The Indian Partnership Act, 1932

07 April 2024 18:12

Partnership is a business organization where two or more persons join together to carry out a
business for the purpose of earning profits. It is an extension of a sole proprietorship, allowing
individuals to pool their resources and expertise to create a larger, more successful enterprise. The
Indian Partnership Act, 1932 Sec 4 defines partnership as "the relation between persons who have
agreed to share the profits of a business carried on by all or any one of them acting for all."

Essential Requirements of a Partnership

To form a partnership, certain essential requirements must be met:

1. Association of two or more persons: A partnership must consist of at least two persons. There is no
maximum limit on the number of partners, although the Companies Act, 2013 imposes a maximum
limit of 100 partners for certain purposes.

A partnership may consist of any number of partners, provided there are at least two partners. There
is no maximum limit imposed by the Partnership Act, 1932. However, the Companies Act, 2013
imposes a maximum limit of 100 partners for certain purposes, such as banking purposes or other
purposes. If the number of partners exceeds the maximum limit, it will amount to an illegal
association under Section 464 of the Companies Act, 2013.

2. Agreement: There must be a valid agreement between the partners, either in written or oral form.
The partnership agreement, also known as the partnership deed, outlines the terms and conditions of
the partnership, including the capital contributions, profit-sharing ratio, rights, and responsibilities of
each partner.

The agreement can be in written or oral form, although it is advisable to have a written agreement,
also known as a partnership deed, to avoid any disputes or misunderstandings in the future.

The partnership deed typically includes the following details:

• Name and address of the firm and business: The partnership must have a unique name that
distinguishes it from other partnerships and businesses.
• Name and address of the partners: The partnership deed should list the names and addresses of all
the partners involved in the partnership.
• Capital contributed by each partner: The partnership deed should specify the capital contributions
made by each partner. This helps determine the profit-sharing ratio and the extent of each partner's
financial stake in the business.
• Profit and loss sharing ratio: The partnership deed should outline the ratio in which the profits and
losses of the business will be shared among the partners. This ratio can be based on the capital
contributions or any other agreed-upon formula.
• Rights, duties, and obligations of partners: The partnership deed should clearly define the rights,
duties, and obligations of each partner. This includes the authority to make decisions, the
responsibility for specific tasks, and the requirement to act in the best interests of the firm.
• Settlement of accounts on the dissolution of the firm: The partnership deed should specify the
procedure for settling the accounts and distributing the assets in the event of the dissolution of the
partnership.
• Rules for admission, retirement, and death of a partner: The partnership deed should outline the
process for admitting new partners, retiring existing partners, and dealing with the death of a partner.
This ensures a smooth transition and continuity of the business.
• Dispute resolution mechanism: The partnership deed may include provisions for resolving disputes
among the partners, such as through arbitration or mediation.
• Any other provisions affecting the rights of the partners: The partnership deed can include any other
provisions that the partners deem necessary or relevant to their specific business.

3. Lawful business { SECTION 12 } : The partnership must be formed for the purpose of carrying on a
lawful business. Any business that is illegal or against public policy cannot be the subject of a
partnership.

To qualify as a partnership, the business must be carried out with the intention to earn profits. Co-
ownership of property alone does not constitute a partnership. Section 2(b) of the Partnership Act
defines business as "every trade, occupation, or profession." It encompasses any lawful activity
conducted in a continuous manner, with the primary purpose of generating income or profits.

4. Mutual agency: Each partner must act as an agent of the firm and have the authority to bind the firm
and other partners in the ordinary course of business. This means that one partner can enter into
contracts on behalf of the firm, and the other partners will be bound by those contracts.

One of the key characteristics of a partnership is the principle of mutual agency. This means that each
partner acts as both a principal and an agent for the firm and the other partners.

Section 13 of the Partnership Act establishes the concept of mutual agency and its implications:
• Each partner is entitled to carry out the business: Every partner has the authority to act on behalf of
the firm and bind the firm with their actions. This means that each partner can enter into contracts,
make decisions, and perform other acts necessary for the conduct of the business.
• Mutual agency exists between the partners: The acts of one partner, within the scope of the
partnership business, are binding on all the partners. This means that each partner is not only bound
by their own acts but also by the acts of the other partners.
• Sharing of profits: The sharing of profits is a significant factor in determining the existence of a
partnership. However, it is not the sole criterion. Other factors, such as mutual agency and the
intention to carry on a business together, also
play a crucial role in determining the partnership.

5. Sharing of Profit
One of the fundamental aspects of a partnership is the sharing of profits among the partners. The
Partnership Act, 1932 requires the partners to agree on a profit-sharing ratio, which determines how
the profits will be distributed. The profit-sharing ratio can be based on the capital contributions of the
partners or any other agreed-upon formula.
The sharing of profits serves multiple purposes in a partnership:
• Incentive for partnership: The prospect of sharing in the profits provides partners with an incentive to
work together and contribute their skills, resources, and efforts to the success of the business.
• Equitable distribution of rewards: The profit-sharing ratio ensures that each partner receives a fair
share of the profits, based on their contributions and the agreed-upon terms.
• Risk-sharing mechanism: In the event of losses, the profit-sharing ratio also determines how the
losses will be distributed among the partners. This helps to distribute the burden of losses and
mitigate the financial impact on individual partners.
It is important to note that the profit-sharing ratio can be modified by the partners through mutual
agreement. Partners may decide to change the ratio based on changing circumstances or the
performance of individual partners.

Kinds of Partnership
Partnerships can be classified based on the duration of the partnership and the extent of the business
carried out by
the partnership.
A. Partnership at Will {Sec 7}: A partnership at will is formed when there is no fixed period prescribed
for the expiration of the partnership. This means that the partnership continues until any of the
partners give notice of their intention to dissolve the partnership. The partners have the freedom to
dissolve the partnership at any time. The Partnership Act, 1932 provides two conditions for a
partnership at will: (1) there is no agreement regarding the duration of the partnership, and (2) there
is no clause for the determination of the partnership.
B. Partnership for a Fixed Period: In a partnership for a fixed period, the partners agree to carry on the
business for a specific duration. The partnership comes to an end after the expiration of the fixed
period, unless the partners decide to continue with the partnership. If the partners continue the
partnership beyond the fixed period, it becomes a partnership at will.
C. Particular Partnership{Sec 8}: A particular partnership is formed for completing a specific project or
undertaking. Once the project or undertaking is completed, the partnership comes to an end. The
partners have the option to continue with the firm or dissolve it.
D. General Partnership: A general partnership is formed for the purpose of carrying on a business. There
is no particular task or project that needs to be completed. The business conducted by a general
partnership is of a general nature.

Scope of Partnership Act (Section 5)

Section 5 of the Partnership Act defines the scope of the Act. It states that the partnership arises from
a contract and is subject to the provisions of the Act. The partners may exercise any of their powers at
any time, but they must not exercise them in a manner that is illegal, fraudulent, or against public
policy. Any contract made by a partner without the consent of all other partners is not binding on the
firm, unless all the partners have accepted or ratified the contract.

Partners
Partners are the members of a partnership who agree to carry out the business jointly and share the
profits and losses. The Partnership Act does not prescribe any specific qualifications for becoming a
partner. However, the partners must have the legal capacity to enter into a contract, as determined
 by the Indian Contract Act, 1872.
The partners in a partnership can have different roles and responsibilities based on their skills,
expertise, and contributions to the business. They can be classified into various types based on their
involvement in the day-to-day operations, extent of liability, and other factors. Some common types
of partners include:
1. Active/Managing Partner: An active or managing partner is actively involved in the day-to-day
management and operations of the business. They take on leadership roles and make key decisions
for the partnership.
2. Sleeping/Dormant Partner: A sleeping or dormant partner does not actively participate in the
management of the business. They contribute capital to the partnership but do not have a significant
role in the day-to-day operations.
3. Nominal Partner: A nominal partner is a partner in name only. They may not have a significant or real
interest in the partnership. They may be included as partners for legal or administrative purposes.
4. Partner in Profit Only: A partner in profit only shares in the profits of the partnership but does not
bear any losses. They are not liable for any obligations or liabilities of the partnership.
5. Minor Partner: A minor cannot be a full-fledged partner according to the Indian Contract Act, 1872.
However, a minor can be admitted to the benefits of the partnership with the consent of all the
partners. The minor shares in the profits and benefits of the partnership but is not personally liable for
any obligations or losses.
6. Partner by Estoppel: A partner by estoppel is not a partner in reality but has represented themselves
as a partner to third parties. They may be held liable as a partner based on their conduct or words,
even though they are not legally a partner.
The rights and responsibilities of partners are determined by the partnership agreement. The
Partnership Act provides a framework for the rights and duties of partners in the absence of a
partnership agreement.

7. Outgoing partner: An outgoing partner is a partner who voluntarily retires without dissolving the firm.
He leaves the existing firm, therefore he is called as an outgoing or retiring partner. Such a partner is
liable for all his debts and obligations incurred before his retirement. However, he can be held liable
for his future obligations, if at all he fails to give a public notice stating his retirement from the
partnership firm.

8. Secret Partner: In a partnership, the position of secret partner lies between the active and sleeping
partner. The membership of the firm of a secret partner is kept secret from the outsiders and third
parties. His liability is unlimited since he holds a share in profit and shares liabilities for losses in the
business. He can even take part in working for the business.

9. Limited partner: A limited partner is a partner whose liability is only upto the extent of his
contributions for the capital of the partnership firm.

Rights of the Partners

• Right to take part in the conduct of the firm’s business: Section 12(a) provides that every
partner has the right to be involved in the conduct of the firm’s business. All partners have the
 right to manage the firm’s business.
• Right to express opinion: Section 12(c) provides that all partners can freely express their opinion
in matters concerning the firm’s business. However, before a decision is made based on an
opinion of a partner, the consent of other partners must be obtained.
• Right to have access to books of the firm: Section 12(d) of the Act provides that every partner
has the right to look into the books of the firm, whether the books concern the accounts of the
firm or not.
• Right to profit: As per Section 13(b), all partners must equally share profits earned through the
business.
• Right to interest on capital: Section 13(c) provides that on an agreement, the partners of a firm
have the right to claim interest on the firm’s profits from the capital.
• Right to interest on advances made by partner: In some cases the firm may need extra money
apart from the capital. In such cases, a partner may make advances to the firm and he may also
claim interest on such advances.
• Right to indemnity: Section 13(e) of the Act provides that a partner may make some payments
and incur liabilities while acting on behalf of the firm. The firm shall indemnify a partner in
respect of such payments and liabilities, whether it was made in ordinary course of business or in
emergency.
• Right to dissolve the partnership: Section 44 provides that a partner has the right to file a suit to
dissolve the partnership. The court may dissolve firm on any of the grounds given below:

1. Unsoundness of mind of a partner, where the suit shall be brought by another partner or the next
friend of the unsound partner;
2. Permanent incapability of another partner to perform his duties;
3. Another partner is guilty of conduct that prejudices the business of the firm;
4. Committing breach of agreement by another partner by wilfully or persistently;
5. Transfer of interest in firm by another partner to a third person;
6. Business of firm cannot be carried on due to losses;
7. Any other ground which makes it just and equitable to dissolve the partnership.

• Right to not get expelled: Section 33 provides that all partners have right to not get expelled
except on certain grounds and they must be given reasonable warning and opportunity of
explanation before the expulsion.
• Right to prevent introduction of new person: Section 31 provides that every partner has the
right to prevent the introduction of a new partner without his consent to the firm, unless the
agreement has expressly provided that such introduction is permitted.
• Right to retire: Section 32 of the Act provides that a person has right to retire with the consent of
other partners, unless the requirement of consent is waived by the agreement. The partners can
 retire by simply providing a notice to other partners in partnerships at will.

Duties of partners

• Duty of greatest common advantage: As per Section 9 of the Act, it is incumbent upon the partners to
carry on their business for the greatest common advantage of the firm. The partners must act so that
all the partners benefit and secure the maximum profits. No partner should act for their personal
gain.
• Duty of good faith: As per Section 9, the partners must act just to each other. The relationship of
partnership is on mutual trust and hence, there must be good faith between them. A partnership is of
fiduciary nature and thus, at every stage of a partnership, the partners must act just and faithful to
one another.
• Duty to render true accounts: Partners of a firm have a duty to render true accounts as per Section 9.
A partner of a firm must keep and render true and complete accounts of the partnership firm’s
business. He must make it available to other partners or their representatives when required.
• Duty to render full information: As per Section 9, partners of a firm have a duty to provide true and
full information regarding the business. Partners are agents of each other and hence, partners must
communicate all information regarding the running of the business in a complete and truthful manner
to each other.
• Duty to not carry another business: As per Section 11(2) of the Act, a partner must not conduct a
business other than that of the firm. Partners can restrain one another from carrying on another
business, provided that such restraint is reasonable.
• Duty to act diligently: As per Section 12(b), a firm’s partner must act diligently in the business.
• Duty to perform without remuneration: As per Section 13(a), every partner must perform and attend
to the firm’s business without expecting remuneration. There is a presumption that all partners are to
work for the common advantage of the firm.
• Duty to share losses: As per Section 13(b) of the Act, partners must share losses in the proportions as
provided by the partnership agreement. If the agreement does not provide it, it must be shared in the
proportion that they share the profits.
• Duty to indemnify for wilful neglect: As per Section 13(f), a partner shall indemnify his firm for any of
the losses caused to it due to his wilful neglect during the course of the business. Wilful neglect refers
to an act that is deliberate and intentional.
• Duty to not assign his rights: No partner can assign his rights in a partnership firm to a third person in
order to make him a partner.
• Duty to act within authority: Every person has to act within the authority that he has conferred upon
him as per the partnership agreement.
• Duty to account private profits: Section 16(a) provides that no partner can use the partnership firm’s
property for private use, or use any profits derived from the partnership business for his own
advantage. If the property of profits of a firm is ever used for personal advantage, it must be
accounted for.
• Duty not to compete: Section 16(b) states that no partner of a firm can carry on another business
simultaneously, except with the consent of other partners. On the failure of obtaining the consent, he
must account for all the profits he made as a result of that and must compensate for the losses
sustained by the firm if any.
• Duty to properly use the firm’s property: Sections 14 and 15 of the Act provide that the property of
the firm must be used solely for the purpose of the firm’s business and not for private purposes. The
term ‘property of the firm’ covers all properties and rights and interests in a property originally
acquired by the firm for the purpose of running the business. The goodwill of the business is also a
property of the firm.

How is registration done?

Section 58 explains the procedure of the registration of a partnership firm.

• Making an application to Registrar: Any of its partners can send an application along with the
prescribed fee and copy of partnership deed o the registrar of the area in which any place of
business is proposed to be situated or is situated. Such a statement shall be signed by all of its
partners.

Such a statement should contain:

○ Name of the firm

○ Principal place of business
○ Any other place where the business is carried on
○ Duration of partnership firm
○ Name and address of all partners of a firm
○ The date on which each partner joined the firm

• Verification: Each partner who has signed the statements needs to be verified.
• The name of the firm shall not contain any name resembling the name of Crown, Emperor, king,
Royal, Emperors’, or any other words implying or expressing the sanction of the government.

Section 59 states that when the Registrar is satisfied that the conditions of Section 58 are complied
with then he shall record an entry of the statement in a register called the Register of Firms, and shall
file the statement.

DISSOLUTION OF A FIRM

Section 39: Dissolution of a Firm

1. The dissolution of a partnership between all the partners of a firm is called the "dissolution of the
firm".

2. When all partners of the firm decide to end their partnership, it leads to the dissolution of the firm.

3. For example, if three partners were running a business and decided to part ways, then the firm
would be dissolved.

Section 40: Dissolution by Agreement

1. A firm may be dissolved with the consent of all the partners or in accordance with a contract
between the partners.

2. When all partners agree to dissolve the firm or have a contract which specifies conditions for
dissolution, the firm can be dissolved.

3. For example, if the partnership agreement mentions that the firm can be dissolved if any partner
decides to leave, then the firm can be dissolved if that condition is met.

Section 41: Compulsory Dissolution

1. A firm is dissolved

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to be carried
on or for the partners to carry it on in partnership.

2. When all partners of a firm are adjudicated as insolvent, or if an event occurs which makes it illegal
to carry on the business of the firm, then the firm is compulsorily dissolved.

3. For example, if a law is passed that makes the business of the firm illegal or if all partners are
declared insolvent, then the firm is dissolved.

Section 42: Dissolution on the Happening of Certain Contingencies

1. Subject to contract between the partners, a firm is dissolved

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;
 (c) by the death of a partner; and

(d) by the adjudication of a partner as an insolvent.

2. If a firm was constituted for a fixed term, then the firm is dissolved when the term expires. If the
firm was constituted to carry out a specific undertaking, then the firm is dissolved when that
undertaking is completed. The death of a partner or the adjudication of a partner as an insolvent also
leads to dissolution of the firm.

3. For example, if a partnership was formed to complete a specific project, then the firm is dissolved
when the project is completed.

Section 43: Dissolution by Notice of Partnership at Will

1. Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to
all the other partners of his intention to dissolve the firm.

2. If the partnership is at will, which means that the partnership has not been formed for any specific
duration or purpose, then any partner can dissolve the firm by giving notice to all other partners of his
intention to dissolve the firm.

3. For example, if two friends decided to start a business and formed a partnership at will, either one
of them can dissolve the partnership by giving notice to the other partner.

Section 44: Dissolution by the Court

At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:

(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the
next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of
performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect
Liabilities
• Liability of partners for the acts of the firm (Section 25): All the partners is jointly and severally liable for the
acts of the firms. He is liable only for those acts which are done at the time he is a partner.
• Liability of a firm for the wrongful act of partner (Section 26): When any wrongful act or omission is done
by any of its partners in the ordinary course of its business or with the consent of others partners then the firm is
liable to the same extent as a partner.
• Liability of a firm for the misapplications by partner (Section 27): when any partner acting as an agent
receives the money from the third party and misapplies it or the firm receives the money and money are
misappropriated by any of its partners then the firm is liable to pay for the loss suffered.

Status of a minor
Section 30 states the legal provision related to the minor according to Section 18 of the Indian Contract act 1872, no
person below the age of 18 years can enter into the contract which implies that no minor can enter into a contract.
But Section 30 states that the minor cannot be a partner in a partnership firm but he can be admitted to benefit from
the partnership firm. The minor will be liable to get only the benefits from the partnership but is not liable for any
losses or liability. The minor can be admitted to the partnership only with the consent of all the partners.

There are various rights that are granted to the minor.

Various rights are as follows:

• Right to inspect the books of account

• Rights to share the profits from the firm
• Rights to sue any partner or all for his share of benefit or profit
• He has a limited liability which means his personal assets may not be disposed of to pay the firm debts
• A minor has a right to become a partner on attaining the age of 18 years.

Liabilities of a minor

• A minor has Limited liability. If minor is declared as insolvent his share will be kept in the possession of official
liquidator.
• If after attaining the age of 18 years he decided to become the partner then he has to give public notice within 6
 months of attaining the majority. If notice not given then minor will become liable for all the acts of others until
the notice is given
• When a minor partner becomes the major he will be liable for the acts of all partners to the third parties.
• If he decided to become a full-time partner then he will be considered as a normal partner and will take part in
the conduct of the business.