partnership act 1932 case study

Case Analysis on V. Subramaniam Vs.Rajesh Raghuvandra Rao

• Whether sub-section 2a of section 69 inserted by the Maharashtra amendment violates article 300a of the constitution of India?
• Whether sub-section 2A of Section 69 inserted by the Maharashtra Amendment violates Article 14 of the Constitution of India?
• Whether sub-section 2A of Section 69 inserted by the Maharashtra Amendment violates Article 19(1) (g) of the Constitution of India?
• Code of Civil Procedure, 1908 (CPC) - Section 113.
• Constitution of India - Article 14, Article 19, Article 19(1), Article 19(1) (g), Article 300A.
• Indian Partnership Act, 1932 - Section 69, Section 69(1), Section 69(3).

The Section 69(1) & (2) of the Partnership Act[3] originally read as follows:

69. effect of non-registration..

• No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm:
• No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of firms as partners in the firms.

The Sub-section 2A which was introduced by the Maharashtra Amendment 1984 states as follows:

The original sub-section (3)(a) of section 69 in the partnership act read as follows:, 19. protection of certain rights regarding freedom of speech etc.

• to freedom of speech and expression;
• to assemble peaceably and without arms;
• to form associations or unions;
• to move freely throughout the territory of India;
• to reside and settle in any part of the territory of India; and
• to practice any profession, or to carry on any occupation, trade or business

(6) Nothing in sub clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub clause, and, in particular, nothing in the said sub clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to:

• the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
• the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise
• Oanali Ismalji Sadikot v. State of Gujarat and Ors[17];
• Bijay Ku. And Ors. Vs. State of Orissa[18],
• Ezra Victor Aboody vs. H. Dhanrajgir Estate Pvt. Ltd[19] and many more.
• Mulla,The Indian Partnership Act(10 edition) 2012.
• Indian Partnership Act,1932
• Section 69,Indian Partnership Act,1932.
• Indian Partnership Act,1932.
• Article 300, Constitution of India.
• Maneka Gandhi v. Union of India and Anr. [1978]2SCR621
• Chiranjit Lal Chowdhuri v. Union of India: [1950]1SCR869
• Ananda Behera v. State of Orissa: [1955]2SCR919
• Virendra Singh v. State of U.P.: [1955]1SCR415
• Vajrapuri Naidu, N. v. New Theatres, Carnatic Talkies Ltd. 1959)2MLJ469
• Article 14, Constitution of India.
• Article 19, Constitution of India.
• Chintamanrao and Anr. v. The State of Madhya Pradesh [1950]1SCR759
• M.C.V.S. Arunachala Nadar v. State of Madras and Ors.: AIR1959SC300
• Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd.: [1964]8SCR50
• Oanali Ismalji Sadikot v. State of Gujarat and Ors ,Special Criminal Application No. 421 of 2007
• Bijay Ku. And Ors. Vs. State of Orissa,WP No. 9251 of 2009.
• Ezra Victor Aboody vs. H. Dhanrajgir Estate Pvt. Ltd,AA no. 4 of 2007.
• Tube Investments of India Limited and Ors.vs. T Assistant Commissioner of Income Tax and Ors, Tax case 249 of 2006.

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The Partnership Act, 1932

This article is written by Richa Goel of Banasthali Vidyapith  and Adhila Muhammed Arif , a student of Government Law College, Thiruvananthapuram . In this article, she has discussed the scope, nature of Partnership Act, 1932 and various provision related to admission, death, the retirement of a partner.

It has been published by Rachit Garg.

Table of Contents

Introduction

Partnership results from a contract and is governed by the Partnership Act 1932. The partnership is also governed by the general provision of the Indian Contract Act on such matters where the Partnership Act is silent. It is expressly mentioned that the provision of India Contract Act which is not repealed will be applicable on Partnership until and unless such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract regarding the capacity to contract, offer, acceptance etc will also be applicable to the partnership. But the rules regarding the status of minor will be governed by the Partnership Act, 1932 since Section 30 of the Act talks about the position of the minor.

Nature of Business

It is a business organization where two or more persons agreed to join together to carry out the business for the purpose of earning the profits. It is an extension of a sole proprietorship. It is better than sole proprietorship because in sole proprietorship the business is carried out by the individual with limited capital and limited skill. Due to the limited resources of a single individual carrying a sole proprietorship, a larger business requiring more resources and investment than available to the sole proprietor cannot be thought of such business. On the other hand in partnership, a number of partners join together with their capital to form an agreement and carry out a business jointly.

According to Section 4 of the 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”.

Essential requirements of a partnership

• It must be an association of two or more persons. 
• There must exist an agreement between the partners.
• There must be a business undertaking or a commercial activity that is lawful. 
• The motive must be to earn the profit and share between the partners.
• The agreement must be to carry out the business jointly or by any of them acting on the behalf of all i.e., there must be mutual agency.

A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a partnership and A and B are considered as partners.

A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership as they had no intention to carry out business.

Number of members

Any two or more persons may form a partnership. There is no limit imposed on the minimum and the maximum number of partners under the Partnership Act,1932. According to Companies Act 2013, the maximum number of 100 must not exceed in case of partnership and minimum is 2 partners.

If in any case, it exceeds the maximum limit then it will amount to the illegal association under Section 464 of Companies Act,2013. According to Section 11 of Companies Act the maximum number of partner in case of:

• Banking purpose-10 persons
• Other purposes- 20 persons

The partnership is an agreement in which two or more person has decided to carry out business and share the profit and losses equally. To create a legal relationship it is necessary to form a partnership agreement.

The partnership agreement becomes the foundation or the basis on which it is based. It can be either written or oral. The written agreement is known as a partnership deed. Partnership deed mainly consists of the following details:

• Name and address of its firm and business
• Name and address of its partner
• Capital contributed by each partner
• Profit and loss sharing ratio
• Rate of interest on capital, loan, drawings etc
• Rights, duties and obligation of partners
• Settlement of accounts on the dissolution of the firm
• Salaries, commission payable to partners
• Rules to be followed in case of admission, retirement and death of a partner
• Mode of settlement on disputes among partner.
• Any other affecting the rights of the partners

Business (Section 12)

The partnership must be created for the purpose of carrying the business which is legal in nature. Co-ownership of property does not amount to the partnership.  As per the definition given in Section 2(b), a business includes any trade, occupation or profession. It is any kind of occupation that is not something done just for pleasure. It is an operation conducted by a particular method that is continuous, and from which income or profits can be derived. 

Mutual agency (Section 13)

The business is to be carried by all of them or by any one of them on behalf of all. It gives two assumptions

Each partner is entitled to carry out the business. The mutual agency exists between the partners. Each partner is a principal as well as an agent for the other partners.he is bound by the acts of other partners as well as can bind others by his own act.

Sharing of profit

The agreement is to share profit and losses among the partners. The sharing of profit and losses can be according to the ratio of the capital contributed or equally.

It helps to distribute the burden among the partners in the case when the partnership suffers losses.

Liability of partnership

All the partners are jointly liable for paying the debts of the firm. The liability is unlimited which means that the partner’s private assets can be disposed of for the purpose of paying the debts of the firm.

Test of partnership 

Section 6 of the Indian Partnership Act provides the mode of determining the existence of a partnership. The following are the provisions in Section 6: 

• While determining whether an association of persons is a firm or if a person is a partner to a firm, the real relation shown by relevant facts between the parties must be examined. 
• Sharing profits from a property held by persons jointly does not automatically qualify such persons as partners. 
• A person can hold a receipt of the share in profits or receipt of payment that is contingent upon the profits, but that does not make him a partner. The following are such persons: 
• Servant or agent who receives remuneration or commission. 
• Widow or child of a deceased partner who receives an annuity. 
• Moneylender to the partnership business. 
• The previous owner or part owner who has consideration for the sale of the goodwill of the business or share of it. 

Real criteria for determining partnership 

It is clear from Section 6 that the sharing of profits is not the ultimate test for determining whether a partnership exists. The existence of a partnership depends on the actual intention of the parties and the contract drawn up by them. In some cases, an alleged partner might have a share in the profits of the business, but that does not by default make him a partner. 

The earlier position was that the share of profits is the criteria for determining partnership, as held in the case of Waugh v. Carver (1973) . The House of Lords overruled this decision in the case of Cox v. Hickman (1860) . In this case, Lord Crownworth held that the real test of partnership is mutual agency among the members of the particular association. However, the factor of share of profits cannot be eliminated. Share of profits is certainly an important piece of evidence that helps to determine the existence of a partnership, but not the ultimate test.

Kinds of partnership

The various types of partnership are based on two different criteria.

With regard to the duration of the term of partnership:

Partnership at wil l

when no fixed period is prescribed for the expiration of partnership then it is a partnership at will. According to Section 7 two conditions need to be fulfilled:

• No agreement about the determination of the  fixed period of partnership
• No clause with respect to the determination of partnership.

Partnership for a fixed period  

When the partners fixed the duration of the partnership firm then after the expiration of the fixed period the partnership comes to an end. When the partners decided to continue with the partnership even after the expiry of the fixed period then it becomes a partnership at will.

On the basis of the extent of the  business carried by a partnership

Particular Partnership (Section 8)

When the partnership is created for completing any project or undertaking. When such an undertaking or project have been completed then partnership comes to an end. The partners have a choice to continue with the firm.

General Partnership  

when the partnership is created for the purpose of carrying out the business. There is no particular task that has to be completed. The task is general in nature.

Scope of Partnership Act (Section 5)

The partnership arises from the contract but not from the status. The intention of partners is a question of the partnership. the partners may exercise any of its power at time but must not exercise in the pursuance of illegal, fraudulent or misconduct.

If any of the partners have made the contract without the consent of all other partners then the question as to the validity of such contract arises. If all the partners have accepted or ratified the contract then no question as to the validity of such contract arise.

With the consent of all the partners, the partnership can become a member of another firm.

The member of a partnership is called partners.it is not mandatory that all the partners are the same or all the partners participate in the conduct of the business or share the profit or losses equally. The partners are classified depending on the nature of work, the extent of liability, etc. There are basically six types of partner:

• Active/managing partner : The partner who takes participation in the conduct of the business daily. This partner is also called an ostensible partner.
• Sleeping/Dormant : He does not participate in the conduct of the business but he is bound by the conduct of all the partners.
• Nominal partner : He is a partner to the firm only by his name. In reality, he has no significant or real interest in the firm.
• Partner in profit only : The partner who agrees to share the profit but does not suffer losses. He is not liable for any liabilities in case of dealing with the third party.
• Minor partner : A minor cannot be a partner according to the Indian Contract Act, but he can be admitted to get the benefit of all the partners gives the consent. His will share the profit equally but his liability will be limited in case of loss of the firm.
• Partner by estoppel: it means when the person is not a partner but he has represented himself by conduct, or words to another person to be the partner then he cannot deny afterwards. Even though he is not a partner but he becomes the partner by holding out or by estoppel.

Relation of partner with one another

All the partners have a right to create their own terms and condition with regard to the affairs of the business in the partnership deed. The Indian Partnership Act has prescribed the provision to govern the relation of partners and this provision is applicable in case when there is no deed. The various rights of the partners are explained below:

• Right to determine the relationship by contract (Section 11)

The partnership deed determines the general administration of the partnership like what will be the profit-sharing ratio, who will do what work etc. The partnership contains the rights and duties of the partners.

Such a deed can be made either expressly or by necessary implication. For example, if one partner looks into sales daily and other partners do not object to it, his conduct will be presumed as the right of all the partners in the absence of written agreement. So it can be concluded that all partners create a right for their own.

Section 27 of the Indian Contract Act,1872

Agreement in restraint of trade is void

All the agreements which restrain the person from carrying any lawful profession, trade or business are void.

But Section 11 of the Partnership Act states that the partners can restrain each other from carrying a business other than the firm. but such restraint must contain in the partnership deed.

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: 
• Unsoundness of mind of a partner, where the suit shall be brought by another partner or the next friend of the unsound partner;
• Permanent incapability of another partner to perform his duties;
• Another partner is guilty of conduct that prejudices the business of the firm;
• Committing breach of agreement by another partner by wilfully or persistently;
• Transfer of interest in firm by another partner to a third person;
• Business of firm cannot be carried on due to losses;
• Any other ground which makes it just and equitable to dissolve the partnership. 
• Section 46 provides that after dissolution, a partner has the right to wind up the business       of the firm. On dissolution, every partner or his representative is entitled, as against all the other partners, to have the firm’s property applied in payment of debts and liabilities of the firm, and then have the surplus distributed among the partners or their representatives. 
• 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. 

Relations of partners to third parties

Section 18 to 22 of the Act talks about the relation of partners third parties

Section 18 prescribes that the partners are an agent of the firm for the purpose of conducting the affairs of the business. The partners act as the principal and agent as well. when he performs the act in his own interest he is the principal and when he does in the interest of another partner then he is an agent. He is not an agent for the dealings or the transactions between the partners themselves.

Section 19 states that any act which is performed by the partners in the usual course of its business binds the firm itself. The authority to bind the firm is implied authority

Section 20 states that partners can make a contract to restrict or expand the implied authority of a partner.

Section 21 states that if any act is done by any partners in case of an emergency which a prudent man would do, then such acts need to bind the firm.

Section 22 specifies that if any act is done by any partner then it must be done in the name of the firm or in such manner which binds the firm.

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. 

When do Rights and Duties change?

The existing relationship between the partners come to an end when there is a change in the constitution of the firms. Such changes in the constitution of the firm may occur due to the following reasons (Section 17)

• Expiration of term of the firm.
• Carrying out the additional business other than agreed upon.
• Changes in the composition of members due to admission, retirement or the death of a partner.

The duties and rights of partners remain the same until there is any change in agreement but such right and duties may vary or modified by creating a fresh agreement.

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.

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.

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.

Non-registration of partnership firm

In India, it is not compulsory to register the partnership and no penalty is being imposed for non-registration but if we talk about English law it is compulsory to register partnership firm and if it is not registered then the penalty is imposed. Non-registration leads to a certain disability in accordance with Section 69 of the Act.

Effect of non-registration (Section 69)

• No suit can be initiated in civil court by the firm or other co-partners against the third party
• In case of breach of contract by the third party; the suit cannot be brought in any civil suit. The suit must be filed by the one whose name is registered as a partner in a register of the firm.
• No partners can claim a relief of set-off.
• Any action which is brought out by the third party against the firm having a value of Rs 100 cannot be set off by the firm or any of its partners.
• An aggrieved person cannot sue against firms or other partners

Generally, no action can be brought against the firm or the partners but there is an exception to it. In a case when the firm is dissolved it can bring a suit for the realization of his share in the firm’s property .

Non-registrations do not affect the following rights

• A third party can bring a suit against the firm
• Right of the partners or firm to claim a relief of set off the claim for the value which does not exceed Rs 100
• Power of official liquidator, official assignees to release the property of insolvent partners and brings a legal action
• Partner right to claim for the realization of his share in case of dissolution of the firm

Introduction or Admission of partner (Section 31)

As per Section 31, no person can be introduced as a new partner to the firm without the consent of other partners. This is, however, subject to the provisions in the agreement of partnership and Section 30, which deals with minor partners. 

Modes of introduction

The following are the modes of introduction of a partner: 

• With the consent of all partners
• Introduction as per the contract between partners
• A minor admitted to the benefit of the partnership becoming a partner

Rights of incoming partner 

• Right to manage partnership business
• Right to access books of firm
• Right to capital, profit and loss
• Right to dissolve partnership
• Right to indemnification of losses

Liabilities of incoming partner 

A partner’s liabilities are only with respect to transactions subsequent to becoming a partner. The same is provided under Section 30(2) . However, the incoming partner and co-partners can enter into an agreement where it provides that the incoming partner can be held liable for obligations of the firm prior to his arrival. 

Retirement of partner (Section 32)

Section 32 of Act talks about the retirement of partners. When the partner withdraws from the partnership by dissolving it then it is dissolution but not a retirement.

Any partner may retire:

• When there is a partnership at will, by serving a notice to all the existing partners
• When there is an express agreement among the partners
• When the consent of all the partners is given

Liabilities of retired partner

A retired partner continues to be liable for the acts of firms and other partners till he or any other partners give public notice about his retirement. When the third party does not know that he was a partner and deals with the firm; then in such case a retired partner is not liable. if it is a partnership at will then there is no requirement to give public notice about his retirement.

The outgoing partner may enter into an agreement to not carry similar business or activities within a specified period of time.

Expulsion of partner (Section 33)

A partner can be expelled only when below three conditions are satisfied:

• Expulsion of the partner is necessary for the interest of the partnership
• Notice is served to the expelled partner
• An opportunity of being heard is given to the expelled partner

If the above three conditions are not fulfilled then such expulsion will be considered as null and void.

Insolvency of a partner ( Section 34)

When a partner is declared as insolvent by the court, it leads to the following consequences:

• He ceases to be the partner of a partnership firm from the date of adjudication
• His estate which is in possession of official liquidator ceases to be liable for any acts of the firm whether the partnership subsequently dissolves or not
• Partnership ceases to be liable for any act of insolvency partner

Liability of estate of a deceased person (Section 35)

Generally, the partnership comes to end on the death of a partner but if there is a contract between partners to continue with the partnership on the death of a partner then surviving partner continues with the business after clearing the deceased partner estate from any liability for the future acts of the firms.

Liability of outgoing partner (S ection 36)

The outgoing partner is restricted to perform acts like:

• Using the name of the firm
• Representing himself as a partner
• Make the customer of the firm in which he was a partner as its own.

The outgoing partner may enter into an agreement not to carry similar business or activities within a specified period of time. After the specified period, the outgoing partner is allowed to carry on a similar business or advertise it.

Liabilities of outgoing partner to subsequent profits (Section 37)

When the any of the partners ceases to be a partner or dies and remaining partner continues with the business without settling the accounts then the outgoing partner is liable to get a share from the profit earned by the firm since the date he ceases to be a partner.

The share may be attributable to the use of a share of his property or 6% interest per annum on the amount of share in his property.

The surviving partner has the option to purchase the share of the deceased partner and if they purchase it then the deceased partner has no right to get the profit derived from such property.

Dissolution of a firm

Section 39 to 44 deals with the Dissolution of a firm.

Sometimes circumstances arise when the firm gets dissolved. Sometimes a firm is dissolved voluntary or by the order from the court. There are various modes prescribed under Section 39 to 44 for the dissolution of a partnership firm. Even when the partnership is dissolved then it gives certain rights and liabilities to the partners.

Lets us understand the concept of dissolution in detail through   the Powerpoint Presentation given below .

Dissolution of a firm ( Section 39 to Section 44)

Liability of partners in Different Situations

Liabilities of partners after the dissolution of the partnership firm (section 45).

The partners are liable for the acts of the firm to the third party until public notice is given. A partner who is declared as insolvent, or who is retired, the estate of a person who dies, or who was not known as a partner at the time of dealing with the third party will not be liable for the act.

Wind up the Business Post-Dissolution (Section 46)

When the firm is dissolved every partner has a right to apply for the firm’s property in the payment of debts and liabilities. If there is any surplus it needs to be distributed among the partners.

The partners have mutual obligations and rights until the affairs of the firm is wound up.

Settlement of partnership account (Section 48)

When the partnership has dissolved the accounts of the partners needs to be settled under the usual course of business. Various modes can be used for the settlement of accounts.

If there is a deficiency in capital or loss is incurred when it is paid out of profit. If profit is not sufficient or no profit is earned then it is paid out by the capital and by the partners if necessary. The partners contribute to the proportion of the profit sharing ratio.

The asset of the firm and the capital contributed by the partners to meet up the deficiency in the capital is applied in the following order:

• Repayment to third parties
• The amount which is due to him from the capital
• The amount which is due to him on account of capital
• And if any amount is left then it is distributed among all the partners in their profit sharing ratio.

Paying Firm Debts and Separate Debts (Section 49)

In a case when there are joint debts from the firm and the separate debts from the partner then joint debts from the firm is given priority and if any surplus is left then separate debts from the partner is to be paid off.

The property of the individual partners is applied firstly for the payment of separate debts.

Personal Profit Earned After Dissolution of Firm (Section 50 and Section 53)

When the firm is dissolved by the death of the partner and business is carried out by the existing partners or his legal heirs then they have to account for the personal benefit earned before winding up the partnership.

Section 53 states that if there is no contract the partner can restrain other partners from carrying similar activities, or using the firm’s name or firm’s property for their own benefit until the winding up process is complete.

Return of Premium on the Premature Dissolution of the firm (Section 51)

When the firm is dissolved before the expiry of a fixed period, then a partner paying a premium can receive a return of a reasonable part of the premium. Such rules are not applicable in a case when the partnership is dissolved by:

Misconduct of partner paying a premium (Section 52)

Post an agreement in which there is no clause for return of premium.

Contract Rescinded for Fraud or Misrepresentation

When the partnership arising from the contract is rescinded due to fraud and misrepresentation then the party who has rescinded the contract will be liable as:

After the debt of the firm is paid the lien on remaining assets.  He will be treated as a creditor for the payment of any debts made by him.

An indemnity from the partners guilty of misrepresentation or fraud against all debts of firms.

Sale of Goodwill After Dissolution of Firm (Section 55)

The goodwill is treated as an asset. The goodwill is included in the assets while settling the account after the dissolution of the firm. The goodwill may be sold separately or with other assets. Once the firm is dissolved and goodwill is sold then any partners can carry on a similar business or advertise a business competing with the buyers of the goodwill. The partners are prohibited from doing the following acts:

• To use the name of the firm
• To represent himself as carrying the business
• To solicit the customers of the firm dealing before dissolution.

Partnership is a very common type of business which is prevailing in the country. It has many advantages for the company. This Act is a complete Act as it covers all the aspect related to the partnership.

Frequently asked questions 

Which statute governed the law of partnership before 1932 .

Prior to 1932, the law of partnership was contained in Chapter XI of the Indian Contract Act, 1872. However, the Indian Contract Act did not contain provisions related to many aspects of the law of partnership, which called for the enactment of a separate statute that compensates for such inadequacies. 

Is the Partnership Act, 1932 an exhaustive statute? 

The Act does not consolidate the law of partnership into a complete single code, and hence it is not meant to be exhaustive. Section 3 of the Partnership Act provides that the provisions in the Contract Act that are not repealed and not inconsistent with the Partnership Act shall continue to be operative. 

Is the Partnership Act, 1932 retrospective in the application? 

Section 1(3) provides that the Act comes into force on October 1st, 1932. The Act applies prospectively and not retrospectively. The same has been clarified under Section 74 of the Act which states that the Act shall not affect what has been done before its commencement. 

• https://www.toppr.com/guides/business-laws/the-indian-partnership-act/consequences-of-dissolution-of-a-firm/
• https://www.advocatekhoj.com/library/bareacts/partnership/index.php?Title=Indian%20Partnership%20Act,%201932
• http://www.legalservicesindia.com/article/158/Indian-Partnership-Act,1932.html
• https://www.lawnotes.in/Indian_Partnership_Act,_1932

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Commissioner of income-tax vs. gomedalli lakshminarayan (1935), vellikannu vs. r. singaperumal and ors. (2005) , khazan singh and ors. vs. state of uttar pradesh and ors. (air 1974 sc 669).

Provisions of Section 13 are wrongly stated. Mutual agency is conferred by Sections 2(a), 19 and 22 of the Partnership Act, 1932. The same has been confirmed by the Court ( https://indiankanoon.org/doc/166100362/ ). Kindly rectify the same.

Awesome blog, Thank you for this.

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.... (2) The plaintiff's suits were dismissed by him primarily on the ground that the suits were not maintainable, as the plaintiff firm was not registered under section 69 (2) of the indian partnership act . T...from the relative contract of tenancy. It is clear, therefore, that suits for ejectment would be suits of the description contemplated by section 69 (2) of the indian partnership act . (3) We are also of the...three suits for ejectment, which came up to this court in second appeal. The present appeals are directed against decrees of dismissal, passed by chatterji, j. In the above three cases ...

...the Companies Act makes it clear that Part X of the Act does not affect the operation of the Indian Partnership Act . Section 590 states:“Saving and construction of enactments confe...which Chapter VI of the Indian Partnership Act contains besides provisions for the dissolution of partnership are left untouched by Section 590 of the Companies Act , 1956. The cases cited in suppo...wound up by the Court. Admittedly this is not a case of voluntary winding up or winding up subject to the supervision of the Court. Chapter VI of the Indian Partnership Act , 1932 also contains provisions...

...of the provisions of the Indian Partnership Act to the cases arising under llie Income-tax...this section only applies to a continuing unit as understood under the Indian Partnership Act and does not take into its ambit the cases of such, firms as are dissolved and...firms reconstituted within the meaning of Section 187(2) of the Act could under the strict provisions of the Indian Partnership Act be regarded as the successors of the old firms. Sectio...

...whether on the facts and circumstances established in the cases an inference of a partnership firm within the meaning of the Indian Partnership Act , 1932 followed and Section 13 was not attracted...firm. That does not necessarily mean that it is a partnership firm within the meaning of Section 4 of the Indian Partnership Act as indicated in Section 2(k) of the Act . In our view no facts and circumstan...which was used for agricultural purposes, namely, the cultivation of sugarcane etc. The definition section further stated that the word “firm” had the same meaning as in the Indian Partnership Act ...

... Partnership Act , as some cases do, a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner.11. The decision of..., Calcutta Bench, under Section 66(1) of the Indian Income Tax Act (11 of 1922)(hereinafter called “the Act ”). One of the references (Income Tax Reference No. 20 of 1959) was made at the instance of M/s...Ghanshyamdas and not Murlidhar Himatsingka who must be taken to be acting on behalf of the firm Fatehchand Murlidhar. Mr Sen further urges that the Indian Income Tax Act taxes real income and not notional...

...language of the English enactment in the important provisions of the Indian Partnership Act with a view to " attract to difficult cases in India the benefits of English...sections 14 and 15 of the Indian Partnership Act relating to partnership property are almost identical in terms with those of Sections 20(1) and Section 21 of the English...on the question of such conversion ; at least, none has been cited at the Bar. The provisions of the Indian Partnership Act , 1932, are based mainly on the...

...) of the Act , In these cases , it was held that the definition of partnership in Section 4 of the Indian Partnership Act envisages an agreement between the parties. A min...30(1) and (2) of the Indian Partnership Act , a minor cannot be a partner. He can be admitted to the benefits of the partnership . On attaining majority, if he so elects, he, under Section 30...', 'partner' and ' partnership ' have the meanings respectively assigned to them in the Indian Partnership Act , 1932 (IX of 1932); but the expression 'partner' shall also include...

...unregistered partnership firm, the above prosecution is not sustainable under S. 69(2) of the Indian partnership Act The effect of non-registration of the Partnership Firm under ...of revision petitioner that the prosecution in this case is not sustainable under S. 69(2) of the Indian partnership Act is not acceptable.5. The counsel for...incompetent to give evidence in this case and there is no proper representation of the Partnership Firm. But under the Partnership Act all partners are agents of the Partnership Firm and therefore, every...

...that by itself does not necessarily establish a partnership within the meaning of the Partnership Act , 1932. Accordingly, it seems to us th...4 of the Indian Partnership Act , which is entitled to registration under section 26A of the Indian Income-tax...of the Indian Partnership Act .5. Mr. Subimal Roy, learned counsel appearing for the applicants, raised various points attacking the decision of the Tribunal. Before dealing with...

... Indian commercial men to regard the firm as having some sort of legal entity apart from the partners has been recognised for some purposes in the Indian Partnership Act , 1932. However, i...good since the passing of the Indian Partnership Act , 1932, which recognises a distinct entity for a firm apart 4rom the members composing it. It was also urged that keeping...observed:“It is true that the Indian Partnership Act goes further than the English Partnership Act , 1890, in recognising that a...

...operation of the Indian Partnership Act . Section 590 states Saving and construction of enactments conferring power to wind up partnership , association or company in certain ... 1977 SCC (4) 9 ACT : Companies Act , 1956, Part X, S. 590 vis-a-vis Indian Partnership Act , 1932. for winding up of unregistered companies..., the Court, HELD : The provisions for winding up of the affairs of a firm which Chapter VI of the Indian Partnership Act contains besides provisions for the dissolution of partnership , are left...

...one of the partners, the firm should not stand dissolved. Mr. Kaji is right when he says that the provisions of section 42(c) of the Indian Partnership Act do not require that there must be an agr...the law. Further, section 187 does not say that the relevant provision of the Indian Partnership Act would have no application. Here in the absence of any agreement to the contrary, on the deat...provisions of section 42(c) of the Indian Partnership Act , that a completely new partnership came into being on June 9, 1966, and, therefore, it was a case of succession of one...

...applicable to the instant case. In this connection, it may be mentioned that according to Section 14 of the Indian Partnership Act , property of a firm includes goodwill of the business. Further...the assets of the firm to which the transferring partner is entitled to. It further appears that under proviso to Section 53 of the Indian Partnership Act , in case of dissolution, a partner or his...case, the benefit of partnership given to minors Kiritkumar Chhotalal and Deepak Kumar Chhotalal was a gift under the Gift Tax Act , 1958?”The High Court answered...

...him, it is necessary that partnership firm should be registered as required under Section 69 of the Indian Partnership Act , 1932. 13. Mr. Mehta, has brought to our notice that Sect... Indian Partnership Act is not applicable for supply of signals to the cable operators. 15. In view of our clear findings in various judgements, prima-facie, I am of the view that Section 69 (2... Partnership Expired on 13.6.2012 3. 829 (C) of 2012 Sole Proprietary Expired on 15.7.2012 4. 830 (C) of 2012...

... Partnership Act , 1932. 13. Mr. Mehta, has brought to our notice that Section 69 of the Indian Partnership Act , 1932 is not applicable in these ...Section 69 of the Indian Partnership Act is not applicable for supply of signals to the cable operators. 15. In view of our clear findings in various judgements, prima-facie, I ...boxes wherever the partnership firm has not been registered as according to him, it is necessary that partnership firm should be registered as required under Section 69 of the Indian ...

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Indian Partnership Act Notes and Reading Materials

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• November 11, 2023

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• The Indian Partnership Act, 1932

An Introduction

When two or more people come together as partners, they can form a partnership firm. This partnership firm is governed by the rules and regulations of the Indian Partnership Act, 1932. The partnership is also governed by the Indian Contract Act in areas where the Partnership Act, 1932 is silent. Let us have an overview of this act by understanding its meaning, scope, and different kinds of partnerships. 

Definition of Partnership

Section 4 of the Indian Partnership Act defines a partnership as “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”.

Meaning of Partnership

In a partnership firm, two or more people come together to carry out a business for the purpose of earning profits and sharing those profits. The partners combine their capital resources and work jointly to carry on the business. According to Section 12 of the Indian Partnership Act, a partnership must be formed for the purpose of carrying a business that is legal in nature. Co-ownership of a property is not considered as a partnership.

Essentials of a Partnership

There must be an agreement between the partners to carry on the business of the partnership firm.

The aim of the formation of the partnership should be to earn profits and share them among partners. The sharing of profit and losses can either be according to the ratio of the capital contributed by each partner or be equally among all the partners unless otherwise specified.

The partnership agreement must state that the business will be jointly carried on by all of them or some of them acting on the behalf of all. According to Section 13 of the Partnership Act, 1932, the mutual agency exists between the partners. Every partner in a partnership acts as a principal as well as an agent for other partners. The actions of a partner are binding on the actions of all the other partners.

Unlimited Liability- The partners can be held liable jointly for any debts of the firm. They have an unlimited liability that extends to their private assets for the disposal of the firm’s debts.

Number of Partners in a Partnership

According to the Indian Partnership Act, there is no limit on the maximum number of partners that can be there in partnership but there must be a minimum of two partners. However, according to Companies Act 2013, the maximum number of partners must not exceed 100 in case of a partnership. If the number of members in a partnership exceeds 100 then it is termed as an illegal association as per Section 464 of the Companies Act, 2013. As per Section 11 of the Companies Act, the maximum number of partners for banking purposes is 10 and for other purposes is 10. 

Partnership Deed

The partnership agreement forms the basis of a partnership. It is the foundation that creates a legal relationship between the partners to carry out the business of the partnership firm. A partnership agreement can either be written or oral but in the written format it is known as the partnership deed. Some of the details mentioned in a partnership deed are as follows.

Name and address of the partnership firm as well as that of the business

Name and address of all the partners

Rights, duties, and obligation of partners

Profit and loss sharing ratio

Capital contribution by each partner

Rate of interest on capital, loan, drawings 

Settlement of accounts in the event of the dissolution of the firm

Mode of settlement in the event of disputes among partners

Salaries and commission payable to partners

Rules to be followed in the event of the admission of a new partner, retirement and death of an existing partner

Any other provisions affecting the rights of the partners

The Indian partnership act of 1932 is an extremely important act that is studied by students in the commerce stream. The Indian partnership act of 1932 is started as a part of the accountancy class 12 NCERT book of accounts This act contains 3 to 4 chapters that are based on the concept of partnership in the firms. These chapters are extremely important as they not only hold significant weightage in the class 12 board examination of accounts but also, the knowledge and the impact are extremely important to have in mind as it will help people who are interested in building a firm to stay vigilant as they will know about all the legal features that are associated with it.

The Indian partnership act of 1932 can be read from the chapter called accounting for partnership – basic concepts 2. After reading the study notes provided by Vedantu on the topic of the Indian partnership act of 1932, students will be able to define partnership and will also be able to list the essential features They will be able to identify the provisions of the Indian partnership act of 1932 that are related to accounting, they will know how to prepare partners capital accounts under fixed and fluctuating capital methods, repairing the profit and loss appropriation account and partners, calculate interest on capital, they will have knowledge on how guarantee for a minimum account of profit affect the distribution of profit among the partners, they will be able to make adjustments to rectify the past errors, they will also learn how to prepare final accounts of a partnership firm.

According to the Indian partnership act of 1932, a partnership can be defined as a “relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

People who have entered into a partnership willingly with the knowledge of every other detail relating to the firm are called partners and they collectively form a firm. They agree on a particular name under which the business will be carried on which is called the firm’s name. A partnership firm does not have a separate legal entity other than the partners constituting it. 

Essential Features of a Partnership

Two or More than Two Persons – in order for a firm to come into existence, it should involve two or more than two partners, who have a vested interest in a  common goal. However, according to section 464 of the companies act of 2013, the central government has prescribed a limit on the maximum number of partners a firm can hold. Therefore, According to the central government, the maximum number of partners a firm can hold is 50.

Legal Agreement - Partners who come together to form a firm, already have a mindset that they will be sharing both profits and losses of the firm equally. These agreements, if made orally are valid however it is advised to get these agreements written in a legal form to avoid disputes in the future.

Partners in Business - In order to be partners in business, there should be some business going on in the firm that only then can they be called Business partners and only then can the Indian partnership act of 1932 be applicable to them.

Mutual Agreements - In order for a partnership to take place, a Mutual agreement on the mutual agency is extremely important. Partners of a firm can make rules and bind other partners to it and also bound to the rules that are made by other partners of the firm. Every partner is allowed to make decisions and conduct the affairs of the business according to him/her.

FAQs on The Indian Partnership Act, 1932

1. What are the different kinds of Partnerships?

There are two kinds of partnerships on the basis of partnership terms and extent of the business.  

Partnership on the Basis of Duration

Partnership at Will - No fixed period is specified for the expiration of a partnership by will. 

Partnership for a Fixed Time - The partners fix the duration of the partnership, after the expiration of which the partnership comes to an end.

Partnership on the Basis of the Extent of Business

Particular Partnership - When a partnership is formed for the completion of a particular project and it expires after the project is completed.

General Partnership - When the partnership is formed for the general business of the firm and not for a specific project.

2. What are the different kinds of Partners in a Partnership Firm?

There are primarily six different kinds of partners in a partnership firm.

Active/Managing Partner- Plays an active role in the day to day business operations of the firm.

Sleeping/Dormant Partner- Does not participate in the operations of the business but is bound by the conduct of the other partners.

Nominal Partner- Does not have any significant interest in the firm and is a partner in name only. 

Partner in profit only- Shares only the profits of the firm but does not share the losses. Such a partner is not liable for any third-party liabilities.

Minor Partner- A minor cannot be a partner in a partnership firm as per the Indian Contract Act, but he can be entitled to the benefits of the firm with the consent of the other partners. The minor partner shares the profits of the firm equally but has limited liability for any losses of the firm.

Partner by Estoppel- A person who is not a partner of the firm but represents himself to be one through his words or conduct, to another person is a partner by estoppel. Such a person cannot deny being a partner afterward even though he is not a partner.  

3. Where can I find the notes on the Indian partnership act of 1932?

The study notes on the Indian partnership act 1932 and is easily available on the website of Vedantu. The study notes are curated according to the students’ needs as they are based on the curricula set by the Central Board of secondary education. The Indian partnership act 1932 is an extremely important concept as about 3 to 4 chapters in accounts revolve around the concept of partnership and it explains in-depth the features of the Indian partnership act of 1932.

4. What does the Indian partnership act of 1932 state?

According to the Indian partnership act of 1932, the partnership can be defined as a ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

5. What is the meaning of partnership?

In order for a partnership firm to come into existence, it needs two or more partners Both of whom have a vested interest in the common goal that benefits the firm. About two or more people come forward to carry out a business, the main objective being to earn profits and to share equal profits. The partners of the firm combine and share their capital resources and work together to build a successful firm. According to section 12 of the Indian Partnership Act, to carry a partnership business partnership must be formed in a legal nature. In other words business should take place as only just a piece of property is not considered a partnership.

6.  What are the different kinds of partnerships?

There are various types of partnership such as active/managing partner, sleeping/dormant partner, nominal partner, partner in profit only, minor partner, partner by estoppel. These concepts can be studied in depth in the study notes provided by Vedantu.

7.  What is a partnership deed?

A partnership deed is an agreement that forms the basis of a partnership. A partnership deed is important to carry out illegal business, as when everything is written in a legal form, disputes in the future can be avoided. A partnership deed can be oral or written but a written format is preferable and it is known as the partnership deed.

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