thus bound together”.

Maximum Limit on Number of Partners
 Section 11 Companies Act provides that the
maximum no. of persons, a firm can have:
In case of partnership firm carrying on a banking business 10
In case of partnership firm carrying on any other business 20
If the number of partners exceeds the limit, the
partnership firm becomes an illegal association.
If an association of persons or firm having members or partners
exceeding the Above limit will not be an illegal association if that firm’s
objective is not to earn profit.

Two or more
persons
An agreement
Sharing of profit
Business
Mutual agency
Essential elements of Partnership
For forming a partnership the above elements should be present. Though
each element is important.
For explanation go through the next slides:

Essentials of Partnership
 At least two person
 Agreement or Contract
 Business- A partnership is formed for the
purpose carrying on business.
1.The business must be in existence at the
time of formation.
2.The business must be a running business
3.The business must be lawful
4.The purpose of business must be to earn
profit

Meaning of Mutual Agency
Mutual agency refers to the relationship of
principal and agent Among partners
Example in case of
firm of A,B and C
When A acts
A- Agent
B and C- Principal
When B acts
B- Agent
A and C- Principal
When C acts
C- Agent
A and B- Principal

 Mutual agency- A business carried on by all of
them or any of them acting for all can bind all
the partners of the firm.
Relationship in case of a firm of A, B and C
A- Agent
B and C- Principals
B- Agent
A and C- Principals
C- Agent
A and B- Principals

 Share profit- Sharing of losses by all the
partners is not essential. The partners
may have express agreement, may agree
that any one or more of them shall not be
liable for the losses. But if nothing is
expressly agreed upon by the partners, it
is implied that the profit and losses will be
shared equally.

Advantages of Partnership Firm
 Easy to form: Like sole proprietorships, partnership
businesses can be formed easily without any compulsory legal
formalities. It is not necessary to get the firm registered. A
simple agreement or partnership deed, either oral or in writing,
is sufficient to create a partnership.
 Availability of large resources: Since two or more
partners join hands to start a partnership business, it may be
possible to pool together more resources as compared to a sole
proprietorship. The partners can contribute more capital, more
effort and more time for the business
Contd.

Advantages contd.
 Better decisions: The partners are the owners of the business. Each of
them has equal right to participate in the management of the business. In
case of any conflict, they can sit together to solve the problem. Since all
partners participate in the decision-making process, there is less scope for
reckless and hasty decisions.
 Flexibility in operations: A partnership firm is a flexible
organization. At any time, the partners can decide to change the size or
nature of the business or area of it’s operation. There is no need to follow
any legal procedure. Only the consent of all the partners is required.
contd.

Contd.
 Sharing risks: In a partnership firm all the partners “share” the
business risks. For example, if there are three partners and the firm
makes a loss of Rs.12,000 in a particular period, then all partners
may share it and the individual burden will be Rs.4000 only.
Because of this, the partners may be encouraged to take up more
risk and hence expand their business more.
 Benefits of specialization: Since all the partners are owners of the
business, they can actively participate in every aspect of business as per
their specialization, knowledge and experience. If you want to start a firm
to provide legal consultancy to people, then one partner may deal with civil
cases, one in criminal cases, and another in labor cases and so on as per the
individual specialization. Similarly, two or more doctors of different
specialization may start a clinic in partnership.

Contd.
 Protection of interest of each partner: In a
partnership firm, every partner has an equal say in decision
making and the management of the business. If any decision
goes against the interest of any partner, he can prevent the
decision from being taken. In extreme cases an unsatisfied
partner may withdraw from the business and can dissolve it. In
such extreme cases the “partnership deed” is required. In
absence of the partnership deed, no legal protection is given to
the partners.

Disadvantage of Partnership Firm
 Unlimited liability:All the partners are jointly liable for the debt of the
firm. They can share the liability among themselves or any one can be
asked to pay all the debts even from his personal properties depending on
the arrangement made between the partners.
 Uncertain life:The partnership firm has no legal existence separate
from it’s partners. It comes to an end with death, insolvency, incapacity or
the retirement of a partner. Further, any unsatisfied or discontent partner
can also give notice at any time for the dissolution of the partnership.
 No transferability of share:If you are a partner in any firm, you
cannot transfer your share or part of the company to outsiders, without the
consent of other partners. This creates inconvenience for the partner who
wants to leave the firm or sell part of his share to others.
Contd.

Contd.
 Lack of harmony: In a partnership firm every partner has an
equal right to participate in the management. Also, every
partner can place his or her opinion or viewpoint before the
management regarding any matter at any time. Because of this,
sometimes there is a possibility of friction and discontent
among the partners. Difference of opinion may lead to the end
of the partnership and the business.
 Limited capital: Since the total number of partners cannot
exceed 20, the capital to be raised is always limited. It may not
be possible to start a very large business in partnership form.

Types of Partnership
Partnership at Will
(Sec.7)
Particular Partnership
(Sec.8)
On the Basis of Duration

Partnership at Will [Sec.7 read with
Sec.43)]
 When there is no provision in partnership agreement
(known as partnership Deed, if in writing) for:
 The duration of their partnership, or
 The determination of their partnership,
then the partnership is called ‘Partnership at Will’.
 Special feature of ‘Partnership at will’ is that such
partnership may be dissolved by any partner by giving a
notice in writing to all other partners of his intention to
dissolve the partnership.
 The partnership will be dissolved from that date which is
mentioned in the notice as the date of dissolution and if no
date is mentioned then from the date of communication of
notice.

Particular Partnership [sec. 8]
 When a partnership is formed for a
 Specific venture or undertaking, or
 Particular period (fixed term)
then such partnership is called a ‘particular partnership’.
 Such partnership comes to an end on the completion of
the venture or the expiry of time period.
 If such partnership is continued after the expiry of term
or completion of venture, it is deemed to be a
partnership at will.
 A particular partnership may be dissolved before the
expiry of the term or completion of the venture only by
the mutual consent of all the partners.

Contd.
 Sec. 17 (b) of the Act provides that if a
firm, constituted for a fixed term,
continues to carry on business after the
expiry of that term, then the partnership
will become partnership at will AND
mutual rights and duties of partners will
remain same as they were before the
expiry.

Partnership deed
 A partnership is formed by an agreement. This
agreement may be in writing or oral though the law
does not expressly require that the partnership
agreement should be in writing, when the contract of
partnership is made in writing, it takes the form of a
document. The document which contains the term of
a partnership as agreed among the partners is called
“partnership deed”.
 The partnership Deed is to be duly stamped as per
the Indian Contract Act, and duly signed by all the
partners. Contd.

Contents of partnership Deed
However, a Partnership Deed should contain the following
clause:
 Name of the firm, Name of the partners
 Nature and place of business
 Duration of partnership
 Capital
 Share of partners in profits and losses
 Bank Account firm, Books of account
 Rules as to admission, expulsion, retirement of partners
 Powers of partners
 Dissolution of firm
 Settlement of disputes

 Obtaining prescribed form
 Preparing statement in the prescribed
form
 Signing the statement
 Verifying the statement
 Submitting the statement with fee
 Registration
 Issue of certificate of registration

 Active or Actual partner
 Sleeping partner
 Nominal partner
 Sub- Partner

• Active partner–Actively participates in
the conduct of the business
• Sleeping Partner–Doesn’t take active part
• Nominal Partner–A partner who lends
his name to the firm without having any
real interest in it.
• Sub-Partner–When a partner agrees to
share his profits derived from the firm with
a third person, a sub-partnership may
arise. The third person is called as sub
partner.

Right and duties of partners
Subject to contract
(Between the partners)

Rights of Partners
 Right to take part in business
 Right to be consulted
 Right to access to books
 Right to share the profits
 Right in emergency
 Right as an agent of the firm
 Right to prevent admission of a new partner
 Right not to be expelled

Duties of Partners
 To carry on business to the greater advantage
 To be faithful
 To render true accounts
 To give full information
 To indemnify for fraud
 Duty to share losses
 To act within authority
 To be liable for the act of the firm

INCOMING AND
OUTGOING
PARTNERS

 . Introduction of a partner
 (1) Subject to contract between the partners
and to the provisions of section 30, no person
shall be introduced as a partner into a firm
without the consent of all the existing
partners.
 (2) Subject to the provisions of section 30, a
person who is introduced as a partner into a
firm does not thereby become liable for any
act of the firm done before he became a
partner.

 . Retirement of a partner
(1) A partner may retire-
(a)with the consent of all the other partners,
(b)in accordance with an express agreement
by the partners, or
(c)where the partnership is at will, by giving
notice in writing to all the other partners of
his intention to retire.

 Expulsion of a partner
 (1) A partner may not be expelled from a
firm by any majority of the partners, save in
the exercise in good faith of powers
conferred by contract between the partners.
 (2) The provisions of sub-sections (2), (3)
and (4) of section 32 shall apply to an
expelled partner as if he were a retired
partner.

 Insolvency of a partner
(1)Where a partner in a firm is adjudicated an
insolvent he ceases to be a partner on the date
on which the order of adjudication is made,
whether or not the firm is hereby dissolved.
 By death of a partner
(1)Where under a contract between the
partners the firm is not dissolved by the death
of a partner, the estate of a deceased partner is
not liable for any act of the firm done after his
death.

DISSOLUTION OF
PARTNERSHIPAND
DISSOLUTION OF
FIRM

 The dissolution of partnership between all
the partners of a firm is called the
dissolution of the firm. [section 39]. Thus,
if some partner is changed/added/ goes
out, the ‘relation’ between them changes
and hence ‘partnership’ is dissolved, but
the ‘firm’ continues. However, complete
breakage between relations of all partners
is termed as ‘dissolution of firm’. After
such dissolution, the firm no more exists.

 Thus, ‘Dissolution of partnership’ is
different from ‘dissolution of firm’.
‘Dissolution of partnership’ is only
reconstruction of firm, while ‘dissolution of
firm’ means the firm no more exists after
dissolution.

 Dissolution of a Firm - A partnership firm is
an ‘organization’ and like every ‘organ’ it has to
either grow or perish. Thus, dissolution of a firm
is inevitable part in the life of partnership firm
some time or the other.
 Dissolution of a firm without intervention of
Court can be (a) By agreement (section 40) (b)
Compulsory dissolution in case of insolvency
(section 41) (c) Dissolution on happening of
certain contingency (section 42) (d) By notice if
partnership is at will (section 43).

 * Dissolution by agreement - [section 40].
 * Compulsory dissolution in case of
insolvency - [section 41]
 * Dissolution on the happening on certain
contingencies [section 42]
will
 * Dissolution by notice of partnership at
[section 43(2)]
 * Dissolution by the court

Dissolution by agreement
 . Dissolution by agreement : A firm
may be dissolved with the consent of
all the partners or in accordance with
a contract between the partners.

Compulsory Dissolution
 A firm is dissolved
 a) by the adjudication of all the partners or of all
partners but one as insolvent or,
 b) By the happening of any event which makes
it unlawful for the business of the firm to be
carried on or for the partners to carry it on in
partnership.

Dissolution on happening of
certain contingencies
 a) If constituted for a fixed term, by the
expiry of that term
 b) If constituted to carry out one or more
adventures or undertakings by the
completion thereof.


c)by the death of a partner.
d)by the adjudication of a partner as an
insolvent.

Dissolution by notice of
partnership at will
 (1) Where the partnership is at will the firm
may be dissolved by any partner giving notice
in writing to all the other partners of his
intention to dissolve the firm.
 (2) The firm is dissolved as from the date
mentioned in the `notice as the date of
dissolution or, if no date is so mentioned, as
from the date of the communication of the
notice.

Dissolution of partnership by
Notice
 Dissolution of partnership at will
Notice in writing to other partners is
necessary

Dissolution by the Court
 a) That a partner has become of unsound mind,
in which case the suit may be brought as well
by the next friend of the partner who has
become of unsound mind as by any other
partner.
 b) That a partner, other than the partner suing,
has become in any way permanently incapable
of performing his duties as partner.


 c) that a partner, other than the partner
suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the
business, regard being had to the nature
of the business.

 d) that a partner, other than the partner
suing, willfully or persistently commits
breach of agreement relating to the
management of the affairs of the firm or
the conduct of its business, or otherwise
so conducts himself in matter relating to
the business that it is not reasonably
practicable for the other partners to carry
on the business in partnership with him.

 e) That a partner, other than the partner
suing has in any way transferred the
whole of his interest in the firm to a third
party, or has allowed his share to be
charged under the provisions of rule 49 of
Order XXI of the First Schedule to the
Code of Civil Procedure, 1908 or has
allowed it to be sold in the recovery of
arrears, of land revenue or of any dues
recoverable as arrears of land revenue
due by the partner.

 f) That the business of the firm cannot
be carried on save at a loss.
 g) On any other ground which renders
it just and equitable that the firm
should be dissolved.

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