CS Tushar Pahade

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Indian partnership act 1932

INTRODUCTION
❖ 1st day of October 1932.
❖ The Partnership is Act is not exhaustive. Where the Partnership Act is silent on any point,
the general principles of the law of contract apply(section3)

DEFINITION OF PARTNERSHIP (SEC.4, PARA-1).

❖ 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

ESSENTIAL OF PARTNERSHIP
1. At least two persons who are competent to contract.
2. Maximum number or partners: 50 (Companies Act, 2013)
3. Business. no business there exists no partnership
4. Sharing of profits is a must but sharing of losses by all the partners is not essential
5. Mutual agency: Section 4 states that the partnership must be carried on by all or any of
them acting for all

TEST OF PARTNERSHIP
1. There must be an agreement between two or more persons.
2. There must be a business of partnership.
3. The partners must have agreed to share the profits of the business.
4. ‘Mutual Agency’ is conclusive evidence

NO PARTNERSHIP AS NO MUTUAL AGENCY

1. Joint holders of property sharing profits
2. Sharing of profits
❖ Money lender sharing profits ❖ Widow or child of deceased partner
❖ Servant or agent receiving share in ❖ Seller of goodwill
profits
3. Members of Hindu undivided family
4. Business of Buddhists Couple

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WHO MAY BECOME PARTNER?

Minor No
Unsound Mind No
Disqualified by Law No
Married Woman Yes
Artificial person Yes provided MOA allows
One Company = One Partner
Firm No
same partners may constitute more than one distinct and separate
firm but firms have no juristic personality
HUF Two or more joint Hindu families represented by their Kartas can
also enter into a partnership if the number of adult members (male
and female member excluding minors) of all the joint families does
not exceed 50

REGISTRATION OF FIRM
❖ not compulsory
❖ optional for the partners
❖ registered at any time even after the partners have agreed to dissolve the firm
❖ But a firm must be registered firm on the date of institution of a suit.
❖ any change in the facts registered in the Registrar of Firms must also be registered.
❖ If such changes are not registered, the firm will be treated as unregistered firm for the
purpose of instituting a suit.

Sec Changes Period of Intimation to Signed & verified by

ROF
60 Recording Of Alterations In Requires almost a new
Firm-Name, Nature Of registration to be signed
Business And Principal Place & verified by ALL
Of Business. partners
61 Noting Of Closing And By any partner or agent
Opening Of Branches. Within a period of 90 days
62 Noting Of Changes In By any partner or agent
Names And Addresses Of
Partners

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63(1) Recording of reconstitution By any partner who was
And Dissolution Of A Firm a partner immediately
before the dissolution

63(2) Change regarding minor’s Within a period of 90 days By minor himself

decision regarding becoming from the date of his
a partner election

EFFECTS OF NON-REGISTRATION

Unregistered firm
1. No suit by a partner against the firm. No s
uit
Partner of
2. No suit by a partner against any other partner. Unregistered firm
No s
uit
Past or present
Partner of
Unregistered firm

Firm
3. No suit by an unregistered partner against the
uit
No s
firm and other partners. Unregistered
No Siut Partner
partner
4. No suit by unregistered partner against third No s
uit
party. Third Party

5. No suit by the firm against third party.

6. Third parties can sue against the firm and its
partners. Unregistered
NO SUIT
Third Party
FIRM
CAN SUIT

7. No claim of set-off exceeding Rs.100.

EXCEPTION: NON-REGISTRATION DOESN’T EFFECT FOLLOWING RIGHTS

1. Right of partners to sue for
❖ Dissolution of firm
❖ Settlement of accounts of dissolved firm
❖ Releasing property of dissolved firm

2. Right of 3rd party to sue the firm or partner

3. Power of official assignee or court to realize property of an insolvent partner & to bring
action on behalf of such partner

4. Right of firm to institute a suit or claim set off not exceeding Rs. 100

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PROPERTY OF THE FIRM
1. All property, right and interest
❖ originally brought into the common stock of the firm
❖ acquired by purchase or otherwise, by or for the firm

2. Goodwill

3. List of property is not exhaustive, its inclusive

4. Unless the contrary intention appears, property and rights and interest in property acquired
with money belonging to the firm are deemed to have been acquired for the firm.

TYPES OF PARTNERSHIPS
1. Partnership for a fixed term.
❖ fixed duration
❖ after expiry of that term the partnership becomes partners at will

2. Partnership at will
❖ no duration has been fixed.
❖ Its existence depends on the will of partners.
❖ Where partnership is at will, a partner may retire by giving a notice in writing to all the
other partners of his intention to retire. [Sec.32(1)(c)]
❖ Where the partnership is at a will, the firm may be dissolved by any partner by giving
notice in writing

3. Particular partnership
❖ a particular adventure or undertaking
❖ after expiry of that term the partnership becomes partners at will

TYPES OF PARTNERS

Type Profit Sharing Loss Sharing Management Liability

towards 3rd
Party
Actual or Yes Yes Yes Yes
ostensible or
active partner

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Sleeping or Yes Yes No Yes
dormant
partner
Nominal No No No Yes
partner
Partner in Yes No Yes / No Yes
profits only
Sub-partner No No No No
Partner by No No No Yes, only for the
estoppel or 3rd party who
holding out relied on his
representation

Note: Partner by estoppel or holding out. Exceptions

The principal of holding out is not applicable in the following two cases:
I. Where after a partner’s death the business is continued by the firm with the old firm’s
name or remaining partners continue to use the name of the deceased partner, his legal
representative or his estate shall not be liable for any act of the firm after his death.
II. Insolvency of a partner also terminates his liability forth with. His estate is no more
liable for any act of the firm done after the date of the order or adjudication

MINOR AS PARTNER IN BENEFITS

❖ A minor being incompetent to contract cannot be a partner in a firm.
❖ A minor can never be a full-fledged partner even in an existing firm
❖ Minor may be admitted to the benefits of partnership. with the consent of all the partners

RIGHTS OF MINOR
❖ To share profits
❖ To share the property
❖ To inspect the books
❖ To copy accounts
❖ To sue partners
❖ To become or not to become a partner in the firm: within six month of his attaining
majority or of his obtaining knowledge that he had been admitted to the benefits of
partnership, whichever date is LATER.

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LIABILITIES OF MINOR
❖ No personal liabilities
❖ Minor’s share is liable
❖ No Liability in case of insolvency
❖ To give public notice on attaining majority.

RIGHTS OF PARTNERS
1. Right to be consulted
❖ ordinary matters: majority
❖ nature of business: ALL
2. Where a partner willfully neglects or refuses to perform his duties for the conduct of
business and burden of such duties falls on other partners, the other partners can claim
compensation for the labor and trouble imposed upon them
3. Right to interest on capital payable only out of profits if agreement allows
4. Right to interest on advances @ 6% pa
5. Right in emergency. A partner has authority, in an emergency, to do all such acts for the
purpose of protecting the firm from loss as would be done by a person of ordinary
prudence, in his own case, acting under similar circumstances. The firm will be bound by
such acts
6. Right of outgoing partner to share subsequent profits. Either
❖ share in the subsequent profits of the firm
❖ or interest at the rate of 6% pa on the amount of his share in the property of firm till
the accounts are finally settled.

DUTIES OF PARTNERS
To account for private profits. A partner is bound to account for and pay to the firm the profit
derived for himself from any of the following
❖ From any transaction of the firm.
❖ From use of the property of the firm.
❖ From use of business connection of the firm or firm name.

ACTS WITHIN IMPLIED AUTHORITY: FIRM WILL BE LIABLE FOR SUCH ACTS
Following are the some of acts which generally fall under the scope of implied authority of a
partner in a general commercial or trading firm:
❖ To buy goods of the kind dealt/used in the business of the firm.

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❖ To sell the goods of the firm.
❖ To buy things necessary (incidentally or consequently) for carrying on the business of the
firm.
❖ To accept payments of the debts due to the firm and issue receipts for the same.
❖ To employ servants for the business of the firm.
❖ To acknowledge a subsisting debt.
❖ To borrow money on credit of the firm.
❖ To pledge goods or borrowing money on behalf of the firm.
❖ To issue negotiable instruments (Cheque, bills etc.) for and on behalf of the firm.
❖ To settle accounts with persons dealing with the firm.
❖ To render accounts to the creditors of the firm.
❖ To defend an action brought against the firm and to engage a lawyer for the purpose.

RESTRICTION ON IMPLIED AUTHORITY: FIRM WILL NOT BE LIABLE

Restrictions on implied authority of a partner are two kinds:
1. Statutory restrictions. In the absence of any usage or custom of trade to the contrary,
the implied authority of a partner does not empower him to do the following acts:
❖ To submit a dispute relating to the business of the firm or arbitration.
❖ To open a bank account on behalf of the firm in his own name.
❖ To compromise or relinquish any claim or portion of a claim by the firm.
❖ To withdraw a suit or proceeding filed on behalf of the firm.
❖ To admit any liability in a suit or proceeding against the firm.
❖ To acquire immovable property belonging to the firm.
❖ To enter into partnership on behalf of the firm.

RESTRICTION ON IMPLIED AUTHORITY

3rd Party doesn’t know about restriction 3rd Party knows about restriction
Firm is LIABLE Firm is NOT LIABLE

PARTNER’S AUTHORITY IN AN EMERGENCY

❖ A partner has authority to do all the necessary acts in an emergency subject to the
following conditions:
❖ The acts must be done for the purpose of protecting the firm from loss threatened by the
emergency.

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❖ The partner must act as a prudent person would act under similar circumstances in his own
case

LIABILITY OF FIRM
1. Liability for extension and restriction of partner’s implied authority
2. Liability for acts done in an emergency
3. Liability for acts done in the name of the firm
4. Liability for the notice to a partner. Notice to a partner operates as notice to the firm
provided the following conditions are satisfied.
❖ When the notice is given to an active partner.
❖ The notice must be of any matter relating to the affairs of the firm
5. Liability for wrongful acts of a partner.
❖ when the wrongful acts are done while acting in the ordinary course of business of the
firm or with the authority of his co-partners.
❖ Such acts cause loss or injury to any other party or any penalty is incurred.
6. Liability for misapplication of money.
❖ Where a partner acting within his apparent authority receives money or property from
third party and misapplies it.
❖ Where a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it is in the
custody of the firm

INTRODUCTION / ADMISSION OF A PARTNER:

I. With the consent of all the existing partners or
II. In accordance with contract

LIABILITY OF NEW PARTNER.

❖ commences from the date of his admission
❖ Minor becomes liable for all acts and debts of the firm since the date of his admission in
the benefits of partnership

RETIREMENT OF PARTNER:
Modes of retirement:
❖ consent of all the other partners or
❖ In accordance with agreement or
❖ Where the partnership is at will, by giving notice in writing

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Rights of Retired Partner
❖ To carry on competing business
❖ To share profits or claim interest

EXPULSION OF A PARTNER:
❖ If allowed by partnership deed
❖ majority
❖ good faith

INSOLVENCY OF A PARTNER
Whether or not the firm is dissolved by the insolvency of the partner depends on the terms of
the contract between the partner

DEATH OF PARTNER
No Liability for acts done before death
❖ For the money borrowed by surviving partners to pay for the goods ordered in the life time
of the deceased partner
❖ For the goods ordered before but delivered after death of the partner. It is because there
is no liability or debt due before the death of the partner.

DISSOLUTION WITHOUT THE ORDER OF THE COURT:

1. Dissolution by agreement
2. Compulsory dissolution
❖ By insolvency of all partners or all but one
❖ By business becoming unlawful
3. Dissolution by happening of contingencies. Subject to contract between the partners, a firm
is dissolved by happening of any of the following contingencies
❖ Expiry of the term. ❖ Death of a partner.
❖ Completion of adventure. ❖ Insolvency of a partner
4. Dissolution by notice when partnership is at will

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Dissolution by Court

Reason Who may file suit for dissolution

1. Insanity
2. Permanent incapacity
3. Misconduct
4. Persistent breach of
agreement
5. Transfer of interest
6. Perpetual losses
7. Any other just and
equitable ground
Any other partner or by the next friend of the partner of
unsound mind
By any other partner. The partner suffering from incapacity
cannot sue for dissolution
partner other than the guilty partner
partner other than the guilty partner
partner other than the transferee partner
Any partner
Any partner

RIGHTS OF PARTNERS ON DISSOLUTION

1. Right to enforce winding up
❖ To have the property of the firm applied in payment of the debts and liabilities of the
firm.
❖ To have the surplus distributed among the partners of their representative according to
their rights.

2. Rights to have debts of the firm and personal debts paid-off. Where there are joint
debts due from the firm, and also separate debts due from any partner, the property of the
firm shall be applied in the first instance in payment of the debts of the firm, and, if
there is any surplus, then the share of each partner shall be applied in payment of his
debts or paid to him. Similarly, the private property of any partner shall be applied first in
the payment of his private debts, and the surplus (if any) in the payment of the debts of
the firm, if any.

3. Right to claim return of premium(goodwill) on PREMATURE dissolution

Where a partner has paid a premium (goodwill) on entering into partnership for a
❖ fixed term and
❖ the firm is dissolved before the expiration of that term,
He shall be entitled to repayment of the premium or of such part thereof as may be
reasonable.

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NO refund of premium on goodwill
1. premature dissolution is due to the death of any partner
2. The dissolution is mainly due to the misconduct of the partner claiming the return of
the premium.
3. no provision for the return of the premium or any part thereof in agreement.

4. Right in case of fraud or misrepresentation. Where a contract of partnership is rescinded

on the ground of fraud or misrepresentation of any of the partners, the aggrieved partner is
entitled to the following rights in addition to his usual rights:
a) Right of lien on surplus assets. He is entitled to a lien on, or a right of retention of,
the surplus or the assets of the firm remaining after the debts of the firm have been
paid, for any sum paid by him for the purchase of a share in the firm and for any
capital contributed by him.
b) Right to subrogation. He is also entitled to subrogate to the rights of a creditor of the
firm in respect of any payment made by him towards the debts of the firm.
c) Right to be indemnified. He is also entitled to be indemnified by the partner or
partners guilty of the fraud or misrepresentation against all the debts of the firm

LIABILITIES OF THE PARTNERS

1. Liability for the acts done after dissolution. All the partners continue to be liable to the
third parties for any act done by any of them after dissolution of the firm but before
public notice of dissolution is given [Sec.45(1)]
However, if the dissolution is a consequence of (a) death of a partner,(b) adjudication of
insolvency of a partner, or(c) retirement of a dormant / sleeping partner, the estate of
such partner will not be liable for the acts done after the date on which he ceases to be
partner.[Proviso to Sc.45(1)]

2. Continuing authority of partners. After the dissolution of a firm, the authority of each
partner to bind the firm as well as mutual rights and obligations of the partners continue,
so far as may be necessary for the following two purposes only:
i. For winding up of the affairs of the firm.
ii. For completing the unfinished transactions at the time of dissolution. (Sec.47)

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Space for Notes

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