PARTNERSHIP ACT - SUMMARY

It is basically a relation between two or more persons who join hands to form a business organisation
with the objective of earning profit. The persons who join hands are individually known as ‘Partner’
and collectively a ‘Firm’. The name under which the business is carried on is called ‘firm name’.
Sultan Chand & Co, Ram Lal & Co, Gupta & Co are the names of some partnership firms. There must
be some agreement between the partners before they actually start the business. This agreement is
termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running
the partnership firm. This agreement may be oral or written. It is always better to insist on a written
agreement among partners in order to avoid future controversies. A partnership firm is governed by
the provisions of the Indian Partnership Act, 1932.

Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting for all”. Section 5
is partnership not created by status. It says the relation of partnership arises from contract and not
from status; and, in particular, the members of a Hindu undivided family carrying on a family
business as such, or a Burmese Buddhist husband and wife carrying on business as such are not
partners in such business. Section 6 provides for mode of determining existence of partnership. It says
in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner
in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts
taken together.

Explanation I : The sharing of profits or of gross returns arising from property by persons holding a
joint or common interest in that property does not of itself make such persons partners.

Explanation II : The receipt by a person of a share of the profits of a business, or of a payment

contingent upon the earning of profits or varying with the profits earned by a business, does not itself
make him a partner with the persons carrying on the business; and, in particular, the receipt of such
share or payment –

(a) by a lender of money to persons engaged or about to engage in any business

(b) by a servant or agent as remuneration,

(c) by the widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or
share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

Section 7 is partnership at will which provides where no provision is made by contract between the
partners for the duration of their partnership, or for the determination of their partnership, the
partnership is "partnership-at-will" whereas Section 8 is about particular partnership. A person may
become a partner with another person in particular adventures or undertakings.

Features of Partnership form of business organisation

i. Two or more Members - You know that the members of the partnership firm are called partners. At
least two members are required to start a partnership business. But the number of members should not
exceed 10 in case of banking business and 20 in case of other business. If the number of members
exceeds this maximum limit then that business cannot be termed as partnership business. A new form
of business will be formed, the details of which you will learn in your next lesson.
ii. Agreement: Whenever you think of joining hands with others to start a partnership business, first of
all, there must be an agreement between all of you. This agreement contains

o the amount of capital contributed by each partner; o profit or loss sharing ratio;

o salary or commission payable to the partner, if any;

o duration of business, if any ;

o name and address of the partners and the firm; o duties and powers of each partner;

o nature and place of business; and o any other terms and conditions to run the business.

iii. Lawful Business - The partners should always join hands to carry on any kind of lawful business.
To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the
law. Again, doing social or philanthropic work is not termed as partnership business.

iv. Competence of Partners - Since individuals join hands to become the partners, it is necessary that
they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent
persons are not eligible to become the partners. However, a minor can be admitted to the benefits of
partnership i.e., he can have a share in the profits only.

v. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the business
amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing,
it should be shared equally among the partners. Suppose, there are two partners in the business and
they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any
other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-.

vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also unlimited. That
means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the
partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make
payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/-
from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal
properties of the partners.

vii. Voluntary Registration - It is not compulsory that you register your partnership firm. However, if
you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable.
The effects of non-registration are:

o Your firm cannot take any action in a court of law against any other parties for settlement of claims.

o In case there is any dispute among partners, it is not possible to settle the disputes through a court of
law.

o Your firm cannot claim adjustments for amount payable to or receivable from any other parties.

viii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also has no separate
legal existence from that of its owners. Partnership firm is just a name for the business as a whole.
The firm means the partners and the partners collectively mean the firm.

ix. Principal Agent Relationship - All the partners of the firm are the joint owners of the business.
They all have an equal right to actively participate in its management. Every partner has a right to act
on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as
an agent of the others and at the same time the others become the principal. So there always exists a
principal agent relationship in every partnership firm.

x. Restriction on Transfer of Interest - No partner can sell or transfer his interest to anyone without the
consent of other partners. For example - A, B, and C are three partners. A want to sell his share to D
as his health does not permit him to work anymore. He cannot do so until B and C both agree.

xi. Continuity of Business - A partnership firm comes to an end in the event of death, lunacy or
bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners.
At any time, they may take a decision to end their relationship.

Limitations of Partnership form of Business Organisation

a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm
to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to
pay all the debts even from his personal properties.

b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an
end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting
member can also give notice at any time for dissolution of partnership.

c) Lack of Harmony: You know that in 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 quarrel among the partners. Difference of opinion may lead to closure of the business on
many occasions.

d) 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.

e) No transferability of share: If you are a partner in any firm you cannot transfer your share of
interest 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.

Types of Partners

In a partnership firm you can find different types of partners. Some may actively participate in the
business while others prefer not to keep themselves engaged actively in the business activities after
contributing the required capital. Also, there are certain kinds of partners who neither contribute
capital nor actively participate in the day-to-day business operations. Let us learn more about them.

a) Active partners - The partners who actively participate in the day-to-day operations of the business
are known as active or working partners. They contribute capital and are also entitled to share the
profits of the business. They are also liable for the debts of the firm.

b) Dormant partners - Those partners who do not participate in the day-to-day activities of the
partnership firm are known as dormant or sleeping partners. They only contribute capital and share
the profits or bear the losses, if any.

c) Nominal partners - These partners only allow the firm to use their name as a partner. They do not
have any real interest in the business of the firm. They do not invest any capital, or share profits and
also do not take part in the conduct of the business of the firm. However, they remain liable to third
parties for the acts of the firm.
d) Minor as a partner -A minor i.e., a person under 18 years of age is not eligible to become a partner.
However, in special cases a minor can be admitted as partner with certain conditions. A minor can
only share the profit of the business. In case of loss his liability is limited to the extent of his capital
contribution for the business.

e) Partner by estoppel - If a person falsely represents himself as a partner of any firm or behaves in a
way that somebody can have an impression that such person is a partner and on the basis of this
impression transacts with that firm then that person is held liable to the third party. The person who
falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in
Ram Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider
represents himself as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held
liable for any loss arising to Madhu. Here Giri is partner by estoppel.

f) Partner by holding out - In the above example, if either Ram or Hari declares that Gopal is a partner
of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those
parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a partner of
that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner
by holding out.

Distinguish clearly between Joint Stock Company and partnership

1. Formation and registration:
A company is created by law while partnership is the result of an agreement between the partners. In
the formation of partnership no legal formalities are involved and registration of the firm is not
compulsory. A company can be formed only after fulfilling legal formalities and its incorporation
under the Act is essential.

2. Number of members:
The minimum number of partners in a partnership firm is two and the maximum is 10 in banking
business and 20 in other businesses. In a private company, the minimum number of members is 2 and
the maximum is 50. In a public company minimum number of members is 7 and there is no maximum
limit prescribed by law.

3. Legal status:
A company has a separate legal entity independent of its members but a partnership firm has no
separate legal entity different from its partners. Partners and the firm are one and the same in the eyes
of law.

4. Liabilities of members:
In a joint stock company, the liability of every member is usually limited to the unpaid money on the
shares held or the amount of guarantee given by him. But in partnership, partners are jointly and
severally liable to an unlimited extent.

5. Transferability of interest:
Shares of a public company are freely transferable but in a private company there are restrictions on
the transfer of shares. A partner cannot transfer his interest in the firm to an outsider without the
unanimous consent of all the partners.

Any person can become a member of a company by purchasing its shares but a new partner can be
admitted only with the mutual consent of all the partners.
6. Statutory control:
A company has to comply with several legal requirements and it must submit reports to the
Government. On the other hand, there is no statutory regulation on day-do-day working of a
partnership. A company cannot change its objects and powers without complying with the statutory
requirements.

7. Change of objects:
The objects and powers of a company as laid down in its Memorandum of Association can be altered
only by fulfilling legal formalities laid down in the Companies Act, 1956. On the contrary, the objects
of a partnership can be altered with the unanimous consent of all the partners without any legal
formality.

8. Management:
In a partnership, all the partners can take active part in the management of the firm. But in a company,
every member does not participate actively in the day- do-day management. The company is managed
by a Board of Directors consisting of elected representatives/nominees of the members. There is
divorce between ownership and management of a company but there is no such divorce in a
partnership.

9. Stability:
A company enjoys perpetual life or existence which is not affected by the retirement, death,
insolvency, etc., of its members. The life of a partnership is uncertain and comes to an end with the
retirement, insanity and death of a partner.

10. Majority rule:

In a company, all policy decisions are taken on the basis of majority opinion in a meeting of the Board
of Directors or of the general body of shareholders. But in partnership all policy matters are decided
through the unanimous consent of all the partners.

11. Accounts and audit:

A company must maintain its accounts in the prescribed form and must get them audited by a
qualified auditor. Accounts and audit are not obligatory for a partnership unless the total sales
turnover or gross receipts in a year exceed Rs. 10 lakhs in case of professionals and Rs. 40 lakh in
other cases.

12. Implied agency:

In a partnership every partner is an implied agent of the other partners and of the firm as a whole. But
no member of a company is an implied agent of other members or of the company.

13. Common seal:

In a partnership one or more partners are authorised to sign documents on behalf of the firm. In a
company, on the other hand, the common seal is affixed on documents as official signatures. Two
directors of the company sign the documents after the common seal is affixed.

14. Winding up:

A partnership can be dissolved at any time without any legal formalities. But several legal formalities
have to be complied with for the winding up of a company.
15. Regulating statute:
A partnership is regulated under the Partnership Act 1932. The Companies Act 1956 governs the
establishment and functioning of a joint stock company.

Difference between a partnership and joint Hindu family business

1. Regulating law:
A partnership is governed by the provisions of the Indian Partnership Act, 1932. A joint Hindu family
business is governed by the principles of Hindu law.

2. Mode of creation:
A partnership arises out of a contract, whereas a joint Hindu family business arises by the operation of
law and is not the result of a contract.

3. Admission of new members:

In a partnership no new partner is admitted without the consent of all the partners, while in the case of
a joint Hindu family firm a new member is admitted just by birth.

4. The position of females:

In a partnership, women can be full-fledged partners, while in a joint Hindu family business
membership is restricted to male members only. After the passage of the Hindu Succession Act, 1956,
females get only co-sharer’s interest at the death of a coparcener and they do not become coparceners
themselves.

5. Number of members:
In partnership the maximum limit of partners is 10 for banking business and 20 for any other business
but there is no such maximum limit of members in the case of joint Hindu family business.

6. Authority of members:
In partnership each partner has an implied authority to bind his co-partners by act done in the ordinary
course of the business, there being mutual agency between various partners. In a joint family business,
all the powers are vested in the ‘Karta’ and he is the only representative of the family who can
contract debts or bind his coparceners by acts done in the ordinary course of business, there being no
mutual agency between various coparceners. But a coparcener other than the ‘Karta’ of the family
may be authorised expressly or by implication to contract debts on behalf of the firm (Lal Chand vs.
Ghanayalal 1939 Lah 243).

7. Liability of members:
In partnership, the liability of the partners is joint and several as well as unlimited. In other words,
each partner is personally and jointly liable to an unlimited extent and if partnership liabilities cannot
be fully discharged out of the partnership property each partner’s separate personal property is liable
for the debts of the firm. In a joint Hindu family business only the ‘Karta’ is personally liable to an
unlimited extent, i.e., his self-acquired or other separate property besides his share in the joint family
property is liable, for debts contracted on behalf of the family business. Other coparceners’ liability is
limited to the extent of their interest in the joint family property and they do not incur any personal
liability. But an adult coparcener can be made personally liable if he is also, expressly or impliedly, a
party to the contract or if he has subsequently ratified and accepted the transaction out of which the
obligation of the creditor arose (Lal Chand vs. Ghanayalal).

8. Right of members to share in profits:

In a partnership each partner is entitled to claim his separate share of profits but a member of a joint
Hindu family business has no such right. His only remedy lies in a suit for partition.

9. Effect of death of a member:

A partnership, subject to contract between the partners, is dissolved on the death of a partner, but a
joint Hindu family firm is not dissolved on the death of a coparcener (Baij Nath vs. Ram Gopal AIR
1939 Cal 92).

Difference between Partnership and Co-Ownership

Partnership and co-ownership are two different things. The ownership of a property by more than one
person is called co-ownership. If two brothers purchase a property collectively, it will be a case of co-
ownership. The property will be disposed off with the consent of all the co-owners. Any income
arising out of co-ownership is shared by all the co-owners.

The property is not purchased with the object of earning profits. If a building is purchased to let it for
rent, then it will be a case of partnership and not of co-ownership. In the co-ownership, there is only a
joint ownership without any business motive. In partnership joint ownership and business are
combined.

Difference between Partnership and Co-ownership:

i. Agreement
A partnership is a result of agreement. Co-ownership is not necessarily the result of agreement. It is
generally created by the operation of law.

ii. Agency
A partner is an agent of the firm. He can bind the other partners for his acts. The co-owner is not an
agent of the business. He cannot bind the other co-owners for his acts.

iii. Lien
A partner has a lien on the property of partnership. A co-owner has no lien on the joint property of his
co-owners.

iv. Transfer of interest

A partner cannot transfer his share without the consent of all the partners. But a co-owner can transfer
his interest or share in the property without the consent of others.

v. Common interest
In partnership there is a common interest. But in co-ownership there is no common interest.

vi. Number of members

In a partnership the maximum limit of partners is 20 for any type of business. In co-ownership there is
no maximum limit of co-ownership
vii. Carrying on business
A partnership is always made to carry on a business, Nut co-ownership does not necessary invlve the
carrying on of a business.

viii. Partition
A partner cannot demand a division of the property. But co-owners can demand the division of the
joint property.

ix. Reimbursement
If a partner spends some amount from his own pocket for the firm, he has a legal right to get the
amount of expenditure reimbursed. But a co-owner has no legal right to claims reimbursement unless
other co-owners agree for that.

x. Regulation
Partnership is regulated by the partnership Act, 1932. But there is no separate law to regulate co-
ownership.

RIGHTS AND DUTIES OF PARTNERS

Two fundamental principles govern relations of partners to one another. The first principle gives the
partners the freedom to settle their mutual rights and duties by their own voluntary agreement. The
statement of duties and rights should be prefaced with the contents of Section 11 which gives freedom
to partners, subject, of course, to the provisions of the Act, to determine their mutual rights and duties
by their own agreement. Certain duties, as stated in the chapter, are of compulsory nature and,
therefore, cannot be altered by an agreement to the contrary. But, subject to that, the partners can
settle their rights and obligations inter se by their own contract. The second principle of high
importance is that relations of partners to one another are based upon the fundamental principle of
absolute good faith. Every partner is an unlimited agent of his co-partners for all matters connected
with the business and, therefore, has the power to bind them into any amount of liability. Mutual trust
and confidence among the partners, therefore, becomes a necessary condition of their relations.
Section 9 gives statutory recognition to this principle by providing that "partners are bound ... to be
just and faithful to each other" This duty cannot be excluded by any agreement to the contrary.
Commenting upon his fiduciary obligation Bacon VC observed in Helmore v Smith (1886) 35 Ch D
436: If fiduciary relationship means anything I cannot conceive a stronger case of fiduciary relations
than that which exists between partners. Their mutual confidence is the life blood of the concern. It is
because they trust one another that they are partners in the first place; it is because they continue to
trust one another that the business goes on.

The Partnership Deed contains the mutual rights, duties and obligations of the partners, in certain
cases, the Partnership Act also makes a mandatory provision as regards to the rights and obligations
of partners. When there is no Deed or the Deed is silent on any point, rights and obligations as
provided in the Partnership Act shall apply.

1. Right to take part in business [S. 12(a)]: According to Section 12(a), every partner has a right to
take part in the conduct of the business. Since the business of partnership belongs to all the partners,
every partner is entitled to take part in the conduct of the business. The partners are free to provide in
their agreement that only some of them will take part in the conduct of the business and certain other
partners will not. If such a right is wrongfully denied to a partner, he can seek the enforcement of the
right through a court of law. If the right to manage the business has been conferred on only some of
the partners, they alone will be entitled to this right.

In Suresh Kumar v Amrit Kumar AIR 1982 Del 131, The Delhi High Court issued an injunction
against a partner who, in order only to undermine the position of the managing partner, wrote to the
principals of the firm not to supply motor vehicles and to the bankers not to honour the firm's
cheques.

2. Majority rights or Right to express opinion [S. 13(c)]: Section 12(c) contains the following
provision with regard to the right of a partner to express the opinion in the partnership matters:
(c) any difference arising as to ordinary matters connected with the 
business may be decided by a majority of the partners, and every 
partner shall have the right to express his opinion before the matter 
is decided, but no change may be made in the nature of the business 
without the consent of all the partners. 

According to the above stated provision, when there is difference of opinion between the partners,
majority of the partners cannot ignore the minority and take decisions without consulting them. The
difference of opinion may be either (i) as to ordinary 'matters connected with the business, or (ii)
matters of fundamental importance. When the difference of opinion pertains to an ordinary or routine
matter connected with the business, the same may be resolved by a decision of the majority of the
partners. But before the matter is decided every partner must be provided with an opportunity to
express his opinion. In Highley v Walker [1910] 26 TLR 685, the partners were divided over the
question of the introduction of a partner's son into the business with a view to his learning the
business, it was held that the difference related to an ordinary matter of business and, therefore,
majority opinion should prevail.

In this connection Lord Eldon observed, "I call that the act of all, which is the act of the majority,
provided all are consulted, and the majority are acting bona fide, meeting not for the purpose of
negativing, what anyone have to offer, but for the purpose of negativing, what, when they met
together, they may, after due consideration, think proper to negative: For a majority of the partners
to say, 'We do not care what one partner may say, we, being the majority, will do what we please, is, I
apprehended, what this Court will not allow.' The power of the majority has to be exercised in good
faith. If, for instance, the majority of the partners decide to expel a partner without sufficient cause,
the expulsion would be set aside."

When the matter is not an ordinary or a routine matter but is of fundamental importance, consent of all
the partners is needed. Admission of a new partner to the firm or a change in the nature of the
business are the matters of this nature. The partnership deed may, however, provide that in all matters,
majority opinion shall prevail. The manner in which majority powers should be exercised was
explained in Blisset v Daniel (1853) 10 Hare 493: The plaintiff was working in partnership with
certain persons. It was proposed to appoint one of the partner's son as a comanager of the firm. The
plaintiff objected. The aggrieved father complained to his partners behind the back of the plaintiff and
persuaded them to sign and serve upon the plaintiff a notice of expulsion. This was done in the
exercise of a power which authorised a majority to expel any partner without giving any reason. The
plaintiff contested the validity of the expulsion and it was set aside. The court pointed out that powers
are given to the majority so that in case of need they may be exercised in good faith for the benefit of
the firm. It is no doubt for the partners to decide what is in the interest of the firm but they must do so
in good faith. Majority powers should not be used for base or unworthy purposes or merely to injure a
co-partner.

3. Right to have access to books of the firm. [Section 12(d)) According to Sec. 12(d), every partner
has a right to have access to and to inspect and copy any books of the firm. This right is available to
both active and dormant partners. This right is not only in respect of books of accounts but in respect
of any books of the firm. A partner may exercise this right himself or by agent, but either can be
restrained from making use of the knowledge thus gained against the interest of the firm. A partner
can have the accounts inspected through an agent and need not do it personally. For example, where a
sleeping partner wanted to sell his interest to the other partners and authorised an expert valuer to
inspect accounts to ascertain the value of his interest, it was held that the other partners could not
object to it, unless they could show some reasonable grounds for their objection such as for example,
protection of trade secrets (Bevan v Webb (1905) 1 Ch. 620). The right to inspect papers, however,
does not include the right to carry them, without the consent of the other partners, to any other place
than the registered office of the company (Floydd v Cheney  [1970] 2 WLR 314).

4. Right to share profits [Section 13(b)] Every partner has a right to share the profits. Generally, the
partners provide in their agreement as to what will be the proportion in which they will share the
profits. For example, in a firm of three partners, it may be agreed that the profit-sharing proportion
will be 2/4: 1/4: 1/4. According to Section 13(b), in the absence of any such agreement, the partners
are to share the profits equally and also to contribute equally to the losses sustained by the firm and
not in the proportion in which various partners contribute capital (Mansha Ram v Tej Bhan AIR
1958 P H 5).

In Robinson v Anderson 121 U.S. 522 (1887), two solicitors were jointly retained to defend certain
actions and there was no satisfactory evidence to show in what proportion they were to divide their
remuneration. It was held that they were entitled to share it equally although they had been paid
separately and had done unequal amount of work. If any partner alleges that their shares are unequal,
he has to prove an agreement to that effect. Since every partner is entitled to share the profits, no other
remuneration, as a general rule, is to be paid to a partner for the management of the firm's business.
The rule contained in this regard in Section 13(a) is that a partner is not entitled to receive
remuneration for taking part in the conduct of the business, unless otherwise agreed. Thus, it is only if
the partners so agree a partner may be entitled to additional salary, commission, etc. for the efforts
made by him in running the business of the firm.

5. Right to interest on capital and advances [Section 13(c) & (d)] Generally, no interest on capital
subscribed by the partners is to be given because the partners share the profits of the business of the
firm. In case the partners agree that interest on capital is to be given, according to Sec. 13(c), such
interest shall be payable only out of profits. Sometimes over and above the capital subscribed by the
partners, the firm may need extra money. In case a partner makes any payment or advance beyond the
amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of six per cent
per annum, according to Sec. 13(d). So far as interest on capital contribution is concerned, it ceases to
run from the date of dissolution (Somasundaran v S. Chettiar AIR 1938 PC 277).

6. Right to indemnity [Section 13(e)] A partner while acting on behalf of the firm may make certain
payments and also incur some liabilities. According to Sec. 13{e), he is entitled to claim indemnity
for the same. The indemnity can be claimed for the acts done by a partner in the ordinary and proper
conduct of the business and also for doing some act in an emergency for the purpose of protecting the
firm from the loss. Thus, the Act provides for two kinds of indemnity. In the first place, a partner is
entitled to recover from the firm any expenses incurred by him "in the ordinary and proper conduct of
the business".

These words constitute an important condition of this right and were explained in Thomas v Atherton
(1877) 10 Ch. D. 185: T, the managing partner of a colliery, received notice from L, an adjoining
owner that the workings were being carried on beyond the boundary. T insisted that he was entitled to
the disputed ground, and carried on his working. The matter, having been referred to arbitration, he
was held liable to pay £6000 as damages for the trespass. His claim for contributions from his co-
partners failed as the loss was not suffered in the ordinary and proper conduct of the business. He
worked beyond the limits of the partnership colliery without proper inquiry as to limits and had acted
with gross negligence and recklessness in continuing his working after notice and without consulting
his partner, when it was evident that his right to work in the disputed area was extremely doubtful.
The second kind of indemnity is recoverable when a partner has done an act involving expenditure in
order to protect the property of the firm from a loss threatened by an emergency. It is necessary that
the partner concerned should have acted as a reasonable person would have acted in his own case.
Proof of actual loss attributable to the conduct of a partner is necessary and not merely one which is
imagined or notional (T.B. Mody v Ghanshyam J. Sanghrajka AIR 1987 Kant 268). The right to
indemnity is not lost by the dissolution of the firm and it also does not matter that there is or has been
no settlement of accounts (Sadhu Narayana Aiyangar v Ramaswami ILR 32 Mad 203).

7. Right to remuneration [S. 13(a)] Unless otherwise agreed, partners are not entitled to receive salary
or remuneration for taking part in the conduct of the business. Section 13(a) so provides: A partner is
not entitled to receive remuneration for taking part in the conduct of the business. The partnership
agreement may, however, provide for the payment of remuneration to the working partners (Re
Garwood's Trusts [1903] 1 Ch 236). But even so a firm cannot be regarded as an employer of a
partner. A contract of service stipulates two different persons whereas a firm and its partners are one
and the same thing. The so-called remuneration paid to the partners is in reality a distribution of
profits (C.V. Mulk v CIT Ag (1979) 120 ITR 670 Ker).

Even where a partner renders extraordinary services, in the absence of an agreement, he cannot claim
remuneration for such services (Shelat Bros v Nanalal Harilal Shelat (1972) 2 MLJ 315 ). The Sind
High Court acted upon the same principle in a case where a licensed business was being managed by
an agent under the supervision of the licensed partner and the other unqualified partner was doing
nothing. Even so no remuneration was allowed to the qualified partner (Hassanand Jethanand v
Bassarmal AIR 1928 Sind 146). Aston JC captured points from different cases: It is well known
principle that under ordinary circumstances the contract of partnership excludes any implied contract
for payment for services (Thompson v Williamson 7 Bligh NS 432). In the absence of an agreement
one partner cannot charge his co-partners with any sum for compensation in the form of salary or
otherwise (Whittle v M'Farlane 1 Knapp, R. 312), even where the services rendered by the partners
were exceedingly unequal.

Duty to act in good faith

 Section 9 of the act provides that it is the duty of partners to act for the greatest common
advantage of the firm. Therefore, the partner should work to secure maximum profits for
the firm. A partner should not secure secret profits at the expense of the firm.
  In Bentley v. Craven [1853] 18 Beav. 75, 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
cannot make secret profits and therefore, the firm was held entitled for profits earned by
the partner.
 The duty continues to exist even after the partnership has ceased to exist. The partners
owe the duty to legal representatives of the partner as well as the former partner.

Duty not to compete

Section 16(b) of the act provides that if the partner makes a profit by engaging in a business which is
similar to or competing with the firm, then the partner should account for such profits. In Pullin
Bihari Roy v. Mahendra Chandra Ghosal (1921) 34 Cal CJ 405, there was a partnership for buying
and selling of the salt. One of the partners while buying the salt for the firm, bought some quantity of
salt for himself and then gained profit by selling it on his personal account. He was held to be liable to
account to his co-partners for the profits earned.

 However, a partner can carry on any business which is outside the scope of the business of
the firm.
 The duty can be altered by the partnership deed. The partners may enter into an agreement
which allows a partner to carry the business competing with the business or can restrict
the partner from carrying any business other than that of the firm. Section 11 provides that
such an agreement will be valid and cannot be considered as a restraint in trade.
 If a person breaches such agreement and carries on a personal business which not
competing to the business of the firm then such a partner will not be liable to account for
the profits, but his co-partners can apply for dissolution of the partnership.

Duty to be Diligent

 Section 12(b) provides that a partner is bound to diligently attend his duties. Section

13(f) states that a person should indemnify the firm for any loss caused to the firm
because of his wilful neglect
 A partner cannot be made liable for mere errors of judgment or acts done in good faith.
 In Cragg v. Ford (1842) 1 Y C 280,there was a partnership between the plaintiff and the
defendant. The defendant was the managing director of the firm and therefore, the conduct
of dissolution was left on him. Plaintiff advised the defendant to dispose of certain bales
of cotton. However, the defendant said that the same would only be done after the
dissolution. Meanwhile, the prices of cotton fell and very less amount was realised by
selling the cotton as compared to which could have been otherwise realised.
 An action for indemnity under this head can be brought only by the firm or partners on
behalf of the firm. A partner can not bring an action for indemnity in his personal
capacity.

Duty to indemnify for fraud

  Section 10 of the Indian Partnership Act, 1932, provides that if a loss is caused to the
business of the firm because of the act of the partner then he shall indemnify his co-
partners for such loss.

 The purpose of this section is to induce partners to deal fairly and honestly with the
customers.
 Illustration: A, B, C, and D entered into a partnership for the banking business. A
committed fraud of ₹30,000 against one of the customers. As a result, all the co-partners
i.e. B, C, and D were held liable. Here, A is bound to indemnify the firm for the loss
caused to the firm because of fraud committed by him.
 The liability to indemnify for fraud cannot be excluded by entering into an agreement to
the contrary. Because entering into any such agreement is opposed to public policy.

Duty to render true accounts

 Section 9 of the Act, provides that the partners are bound to disclose and provide full
information about the things that affect the firm to any partner or his legal representatives.
This means that a partner should not conceal things from other co-partners in relation to
the business of the firm.

 Every partner has the right to access the accounts of the firm.

 In Law v. Law [1905] 1 Ch 140,it was held by the court that if a partner is in possession of
some extra information then he is bound to deliver it to the co-partners. If the partner
enters into a contract with other co-partners without furnishing them the material details
which is known to him but not his co-partners then such a contract is voidable.

Duty to properly use the property of the firm

 Section 15 of the act, provides that property of the firm should be held and used by the
firm only for the business of the firm.

 A partner cannot make use of the property for his personal purpose and if does so, then he
will be accountable to all the co-partners. He could be made liable for the losses caused
because of any such use.

 This duty can be avoided by entering into an agreement to the contrary.

Duty to account for personal profits

 Section 16 of the Partnership Act, provides that:

 If a partner makes the use of the property of the firm and earns profit out of it, then he
should account for the property. This duty arises because of the fiduciary
relationship between the partners.
  Illustration: A, B, and C were partners in a firm. Goods were supplied to a person D. D
paid some extra commission to A, for using his influence to deliver the goods to D. Here,
A has the duty towards the co-partners to account for the commission.
 If a partner enters into a business which is competing with the business of the firm then
the partner should account for the profit earned from any such business.
 Illustration: A, B, and C were partners in the business of sale of bottles. B started to carry
on the same business and started to influence the customers to buy the bottle from him
rather than the firm. Here, B has a duty to account for the profits earned from the business.
 However, a competing business can be carried out after the dissolution of the partnership.
The firm has the right to put reasonable restrictions on carrying the competing business by
the ex-partners such as, any reasonable time for which the ex-partners can’t carry the
competing business or the geographical limits where he can’t carry the business.
 This is not a compulsory duty and thus, can be avoided by entering into an agreement to
the contrary

3. Liabilities of a Partner to Third Parties: The following are the liabilities of a partner to third
parties:

i. Liability of a partner for acts of the firm: Every partner is jointly and severally liable for all acts of
the firm done while he is a partner. Because of this liability, the creditor of the firm can sue all the
partners jointly or individually.

ii. Liability of the firm for wrongful act of a partner: If any loss or injury is caused to any third party
or any penalty is imposed because of wrongful act or omission of a partner, the firm is liable to the
same extent as the partner. However, the partner must act in the ordinary course of business of the
firm or with authority of his partners.

iii. Liability of the firm for misutilisation by partners: Where a partner acting within his apparent
authority receives money or property from a third party and misutilises it or a firm receives money or
property from a third party in the course of its business and any of the partners misutilize such money
or property, then the firm is liable to make good the loss.

iv. Liability of an incoming partner: An incoming partner is liable for the debts and acts of the firm
from the date of his admission into the firm. However, the incoming partner may agree to be liable for
debts prior to his admission. Such agreeing will not empower the prior creditor to sue the incoming
partner. He will be liable only to the other co-partners.

v. Liability of a retiring partner: A retiring partner is liable for the acts of the firm done before his
retirement. But a retiring partner may not be liable for the debts incurred before his retirement if an
agreement is reached between the third parties and the remaining partners of the firm discharging the
retiring partner from all liabilities. After retirement the retiring partner shall be liable unless a public
notice of his retirement is given. No such notice is required in case of retirement of a sleeping or
dormant partner.

RELATION OF PARTNERS WITH THIRD PARTIES

Each partner acts both as the agent and the principal. It is this position of the partners which governs
their relationship with the third parties. Section 18 clearly states that from the point of view of the
third parties, a partner is an agent of the firm, for the purposes of the business of the firm. In that
capacity, he binds all other partners by his acts done on behalf of the firm provided these are done in
the ordinary course of business and in the name of the firm. So, all partners are liable to third parties
for such acts.

Implied Authority of a Partner

In the context of a partnership firm, the authority of/a partner means his authority to bind the firm by
his acts. This authority may be express or implied. The authority conferred on a partner by mutual
agreement is called an express authority. But, where there is no agreement or where the partnership
agreement is silent, the act of a partner which is done to carry on, in the usual way, business of the
kind carried on by the firm, binds the firm (Section 19). This capacity of a partner to bind the firm by
his acts is called the 'implied authority of a partner'. In order that his act may fall within the scope of
his implied authority, the following conditions must be fulfilled.

1 The act done by the partners must relate to the normal business of the firm. If it is of a nature which
is not common in the type of business carried on by the firm, it will not bind the firm even if it has
been done in the name of the firm. For example, an exporter of readymade garments places an order
for a huge quantity of liquor in the name of the firm. As this act does not relate to the normal business
of the firm, it will not fall within the scope of implied authority. The firm, therefore, will not be bound
by it.

2 The act must have been done in the usual way of carrying on the firm's business. In other words, the
act should be such as is usual in the type of business carried on by the firm. For example, X and Y are
partners in a retail business. Goods were sold on credit to Z. Later on, X received the amount from
him (Z) on behalf of the firm. Y does not know of this receipt and X utilises this amount for his
personal use. Receiving money from debtors is an act done in the usual course of business. Hence, the
firm cannot claim the amount from Z on the plea that X had no authority to receive the amount. It is
difficult to clearly lay down as.to what is usual and what is unusual in a business. It will depend on
the nature of business and the usage of trade. For example, buying and selling of goods, drawing and
accepting bills of exchanges, taking loan, etc, are considered normal activities in case of a trading
concern. But, in case of an auctioneering firm or a firm of solicitors, taking loan is not considered to
be a usual activity.

3 The act must be done in the firm's name or should, in some manner, imply an intention to bind the
firm. For example, A and B are partners in a stationery business. A goes to a wholesaler and buys on
credit certain quantity of pencils in the firm's name. He uses these pencils for the family. Since this act
is of the kind usually done in the stationery business and is done in the firm's name, it will bind the
firm.

Act within the implied authority of a partner: The implied authority of a partner shall normally
include:

i) purchasing, on behalf of the firm, goods in which the firm deals or which are used in the firm's
business,

ii) selling the goods of the firm;

iii) receiving payment of the debts due to the firm and giving receipt therefor,

iv) settling accounts with third parties dealing with the firm;

v) employing servants necessary for carrying on the firm's business;

vi) borrowing money in the credit of the firm;

vii) pledging goods of the firm as security for the purpose of getting loans;

viii) drawing, accepting and endorsing negotiable instruments on behalf of the firm; and

ix) employing solicitor to defend action against the firm.

Acts outside the implied authority of a partner:

Sections 19(2) has restricted the scope of implied authority of a partner. According to this section, in
the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not
enable him to:

i) submit to arbitration a dispute relating to the business of the firm;

ii) open a bank account on behalf of the firm in partner's own name;

iii) compromise or relinquish any claim or portion of the claim by the firm;

iv) withdraw a suit or proceedings filed on behalf of the firm;

v) admit any liability in a suit or proceedings against the firm;

vi) acquire immovable property on behalf of the firm;

vii) transfer immovable property belonging to the firm, and

viii) enter into partnership on behalf of the firm.

However, the partners, by mutual agreement, can restrict or extend the implied authority of a partner.

Partners authority in an emergency: According to Section 21, in an emergency a partner will have an
authority to do all such acts to protect the firm from loss as a prudent man would undertake under
similar circumstances in his own case. These acts do not form part of the implied authority of the
partner but, nevertheless, they would bind the firm. For example, the partners of a trading firm by an
express contract decided that no partner would have the authority to sell goods of the firm above the
value of Rs. 10,000without consulting all other partners. Owing to a sudden slump in market, the
prices, crashed. One partner, in order to save the firm from loss, sold all the stock worth Rs. 1,00,000
without consulting any other partner. The firm is bound by such act of the partner.

Implied Authority and Third Parties

All partners are liable to third parties for all acts of a partner which fall within the scope of his express
or implied authority. Their liability to the third parties for such acts can be discussed under the
following heads:

1 Extension or restriction of partner's implied authority: The partners of a firm by mutual agreement,
may extend or restrict the scope of implied authority of any partner. But, the third party is not bound
by any restriction imposed on the implied authority of a partner unless it has the knowledge of such
restriction. In other words, the third party remains unaffected by any secret restriction on the implied
authority of any partner. For example, a trading firm limited the authority of partners to purchase
goods on credit up to Rs. 1,000. A third party who had no knowledge of such restriction sold goods
worth Rs. 1,500 on credit to a partner of the firm. The firm is liable to pay the full amount to the third
party.
2 Effect of admission by a partner : Since, for the purpose of the business of the firm, a partner is an
agent of the firm, any admission or representation by a partner about the affairs of the firm is
sufficient evidence against the firm, provided the admission is made in the ordinary course of
business.

3 Effect of notice to an acting partner: A notice to an agent on matters relating to agency is notice to
the principal. The same rule applies to partnership. Thus, a notice of any matter relating to the affairs
of the firm, when given to a partner who habitually receives it in the ordinary course of business of
the firm, is taken to be a notice to the firm. This rule would not apply in case of a fraud committed by
the partners and the third party against the firm.

4 Liability of partners for acts of the firm: For all acts of the firm, done while he is a partner, every
partner is jointly and severally liable to third parties. This means that for every act of the firm, the
third party can sue each partner individually and also jointly with other partners.

5 Liability for wrongful acts of a partner: When a partner, in the ordinary course of business, commits
a wrongful act, the firm is liable for such an act. Section 26 specifically provides that if on account of
the wrongful act or omission of a partner acting in the ordinary course of business or with the
authority of other partners, some loss or injury is caused to any third party. or any penalty is incurred,
the firm is held liable to the same extent as the partner. For example, A, R and C are partners in a
newspaper business. A is also the editor of the newspaper. A allows the publication of a defamatory
article about a prominent person P, without -. checking its validity. P sues the firm for libel. The firm
will be liable for this act of the editor partner as the omission which caused loss of goodwill to P was
alone in the usual course of business.

6 Liability of firm for misapplication by partners : Section 27 provides that the firm is liable to the
third parties where (i) a partner, acting within his apparent authority, receives money or property from
a third person and misapplied it, or (ii) the firm in the course of its business receives money or
property from a third party and the money is misapplied by any of its partners while it is in the
custody of the firm. For example, X, Y and Z are partners in a business. K, a debtor of the firm repays
his debts of Rs. 10,000 to 2 who does not inform Y and Z about the repayment and misuses the
money. K would be discharged of the debts on account ' of payment made to X.

Partnership Property ( Section 14 )

The expression ‘property of the firm’, also referred to as ‘partnership property’, ‘partnership assets’,
‘joint stock’, ‘common stock’ or ‘joint estate’, denotes all property, rights and interests to which the
firm, that is, all partners collectively, may be entitled. The property which is deemed as belonging to
the firm, in the absence of any agreement between the partners showing contrary intention, is
comprised of the following items:

(i) all property, rights and interests which partners may have brought into the common stock as
their contribution to the common business;

(ii) all the property, rights and interest acquired or purchased by or for the firm, or for the purposes
and in the course of the business of the firm; and

(iii) Goodwill of the business.

The determination of the question whether a particular property is or is not ‘property’ of the firm
ultimately depends on the real intention or agreement of the partners. Thus, the mere fact that the
property of a partner is being used for the purposes of the firm shall not by itself make it partnership
property, unless it is intended to be treated as such. Partners may, by an agreement at any time,
convert the property of any partner or partners (and such conversion, if made in good faith, would be
effectual between the partners and against the creditors of the firm) or the separate property of any
partner into a partnership property.

Goodwill: Section 14 specifically lays down that the goodwill of a business is subject to a contract
between the partners, to be regarded as ‘property’ of the ‘firm’. But this Section does not define the
term. ‘Goodwill’ is a concept very easy to understand but difficult to define. Goodwill may be denied
as the value of the reputation of a business house in respect of profits expected in future over and
above the normal level of profits earned by undertaking belonging to the same class of business.
When a partnership firm is dissolved every partner has a right, in the absence of any agreement to the
contrary, to have the goodwill of business sold for the benefit of all the partners. Goodwill is a part of
the property of the firm. It can be sold separately or along with the other properties of the firm. Any
partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such
partner will not carry on any business similar to that of the firm within a specified period or within
specified local limits and notwithstanding anything contained in Section 27 of the Indian Contract
Act, 1872 such agreement shall be valid if the restrictions imposed are reasonable.

Property of a partner : Where the property is exclusively belonging to a person ,it does not become a
property of the partnership merely because it is used for the business of the partnership. Such property
will become property of the partnership if there is an agreement.

DOCTRINE OF HOLDING OUT

According to Section 28, a person who by written or spoken words, or by conduct, represents himself
or knowingly permits himself to be represented, 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. This is the
doctrine of holding out, which is part of the law of estoppel. A person becomes ordinarily liable for
the debts of a firm if he is a partner. But a person who is not a partner may also become liable to a
third party, if he represents himself as a partner and induces the third party to give credit to the firm.
The objective is to protect the interests of innocent third persons. The example is the case of a retiring
partner. If he retires, without giving public notice but uses the firm name, bills, letter heads etc., he
will be holding out as a partner. It A has given advances to such a retired partner R, he may sue R as a
partner of the firm, and recover his advances.

This section states that a person is held liable as a partner by holding out if such conditions are
fulfilled:

1. He represented himself or knowingly allowed himself to be represented as a partner.

2. Such representation may be by spoken or written words, by conduct or by knowingly
permitting others to make such representation by words or conduct.
3. The other party on the faith of such representation gave credit to the firm.

For example, X and Y are partners in a firm. Another person Z manages the firm on their behalf and
performs various tasks like placing all orders, making payments, etc. If Z places an order on behalf of
the company, then the payment has to be made by the partners, as they have implied authorised Z to
function as a partner and did not inform the suppliers or the customers that Z was only a manager.
However, if a person is aware that Z is merely a manager and not a partner, then he cannot sue the
company to make good the losses incurred by dealing with Z as a partner. A partner by holding out is
liable to the person giving credit, to make good the loss which any third party may suffer. However,
he does not acquire any claim over the firm, and doesn’t become a ‘real’ partner, but he does become
liable for compensation to the third party whom he induced as a partner by holding out and caused
him suffer loss or injury due to such representation.

Ingredients of Partnership by Holding Out

1. There must be representation

The voluntary representation by the person who is depicting himself as a partner of the firm should
have been made, though it is not necessary that the representation must be express, it can be implied
too. In case of Bevan v. National Bank Ltd. (1906) 23 T.L.R. 65, where Mr. MW was the manager of
one Mr. B’s business. The business was carried on in the name and style of MW and Co. The Plaintiff
who had supplied the goods sued MW to recover his money as one of the partners of the firm, but B
contended that he should not be held liable because the style of the firm carried the name only of
MW. Court held that he was liable and laid down that where a person carries a business in the name of
an individual with the addition of the words “and Co.” and employ that individual as manager of the
business to whom the entire management of the business is left, that doesn’t amount to holding out
that person as sole owner of the business, it may amount to holding out that he is partner in the
business. MW was also liable because by permitting his name to be used in the title of the firm he
made a representation that he was a partner and responsible to those who had given credit to the firm
on the faith of that representation.

2. Knowledge of representation and acting on it in good faith

The second requirement of liability for holding out is that a person seeking to charge another with
liability has to show that he had knowledge of the representation and did act under the belief that the
facts represented were true. Where there is no representation to the plaintiff or, at any rate, there is no
representation to his knowledge, his right to sue the person making such representation does not arise.
To charge the defendant with liability as a partner on the ground of representation of himself as a
partner, it must be proved either that he has represented himself as a partner to the plaintiff or has
made such a public representation of himself in a character as to lead the court to conclude that the
plaintiff knowing of the representation and believing that the defendant to be a partner gave him credit
under that belief.

If the plaintiff has acted on the faith of representation, liability is incurred by him, and it is immaterial
that the defendant didn’t know that this representation had reached to the plaintiff.  But if the plaintiff
has not heard of the representation or having heard didn’t believe it or knew the real truth, then in
such cases no liability by holding out arises because he has not been twisted by the representation.
The person representing himself to be a partner is liable as a partner to anyone who has on the faith of
any such representation gave credit to the firm.

Scarf v. Jardine 1882 7 APP CAS 345, is an important case for the principle of holding out wherein
the importance of notice of retirement was highlighted. The court, in this case, stated that the retiring
partner must give notice of his retirement from a firm in the same manner as a notice of appointment
is given, so that the people can know about his status with regard to the company. Or else, he might be
treated as a partner by holding out no matter how long back he retired from the firm without notice.

The court further stated that such notice can be given either by the retiring partner or the existing
partners of the company. Unless such notice of retirement is given, the liability of a retired partner to
old creditors or customers subsists, and the firm would also be liable for the acts of the retired partner.
There are exceptions to the rule established in the Scarf v. Jardine case as given below:

1. The death of a partner constitutes sufficient notice by itself.

2. Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian
Partnership Act.
3. If one has been a dormant or sleeping from beginning to end, notice can be dispensed with
as neither the customers nor the clients know of his participation in the firm.

In English law, Partnership by holding out is referred to as apparent partnership instead, and the legal
provisions in both countries are very similar. In Smith v. Bailey 2 QB 432, it was decided that the
liability on the principle of Estoppel extends only on account of credit given to the firm and not to
torts or civil wrongs committed on behalf of the firm.

Section 29 - RIGHTS OF TRANSFEREE OF A PARTNER'S INTEREST

(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or, by the
creation by him of a charge on such interest, does not entitle the transferee, during the continuance of
the firm, to interfere in the conduct of the business or to require accounts or to inspect the books of the
firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the
transferee shall accept the account of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled
as against the remaining partners, to receive the share of the assets of the firm to which the
transferring partner is entitled and, for the purpose of ascertaining that share, to an account as from the
date of the dissolution.

A share in a partnership is transferable like any other property, but as the partnership relationship is
based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot
enjoy the same rights and privileges as the original partner. The Supreme Court has held that the
assignee will enjoy only the rights to receive the share of the profits of the assignor and account of
profits agreed to by other partners.

The rights of such a transferee are as follows:

(1) During the continuance of partnership, such transferee is not entitled (a) to interfere with the
conduct of the business, (b) to require accounts, or (c) to inspect books of the firm. He is only entitled
to receive the share of the profits of the transferring partner and he is bound to accept the profits as
agreed to by the partners, i.e., he cannot challenge the accounts.

(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be
entitled, against the remaining partners: (a) to receive the share of the assets of the firm to which the
transferring partner was entitled, and (b) for the purpose of ascertaining the share, he is entitled to an
account as from the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of all
the partners. A partner cannot by transferring his own interest, make anybody else a partner in his
stead, unless the other partners agree to accept that person as a partner. At the same time, a partner is
not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as
an existing interest and tangible property which can be assigned.

As a general rule, the partners are at liberty to determine their rights and obligation per se (as between
themselves) by means of a contract between them. It follows that an agreement between partners
which enables one either to introduce a new partner in the firm (over and above the existing partners)
or to substitute another partner in his place by novation, transfer or otherwise, could bind all the
partners. If a partner has an unconditional right to transfer his share so as to substitute another person
in his stead, then he will not be liable for any acts of the firm subsequent to a valid transfer of his
share and serving notice of it on his co-partners. This would, in effect, by tantamount to his retirement
from the firm and hence his rights and liabilities would be governed by Section 32 of the Act.

MINOR AS A PARTNER

A minor cannot be bound by a contract because a minor’s contract is void and not merely voidable.
Therefore, a minor cannot become a partner in a rm because partnership is founded on a contract.
Though a minor cannot be a partner in a rm, he can nonetheless be admitted to the benefits of
partnership under Section 30 of the Act. In other words, he can be validly given a share in the
partnership profits. When this has been done and it can be done with the consent of all the partners
then the rights and liabilities of such a partner will be governed under Section 30 as follows:

(1) Rights:

(i) A minor partner has a right to his agreed share of the profits and of the firm.

(ii) He can have access to, inspect and copy the accounts of the firm.

(iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the rm, and not otherwise.

(iv) On attaining majority he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was entitled as a
minor. If he does not, then his share is not liable for any acts of the rm after the date of the public
notice served to that effect.

(2) Liabilities:

(i) Before attaining majority:

(a) The liability of the minor is conned only to the extent of his share in the profits and the property of
the firm.

(b) Minor has no personal liability for the debts of the rm incurred during his minority.

(c) Minor cannot be declared insolvent, but if the rm is declared insolvent his share in the rm vests in
the Official Receiver/Assignee.

(ii) After attaining majority: Within 6 months of his attaining majority or on his obtaining knowledge
that he had been admitted to the benefits of partnership, whichever date is later, the minor partner has
to decide whether he shall remain a partner or leave the firm. Where he has elected not to become
partner, he may give public notice that he has elected not to become partner and such notice shall
determine his position as regards the rm. If he fails to give such notice, he shall become a partner in
the rm on the expiry of the said six months. (a) When he becomes partner: If the minor becomes a
partner on his own willingness or by his failure to give the public notice within specified time, his
rights and liabilities as given in Section 30(7) are as follows:

(i) He becomes personally liable to third parties for all acts of the firm done since he was admitted to
the benefits of partnership.

(ii) His share in the property and the profits of the rm remains the same to which he was entitled as a
minor.

(b) When he elects not to become a partner:

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

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

(iii) He shall be entitled to sue the partners for his share of the property and profits. It may be noted
that such minor shall give notice to the Registrar that he has or has not become a partner.

Section 31 - INTRODUCTION OF A PARTNER

Subject to a contract between partners and to the provisions regarding minors in a firm, no new
partners can be introduced into a rm without the consent of all the existing partners. Rights and
liabilities of new partner: The liabilities of the new partner ordinarily commence from the date when
he is admitted as a partner, unless he agrees to be liable for obligations incurred by the firm prior to
the date. The new firm, including the new partner who joins it, may agree to assume liability for the
existing debts of the old firm, and creditors may agree to accept the new firm as their debtor and
discharge the old partners. The creditor’s consent is necessary in every case to make the transaction
operative. Novation is the technical term in a contract for substituted liability, of course, not conned
only to case of partnership. But a mere agreement amongst partners cannot operate as Novation. Thus,
an agreement between the partners and the incoming partner that he shall be liable for existing debts
will not ipso facto give creditors of the rm any right against him.

Section 32 - RETIREMENT OF A PARTNER

(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.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done
before his retirement by an agreement made by him with such third party and the partners of the
reconstituted firm, and such agreement may be implied by a course of dealing between the third party
and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable
as partners to third parties for any act done by any of them which would have been an act of the firm
if done before the retirement, until public notice is given of the retirement: Provided that a retired
partner is not liable to any third party who deals with the rm without knowing that he was a partner.
(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.

Section 33 - EXPULSION OF A PARTNER

(i) the power of expulsion must have existed in a contract between the partners;

(ii) the power has been exercised by a majority of the partners; and

(iii) it has been exercised in good faith. If all these conditions are not present, the expulsion is not
deemed to be in bona de interest of the business of the firm. The test of good faith as required under
Section 33(1) includes three things: If a partner is otherwise expelled, the expulsion is null and void.
It may be noted that under the Act, the expulsion of partners does not necessarily result in dissolution
of the firm. The invalid expulsion of a partner does not put an end to the partnership even if the
partnership is at will and it will be deemed to continue as before.

Section 34 - 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.

(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a
partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and
the firm is not liable for any act of the insolvent, done after the date on which the order of
adjudication is made.

Section 35 - LIABILITY OF ESTATE OF DECEASED PARTNER

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in
regard to the dissolution of the partnership, by death of partner is subject to a contract between the
parties and the partners are competent to agree that the death of one will not have the effect of
dissolving the partnership as regards the surviving partners unless the firm consists of only two
partners. In order that the estate of the deceased partner may be absolved from liability for the future
obligations of the firm, it is not necessary to give any notice either to the public or the persons having
dealings with the firm.

Revocation of continuing guarantee by change in the firm(Section 38): Section 38 of the Indian
Partnership Act provides that a continuing guarantee given to a firm or to third party in respect of the
transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future
transactions from the date of any change in the constitution of the firm. One should note that the
above rule is subject to an agreement to the contrary. The agreement, if any, to the contrary required
to displace the effect of Section 38, must be clear.

Mode of Effecting Registration

The registration of a firm may be affected at any time by sending by post or delivering to the
Registrar, of the area in which any place of business of the firm is situated or proposed to be situated,
a statement in the prescribed form. It is not essential that the firm should be registered from the very
beginning. When the partners decide to get the firm registered, as per the provisions of Section 58 of
the Indian Partnership Act, 1932 they have to file the statement in the prescribed form. The statement
must be accompanied by the prescribed fee stating

(i) the firm’s name,

(ii) the principal place of business,

(iii) the names of its other places of business,

(iv) date of joining of each partner,

(v) names in full and permanent addresses of the partners, and

(vi) the duration of the firm. The aforesaid statement is to be signed by all the partners or by their
agents specially authorized in this behalf. Each partner so signing it shall also verify it in the manner
prescribed.

When the Registrar is satisfied that the above-mentioned provisions have been complied with, he shall
record an entry of this statement in the register (called the Register of Firms) and shall file the
statement. Subsequent alterations as alterations in the name, place, constitution, etc., of the firm that
may occur during its continuance should also be registered.

When the Registrar is satisfied that the provisions of Section 58 have been duly complied with, he
shall record an entry of the statement in a Register called the Register of Firms and shall file the
statement. Then he shall issue a certificate of Registration. However, registration is deemed to be
complete as soon as an application in the prescribed form with the prescribed fee and necessary
details concerning the particulars of partnership is delivered to the Registrar. The recording of an
entry in the register of firms is a routine duty of Registrar. Registration may also be affected even
after a suit has been filed by the firm but in that case, it is necessary to withdraw the suit first and get
the firm registered and then file a fresh suit.

Disabilities of non- registration are:

(i) No suit in a civil court by firm or other co-partners against third party: The firm or any other
person on its behalf cannot bring an action against the third party for breach of contract entered into
by the firm, unless the firm is registered and the persons suing are or have been shown in the register
of firms as partners in the firm. In other words, a registered firm can only le a suit against a third party
and the persons suing have been in the register of firms as partners in the firm.

(ii) No relief to partners for set-off of claim: If an action is brought against the firm by a third party,
then neither the firm nor the partner can claim any set-off, if the suit be valued for more than ‘ 100 or
pursue other proceedings to enforce the rights arising from any contract.

(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an
unregistered firm (or any other person on his behalf) is precluded from bringing legal action against
the firm or any person alleged to be or to have been a partner in the firm. But such a person may sue
for dissolution of the firm or for accounts and realization of his share in the firm’s property where the
firm is dissolved.

(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought against the
firm by a third party.

Exceptions: Non-registration of a firm does not, however effect the following rights:

1. The right of third parties to sue the firm or any partner.

2. The right of partners to sue for the dissolution of the firm or for the settlement of the accounts of a
dissolved firm, or for realization of the property of a dissolved firm.
3. The power of an Official Assignees, Receiver of Court to release the property of the insolvent
partner and to bring an action.

4. The right to sue or claim a set-off if the value of suit does not exceed ‘100 in value.

DISSOLUTION OF FIRMS ( Section 39-47 )

According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership between
all partners of a firm is called dissolution of the firm. Thus the Dissolution of firm means the
discontinuation of the jural relation existing between all the partners of the firm. But when only one or
the partners retires or becomes incapacitated from acting as a partner due to death, insolvency or
insanity, the partnership, i.e. the relationship between such a partner and other is dissolved, but the
rest may decide to continue. In such cases, there is in practice, no dissolution of the firm. The
particular partner goes out, but the remaining partners carry on the business of the firm, it is called
dissolution of partnership. In the case of dissolution of the firm, on the other hand, the whole firm is
dissolved. The partnership terminates as between each and every partner of the firm.

Modes of Dissolution of a Firm (Sections 39-44)

The dissolution of partnership may be in any of the following ways:

1. Dissolution without the order of the court or voluntary dissolution:

It consists of following four types:

(a) Dissolution by agreement (Section 40): A firm may be dissolved with the consent of all the
partners or in accordance with a contract between the partners.

(b) Compulsory dissolution (Section 41): A firm is compulsorily dissolved- (i) by adjudication of
all the partners or of all the partners but one as insolvent, or (ii) by happening of any event which
makes it unlawful for the business of the firm to be carried on. For example: A firm is carrying on the
business of trading a particular chemical and a law is passed which bans on the trading of such a
particular chemical. The business of the firm becomes unlawful and so the firm will have to be
compulsorily dissolved.

(c) Dissolution on the happening of certain contingencies (Section 42): Subject to contract
between the partners a firm can be dissolved on the happening of any of the following contingencies-

(i) where the firm is constituted for a fixed term, on the expiry of that term.

(ii) where the firm is constituted to carry out one or more adventures or undertaking, then by
completion thereof.

(iii) On the death of a partner, and

(iv) On the adjudication of a partner as an insolvent.

For example: Where a partnership was constituted for a fixed term or for carrying out a particular
adventure or undertaking the death or insolvency does not dissolve the partnership firm, unless there
is any contract to the contrary.

(d) Dissolution by notice of partnership at will (Section 43): 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. If the date is mentioned, 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.

(2) Dissolution by the court (Section 44): The Court may, at the suit of the party, dissolve a firm
on any of the following ground:

(a) Insanity/unsound mind: Where a partner has become of unsound mind, the court may dissolve
the firm on a suit of the other partners or by the next friend of the insane partner.

(b) Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, there the court may dissolve the firm.

(c) Misconduct (Section 45): Where a partner, other than the partner suing, is guilty of conduct
which is likely to affect prejudicially the carrying on of business, the court may order for dissolution
of the firm, by giving regard to the nature of business.

(d) Persistent breach of agreement: Where a partner other than the partner suing, willfully or
persistently commits breach of agreements relating to the management of the affairs of the firm or the
conduct of its business, or otherwise so conduct himself in matters relating to the business that it is
not reasonably practicable for other partners to carry on the business in partnership with him, there the
court may dissolve the firm at the instance of any of the partners. For example: If one of the partners
keeps erroneous accounts and omits to enter receipts or if there is continued quarrels between the
partners or there is such a state of things that destroys the mutual confidence of partners, the court
may order for dissolution of the firm.

(e) Transfer of interest: Where a partner other than the partner suing, has transferred the whole of
his interest in the firm to a third party or has allowed his share to be charged or sold by the court, in
the recovery of arrears of land revenue, the court may dissolve the firm at the instance of any other
partner.

(f) Continuous losses: Where the business of the firm cannot be carried on except at a loss in
future also, the court may order for its dissolution.

(g) Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases for the
just and equitable grounds-

(i) Deadlock in the management.

(ii) Where the partners are not in talking terms between them.

(iii) Loss of substratum.

(iv) Gambling by a partner on a stock exchange.

Consequences of Dissolution of a Firm

After the dissolution of firm, the partners have certain rights and liabilities. Sections 45 to 55 of the
Indian Partnership Act, 1932, provides details on the consequences of the dissolution of a firm. 

Liability for Acts done by Partners after the Dissolution of Firm (Section 45)
According to this section, the partners of a firm are liable to a third party for any act done by any of them
unless they give a public notice of the dissolution. This notice can be given by any partner. It also
specifies that the estate of a partner who dies, retires from the firm, becomes insolvent, or that of a person
who the third party is not aware of being a partner of the firm, is not liable under this section (from the
date he ceases to be a partner).

In simple words, Section 45 endeavors to protect third parties who have no clue about the dissolution of
firm and also the partners of a dissolved firm from liabilities towards third parties post-dissolution

Wind up the Business Post-Dissolution (Section 46)

Once a firm is dissolved, every partner or his representative has a right to apply the property of the firm in
payments of debts and liabilities of the firm. The surplus, if any, can be distributed among the partners
according to their rights.

Also, according to section 47 post-dissolution, the authority of each partner to bind the firm, along with
other mutual rights and obligations, continue till such time that they can wind up the affairs of the firm.

This gives them a chance to complete the unfinished transactions at the time of dissolution. This does not
include the acts of a partner who has been adjudicated insolvent.

Settlement of Partnership Accounts (Section 48)

Section 48 lays down certain rules for settlement of partnership accounts after the dissolution of firm
under the usual course of business. However, the partners can mutually agree for a different settlement
mode. The rules are as follows:

1. Any losses or deficiencies of capital will be paid out of profits. If the profits are not sufficient,
then they are paid out of the capital and finally, if necessary, by the partners. The partners
contribute in the proportion in which they receive their share in profits.

2. The assets of the firm, which includes the sums contributed by the partners to make up for the
deficiency in the capital, is applied in the following order:
1. Repaying the debts of the firm to third parties

2. Paying each partner rateably what is due to him from the capital

3. Paying each partner rateably what is due to him on account of capital

4. If any amount is left, then dividing it among the partners in proportions in which they
receive their share in profits.

Nowell v. Nowell in this case A and B trade as partners and it is agreed that profits should be shared
and losses borne equally. On dissolution it is found that A has advanced more capital than B to the
extent of Rs.1900. the net assets were only Rs.1400. there is thus a deficiency of capital to the extent of
Rs500. Under sub section(a) both the partners must contribute in the proportion in which they have
agreed to share profits that is equally. Therefore B should pay to A sum of Rs 250.

Paying Firm Debts and Separate Debts (Section 49)

If there are joint debts due from the firm and separate debts due from any partner, then:

 The payment of firm debts is given priority. If there is any surplus, then the share of each
partner is applied to his separate debts. It can also be paid to him.

 The separate property of the partner is applied first in the payment of his separate debts. IF
there is any surplus, then it is applied to the payment of firm debts.

Personal Profits Earned after Dissolution of Firm (Section 50 and 53)

A firm is dissolved by the death of a partner. If the surviving partners, either themselves or with the
representative of the deceased partner carry on the business of the firm, then they have to account for any
personal profits by them, before winding up the firm.

So, if a lease expires on the death of a partner and the surviving partners renew it before the firm winds
up, then the profits belong to the firm.

Section 53 clearly states that in the absence of an agreement to the contrary, a partner can restrain other
partners from carrying on a similar business in the name of the firm or from using the property of the firm
for their own benefit, unless the winding up process is complete.

Return of Premium on the Premature Dissolution of Firm (Section 51)

If a firm dissolves earlier than the time fixed for it, then the partner paying the premium can receive a
return of a reasonable part of the premium. This holds true except when the partnership is dissolved:

 Due to the death of a partner

 Due to the misconduct of the partner paying the premium

 Post an agreement which has no provisions for the return of premium

Also, the partner paying the premium gets a return of a proportionate part of the premium. This holds true
when the partnership is dissolved:

 Without either partner being at fault

 Owing to the fault of both the partners

 Due to the fault of the partner receiving the premium

 Due to unawareness about the insolvency of the partner receiving the premium
Contract Rescinded for Fraud or Misrepresentation (Section 52)

If the contract creating a partnership is rescinded due to fraud or misrepresentation, then the party who
can rescind the contract is entitled to:

 Lien on the assets of the firm remaining after the debts of the firm is paid. This lien is for any
sum paid by him for the purchase of a share in the firm and capital contributed by him.

 Rank as a creditor of the firm for any payment made by him towards the debts of the firm

 An indemnity from the partners guilty of the fraud or misrepresentation against all debts of the

firm.

Sale of Goodwill after the Dissolution of Firm (Section 55)

The goodwill is included in the assets during the settling of the accounts of a firm after dissolution. The
goodwill can be sold separately or along with the other assets of the firm. This is subject to the contract
between the partners. Once the goodwill of the firm is sold after dissolution, a partner can carry on and
advertise a business competing with that of the buyer of goodwill. However, subject to the agreement
between him and the buyer, he may not:

 Use the name of the firm

 Represent himself as carrying on the business of the firm

 Solicit the customs of persons dealing with the firm before the dissolution

It is also important to note that a partner can make an agreement with the buyer of goodwill that he will
not carry on any business similar to that of the firm or with certain local limits. Such an agreement,
notwithstanding Section 27 of the Indian Contract Act is valid if the restrictions are reasonable. In Curt
Brothers Ltd. v. Webster 1904 1 Ch. 685, A sells the goodwill of his business to B and sets up a new
business. X who remains customer of the old firm deals his own accord with the new firm set by A. A
is not entitled to solicit even such a customer as X, though if X continues to deal with A of his own
accord, A would be entitled to deal with him.

Mode of Giving Public Notice (Section 72)

In every case where the public notice of any matter in respect of partnership firm is required to be
given under this Act, it must be given by publication in the Official Gazette and in at least one
vernacular newspaper circulating in the district where the firm to which it relates, has its place or
principal place of business. In the case of registered firms, apart from the aforesaid notification, a
notice is also required to be served on the Registrar of Firms under Section 63 where the matters
relate to (a) the retirement or expulsion of a partner, or (b) dissolution of the firm, or (c) the election,
on attaining majority, to be or not to be a partner, by a person who as a minor, was admitted to the
benefit of partnership.