CONTRACT OF

PARTNERSHIP
By -
Tushar Chitlangia (5th Year)
Teaching Assistant to Ms. Sonal Singh
THE INDIAN PARTNERSHIP
ACT, 1932
 FUNDAMENTALS

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. [s.4]

Persons who have entered into partnership with one another are called
individually “partners” and collectively “a firm”. [s.4]
 ESSENTIALS OF
PARTNERSHIP
(1) Association of 2 or more persons: Partnership is an association of 2 or
more persons. Only natural or artifical persons can be partners.

Points to ponder:
a. Can a firm and a company be a partner?
b. Can minor be a partner in the firm?
c. What is the maximum number of partners? (fun fact: Trilegal has X number
of partners)
 ESSENTIALS OF
PARTNERSHIP
(2) Agreement: There must be an agreement between all concerned. The
nature is voluntary and contractual. Further, relationship of partnership arises
from contract and not by status.

(3) Sharing of profit and loss: There must be sharing of profit and loss
between the partners in a manner they choose.
 ESSENTIALS OF
PARTNERSHIP
(4) Business: Business includes every trade, occupation and profession.
Point to ponder
a. Can Co-Owner of a property who is receiving rent be called as a partner?

(5) Mutual agency: Business should be carried on by all or any of them acting
for all. Each partner is an agent and principal.
 KD KAMATH V CIT 1971
(SC)
Facts: Kamath had management as well as the control of the business. The
business was entirely left in the hands of the Kamath and other partners
used to serve under his directions. Further, they had no authority to accept
any business without his consent and could not operate a bank account.
But all the conditions of partnership were fulfilled.

Issue: Whether the said arrangement is partnership?

 KD KAMATH V CIT 1971
(SC)
Held:
The Supreme Court has held that it was a partnership as essential
conditions of partnership are satisfied.

Just because the exclusive power to control the parties is vested in one
partner or that one partner can operate the bank account or borrow on
behalf of the firm are not destructive of the theory of partnership
provided the conditions are satisfied.
 TRUE TEST OF
PARTNERSHIP
To determine whether there exists a partnership of not, you have to see the
real intention of the parties along with what is mentioned in the contract
[s.6]

Point to ponder:
”Nothing contained herein would constitute the parties as partners”
“Nothing contained herein would cause the parties not to be parterns”
Do these clauses necessarily indicate or not indicate a partnership?
 COX V HICKMAN (1860)
(UK)
Facts: Smith & Sons [S. & S.] was a partnership firm. Due to financial difficulties they
executed a deed of arrangement with the creditors wherein S. & S. agreed that that
five trustees (including Cox) on behalf of creditors would manage the business of S.
& S. The trustees had the duty to distribute income between the general creditors.
After the creditors were paid off then the business had to be transferred to S. & S.
Some amount of Hickman, supplier of goods, were unpaid. Therefore, Hickman sued
the firm.

Issue: Can Cox be liable in this case?

 COX V HICKMAN (1860)
(UK)
Held: As per the deed, S. & S. agreed to appointment of trustees for paying off
the debt and when the debt was paid the business had to be transferred.
Creditors instead of taking legal recourse, settled for the arrangement.
Therefore, there was no intention of the parties to get into a partnership.
TYPES OF PARTNERSHIP
 TYPES OF PARTNERS

Partnership at will - When there is no fixed period agreed upon for

duration of internship [s.7]
Partnership for a fixed period - Where a provision is made by a contract
for duration of internship and such partnership ends after the expiry of the
fixed period
Particular partnership - Where a person becomes a partner with another
person in any particular adventure or undertaking [s.8]
General partnership - Where a partnership is constituted with respect to
the business in general
 TYPES OF PARTNERS

Active/Actual/Ostensible Partner: Actively participates in the business

Sleeping/Dormant Partner: Does not actively participates in business
Partner for profit: Only entitled to profit and not liable for loss of the firm
Incoming partner: Person admitted into an exisiting firm
Outgoing partner: Person who leaves the partnrship and other partners
continue with the firm
Nominal partner: Is not a real partner but merely lends the name to the firm.
He is not entitled to profit or take part in business.
 TYPES OF PARTNERS
Partner by holding out: When a person represents himself or knowingly
permits himself to be represented as a partner in a firm where he is not one,
then he is liable like a partner in a firm to anyone who on the faith of
representation has given credit to firm [s.30]

Example - X and Y are partners in a firm. X introduced A, a manager, as his

partner to Z. A remained silent. Z, a trader believing A as partner supplied 100
Iphone 15 to the firm on credit. After expiry of credit period, Z did not get
amount of Iphone 15 sold. Z filed a suit against X and A for the recovery of
price. Here, in the given case, A, the Manager is also liable for the price because
he becomes a partner by holding out.
 PARTNERSHIP DEED

Contract of partnership i.e. partnership deed can be oral or written. But it is

better that deed is written to avoid future disputes.
Contents:
1. Partners name
2. Effective date
3. Sharing of profit and loss
4. Capital contribution
5. Objects and operations
6. Termination of partnership
 DIFFERENCE BETWEEN COMPANY AND FIRM

FIRM COMPANY
1. Not a legal entity 1. It is a legal entity different from members
2. All partners are agent of each other 2. Members are not agent of each other
3. Liabiliy is unlimited 3. Liability is limited
4. Max partners - 50 and min. partners - 2 4. Private - 2 to 200 and Public - 7 or more
5. Registration is not compulsory 5. Registration is compulsory
6. Subject to contract, partners can participate in 6. Members cannot participate in
management management unless appointed as
directors.
RELATION OF PARTNERS TO
ONE ANOTHER
 STATUTORY DUTIES OF
PARTNERS
These duties cannot be overridden by contract and it includes the following :
Partners are bound to carry on the business of the firm to the greatest
common advantage [s.9]
They should be just and faithful to each other [s.9]
They are bound to render true accounts and full information of all things
affecting the firm to any partner or his legal representative [s.9]
Every partner shall indemnify the firm for any loss caused to it by his fraud
in the conduct of the business [s.10]
 RIGHTS & OBLIGATIONS OF
PARTNERS
(CAN BE OVERRIDEN)
Every partner has a right to take part in the conduct of business [s.12]
Decision by majority of the partners [s.12]
No change in the nature of business without consent of partners [s.12]
Right to inspect books of the firm [s.12]
Not entitled to receive remuneration for taking part in the conduct of the
business [s.13]
Should share profit and loss equally [s.13]
Entitled to interest on capital [s.13]
 RIGHTS & OBLIGATIONS OF
PARTNERS
(CAN BE OVERRIDEN)
Right to be indemnified by the firm in respect of payments made and
liabilities incurred by the partner in the ordinary and extraordinary
circumstances [s.13]
Duty to indemnify the firm for wilful neglect in conduct of business [s.13]
If a partner derives profit from himself or herself from any transaction of the
firm or from the use of the firm property the partner shall pay that profit to
firm [s.16]
 COFFEY REGISTERED DESIGN RE
(1982) (UK)

Facts: The firm was trading in home brewing materials. It was buying and
selling products manufactured by others. It was not manufacturing such
products itself. A partner of his own initiative developed a design for a container
for brewing beer.
Held: He was allowed to enjoy the benefits of his invention and not to share
them with his co-partners because his invention had nothing to do with the
scope of the partnership business.
 POINT TO PONDER

A, B, C & D established partnership business for refining sugar. A, who was

himself a wholesale grocer, was entrusted with the work of selection and
purchase of sugar. As a wholesale grocer, A was well aware of the
variations in the sugar market and had already in stock sugar purchased at
a low price which he sold to the firm when it was in need of some, without
informing the partners that the sugar sold had belonged to him. Decide
liability of A.
Suppose the management power of the partner - Z in the firm Titans is
interfered with and he has been wrongfully precluded from participating
therein. Can the Court interfere (a) in case there is a contract precluding
Z (b) in case there is no contract precluding Z
RELATION OF PARTNERS TO THIRD PARTIES
 AGENT OF THE FIRM
Partner is agent of the firm for business carried out [s.18]
Implied authority of the partner as an agent- Act of a partner which is
done to carry on the business of a firm in ordinary course of nature will
bind the firm provided that the act is done under the firm’s name or in any
manner which expresses an intention to bind the firm [s.19 and s.22]. The
implied authority may be limited by contract [s.20]
Where the nature of business carried on by the firm is such a nature that
any of the partners has or should have the authority to bind the firm by his
individual act is to be decided on the facts of the case [Raghaveera Sons v
Mrs Padmavathi (1978) Mad HC]
 IMPLIED AUTHORITY
Points to ponder
a. Harvey, a partner in a firm of Pearson S, borrows money and executes a
promissory note in the name of firm. Decide whether firm is liable for
promissory note.

b. Systum pe Systum, a multi-brand retail store, executes a promisory note in

the name of the firm. Decide whether the firm is liable for promissory note.
 NOTICE
Effect of notice to partners – The notice to an acting partner on matters
relating to the affairs of the firm, operates as a notice to the firm. Exception
– Fraud committed by partner [s.24]

Point to ponder
Rohit, Virat and Dhoni are partners in a gym chain. Rohit purchases a second
hand treadmill on behalf of the firm from Akhtar. In the course of dealings with
Akhtar, Rohit comes to know that the treadmill is a stolen one and it actually
belongs to Sachin. Virat and Dhoni are ignorant about it. Decide whether Virat
and Dhoni are liable.
 LIABILITY TO THIRD PARTY
Every partner is liable, jointly with all the other partners and also severally,
for all acts of the firm done while he is a partner [s.25]

Where there is a wrongful act or omission by a partner and some loss is

caused to any third party the firm is liable to the same extent as the partner
[s.26]
INCOMING AND OUTGOING
PARTNERS
 INTRODUCTION OF NEW
PARTNERS
Unless there is any contract to contrary, a new partner can be introduced
in the firm only with the prior consent of all the partners [s. 31(a)]

New partner does not become liable for the act which was done by the
firm prior to his introduction. If that person is to be held liable following
conditions are to be satsfied:
(1) The new firm has agreed to take over the debt
(2) The creditors had agreed to discharge the old firm, and to accept the new
firm as his debtors
 INTRODUCTION OF NEW
PARTNERS
Point to ponder:
A, B and C are partners. D is their creditor. A retires, and a new partner X is
introduced into the firm. X agrees to take over the liability of A. D, the creditor,
agrees with A and the reconstituted firm of B, C and X, that he will look only to
the new firm for the payment of his debt. Decide whether A is liable for
payment.
 VINOD BABU V DISTRICT
COLLECTOR (2005) (KER HC)

Issue before the court was whether the incoming partner can be held liable
for the arrears of sales tax which accrued prior to his induction in the firm.

The court held that there was no agreement to show that the partner has
agreed to contribute to the liability which accrued before his induction in the
firm. Hence, the partner is not liable for the accrued sales tax.
 MODES OF RETIREMENT

A partner may retire—

(1) By consent of all other partners [s.32(1)(a)]

(2) By agreement [s.32(1)(b)]

(3) By notice - If it is a partnership at will [s. 32(1)(c)]

(4) By insolvency - Partner ceases to be a partner in case the partner is declared

insolvent whether the firm is dissolved or not from the date of adjudication.
 MODES OF RETIREMENT

(5) By expulsion - Good faith in the interest of the firm + contract + opportunity
of being heard [s.33]

Ganesh Chandra v Gopal Chandra (1978) (Cal HC)

There was a partner who paralysed the business of the firm by giving notice to
the firm’s bankers not to pay the firm’s cheques and offered no explanation for
his conduct even when full opportunity was given to him. The court upheld such
a explusion.

(6) By death - The estate of deceased is not liable for any act of the firm after
death [s.35]
 RETIREMENT OF PARTNER

A retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement if - there is an agreement made
by him with such third party and the partners of the reconstituted firm
[s.32(2)]

Public notice is to be given for retirement by the retiring partner or the

continuing partners. If notice is not given then he will be liable for the act of
the new firm. [s.32(3)]
DISSOLUTION OF
PARTNERSHIP
DISSOLUTION OF FIRM
 DISSOLUTION WITHOUT
COURT

1. Dissolution by mutual agreement - With consent of all parties or a contract

[s.40]
2. Compulsory dissolution - Happening of any event which makes it unlawful
for the business of the firm to be carried on. Earlier there was one more
ground of insolvency but now it has been repealed. [ s.41]
3. On happening of an event - Subject to contract, the firm will be dissolved
when the following events take place
a. By expiry of the term
b. By completition of one or more undertakings or adventures
 DISSOLUTION WITHOUT
COURT

c. Death of partner
d. Adjudication of a partner as insolvent [s.42]
4. By notice - Any partner can give notice in writing for his intention to dissolve
the firm where partnership is at will[s.43]
Point to ponder
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. By which mode
should the firm be dissolved?
 DISSOLUTION BY ORDER OF
THE COURT

At a suit by the partner, the Court can dissolve the firm on the following
grounds:
1.Insanity - Parnter becomes of unsound mind

2.Permanent incapacity - Incapacity may be due to physical or mental illness

3.Misconduct - It should damage the business prospect of the firm.

Snow v Milford (1868)
Facts: A partner of a firm of bankers committed aldultery with several women in
the city where the business was carried on and wife had left him. Other
partners filed for dissolution.
 DISSOLUTION BY ORDER OF
THE COURT

issue: Whether there is misconduct?

Held: It cannot be said that a man’s money is less safe because a partner has
committed adultery. Hence, there is no loss to the business prospect.

4. Persistent breach of agreement which is related to management of the firm

or behave in such a way that it is not possible for others to carry on business.

5. Transfer of interest - Transferred the whole interest OR has allowed it to be

sold in the recovery of land revenue
 DISSOLUTION BY ORDER OF
THE COURT

6. Perpetual losses - Whole object is profit only

Example - Where the whole capital contributed by partner has been spent and
they refused to introduce further capital then the court can grant can grant
dissolution.

7. Just and equitable ground

 CONSEQUENCES OF
DISSOLUTION

1. Notice
The partners to be liable for third parties until public notice is given.
The notice may be given by any partner.
Exception: Estate of partner who dies + insolvent are not liable irrespective
of the fact hat they give notice or not.

2. Right to wind up the business - Property to be used for payment of debt

and amount surplus to be distributed among partners.
 CONSEQUENCES OF
DISSOLUTION

3. Continuing authority of partners for winding up - The rights and obligations

of the partners remain intact till the affairs are wound up and unfinished
transactions are finished.

Point to ponder -
X and Y who carried on business in partnership for several years, executed on
December 1, a deed dissolving the partnership from the date, but failed to give
a public notice of the dissolution. On December 20, X borrowed in the firm’s
name a certain sum of money from R, who was ignorant of the dissolution.
Decide liablity of Y.
REGISTRATION OF
PARTNERSHIP
 REGISTRATION OF
PARTNERSHIP

It is not essential to register the firms. Even if you decide to register you
need do it from the beginning.

For registration, a statement along with the fees is to be given to Registrar

of Firms.

Statement must be signed and verified by partners or agent. [s.58]

 REGISTRATION OF
PARTNERSHIP

Items to be included in the statement:

(a) the firm name,
(b) the place or principal place of business of the firm,
(c) the names of any other places where the firm carries on business,
(d) the date when each partner joined the firm
(e) the names in full and permanent addresses of the partners
(f) the duration of the firm [s.58]
 EFFECTS OF NON-
REGISTRATION

1.Cannot enforce a right arising from a contract or conferred by this Act in

any court against the firm or any partner

2. Cannot enforce a right arising from a contract in the court by or on behalf

of a firm against any third party
 POINTS TO PONDER

Mr. A has the right to share profit in the ratio of 2:1 with Mr. B. Mr. B, being
an active partner, is not paying Mr. A his righful dues as mentioned in the
contract. Can Mr. A file a suit if the firm is (a) not registered and (b)
registered.

Z,Y and Z were partners in the firm. They did not pay to the creditor,A, for
dues amounting to Rs. 1000. Can A sue the firm if (a) firm is not
registered and (b) firm is registered.