PARTNERSHIP ACT, 1932
DEFINITIONS UNDER THE PARTNERSHIP ACT, 19321.
SCOPE OF THE
PARTNERSHIP ACT
1932
1. The Act extends to the whole
of India except the state of
Jammu and Kashmir.
2. It came into force on the 1st
day of October 1932 and sec.
69 came into force on the
day of 1st October 1933.
3. The expression used but not
defined in this Act and
defined in the Indian
Contract Act, 1872 shall have
the meanings assigned to
them in that Act.
63
1. Partner: persons who have entered into partnership with one are individually called Partners.
2. The following persons are not deemed to be partners – (i) members of HUF carrying on family
business, (ii) A Burmese Buddhist husband and wife carrying on a business. (sec. 5)
3. Firm: Persons who have entered into partnership with one another are collectively called firm.
4. Firm Name: The name under which their business is carried on is called the firm name.
5. Act of Firm – [Sec. 2 (a)]: Act of Firm means any act or omission by all the partners, or by any
partners, or agent of the firm which gives rise to a right enforceable by or against the firm.
RIGHTS OF Right to receive interest on capital : Right to be consulted
PARTNER Right to share subsequent profits Right to be indemnified
Right to take part n the Right not to be expelled
Right to access the books of accounts
conduct of the business
Interest on advances
Right to use partnership property
Right to be consulted at the Right to share profits
time of admission of a new Right to receive remuneration Sec.
partner 13(a) : Right to retire
 PARTNERSHIP ACT, 1932 64

• Definition – Sec. 4: Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
MEANING OF
• Person Competent to enter into a valid contract can enter into Partnership
PARTNERSHIP • Minor cannot become a partner, but with the consent of all other, he can admitted
AND PERSONS • company can become a partner by itself, but not as a group of individuals representing it.
• Partnership between Indian nationals and alien friends is possible, but no partnership can be
COMPETENT TO
entered into with alien enemies.
BE PARTNERS • Two Partnership Firms cannot enter into Partnership, though all the partners of the two firms
may form a partnership

1. Association of two or more persons: As per Companies Act when the association of persons exceeds
50 business an illegal association
2. Carrying on business: Partnership can be formed only for the purpose of carrying on some business
ESSENTIAL 3. Agreement: Partnership originates from an agreements / contract between persons.
4. Sharing the profits of business is the essence of partnership but it cannot be the conclusive evidence
ELEMENTS OF • Sharing of profits implies sharing of losses as well, unless agreed otherwise.
PARTNERSHIP • A person may become a partner only in profits and not for losses by agreement between all partners.
• Ratio in which profits and losses will be shared is based on agreement amongst the partners.
5. Mutual Agency: Partnership business is carried on by all or any of them acting for all. Hence
• A partner is both an agent and principal
 PARTNERSHIP ACT, 1932
CONCEPT OF 2. Sharing of profits NOT
MUTUAL AGENCY conclusive test:
1. Real relation – [sec. 6]: 1. Joint owners sharing
determining (a) Gross Return arising
whether a group of property held by them
are not partners.
person is or is not firm,
or (b)whether a person 2. A partnership is NOT
is or is not a partner in created when share or
a firm, regard shall be payment is received by –
had to the real relation • A lender of money – to any
between the parties, as persons engaged or about
to engage in any business,
shown by all relevant
• A servant or agent – as
facts taken together.
remuneration,
• A window or child of a
3. Existence of mutual
deceased partner – as an
Agency – True Test: The
annuity.
true test of partnership • A previous owner or part
lies in existence of owner of the business, as
mutual of mutual consideration for sale of
agency relationship goodwill or share thereof.
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DUTIES OF A PARTNER :
ABSOLUTE DUTIES
Absolute duties are Duty to act in good faith
imposed by law and Duty to carry on the business of the firm to
cannot be varied by an the greatest common advantage
agreement among the Duty to render true accounts
partners. The law has Duty to give full information
imposed the following Duty to indemnify for the loss caused by
unalterable duties of a fraud
partner. Duty not to transfer his rights and interest
QUALIFIED DUTIES
Qualified duties are those Duty to attend to his duties diligently
which depend upon the Duty to share loss equally
contract between the partners
Duty to account for personal profits
and therefore can be varied by
Duty to account for profits in a
express or implied agreement
among the partners. If the competing business
agreement is silent, then the Duty to use firm’s property exclusively
duties imposed by The for the firm
Partnership Act will prevail. Duty to indemnify for will ful neglect
 PARTNERSHIP ACT, 1932 66

RELATION OF PARTNERS WITH THIRD PARTIES :

Every partner is an agent of the firm for the purpose of the business of the firm. He can act on behalf of the firm and bind the firm.

AUTHORITY OF A PARTNER ACTS OUTSIDE STATUTORY RESTRICTIONS

THE IMPLIED
Express authority: It can be described as the
AUTHORITY • The submit a dispute relating to the business
authority which is expressly given by words,
of the firm to arbitration [settlement]
spoken or write a partner assumes a little too
• To compromise or surrender any claim or
much about his implied
Implied authority: The implied authority of a portion of claim by the firm
authority and tries to misuse
partner is the authority that is ordinarily • To withdraw a suit or proceedings filed on
the facility. Such misuse may
available to any partner to do the routine behalf of the firm.
take place even without an
business of the firm. However, the firm will be • To admit any liability in a suit or proceedings
intention to do any wrong.
liable only if the following conditions are against the firm.
fulfilled These restrictions may be • To acquire immovable property on behalf of
• The act must relate to the normal business of discussed under the following the firm
the firm two sub-heads : • Transfer immovable property on behalf of
• The act must be done in the usual way in 1. Statutory restrictions the firm.
which such a business is carried on 2. Restrictions imposed by • To enter into a partnership on behalf of the
• The act must be done in the name of the firm the partnership deed. firm.

RESTRICTIONS
IMPOSED BY A
PARTNERSHIP DEED
The restrictions on the implied
authority may also be imposed
by a partnership deed. This
provision is contained in the first
paragraph of Sec. 20 of the
Indian Partnership Act, which
states that “the implied authority
of the partners may also be
restricted by an agreement
between them. However, the firm
will be liable for such restricted
acts, if the person dealing with
the firm has no knowledge of
such restrictions”
PARTNERSHIP ACT, 1932 67
EXPULSION OF A PARTNER
PARTNER’S AUTHORITY
IN EMERGENCY 1. The power of expulsion must be available to the
partners by an express contract between them
2. the power to expel should be exercised by majority of
According to Sec. 21, a partner
the partners prescribed in the contract.
has an authority in emergency; to
3. It should be exercised in absolute good faith.
do all such acts for the purpose of
The test of good faith implies that :
protecting the firm from the loss
• Expulsion must be in the interest of the partnership.
as would be done by a person of
• The partner to be expelled must be served with a notice.
ordinary prudence, in his own
• The expelled partner should be given a change to defend
case in the same situation.
himself.
The firm will be liable only if the
following conditions are satisfied
• The act must be done in an MODES OF DISSOLUTION OF A FIRM
emergency.
1) Dissolution without the intervention of Court [i.e. voluntary
• The act must be done to
dissolution]
protect the firm from the loss
threatened by the emergency. 2) Dissolution with the intervention of the Court [i.e. by Court
• The act must be reasonable in order]
the circumstances.

RELATIONSHIP OF A FIRM AND ITS PARTNERS TO A THIRD
PARTY
Notice to an active partner : Notice
or information given to an active
partner is a constructive notice to
the firm.
Notice to an active partner : Notice
or information given to an active
partner is a constructive notice to
the firm
Representation or admission
made by the firm : When a
partner of the partnership firm
makes an admission or
representation of certain affairs
of the firm to a third party then it
is constructed that such
admission or representation is
made by the firm.
PARTNERSHIP ACT, 1932
Liability for wrongful acts of partners : A firm is liable
to the third parties for all the wrongful acts of a partner.
However, the firm is liable if such acts are done in the
ordinary course of business of the firm. The term
‘wrongful’ act includes fraud, negligence or tort.
o In the ordinary course of business of the firm, or
o With the authority of all the other partners
Liability for misapplication of money or property by a
partner : This provision is contained in Sec. 27 of the
Indian Partnership Act which lays down the following
two rules in this regard :
• When money or property is received by a partner and
then misapplied by the same partner
• When money or property is received by the firm and
then misapplied by any of the partners.
68
INSOLVENCY OF A
PARTNER
1) partner is declared insolvent, he is
no more a partner in the firm
2) ordinary circumstances, the firm is
automatically dissolved as one of its
members ceases to be a partner due
to his insolvency.
3) partners specifically provide in the
agreement that the firm shall not be
dissolved and the remaining
partners continue the firm’s
business, the firm is not dissolved.
4) insolvent person is not liable for the
acts of the firm which are done after
the order of insolvency.
5) The firm is also not liable for any act
of the insolvent partner done after
the date of the order of insolvency
 PARTNERSHIP ACT, 1932 69

DEATH OF A
ADMISSION OF A PARTNER
PARTNER
• A firm has a right to admit a new partner at any time
during its life time. C) AN INCOMING PARTNER CAN 1 )When a partner dies, his status
• A newly admitted partner is known as an ‘incoming BE HELD LIABLE TO THE as a partner automatically comes
partner’. CREDITORS FOR THE PAST to an end
DEBTS, IF THE FOLLOWING
2) The firm may or may not be
A) CASE WHERE CONSENT OF ALL THE PARTNES IS NOT TWO CONDITIONS ARE
dissolved on the death of a
REQURED : SATISFIED
partner depending upon the
1) When the minor already admitted to the benefit of the firm
• assumed the liability for agreement among the partners.
contract already entered into between the existing partners.
the past debts of the old
3) The estate of the deceased
firm.
B. LIABILITY OF AN INCOMING PARTNER : partner will not remain liable for
• The creditors have been
• Incoming partner is not liable for the past debts of the any act of the firm done after his
informed of this new
firm done before his admission in the firm. death.
arrangement, and they
• The liability of an incoming partner starts from the date of
have accepted the new 4) No public notice is necessary
his admission into the firm.
firm as their debtor and to terminate the liability of the
• However, by an agreement with the old partners, an
discharge the old firm of deceased partner.
incoming partner may also agree to be liable to the past
its liability.
debts of the firm.

DISSOLUTION WITHOUT THE INTERVENTION OF COURT
1) Dissolution by consent
of all the partners : A
partnership firm may be
dissolved with the consent
of all the partners at any
point of time during its
life. This principle applies
to all the cases whether
the firm is for a fixed
period or at will.
2) Dissolution by contract
between the partners : A
firm may also be dissolved
in accordance with the
contract between the
partners in the same way
as a firm is formed with
the contract between the
partners
PARTNERSHIP ACT, 1932 70
• Expiry of the fixed term : When a firm is constituted
3) Dissolution on 4) Compulsory Dissolution
for a fixed term, the firm is dissolved on the expiry of
the happening of In the following cases,
certain such term. If the firm continues it will be partnership
partnership will be
contingencies : A at will.
compulsorily dissolved :
firm would be
• On completion of particular venture : Sometimes, a • Insolvency of all
automatically
firm is constituted for a particular venture or partners or all but one
dissolved on the
undertaking. In such case, the firm is dissolved on the partner : When all
happening of any
completion of such venture. This is however subject partners or all but one,
of the following
to contract to contrary. If the firm continues, it will be have been declared as
certain
contingencies. partnership at will. insolvent, the firm shall
This is, however, be compulsorily
• Death of a Partner : Sometimes, one of the partners
subject to a dissolved even if the
of the firm may die during the continuance of the
contract to partnership agreement
contrary and the firm. In such a case, the firm is dissolved on the death
provides that the firm
partners may of the partner.
shall not be dissolved
decide that the Note : When there are only two partners, the death of on insolvency of any
firm shall not be one partner automatically dissolves the firm since there partner.
dissolved in such must be at last two partners to carry on the business.
cases.

Business of the firm becomes unlawful :
When the happening of any event makes it
unlawful for the business of the firm to be
carried on or for the partners to carry it on
as a partnership, the firm has to dissolve.
5) Dissolution by notice :
• When the partnership is at will, its
dissolution can be brought about by any
partner by giving a notice to that effect.
• The notice should clearly state the
partners intention to dissolve the firm.
• The dissolution by notice takes effect
from the date mentioned in the notice or
if no date is mentioned, from the date of
communication of notice.
• If the firm is not at will, then it cannot be
dissolved by a notice of dissolution.
PARTNERSHIP ACT, 1932 71
DISSOLUTION WITH THE INTERVENTION OF THE
COURT
1) Sometimes, a partner or few partners believe that the firm needs to be dissolved, but
the other partners do not think in the same way.
2) In such a situation, he can go to the Court and file a suit for dissolution of the firm.
3) The Court will take up the matter only on an application by a partner and on hearing
the matter; the Court may or may not allow the dissolution of the firm.
4) The Court may order the dissolution of the firm on any of the following grounds on the
application by the partners :
A) Insanity of a Partner :
• When a partner has become of unsound mind, a firm may be dissolved by an agreement
among the partners or under a clause to this effect in the partnership deed.
• If there is no agreement in this regard, then the partners may approach the Court.
• The suit for dissolution of a firm may be filed by any partner other than the partner who
has become insane.
• The suit may also be filed by the legal representative of the insane partner.
• In this case, the firm is not automatically dissolved; it is dissolved by an order of the
Court.
 PARTNERSHIP ACT, 1932 72

B) Permanent Incapacity : D) Persistent breach of F) Continuous Losses : Where the

agreement : A partner
• When a partner becomes permanently incapable of willfully or frequently
performing his right or duties, the Court allows the commits a breach of
partnership to be dissolved. agreement relating to the
• The suit for dissolution of a firm may be filed by any management of affairs of the
partner other than the partner who has become incapable. firm and the other partners
• In this case, the firm is not automatically dissolved; it is find it difficult to carry on the
dissolved by an order of the Court. business with him. In this
case, the court may allow the
C) Misconduct : dissolution of the firm.
• Where the partner is guilty of misconduct, the court may
allow the dissolution of the firm. E) Transfer of Interest : When
• It is not necessary that the misconduct should relate to the partner transfers the
business operation of the firm. whole or part of his share to a
• It is sufficient if the misconduct is capable of damaging third party without the
the reputation of future prospect of the firm. consent of other partners, the
• This suit for dissolution of a firm may be filed by any court may allow the
partner other than the partner who is guilty of dissolution of the firm at the
misconduct. instance of any other partner
prospect of the business have
gone down so substantially, for
whatever reasons, and it is clear
that the business of a firm cannot
be carried on, except at losses, the
court may be approached by any
of the partners seeking
dissolution of the firm, and the
court may allow dissolution of the
firm.
G) Just and Equitable Grounds : In
addition to the above, the court
may order dissolution of a firm on
just and equitable grounds. A ‘just
and equitable ground’ is a ground
which is fair and reasonable
according to the opinion of the
court
 PARTNERSHIP ACT, 1932
CONSEQUENCES OF
DISSOLUTION
Dissolution of a firm does not by
itself bring the partnership
business to a close. It is the
beginning of a long process to bring
the firm to an end. During the long
process of winding up of firm, there
will be plenty of consequences
which may be discussed as under :
1) Rights of a partner after
dissolution of a firm.
2) Continuing authority of a partner
for the purpose of winding up.
3) Modes of settlement of accounts.
4) Sale of goodwill after dissolution.
RIGHTS OF PARTNERS ON
DISSOLUTION OF A FIRM :
1) Right to have a business wound up after
dissolution
2) Right to earn personal profits by using
the firm’s name
3) Right to have the premium returned on
premature dissolution of a firm
4) Rights when the partnership contract is
rescinded for fraud or
misrepresentation
5) Right of lien or retention of surplus
6) Right of suborgation
7) Right to be indemnified
8) Right to restrain partners from the use
of firm name or firm property
73
LIABILITIES OF A
PARTNER AFTER
DISSOLUTION OF A FIRM
1) Liabilities for the acts done after
dissolution : A public notice is necessary to
terminate the liability of the partners
2) Liability to share personal profit : A
partnership may be dissolved by the death of
a partner
INSPECTION OF REGISTER
OF FIRMS AND GRANT OF
COPIES
Inspection of register of firms [sec. 66]:
Grant of copies [sec. 68]:
Rules of Evidence [sec. 68]:
 PARTNERSHIP ACT, 1932 74

MODE OF SETTLEMENT OF 2) Utilization of assets : The assets of the firm, including any
CONTINUING ACCOUNT sums contributed by the partners to make up the deficiencies
of capital shall be utilized in following manner :
AUTHORITY
o It will be utilized to pay the debt of the firm.
OF 1) Payment of losses : If the assets of the firm o Then, if there is any surplus, it will be utilized to pay
PARTNERS are insufficient to discharge the debts and partners’ loan and advances to the firm other than the capital
liabilities of the firm including deficiencies of proportionally.
FOR capital, then it is a loss and such loss shall be o Then in case of surplus, it will be paid towards capital
WINDING UP paid in the following order : proportionally.
o The losses shall be paid out of profits. o Then, if surplus remains it will be divided among the
: partners in proportion to their share in the profits of the firm
o If profits are not sufficient, then the balance
On dissolution of of losses shall be paid out of capital.
the firm, the o If shall some balance of loss remains, then it 3) Sale of Goodwill : The term goodwill may be defined as the
authority of the will be paid by the partners individually in the value of reputation of the business of a firm and it is an
partners for the proportion in which are entitled to share intangible asset. On the dissolution of a firm, the goodwill
profits. may be sold separately or along with the other properties of
purpose of winding
the firm.
up the affairs of the
business is not
4) Public Notice : A public notice is a method of a public proclamation [announcement] by any person to bring an
terminated important fact to the knowledge of the general public who may be interested in that information.
 PARTNERSHIP ACT, 1932 75

Appointment of registration of firms EXEMPTION FROM APPLICATION [SECTION. 56]:

1. Firms can be exempted from the registration provision
1. The state government appoints the register of 2. The state government shall grant such exemption by way of notification
firms for the purpose of this act. in the official gazette.
2. It defines the areas within which they shall 3. The exemption shall apply to that state or to any part of the state as
exercise their power and perform their duties. specified in the notification.
3. Every registrar is deemed to be a public servant.

Particulars Description

CONSEQUENCES OF NOT Suit between A partner of an unregistered firm cannot sue the firm or any other
partners and firm partner of the firm to enforce right (1) arising from a contract, or (2)
REGISTERING A conferred by the partnership Act
PARTNERSHIP WITH THE Suit between firm An unregistered firm cannot file a suit against a third party to enforce
REGISTRAR OF FIRMS and Third party any right arising from a contract

Registration of firms is not compulsory, but Claim of set – off An unregistered firm or a partner thereof cannot claim a set off- or
an unregistered firm suffers the following other proceeding to enforce a right arising from a contract.
disabilities as mentioned u/s 69
 PARTNERSHIP ACT, 1932 76

EXCEPTION I.E,. NON – REGISTRATION NOT PENALTY FOR FURNISHING FALSE

TO AFFECT THE FOLLOWING – [SECTION. 69] PARTICUALRS TO THE REGISTER
1. Right of third to sue the firm or any partner.
2. Right of partners to sue for – (a) dissolution of the firm, or (b)
• Where any person sings any
settlement of accounts of a dissolve firm, or (c) realizing the
property of a dissolved firm. (a)statements,
3. Power of an official assignee, receiver or court to realize the
(b) Amending Statements,
property of an insolvent partner and to bring an action on behalf of
the insolvent partner. (c) Notice,
4. Rights of the firm or the partners of the firm which has (a) no place (d) Intimation
of business in the territories to which the Act applies, or (b) whose
places of business are in such territories to which the chapter does • Containing any particulars which he knows – (a) to
not apply. be false or (b) does not belive to be true or (c)
5. Right of the firm to institute a suit or claim of set off not exceeding containing particulars which he knows to be
Rs. 100. incomplete or (d) does not believe to be complete
6. Right of an unregistered firm to bring a suit against third parties to • Shall be liable with (a) imprisonment extending to
enforce a right arising otherwise than out of a contract, e.g. for three months, or (b) with fine, or (c) with both.
enforcing a trademark.