UNIT IV PARTNERSHIP ACT

1 – Define partnership and discuss its essential elements.

Introduction

A partnership is the relationship between persons who have agreed

to share the profits of a business carried on by all or any of them
acting or all. In India it is governed by the Indian Partnership Act,
1932, which extends to the whole of India except the State of Jammu
and Kashmir. It came into force on 1st October 1932.

Eligibility

A partnership agreement can be entered into between persons who

are competent to contract. Every person who is of the age of majority
according to the law to which he is subject and who is of sound mind
and is not disqualified from contracting by any law to which he is
subject can enter into a partnership.

The following can enter into a partnership -

Individual

Firm

Hindu undivided family

Company

Trustees

INDIVIDUAL: An individual, who is competent to contract, can

become a partner in the partnership firm. If there are more than two
partners in a firm, an individual can be a partner in his individual
capacity as well as in a representative capacity as Karta of the Hindu
undivided family.

FIRM: A partnership firm is not a person and therefore a firm can not
enter into partnership with any firm or individual. But a partner of
the partnership firm can enter into partnership with other persons
and he can share the profits of the said firm with his other co-partners
of the parent firm.

HINDU UNDIVIDED FAMILY: A Karta of the Hindu undivided family

can become a partner in a partnership in his individual capacity,
provided the member has contributed his self acquired or personal
skill and labour.

COMPANY: A company is a juristic person and therefore can become

a partner in a partnership firm, if it is authorised to do so by its
objects.

TRUSTEES: Trustees of private religious trust, family trust and

trustees of Hindu mutts or other religious endowments are juristic
persons and can therefore enter into partnership, unless their
constitution or objects forbid.

Number of partners

The number of partners in a firm shall not exceed 20 and a

partnership having more than 20 persons is illegal. When there is
partnership between two firms, all the partners of each firm will be
taken into account. If the partnership is between the karta and
member of Hindu undivided family the members of the joint Hindu
family will not be taken into account.

ESSENTIALS OF PARTNERSHIP

Agreement- The relationship between partners arises from contract

and not status. If after the death of sole proprietor of a firm, his heirs
inherit firm they do not become partners, as there is no agreement
between them.

Sharing of profits- The partners may agree to share profits out of

partnership business, but not share the losses. Sharing of losses is not
necessary to constitute the partnership. The partners may agree to
share the profits of the business in any way they like.

Business- Business includes every trade, occupation, or profession.

There must be course of dealings either actually continued or
contemplated to be continued with a profit motive and not for sport
or pleasure.

Essential elements of partnership in business are given below:

This definition contains five elements which constitute a partnership,

namely:

(1) There must be a contract;

(2) Between two or more persons;

(3) Who agree to carry on a business

(4) With the object of sharing profits; and

(5) The business must be carried on by all or any of them acting for
all (i.e., there must be mutual agency).

All the above elements must coexist in order to constitute a

partnership. If any of these is not present, there cannot be a
partnership. We now discuss these elements one by one:

1. Contract:

Partnership is the result of a contract. It does not arise from status,

operation of law or inheritance. Thus at the death of father, who was
a partner in a firm, the son can claim share in the partnership
property but cannot become a partner unless he enters into a
contract for the same with other persons concerned.

Similarly, the members of Joint Hindu Family carrying on a family

business cannot be called partners for their relation arises not from
any contract but from status. To emphasise the element of contract,
Sec. 5 expressly provides mat “the relation of partnership arises from
contract and not from status.”

Thus a ‘contract’ is the very foundation of partnership. It may,

however, be either express or implied. Again, it may be oral or in
writing (Laxmibai vs. Roshan Lai).

2. Association of two or more persons:

Since partnership is the result of a contract, at least two persons are

necessary to constitute a partnership. The Partnership Act does not
mention any thing about the maximum number of persons who can
be partners in a partnership firm but Sec. 11 of the Companies Act,
1956, lays down that a partnership consisting of more than 10
persons for banking business and 20 persons for any other business
would be illegal. Hence these should be regarded as the maximum
limits to the number of partners in a partnership firm.

Only persons competent to contract can enter into a contract of

partnership. Persons may be natural or artificial. A company may,
being an artificial legal person, enter into a contract of partnership, if
authorised by its Memorandum of Association to do so.

Even there could be a partnership between a numbers of companies

(Steel Bros. & Co Ltd. Vs. Commissioner of Income-tax). A partnership
firm, since it is not recognised as a legal person having a separate
entity from that of partners cannot enter into contract of partnership
with another firm or individuals (Duli Chand vs. Commissioner of
Income-tax).

When a firm (under a firm name) enters into a contract of partnership

with another firm or individual, in that case, in the eye of law the
members of the firms or firm become partners in their individual
capacity (Commissioner of Income-tax vs Jadavji Narsidas & Co.).

3. Carrying on of business:

The third essential element of a partnership is that the parties must

have agreed to carry on a business. The term ‘business’ is used in its
widest sense and includes every trade, occupation or profession [Sec.
2(b)].

If the purpose is to carry on some charitable work, it will not be a

partnership. Similarly, if a number of persons agree to share the
income of a certain property or to divide the goods purchased in bulk
amongst them, there is no partnership and such persons cannot be
called partners because in neither case they are carrying on a
business.

Thus, where A and B jointly purchased a tea shop and incurred

additional expenses for purchasing pottery and utensils for the job,
contributing necessary money half and half and then leased out the
shop on rent which was shared equally by them, it was held that they
are only co-owners and not partners as they never carried on any
business (Govind Nair vs Maga).

Further, in order to be a partnership, the business must be ‘carried

on’ which suggests continuity or repetition of acts. Merely a single
isolated transaction of purchase and sale by a number of persons
does not mean carrying on of the business.

But if a number of articles are purchased at one time and the sales
are to go on, profits are to be realised and are to be divided amongst
a number of persons, there is a carrying on of business.

Section 8, however, provides that there can be ‘particular

partnership’ between partners whereby they engage in a particular
adventure or undertaking, which if successful, would result in profit.

Thus, there can be a partnership business as to the working out of a

coal mine, or the sowing, cropping, harvesting and sale of a particular
crop, or the production of a film because although in each of these
cases there is a single adventure but the same requires a series of
transactions and continuing relationship (Ram Dass vs Mukut Dharfi).

4. Sharing of profits:

This essential element provides that the agreement to carry on

business must be with the object of sharing profits amongst all the
partners. Impliedly the partnership must aim to make profits because
then only profits may be divided amongst the partners.

Thus, there would be no partnership where the business is carried on

with a philanthropic motive and not for making a profit or where only
one of the partners is entitled to the whole of the profits of the
business. The partners may, however, agree to share profits in any
ratio they like.

Sharing of losses not necessary:

To constitute a partnership it is not essential that the partners should

agree to share the losses (Raghunandan vs. Harmasjee). It is open to
one or more partners to agree to bear all the losses of the business.

The Act, therefore, does not seek to make agreement to share losses
a test of the existence of partnership. Section 13(6), however,
provides that the partners are entitled to share equally in the profits
earned, and shall contribute equally to the losses sustained by the
firm, unless otherwise agreed.
Thus sharing of losses may be regarded as consequential upon the
sharing of profits and where nothing is said as to the sharing of losses,
an agreement to share profits implies an agreement to share losses
as well.

It must be noted that even though a partner may not share in the
losses of the business, yet his liability vis-a-vis outsiders shall be
unlimited because there cannot be ‘limited partnerships’ in our
country under the Partnership Act.

Sharing of profits not conclusive test:

Although sharing of profits is an evidence of partnership but this is

not the conclusive test of partnership. There may be persons sharing
the profits of a business but who do not by that reason become
partners.

In this respect Explanation II to Section 6 clearly states: “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 of 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 a 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
itself make the receiver a partner, with the persons carrying on the
business.”

The question whether a person sharing profits of a business is a

partner or not depends upon the real relation between the parties,
as shown by all relevant facts taken together (Sec. 6).

5. Mutual agency:

The fifth element in the definition of a partnership provides that the

business must be carried on by all the partners or any (one or more)
of them acting for all, that is, there must be mutual agency.

Thus every partner is both an agent and principal for himself and
other partners, i.e. he can bind by his acts the other partners and can
be bound by the acts of other partners in the ordinary course of
business.

To test whether a person is a partner or not, it should be seen, among

other things, whether or not the element of agency exists, i’. e.,
whether the business is conducted on his behalf.
It is on the basis of this test that a widow of a deceased partner or a
manager having a share in the profits is not a partner, because
business is not carried on her or his behalf. If she or he does
something the firm is not legally bound by that.

The importance of the element of mutual agency lies in the fact that
it enables every partner to carry on the business on behalf of others.
Partners may agree among themselves that some one of them shall
not enter into any contracts on behalf of the firm, but by virtue of the
principle of mutual agency, such partner can bind the firm vis-a-vis
third parties without notice in contracts made according to the
ordinary usage of trade.

Of course he can be made liable by other partner’s inter-se for

exceeding his authority. In fact, the law of partnership governing
relations of the partner’s inter-se and with the outside world is an
extension of the law of agency.

In Cox vs. Hickman it was rightly observed: “The law as to partnership

is undoubtedly a branch of the law of the principal and agent…. The
liability of one partner for the acts of his co-partner is in truth the
liability of a principal for the acts of his agent.

Where two or more persons are engaged as partners in an ordinary

trade, each of them has an implied authority from the others to bind
all by contracts entered into according to usual course of business in
that trade.

Every partner in trade is, for the ordinary purposes of the trade, the
agent of his co-partners; all are therefore liable for the ordinary trade
contract of the other. The public have a right to assume that every
partner has authority from his co-partners to bind the whole firm in
contracts made according to the ordinary usage of trade.”

2 – Discuss different kinds of partnerships and partners.

Kinds of Partnership:

Partnership firms are of two type’s viz., General Partnership and

Limited Partnership. These are explained as under.

1. General Partnership:

In this case the liability of all the partners is unlimited. It means in

order to meet the creditor’s claims even the private property of the
partners can also be used.

Under General Partnership, every partner has the right to take part
in the management of the business of the firm. In India all the
partnership firms are formed in this form.
General Partnership can be further divided into two types i.e. (i)
Partnership at Will, and (ii) Particular Partnership. These are
explained as under:

(i) Partnership at will:

When a partnership firm is constituted for unspecified period, it is

known as Partnership at will. The business of such a firm is transacted
for any length of time depending upon the will of the partners.

It can be dissolved by any partner by giving a notice indicating that

he wants to withdraw his interest from the firm.

(ii) Particular partnership:

As the very name suggests, this type of partnership is formed for

conducting business of specific or temporary nature. The partnership
comes to an end either on the accomplishment of the task for which
the partnership was undertaken or on the expiry of the time period
for which the firm was constituted.

Partnership to construct Mahanadi Bride. The movement bridge is

complete partnership leased then and there.

2. Limited Partnership:
Under this type of partnership some of the partners have unlimited
liability while others have limited liability up to their individual share
in the capital of the firm.

Such types of partnerships are not permissible in India, but they are
quite common in U.S.A. and England. The partners having limited
liability in the firm is known as special partner and others having
unlimited liability is called general partner.

There are various types of partners in a partnership firm. They are as

follows:

Active Partner:

Partner who takes an active part in the management of the business

is called active partner. He may also be called 'actual' or 'ostensible'
partner. He is an agent of the other partners in the ordinary course
of business of the firm and considered a full fledged partner in the
real sense of the term.

Sleeping or Dormant Partner:

A sleeping or dormant partner is one who does not take any active
part in the management of the business. He contributes capital and
shares the profits which are usually less than that of the active
partners. He is liable for all the debts of the firm but his relationship
with the firm is not disclosed to the general public.
Nominal Partner:

A partner who simply lends his name to the firm is called nominal
partner. He neither contributes any capital nor shares in the profits
or take part the management of the business. But he is liable to third
parties like other partners. A nominal partner must be distinguished
from the sleeping partner. While the nominal partner is known to the
outsiders and does not share in the profits, the sleeping partner
shares in the profit and his relationship is kept secret.

Partner in Profits:

A partner who shares in the profits only without being liable of the
losses is known as partner in profits. He does not take part in the
management of the business but he is liable to third parties for all the
debts of the firm.

Sub-partner:

When stranger shares the profits derived from the firm by a partner
he is regarded as a sub-partner. A sub-partner is in no way connected
with the firm or he is not a partner of the firm. He is simply a partners'
partner. Therefore, he has no rights again the firm nor he is liable for
the debts of the firm. He only shares profits from a partner.

Partner by Estoppels or Holding out:

When a partner is not a partner but represent to the outside world
that he is a partner in a firm, he is stopped or prevented from denying
the truth. He is considered as a partner in the eyes of law. Similarly,
if a person is declared to be a partner by a partner of a firm and such
person remained silent without denying it, he also considered a
partner by holding out. Thus, such persons are liable to outsiders as
partners on the principle of estoppel or holding out because on faith
of their representation action outsiders have granted credit to the
firm.

Minor Partner:

Partnership arises from contract and a minor is not competent to

enter into contract. Therefore, strictly speaking, a minor cannot be
full-fledged partners. But with the consent of all the partners he can
be admitted into partnership for benefits only. He is not personally
liable to third parties for the debts of the firm, on attaining majority,
if he continues as a partner, his liability will become unlimited with
effect from the date of hi original admission into the firm.

3 - Write a note on partnership deed.

Partnership is formed by an agreement. The agreement may be

verbal or in writing or may be inferred from the conduct of the
partners. To avoid future disputes and differences between the
partners it is desirable to have a written agreement. The written
agreement between or among the partners is known as “Partnership
Deed” otherwise known as 'Articles of Partnership'. It must be signed
by all partners and stamped in accordance with the Indian Stamp Act.
A partnership deed generally contains the following important
particulars:
Contents

i. Names and addresses of the firm and each partners

ii. Nature of business to be carried on and the locally where business

is to set up

iii. Duration of partnership, whether for a fixed period/job of not

iv. Capital contribution by the each partner

v. Profit sharing ratio among the partners

vi. Interest on capital, if any to be paid to partners

vii. Drawings and interest on drawings, whether permissible or not

viii. Loans and advances by partners to the firm

ix. Whether or not to pay salary or commission to partners How and

who will manage the business
x. Methods of keeping account who and how to audit the accounts.
Maintaining bank accounts

xi. The mode of admission and retirement of partners

xii. How to value the goodwill on admission, retirement and death of

a partner

xiii. Method of settlement of accounts on retirement and death of a

partner

xiv. Provision for arbitration in case of disputes

xv. The methods of dissolution of partnership firm

xvi. Settlement of accounts in case of dissolution of the firm

4- Discuss the advantages and disadvantages of partnership.

Merits of Partnership

The partnership form of business organization enjoys the following

advantages:

1. Ease of formation:

Partnership is simple to form, inexpensive to establish and easy to

operate. No legal formalities are involved and no formal documents
are to be prepared. Only an agreement is required. Even the
registration of the firm is not compulsory. Similarly, a partnership can
be dissolved easily at any time.

2. Larger financial resources:

It is possible to collect a large amount of capital due to a number of

partners. New partners can be admitted to raise further capital
whenever necessary. Credit-worthiness is also high because every
partner is jointly and severally liable for all the debts of the firm.

3. Combined abilities and judgment:

The skill and experience of all the partners are pooled together.
Combined judgment of several persons helps reduce errors of
judgment.

The partners may be assigned duties according to their talent.

Therefore, benefits of specialization are available. Partners meet
frequently and can take prompt decisions.

4. Direct motivation:

Ownership and management of business are vested in the same

persons. There is direct relationship between effort and reward.
Every partner is motivated to work hard and to ensure the success of
the firm.

5. Close supervision:
Every partner is expected to take personal interest in the affairs of
the business. Different partners can maintain personal contacts with
employees and customers.

Fears of unlimited liability make the partners cautious and avoid

reckless dealings. Management of partnership is cheaper when
expert managers are not employed.

6. Flexibility of operations:

Partnership business is free from legal restrictions and government

control. Partners can make changes in the size of business, capital
and managerial structure without any approval. The activities of
partnership business can be adapted easily to changing conditions in
the market.

7. Secrecy:

A partnership firm is not required to publish its annual accounts.

Audit of accounts is not essential and no reports are to be filed with
the government authorities. Therefore, the affairs of a partnership
business can easily be kept secret and confidential.

8. Protection of minority interest:

Management of partnership is democratic. Every partner has a right

to be consulted and express his opinion. All important decisions are
taken with the mutual consent of all the patters. In case a partner is
dissatisfied with the majority decisions, he can retire from the firm or
give a notice for its dissolution.

9. Cooperation:

Partnership encourages mutual cooperation and trust amongst

people. Partners work in common for the benefit of all and do their
level best to make the business prosperous.

Demerits of Partnership
1. Unlimited liability:

Every partner is jointly and severally liable for the entire debts of the
firm. He has to suffer not only for his own mistakes but also for the
lapses and dishonesty of other partners.

This may curb entrepreneurial spirit as partners may hesitate to

venture into new lines of business for fear of losses. Private property
of partners is not safe against the risks of business.

2. Limited resources:

The amount of financial resources in partnership is limited to the

contributions made by the partners. The number of partners cannot
exceed 10 in banking business and 20 in other types of businesses.
Therefore, partnership form of ownership is not suited to undertake
business involving huge investment of capital.

3. Risk of implied agency:

The acts of a partner are binding on the firm as well as on other

partners. An incompetent or dishonest partner may bring disaster for
all due to his acts of omission or commission. That is why the saying
is that choosing a business partner is as important as choosing a life
partner.

4. Lack of harmony:

The success of partnership depends upon mutual understanding and

co-operation among the partners. Continued disagreement and
bickering among the partners may paralyze the business or may
result in its untimely death. Lack of a central authority may affect the
efficiency of the firm. Decisions may get delayed.

5. Lack of continuity:

A partnership comes to an end with the retirement, incapacity,

insolvency and death of a partner. The firm may be carried on by the
remaining partners by admitting new partner.
But it is not always possible to replace a partner enjoying trust and
confidence of all. Therefore, the life of a partnership firm is uncertain,
though it has a longer life than sole-proprietorship.

6. Non-transferability of interest No partner can transfer his share in

the firm to an outsider without the unanimous consent of all the
partners. This makes investment in a partnership firm non-liquid and
fixed. An individual's capital is blocked.
7. Public distrust:

A partnership firm lacks the confidence of public because it is not

subject to detailed rules and regulations. Lack of publicity of its affairs
undermines public confidence in the firm.

5 -Write a short note on minor as a partner in a firm.

Rights of a Minor

A person who is a minor according to the law to which he is subject

may not be a partner in a firm, but, with the consent of all the
partners for the time being, he may be admitted to the benefits of
partnership.

Such minor has a right to such share of the property and of the
profits of the firm as may be agreed upon, and he may have access
to and inspect accounts of the firm.
Such minor's share is liable for the acts of the firm, but the minor is
not personally liable for any such act.

Such minor may not sue the partners for an account or payment of
his share of the property or profits of the firm.

At any time within six months of his attaining majority, or of his

obtaining knowledge that he had been admitted to the benefits of
partnership, whichever date is later, such person may give public
notice that he has elected to become or that he has elected not to
become a partner in the firm, and such notice shall determine his
position as regards the firm, provided that, if he fails to give such
notice, he shall become a partner in the firm on the expiry of the
said six months.

Where any person has been admitted as a minor to the benefits of

partnership in a firm, the burden of proving the fact that such person
had no knowledge of such admission until a particular date after the
expiry of six months of his attaining majority shall lie on the person
asserting that fact.

Where such person becomes a partner-

His rights and liabilities as a minor continue up to the date on which

he becomes a partner, but he also becomes personally liable to third
parties for all acts of the firm done since he was admitted to the
benefits of the partnership, and his share in the property and profits
of the firm shall be the share to which he was entitled as a minor.

Where such person elects not to become a partner-

His rights and liabilities shall continue to be those of a minor upto

the date on which he gives public notice,

his share shall not be liable for any acts of the firm done after the
date of the notice, and

He shall be entitled to sue the partners for his share of the property
and profits.

6 - What are the advantages of partnership over sole

proprietorship?

The main points of distinction between partnership and sole trader

are as follows:

1. Number of members:

Sole proprietorship is owned and controlled by one person. The

number of partners in a firm can be up to ten in banking business
and 20 in other cases. At least two persons are required to form a
partnership.

2. Agreement:
No agreement is required in a sole proprietorship. On the other
hand, there must be an express or implied agreement among
partners in order to constitute a partnership.

3. Registration:

A sole proprietorship need not be registered except under the Shops

and Establishments Act. A partnership firm should be registered
otherwise it will not be able to enforce its rights in the court of law.

4. Capital:

The entire capital of a sole proprietorship is contributed by one man,

the owner of business. In a partnership, several persons contribute
capital. Therefore, a partnership firm can raise larger financial
resources than a proprietor.

5. Management:

The management of sole proprietorship lies exclusively with its

owner. He is the supreme authority in the business. But in a
partnership, every partner has a right to take part in the
management of the firm.

There is pooling of knowledge and judgment. Work can be divided

among partners according to their skills and aptitudes.

6. Secrecy:
Secrets of sole proprietorship are known only to its owner. In
partnership, secrets are shared amongst the partners. Therefore, a
sole proprietor is in a better position to retain the secrets of
business.

7. Risk:

The owner alone bears all the risks of sole proprietorship. In a

partnership risks are shared by all the partners.

8. Continuity:

The life of a partnership is more uncertain than that of sole

proprietorship. Lack of mutual trust and unity among the partners
can result in untimely dissolution of partnership.

9. Sharing of profits:

In sole proprietorship there is no sharing of profits and all the profits

belong to the proprietor. In partnership, profits are shared by the
partners in the agreed ratio or equally.

7 - Differentiate between partnership and company.

PARTNERSHIP AND COMPANY

A joint stock company differs from partnership in the following

respects:
1. Formation—a partnership is governed by the partnership act while
a joint stock company is governed by the companies act. The
formation of a partnership is relatively easy while a company has to
observe a number of legal formalities connected with its formation.

2. Registration—a partnership may or may not be registered.

However, a joint stock company must be registered. The certificate
of incorporation is a conclusive evidence of the registration of a
company. An unregistered company becomes either a partnership or
an illegal association, depending upon the number of members.

3. Legal status—a partnership is not a distinct legal entity. Persons

who have entered into partnership with one another are called
individually partners and collectively a firm. In a case of a company,
however, the members are quite distinct from the company, which is
a juristic person. In other words, a company is an artificial person in
the eyes of law enjoying a distinct entity apart from its members.

4. Nature of contract—the agreement between persons that brings

a partnership into existence may, or may not be in writing. If it is in
writing, it becomes a private document. As such, outsiders cannot
have recourse to its contents. However, the agreement that brings a
company into existence, known as the memorandum of association,
must be in writing. It is also a public document.
5. Number of members—in the case of a partnership business
engaged in banking activity, the maximum number of members is
ten. In the case of other types of business, however, the maximum is
twenty. The minimum is, of course, 2. In the case of private joint stock
company, the minimum number of members is 2, while the
maximum is 50 excluding the employees. In a public company,
however, the minimum is seven and the maximum is unlimited.

6. liability—the liability of a partner is joint, several and unlimited,

but the liability of a member of a company is limited to the face value
of the shares held by him, or the amount guaranteed by him,
depending on whether the liability of the members is limited by
shares or by guarantee.

7. Objects—a partnership may engage itself in any business, which

the partners like whereas a company can engage itself only in the
business mentioned under the object clause of the memorandum.
Thus, this clause restricts the powers of a company with regard to the
nature of the business, which it could undertake.

8. Capital—the capital contributions by the partners can be altered

freely but, the capital of a company cannot be altered except by
observing the legal formalities laid down in the companies act.

9. Property—the partnership property belongs to all the partners as

such, the property of the firm is the property of the partners. In case
of a company, however, the property belongs to the company and
not to the members.

10. Management—in the case of a partnership, every partner is

entitled to take part in the management of partnership business. In
the case of a company, the management of its affairs is entrusted to
a board of directors duly elected by the members.

11. Agency—principal-agent relationship is the essence of a

partnership. Every partner is an agent of the firm to make contracts
on behalf of the firm. In the case of the company, however, no
member is agent of the company or of any other member.
Consequently, no member can make contracts on behalf of the
company. Such a power -vests only with the directors who have to
act intra vires the memorandum and articles.

8 - Differentiate between partnership and Joint Hindu family.

The following are the points of distinction between the two:

1. Mode of creation—a partnership arises on the basis of a contract

as stated in sections 4 and 5 of the act. A joint Hindu family firm arises
on the basis of status, i.e. by the operation of law, upon the fact of
marriage, birth or adoption.

2. Admission of new members—no new partner can be admitted

into partnership without the consent of all the existing partners. The
membership of a joint Hindu family firm is automatic by the birth or
in case of adoption into the family of male members if that family is
carrying on a business. A minor can also be a member. Thus the
membership of a joint Hindu family keeps changing, whereas in the
partnership the members remain more or less fixed and constant.

3. Management and representative capacity—while in a

partnership all the members are entitled to take an active part in the
management of the business, in the case of a joint Hindu family
business it is only the manager or karta who is the senior male
member entitled to manage the business. The other members of the
family do not have the representative capacity. In partnership, every
partner becomes an agent of the firm for the purposes of the
business of the firm. There is mutual agency among partners. The
existence of mutual agency enables partner to bind the other
partners for the acts done by him in the ordinary course of the
business of the firm.

4. Nature and extent liability—according to section 25 every partner

is liable jointly with others as well as personally for the acts of the
firm. In case of the joint Hindu family business the members are not
personally liable. The liability of the members of a family is limited to
their share in the property and profits of the family business. It is only
the manager or karta who is personally liable to an unlimited extent.
In case of partnership the liability of the partners is unlimited.

5. Mode of effecting separation—in case of partnership the remedy

against each other is a suit for dissolution of the firm, whereas in case
of joint hindu family the remedy is a suit for partition of the family
assets. A family is not dissolved; it can split into smaller units.

6. Number of members—in case of partnership the maximum

number of partners is ten for partnership 'doing banking business and
twenty in any other business. But there is no such limit in case of joint
Hindu family business.

9 - Discuss the procedure for registration of a partnership firm.

Registration of a partnership firm is not compulsory under law. The

Partnership Act, 1932 provides that if the partners so desire they may
register the firm with the Registrar of Firms of the State in which the
main office of the firm is situated.

Restriction as to Name

A registered firm cannot use words in connection with their name

such as 'Crown,' 'Emperor,' 'Empress,' 'Empire,' Imperial,' 'King,'
'Queen,' 'Royal,' or words expressing or implying the sanction,
approval or patronage of Government except when the- State
Government signifies its consent to the use of such words as part of
the firm name by order in writing.

Procedure for Registration:

In order to get a partnership firm registered an application in the

prescribed form must be filed with the Registrar of Firms. The
application should contain the following information:

(i) The name of the firm

(ii) The principal place of business of the firm.

(iii) Names of other places where the firm's business is carried on.

(iv) Names in full and permanent addresses of the partners.

(v) The date on which each partner joined the firm,

(vi) Duration of partnership, if any.

The application should be signed and verified by each partner. A small

amount of registration fee is also deposited along with the
application. The application submitted to the Registrar is examined.

If everything is in order and all legal formalities have been observed,

the Registrar shall make an entry in the register of firms. He will also
issue a certificate of registration.
Any change in the information submitted at the time of registration
should be communicated to the Registrar. Registration does not
provide a legal entity to the partnership firm.

Consequences of Non-Registration: An unregistered partnership

firm suffers from the following limitations:

1. It cannot enforce its claims against a third party in a court of law.

2. It cannot claim adjustment for any sum exceeding Rs. 100. Suppose
an unregistered firm owes Rs. 1200 to A and A owes Rs. 1000 to the
firm the firm cannot enforce adjustment of Rs. 1000 in a court of law.

3. It cannot file a legal suit against any of its partners.

4. Partners of an unregistered firm cannot file any suit to enforce a

right against the firm.

5. A partner of an unregistered firm cannot file a suit against other

partners. Non-registration of a firm, however, does not affect the
following rights:

(i) The right of a partner to sue for the dissolution of the firm or for
the accounts of a dissolved firm or to enforce any right or power to
realize the property of a dissolved firm.

(ii) The power of an Official Assignee or Receiver to realize the

property of an insolvent partner.
(iii) The rights of the firm, or its partners, having no place of business.

(iv) Any suit or set off in which the claim does not exceed rupees one
hundred.

(v) The right of a third party to sue the unregistered firm or its
partners.

10- Describe the rights, duties and authority of partners.

RELATION BETWEEN PARTNERS- The partner while carrying on the

business of the partnership acts a principle and an agent. He is a
principal because he acts for himself, and he is an agent as he
simultaneously acts for the rest of the partners.

General duties of a partner

Subject to a contract to the contrary between the partners the

following are the duties of a partner.

➢ To carry on the business of the firm to the greatest common

advantage. Good faith requires that a partner shall not obtain a
private advantage at the expense of the firm. Where a partner
carries on a rival business in competition with the partnership,
the other partners are entitled to restrain him.
➢ To be just and faithful. Partnership as a rule is presumed to be
based on mutual trust and confidence of each partner, not only
 in the skill and knowledge, but also in the integrity, of each
other partner
➢ To render true accounts and full information of all things done
by them to their co-partners.
➢ To indemnify for loss caused by fraud. Every partner shall
indemnify the firm for loss caused to it by his fraud in the
conduct of the business of the firm.
➢ Not to carry on business competing with the firm. If a partner
carries on any business of the same nature as and competing
with that of the firm, he shall account for and pay to the firm all
profits made by him in that business.
➢ To indemnify the firm for willful neglect of a partner. A partner
shall indemnify the firm for any loss caused to it by his willful
neglect in the conduct of the business of the firm.
➢ To carry out the duties created by the contract. The partners
are bound to perform all the duties created by the agreement
between the partners.

Rights of the partners

➢ Every partner has a right to take part in the conduct and
management of the firm's business.

➢ Every partner has a right to be consulted and express his

opinion on any matter related to the firm. In case of difference
of opinion, the decision has ordinarily to be taken by a majority.

➢ But vital issues like admission of a new partner, change in the

firm's business, alteration of profit-sharing ratio, etc., must be
resolved by unanimous consent of all the partners.

➢ Every partner has a right to have access to inspect and copy any
books of accounts and records of the firm.

➢ Every partner has the right to an equal share in the profits of

the firm, unless otherwise agreed by the partners.

➢ Every partner has the right to receive interest on loans and

advances made by him to the firm. The rate of interest should
be 6 per cent unless otherwise agreed by the partners.

➢ Every partner has the right to be indemnified for the expenses

incurred and losses sustained by him in the ordinary conduct of
the firm's business.

➢ Every partner has a right to continue in the firm unless expelled

in accordance with the terms of the partnership agreement.
 ➢ Every partner has a right to retire in accordance with the terms
of the partnership agreement or with the consent of other
partners.

Restrictions on authority of partner

Restrictions are governed by Contract and by the Partnership Act

The partners may by contract extend or restrict the implied authority

of any partner.Under the Partnership Act in the absence of any usage
of trade to the contrary, the implied authority of a partner does not
empower him to do the following acts:

➢ Submit a dispute relating to the business of a firm to arbitration

➢ Open a bank account in his own name
➢ Compromise or relinquish any claim of the firm
➢ Withdraw a suit or proceeding on behalf of the firm
➢ Admit any liability in a suit or proceeding against the firm
➢ Acquire immovable property on behalf of the firm
➢ Transfer immovable property belonging to the firm, or
➢ Enter into partnership on behalf of the firm.

11 - What do you mean by dissolution of a firm? Discuss its modes.

Dissolution of a firm
When the relation between all the partners of the firm comes to an
end, this is called dissolution of the firm. Section 39 of the Indian
Partnership Act, provides that “the dissolution of the partnership
between all the partners of a firm is called the dissolution of a firm.”
It implies the complete breakdown of the relation of partnership
between all the partners.

Dissolution of partnership is different from the dissolution of firm.

Dissolution of a partnership firm merely involves a change in the

relation of partners; whereas the dissolution of firm amounts to a
complete closure of the business. When any of the partners dies,
retires or become insolvent but if the remaining partners still agree
to continue the business of the partnership firm, then it is dissolution
of partnership not the dissolution of firm. Dissolution of partnership
changes the mutual relations of the partners. But in case of
dissolution of firm, all the relations and the business of the firm
comes to an end. On dissolution of the firm, the business of the firm
ceases to exist since its affairs are would up by selling the assets and
by paying the liabilities and discharging the claims of the partners.
The dissolution of partnership among all partners of a firm is called
dissolution of the firm.

A firm may be dissolved in the following manner

 ➢ Dissolution by Court
➢ Dissolution by agreement
➢ Dissolution by operation of law
➢ Dissolution on the happening of certain contingencies
➢ Dissolution by notice

DISSOLUTION BY COURT

The court may dissolve a firm at the suit of any partners on any of the
following grounds namely:

Insanity of a partner: that a partner has become of unsound mind.

The insanity of a partner does not ipso facto dissolve the firm and the
next friend or continuing partners has to file suit for dissolution.

Permanent incapacity of a partner: that a partner has become

permanently incapable of performing his duties as partner.

Conduct affecting prejudicially the business: that a partner is guilty

of conduct, which is likely to affect prejudicially the carrying on the
business of the firm.

Breach of partnership agreement: that a partner wilfully or

persistently commits breach of agreements relating to the
management of the affairs of the firm or the conduct of its business
or otherwise conducts himself in matters relating to the business,
that it is not reasonably practical for the other partners to carry on
the business with him.

Transfer of interest of a partner: that a partner has in any way

transferred the whole of his interest in the firm to a third party.

Loss: that the business of the firm cannot be carried on save at a loss

Just and equitable: on any other ground that renders it just an

equitable that the firm should be dissolved.

DISSOLUTION BY AGREEMENT

A firm may be dissolved with the consent of all the partners or in

accordance with the contract between the partners. The partnership
agreement may contain a proviso that the firm will be dissolved on
the happening of certain contingency.

DISSOLUTION BY OPERATION OF LAW

A firm is compulsorily dissolved on the following grounds

➢ Insolvency of partners
➢ By the happening of any event which makes it unlawful for the
business of the firm to be carried on.

DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES

Subject to contract between the partners a firm is dissolved on the
happening of the following contingencies.

➢ If constituted for a fixed term, by the expiry of that term

➢ If constituted to carry out one or more adventures or
undertakings, by its completion.
➢ By the death of a partner
➢ On insolvency of a partner

DISSOLUTION BY NOTICE

If the partnership is at will, the same may be dissolved by service of a

notice by one partner to dissolve the firm. In case of partnership-at-
will, a firm may be dissolved if any partner gives a notice in writing to
other partners indicating his intention to dissolve the firm.

In such a case, the dissolution takes place with effect from the date
mentioned in the notice. If no date is mentioned, the firm would be
dissolved with effect from the date of receipt of the notice by other
partners.

When such a notice is given to other partners, it cannot be withdrawn

without their consent.
Procedure for settlement of accounts on the dissolution of a
partnership firm

When a partnership firm is dissolved, its assets are disposed of and

the proceeds there from are utilized in paying the creditors.

If the amount realized by sale of assets is not sufficient to discharge

the claims of the creditors in full, the deficiency can be recovered
proportionately from the personal properties of the partners.

If any partner becomes insolvent, the remaining solvent partners will

bear the loss in their capital ratio.

In case the assets of the firm are more than sufficient to meet the
liabilities in full, then the surplus may be utilized to pay off the loans
and capitals contributed by the partners.

Section 48 of the Partnership Act, 1932 lays down the following

procedure for the settlement of accounts between partners after the
dissolution of the firm:

1. Losses including deficiencies of capital should be made good

(a) First out of profits,

(b) Then out of capital, and

(c) If needed out of personal contributions of partners in their profit-
sharing ratio.

2. The assets of the firm including any sum contributed by partners

to make up deficiencies of capital will be applied for settling the debts
of the firm, in the following order, subject to any agreement to the
contrary:

(a) First, in paying off the debts of the firm due to third parties;
(b) Then in paying to each partner ratably any advances or loans given
by him in addition to or apart from his capital contribution;
(c) If any surplus is available after discharging the above liabilities, the
capital contributed by the partners may be returned, if possible, in
full or otherwise ratably;
(d) The surplus, if any, shall be divided among the partners in their
profit-sharing ratios.