Partnership Act 1932

MBA & BBA

 Partnership Act 1932

Partnership is 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
 Content
Essentials element of partnership.
Kinds of partners
Types of partnership
Rights of partner
Duties of partner
Dissolution of partnership and partnership firm.
Winding up of partnership and partnership firm.
Advantage of winding up
Reconstitution of a firm.
 Partnership Deed :
Partnership Deed is the document that defines the
rights and obligations of partners. Besides names,
address and occupation of partners it lays down the
duration of partnership, nature of business, profit
sharing ratio, right to interest, salary, commission
etc.
Section 4 of the Partnership Act, 1932 defines
‘partnership’ as follows: “a business carried on by all or

Essential elements of
any of them acting for all.”

partnership:
(1) Association of two or more persons;
(2) Existence of a contract;
(3) Carrying on a business;
(4) Sharing of profits; and
(5) Prevalence of mutual agency.
 Kinds Of Partners

There may be different kinds of partners in a partnership firm.

The important classification of partners is given below:

Actual or active partners,

Dormant or sleeping partner,
Nominal partner,
Partner in profits only,
 Sub-partner,
Partner by estoppel or by holding out.
 Types Of Partnership

oPartnership at will- (Sec. 7)where time is not mentioned in

agreement
oParticular partnership - (Sec. 8)partner in a specific venture
only
oPartnership for fixed term - (Sec. 7)
 Rights Of Partners.section 12 & 13 of the
partnership act

 Rights to take part in management

Every partner has a right to take part in the conduct of the business.
 Rights to inspect books

Every partner has a right to check the books of account of the firm
and to get the copies.
 Rights to be consulted

Every partner has a right to be consulted and heard before any matter
is decided.
 Rights to share profit
Every partner has a right to share equally in the profits earned by the
firm, irrespective of his amount of capital contribution.
 Rights to interest on capital

A partner is not entitled to receive interest on capital contributed by him..

 Right to use property

Every partner of the firm is co-owner in the property of firm and he has a right
to use it for the best benefit of the business of the allowed.
 Rights to admit and expel partner

A new partner cannot be admitted in the firm and an old partner cannot be
expelled from the firm without the prior consent of all the partners.
 Right to give opinion
Nature of the partnership business cannot be altered without the prior approval
of all the partners.
 Right to collect debts
A partner has an implied right to collect partnership debts and to give
receipts for payments.
 Right to act as agent
Every partner can act as an agent on behalf of the remaining partners
and bind the other partners to his act.
 Rights of retirement
Every partner has a right of retirement from the firm with the mutual
consent of all other partners. But when the partnership is at will, he
can leave the firm at any time while giving a due notice of his
retirement from the firm.
 Right of competing business
Any outgoing partner has a right to start a business competing with that
of the firm but he cannot use the name of the firm.
 Duties Of Partners:

To work for common advantage

To be faithful
Render true account
To indemnify for fraud
Not to claim remuneration
To share profits and losses
To act within authorities given
 Dissolution Of A Firm

Dissolution of a firm means an end of the firm. The

Indian Partnership Act distinguishes between:
(a) Dissolution of firm, and

(b) Dissolution of partnership.

Section 39 provides that the dissolution of
partnership between all the partners of a firm is
called the “dissolution of the firm”.
Compulsory dissolution :

1. When all the partners or all except one partner becomes

insolvent or of unsound mind.
2. When the business becomes unlawful.
3. When all the partners or all except one decide to retire from the
firm.
4. When all the partners or all except one partner die.
5. A firm is also dissolved compulsorily if the partnership deed
includes any provision regarding the happening of the following
events
(a) expiry of the period for which the firm was formed,
(b) completion of the specific venture or project for which the
firm was formed.
 Dissolution by Agreement :
1. All the partners give consent or
2. as per the terms partnership agreement .
 Dissolution by notice : In case of a partnership at will, the
firm may
be dissolved if any one of the partner gives a notice in writing to the
other partners.
 Dissolution by Court :
1. When a partner becomes of unsound mind.
2. When a partner becomes permanently incapable of performing his/her
duties as a partner,
Partnership Is Dissolved In The
Following Circumstances:
Partnership is dissolved in the following circumstances:
 1) At the time of admission of a new partner;
 2) On the retirement/death of an old partner;
 3) At the time of change in profit sharing ratio among existing partners;
 4) If any partner is declared insolvent;
 5) On the expulsion of any partner;
 6) On the expiry of the period of partnership.
Thus this is clear from the above discussion that in the case
of dissolution of the partnership the firm may continue under a new
agreement whereas in the case of dissolution of partnership firm the business
of the firm comes to an end.
 There are two basic ways that
the partnership can be wound
up:

Creditor’s Petition

Partner’s Petition
Creditor’s Petition

A creditor can petition to wind up the partnership

but not issue bankruptcy petitions against the
individual partners. Or the creditor can issue a
petition to wind up the partnership concurrently
with a bankruptcy petition against one or more of
the individual partners.
Partner’s Petition

The partners can petition to wind up the partnership

but not issue bankruptcy petitions against the
individual partners. Or the partners can issue a
petition to wind up the partnership concurrently
with a bankruptcy petition against the individual
partners.
 Partnership Winding Up

Where the partners have decided that the partnership

has no viable future or purpose then a decision may
be made to cease trading and wind up the
partnership. Clearly such a decision should not be
taken lightly and is recommended that all other
options are carefully considered and compared to
the objectives of the partnership and the individual
partners.
 The Winding-Up Process
The partnership is treated much like an unregistered company and is wound up in
the same way as a company. The tasks of the liquidator are therefore to

 Realise the assets in the partnership including any deficiencies due on the
partner’s individual capital accounts (the partners will have to pay such
deficiencies if required). All debtors, property and other assets will be collected
by the liquidator.

 Investigate the conduct of the "officers of the partnership" just as the liquidator
in a company liquidation must do.
Interestingly the liquidator can initiate actions against the partners to seek to
disqualify them as partners in a partnership (Insolvent Partnerships Order 1994)
2.2. The liquidator must also ascertain whether any transactions have taken place
that put the partners (individually or collectively) into a better position than they
should be then such transactions (known as preferences or transactions at
undervalue). If such transactions have been completed before the winding up,
they can be un-done. The court can order that the partners reverse the
transaction.
 The Advantages of Winding up

By initiating such action themselves the partners as

individuals may avoid the disqualification of the partners and
as company directors, however this will depend on their
actions pre the failure and whether they had acted at all times
correctly and in the creditor’s interests.
The creditors will know that an insolvency practitioner must
be appointed where the winding up process is used. This can
ensure (sometimes) a better return, investigation into the
officers conduct pre insolvency and the knowledge that the
partnership will not increase debts.
 Liabilities of a Partner to Third
Parties:
The following are the liabilities of a partner to third parties:
Liability of a partner for acts of the firm

Liability of the firm for wrongful act of a partner

Liability of the firm for misutilisation by partners

 Liability of an incoming partner:
An incoming partner is liable for the debts and acts of the firm from
the date of his admission into the firm. However, the incoming
partner may agree to be liable for debts prior to his admission. Such
agreeing will not empower the prior creditor to sue the incoming
partner. He will be liable only to the other co-partners.
 Liability of a retiring partner:
A retiring partner is liable for the acts of the firm done before his
retirement. But a retiring partner may not be liable for the debts
incurred before his retirement if an agreement is reached between the
third parties and the remaining partners of the firm discharging the
retiring partner from all liabilities. After retirement the retiring
partner shall be liable unless a public notice of his retirement is given.
No such notice is required in case of retirement of a sleeping or
dormant partner.
 Reconstitution Of A Firm
A change in the constitution of the firm occurs when a new
partner is admitted or an old partner retires or dies. The
partnership is reconstituted on:
 Admission

Retirement

Death of a partner.

Amalgamation of two partnership firms.

Change in the profit sharing ratio between the partners.

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