Indian Partnership Act,1932

Partnership is one of the specific contracts which was a part of the

Indian Contract Act, 1872. In 1930, however, the provisions
relating to partnership contract were repealed and a separate Act
called the Indian Partnership Act, 1932 was passed which is in
force till today.

1) Meaning & essential element of partnership

Meaning of Partnership (section 4) : Partnership is the

relation between two or more persons who have agreed to
share the profits of a business carried on by all or any of
them acting for all.

Essential Elements of Partnership : The following are the

essential elements of partnership :

a. Two or more persons : There must be at least two persons

to form a partnership and all such persons must be
competent to contract. According to section 11 of the
Indian Contract Act, 1872, every person except the
following, is competent to contract :

1. Minor.

2. Persons of unsound mind (e.g. lunatics, idots), and

3. Persons disqualified by any law to which they are

subject (e.g., alien enimies, insolvents).
b. Agreement : There must be an agreement to form a
partnership. This agreement may be express (whether
written or oral) or implied. This essential element is
further clarified under section 5. Section 5 provides that
the relation of partnership arises from contract and not
from status.

c. Business : There must exist a business. According to

secion 2(b), the term business includes every trade,
occupation and profession.

d. Sharing of profits : There must be sharing of profits.

Unless otherwise agreed, sharing of profit implies sharing
of losses as well.

e. Mutual Agency : There must exit a mutual agency

relationship among the partners. Mutual Agency
relationship means that each partner is both an agent and
a principal. Because of the mutual agency relationship
amongst the partners, the law of partnership is also
regarded as an extension of the general law of agency.

2) Meaning of Partner, Firm and Firm name

Person who have entered in to 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.
3) Maximum limit on numbers of partners

According to section 11 of the companies Act, 1956, the

maximum limit is as under :

a. In case of a partnership firm carrying on a banking

business 10

b. In case of a partnership firm carrying on any other

business 20

If the number of partners exceeds the aforesaid limit,

the partnership firm becomes an illegal association.

4) Partship & co-ownership

Co-ownership means joint ownership of some property.

The two or more persons who own some property jointly
are called co-owners.

Distinction between Partnership and Co-ownership :

 Basis of Distinction Partnership Co-ownership
1. Agreement It arises from an It may or
agreement. maynot arise
from agreement

2. Business It is formed to It may or may

carry on a not involve
business carrying on a
business.
3. Profit or loss It involves profit It may or may
or loss not involve
profir or loss.
4. Mutual Partners have a Co-owners do
Agency mutual agency not have a
relationship mutual agency
relationship.

5) Partship & 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.

Distinction between partnership and Hindu undivided family :

Basis of distinction Partnership Hindu undivided

family
1. Agreement It arises from an It arises by status
agreement. or operation of
law.
2. Regulating law It is governed by It is governed by
the Indian Hindu Law.
partnership
Act,1932.
3. Name of the The persons who The persons who
persons form partnership are the members
involved are called of the HUF are
partners. called
Coparceners.
4. Maximum The maximum There is no
Limit limit of partner is maximum limit of
10 for a banking Coparceners.
business and 20
for any other
business.
 5. Female A female becomes A female does not
Members a fullfledged become member
partner. merely by her
birth.

6) Partnership deed

A partnership is formed by an agreement. This agreement

may be express or implied. The document which contains
the term of a partnership as agreed among the partners is
called partnership deed. The deed is required to be duly
stamped as per the Indian Stamp Act, 1889 and duly
signed by all the partners.

7) Registration

Registration means getting the partnership registered

with the registrar of firm of the area in which the place of
business of the firm is situated or proposed to be situated.

8) Duration of partnership
 On the basis of duration, the partnership can be either
partnership at will or particular partnership.

Partnership at will (Section 7) :

When there is no provision in partnership agreement for

duration of the partnership, the partnership is called
partnership at will.

Particular Partnership (Section 8) :

When a partnership is formed for a specific venture or for

a particular period, the partnership is called a particular
partnership. Such partnership comes to an end on the
compulsion of the venture or the expiry of the period.

9) Types of partner

A person who deals or intends to deal with a firm, must

know who the partners are and to what extent each
partner is liable.

The following are the types of partners :

Active Sleeping Nominal Partner in Sub -
partner partner partner profits only partner
He takes an He does not He lends He shares He is a third
active part take an his name to the profits person with
in the active part the firm only and whom a
conduct of in the without not losses. partner
the conduct of having any agrees to
business. business. real share his
interest in profits
the firm. He derived
neither from the
contributes firm.
to the
capital nor
shares the
profits or
takes part
in the
conduct of
the
business of
the firm.
He along He along He along He along He has no
with other with other with other with other rights
partners is partners is partners is partners is against the
liable to liable to liable to liable to firm nor is
third third third third he liable for
parties for parties for parties for parties for the acts of
all the acts the acts of all the acts all the acts the firm.
of the firm. the firm. of the firm of the firm.
as if he is
an actual
 partner.
He must He need He must He must There is no
give public not give give public give public question of
notice of public notice of notice of public
his notice of his his notice at all
retirement. his retirement. retirement. since he is
retirement. a third
person and
not a
partner.

10) Position of minor as a partner

Since a minor is not capable of entering into a contract, an

agreement by or with a minor is void. Since partnership is
formed by an agreement, a minor cannot enter into a
partnership agreement, on the basis of the general rule
that a minor cannot be a promissory, but can be a
promisee or a beneficiary, section 30 of the Indian
partnership Act 1932.

11) Property of the firm

Unless otherwise agreed by the partners, the property of

the firm includes :
 a. All properties, rights and interest originally brought
to the common stock of the firm.

b. The property acquired by a purchase or otherwise by

or for the firm.

c. The property acquired with money belonging to the

firm, and

d. The goodwill of the business of the firm.

12) Implied authority of a partner (Section 19)

The authority of a partner means the capacity of a partner

to bind the firm by his act. This authority may be express
or implied. The authority conferred on a partner by the
provisions of section 19 of the Indian partnership act is
called Implied Authority. Implied Authority covers those
acts of partners which fulfill the following three
conditions :

a. The act must relate to the normal business of the

firm.

b. The act must have been done in the usual way of

carrying on the business of the firm.

c. The act must be done in the firms name or in any

other manner expressing or implying an intention to
bind the firm.

13) Reconstitution of a firm

The reconstitution of a firm take place when there is any
change in the composition of the partnership. The
following are the various ways in which the firm is
reconstituted :

1. Introduction of a partner (Section 31) : A person may

be admitted as a partner either

a. With the consent of all the existing partners or,

b. In accordance with a contract already entered into

between the existing partners for the admission of a
new partner.

2. Retirement of a partner (Section 32) : A partner may be

retire from the firm in any of the following ways :

a. With the consent of all the other partners; or

b. In accordance with an express agreement among the

partners.

3. Insolvency of a partner (Section 34) : The effects

resulting from the insolvency of a partner are
summarized below :

a. He ceases to be a partner on the date of the orders

of adjudication.

b. Unless otherwise agreed, the firm is dissolved.

4. Rights of Transferee of a partners share (section 29) :

A partner may transfer his interest in the firm by sale,
mortgage or charge fully or partially.
14) Dissolution of a firm

Dissolution of a firm means the dissolution of partnership

between all the partners of a firm. In such a situation, the
business of the firm is discontinued, its assets are
realized, the liabilities are paid off and the surplus (if any)
is distributed among the partners according to their
rights.

15) Right and liabilities of a partner on dissolution

Rights of a partner on Dissolution : The various rights of a

partner on dissolution are as follows :

a. Partners general line (section 46) : Every partner or

his representative is entitled

1. To have the firms property applied in payment

of the firms debts, and

2. To have the surplus distributed amongst the

partners or the representatives according to
their respective rights.
 b. Right to claim the return of premium on premature
winding up (section 51) : If a partner joined a firm for
a fixed term and had paid a premium and the firm is
dissolved before the fixed term, he is entitled to
return of the premium.

Liabilities of a partner on Dissolution : The various

liabilities of a partner on dissolution are as follows :

a. Continuing Liability for acts of partners done after

dissolution (section 45) : Until a public notice is given
of dissolution, the partners continue to be liable for
any act done by any of them after dissolution and
such act is deemed to be an act done before the
dissolution.

b. Continuing authority of partners after dissolution

(section 47) : After the dissolution of a firm, the
authority of a partner to bind the firm and the other
mutual rights and obligations of the partners
continue.

16) Settlement of accounts

Unless otherwise agreed by the partners, the accounts of

a dissolved firm shall be settled according to the
provisions of section 48, 49 and 55. These provisions are
as follows :
a. Treatment of Losses (Section 48(a)) : Losses
including deficiencies of capital are to be paid in the
following manner :

1. First out of profits.

2. Then out of capital.

3. Lastly by partners individually in their profit-

sharing ratio.

b. Application of Assets (Section 48(b)) : The assets of

the firm shall be applied in the following manner and
order :

1. In paying firms debts to the third parties;

2. In paying to each partner rateably what is due

to him on account of advances.

3. In paying to each partner rateably what is due

to him on account of capital.

c. Payment of firms debts and partners private debts

(section 49) : Where there are firms debts and
partners private debts, the following provisions shall
apply :

1. Firms property shall be applied first in

payment of firms debts then the surplus.

2. Partners private property shall be applied first

in payment of his private debts and the
surplus.
17) Public notice (section 72)

When a public notice is required to be given in the

following three cases:

a. On the retirement or expulsion of a partner, or

b. On the dissolution of the firm,

c. On the election to become or not to become a

partner by a minor on his attaining majority.

When a public notice is not required to be given in the

following two cases:

a. On the death of a partner;

b. On the insolvency of a partner.