Business Environment & Entrepreneurship Indian Partnership Act, 1932

2 INDIAN PARTNERSHIP ACT, 1932

LESSEN OUTLINE
 Nature of Partnership  Sub-Partner
 Essentials of a Partnership  Partner by Estoppel or Holding Out
 Classification of Partnership  Minor Admitted to the Benefits of
 Kinds of Partners Partnership
 Actual, Active or Ostensible Partner  Rights and Duties of Partners
 Sleeping or Dormant Partner  Relation of Partners to Third Parties
 Nominal Partner  Dissolution of Partnership
 Partner in Profits Only

 NATURE OF PARTNERSHIP :
The Indian Partnership Act, 1932 lays down the important provisions relating to partnership contracts.
However, the general principles of the Indian Contracts Act, 1872 which formally contained the
provisions of the law of partnership shall apply so far as they are not inconsistent with this Act.
(Section 3)
 DEFINITIONS :
Partnership :
According to Section 4 "Partnership is the relation between persons who have agreed to share the
profits of business carried on by all or any of them acting for all".
When analysed, the definition tells us that in order that persons may become partners, it is essential
that:
(1) There must be at least two persons.
(2) There must be relationship arising out of an agreement between two or more persons to do a
business.
(3) The agreement must be to share the profits of a business.
(4) The business must be carried on by all or any of them acting for all.
All these four elements must be present before a group or an association can be held to be partners. In
other words, it can be said that all the foretasted four elements must co-exist before a partnership can
be said to come into existence. If any one of them is not proved to be present, there cannot be a
partnership. The first element relates to the voluntary contractual nature of partnership; the second
gives the motive which leads to the formation of firms, i.e. the acquisition of gains; the third shows that
the persons of the group who conduct the business do so as agents for all the persons in the group,
and are therefore liable to account to all the persons in the group (Maliram Choudhary V. Jagannath
AIR 1972 Orissa 17).

Unique Academy 2.1 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

Partners, Firm and Firm Name :

Persons who have entered into partnership with one another are called individually "partners" and
collectively "a firm", and the name under which their business is carried on is called the "firm name"
(Section 4). In law, "a firm" is only a convenient phrase for describing the partners, and the firm has no
legal existence apart from its partners. It is neither a legal entity, nor is it a person as is a corporation; it
is a collective name of the members of a partnership.
A regard the "firm name", partners have a right to carry on business under any name and style which
they choose to adopt, provided they do not violate the rules relating to trade name or goodwill. They
must not adopt name calculated to mislead the public into confusing them with a firm of repute already
in existence with a similar name. They must not use a name implying the sanction of patronage of the
Government. A partnership firm cannot use the word "Limited" as a part of its name.
Essentials of a Partnership and True Test of Partnership :
These elements are discussed below in detail :
(i) Association of two or more Persons : There must be a contract between two or more persons.
Therefore unless there are at least two persons there cannot be a partnership. Persons must be
competent to enter into a contract. They may all be natural or artificial or some natural and other
artificial. Thus a corporation or limited partnership may itself.
(ii) Agreement : Existence of an agreement is essential of partnership. Section 5 of the Act states that
the relation of partnership arises from contract and not from status; and in particular, the members
of a Hindu Undivided Family carrying on a family business as such, or a Burmese Buddhist
Husband and wife carrying on business as Such are not partners in such business. Such an
agreement between the partners may be express or implied. Further, the agreement must be a valid
agreement and for a lawful object and purpose and between the persons competent to contract.
(iii) Business : Partnership implies business and when there is no association to carry on business
there is no partnership. The term "business" is however, used in the widest sense to cover trade,
occupation and profession.
As per Section 2(b) of the Act the term "business" includes every trade, occupation and profession.
In the definition of partnership the word "business" is used in the sense of "carrying on business"
which suggests continuity or repetition of acts. But it does not mean that it should be confied to
lengthy operations, it may consist of a single adventure of a single undertaking. if there is continued
participation of two or more persons for acquisition of gains. The term must be understood in a
particular sense. It refers to any activity which, if successful, would result in profit.
(iv) Sharing of Profits : To constitute a partnership, the parties must have agreed to carry on a
business and to share profits in common. "Profits" mean the excess of returns over advances, the
excess of what is obtained over the cost of obtaining it. Sharing of profits also involves sharing of
losses. But whereas the sharing of profit is an essential element of partnership, the sharing of
losses is not. It is open to one or more partners to bear all the losses of the business.
It follows that the sharing of profits is an essential ingredient of partnership and there would be no
partnership where only one of the partners entitled to the whole of the profits of the business. But it
is open to the partners to agree ton share the profits in any way they like. They may agree to share
the profits either in specific proportions or in specific sums. There is nothing to stop a partner from

Unique Academy 2.2 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

agreeing to receive a fixed annual or monthly amount "by way of profits" irrespective of whether
profits are earned or not.
Sharing of Profits is not Conclusive : Test although sharing of profits is a prima facie existence of
partnership; this is not the conclusive test of the same. A person may have a share in the
partnership profits, but still may not be a partner. For instance, a joint owner of a property sharing its
return or members of non-profit or non-trading associations will not be called partners.
(v) Mutual Agency the True Test : Mutual agency is the foundation of partner's liability. Each partner
is both an agent and principal for himself and others; that is the significance of the phrase "carried
on by all or any of them acting for all". Each partner is an agent binding the other partners who are
his principal and each partner is again a principal, who in turn is bound by the acts of the other
partners. In other words, there must be facts or circumstances from which it can be inferred that
each of the persons alleged to be partners was the agent, real or implied of another. What is
essential is that the partner who conducts the business of the firm not only acts for himself but for
the other partners also.
The true test, therefore, in determining whether a partnership exists, is to see whether the relation of
principal and agent exists between the parties and not merely whether the parties share the profits or
the business is carried on for the benefit of all. It is this relation of agency among partners which
distinguishes a partnership from a single co-ownership on the one hand and the agreement to share
profits on the other. The existence of this relation of agency can be gathered from the real intention of
the parties and the circumstances of the case. The question of intention must be decided on the basis
of the conduct of parties and of all the surrounding circumstances. The partners finding themselves in
financial difficulties assigned their properties to creditors trustees for carrying on the business and
paying off their debts out of the income of the business. The trustees incurred certain liabilities and the
creditors brought action against trustees seeking to make them personally liable on these contracts.
The House of Lords held that they were not liable. Mere sharing of profits is not a conclusive test of
partnership. "The real test is whether the trade was carried on his behalf, i.e., he stood in the relation of
principal towards the persons acting ostensibly as the traders, by whom the liability has been incurred
and under whose management the profits have been made".
It may be observed that the question whether a person is or is not a partner depends almost in all cases
upon whether he has the authority to act for other partners and whether other partners have the
authority to act for him. It follows that the agency relationship is the most important test of partnership.
 Formation of Partnership :
According to the definition of partnership under the Indian Partnership Act, there must be an
agreement between the partners of a partnership firm.
The partnership agreement must comply with all the essentials of a valid contract. There must be
free consent of the parties who must be competent to contract and the object of partnership should
not be forbidden by law or immoral or opposed to public policy.
Two exceptions, however, may be noted :
(i) A minor may be admitted to the benefits of a partnership with the consent of all other partners.
(ii) As relations of partners inter se are that of agency, no consideration is required to create the
partnership.

Unique Academy 2.3 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

 Partnership Deed :
The agreement of partnership may be oral but to avoid future disputes it is always advisable to have
it in writing. The mutual rights and obligations of partners must be discussed in detail and should be
put into writing in the shape of a 'Partnership Deed', before the partnership is actually started. (The
partnership deed is also called as 'Partnership Agreement', 'Constitution of Partnership', 'Articles of
Partnership' etc). The deed must be property drafted and stamped according to the provisions of the
Indian Stamp Act. Each partner should be given a copy of the deed and if the firm is to be
registered, a copy of the deed should be filed with the Registrar of Firms at the time of such
legislation.
 Contents :
The exact terms of the partnership deed (or agreement) will depend upon the circum-stances but
generally a partnership deed contains the following covenants:
(i) The firm name and business to be carried on under that name.
(ii) Names and addresses of partners.
(iii) if Nature and scope of business and address(es) of business place(s).
(iv) Commencement and duration of partnership.
(v) The capital and the contribution made by each partner.
(vi) Provision for further capital and loans by partners to the firm.
(vii) Partner's drawings.
(viii) Interest on capital, loans, drawings and current account.
(ix) Salaries, commission and remuneration to partners.
(x) Profit (or loss) sharing ratio of partners.
(xi) The keeping of proper books of account, inspection and audit, Bank Accounts and their
operation.
(xii) The accounting period and the date on which that accounts are to be prepared.
(xiii) Rights, powers and duties of the partners.
(xiv) Whether and in what circumstances, notice of retirement or dissolution can be given by a
partner.
(xv) Provision that death or retirement of a partner will not bring about dissolution of partnership.
(xvi) Valuation of goodwill on retirement, death, dissolution etc.
(xvii) The method of valuation of assets (and liabilities) on retirement or death of any partner.
(xviii) Provision regarding the allocation of business activities to be performed by individual partners.
(xix) Provision for expulsion of a partner.
(xx) The arbitration clause for the settlement of disputes. The terms contained in the partnership
deed may be varied with the consent of all the parties, and such consent may be express or
implied by a course of dealing. [Section 11(1)]
 CLASSIFICATION OF PARTNERSHIP :
A partnership may either be for a particular adventure or for a fixed period. It may also be a partnership
at will.
From the duration point of view, a partnership may be classified into the following two categories :

Unique Academy 2.4 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(i) Particular Partnership (Section 8) :

"A person may become a partner with another person in a particular adventure or undertaking".
When two or more persons agree to do business in a particular adventure or undertaking, such a
partnership is called Particular Partnership. Thus, a particular partnership may even be for a single
adventure or undertaking
(ii) Partnership at Will (Section 7) :
"Where no provision is made by contract between the partners for the duration of their partnership
or for the determination of their partnership, the partnership is called Partnership at Will". A
partnership is deemed to be a partnership at will when (i) no fixed period has been agreed upon for
the duration of partnership, and (i) there is no provision made as to the determination of partnership
in any other way. The partnership at will has no fixed or definite date of termination and, therefore,
death or retirement of a partner does not affect the existence of such partnership.
Section 43(1) provides that "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. The firm
is dissolved as from the date mentioned in the notice as the date of dissolution or, if no such date is
mentioned, as from the date of communication of the notice". This accounts for the importance of
the definition of 'Partnership at Will'.
 Co-ownership and Partnership :
There is a possibility that two co-owners may employ their property in a business and share the
profits, and still be not partners. A distinction between the two is in point. Partnership is between
two persons but not more than 20 (10 in the case of banks) co-ownership may have two or any
number more than two. Co-ownership is not always the result of an agreement: it may arise by
the operation of law or from status, e.g., co-heirs of a property. Partnership must arise from an
agreement. A partner is the agent of the other partners, but a co-owner is nol the agent of the
other co-owner(s). Co-ownership does not necessarily involve community of profits and loss,
partnership docs. A co-owner can without the consent of the others transfer his rights and
interests to strangers, a partner cannot do so without the consent of all the other partners so as
to make the transferee a partner in the firm. A co-owner can ask for division of property in
specie, but no partner can as for this. His only right is to have a share of the profits out of the
properties. Partnerships end at death or insolvency; co-ownerships end at death. A co-owner
has no lien on the property while a partner has a lien on the firm property.
 Hindu Joint Family Firm and Partnership :
A Hindu joint family firm differs from a partnership in the following ways :
A partnership comes into existence by means of a contract between the partners; a Hindu joint
family firm arises as a result of status, i.e., by birth in the family. The death of a partner
dissolves the partnership, but the death of a coparcener does not dissolve the family firm. In a
joint family firm only the Karta or manager (who is the head of the family) has implied authority
to borrow and bind other members; in a partnership each partner is entitled to do so. Every
partner is personally liable for the debts of the firm; in a joint family business only the Karta is
personally liable. A minor is a member of a joint family firm from the very day of his birth by
virtue of his status, but he is not personally liable. A minor cannot be a partner, although he may
be admitted to the benefits of partnership. A partner can demand the accounts of the firm, a
coparcener cannot ask for accounts, his only remedy is to ask for partition of the assets of the

Unique Academy 2.5 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

family firm. No registration of a family firm is necessary, while a partnership firm must be
registered before it can maintain suits against outsiders. Each partner has a definite share in the
business and this can be changed only by agreement, but the share of a coparcener is not fixed;
it may be enlarged by death or reduced by a birth in the family. There is a definite limit to the
number of partners, but there is no such limit in the case of a Hindu join family firm. A Hindu
joint family business is governed by Hindu Law, while Indian Partnership Act, governs
partnerships and excludes Hindu joint family firms. (Section 5).
 Company and Partnership :
The members constituting a partnership do not form a whole as distinct from the individuals
composing it. The firm has no legal entity and has no rights and obligations separate from the
partners. In a firm every partner is an agent of the rest of the partners, but a member of a
company is neither the agent of the company nor of other members. A company, as soon as it is
incorporated, say by registration under the Companies Act, becomes a legal entity distinct from
its members constituting it (Salomon v. Salomon & Co., 1897, A.C. 22). It can sue and be sued
in its own name like any natural person. In a partnership, there are rights and obligations as
against individual partners, but in the case of a company, the rights and obligations are as
against the fictitious entity of the whole of the company and not the members composing it. The
creditors of the partnership can call upon individual partners to pay the firm's debt, but the
members of a company are not personally liable for the company's debts. In other words, a
partner's liability is unlimited while the liability of the members of a company is limited to the
extent of the amount remaining unpaid on their shares (Prasad v. Missir). Partnership firm may
dissolve by the death or insolvency of a partner, but a company is not affected by the death or
insolvency of a member. A partner cannot transfer his interest so as to substitute the transferee
in his place as the partner, without the consent of all the other partners; a member can transfer
his share to any one he likes. The maximum number of partners for a banking firm is 10 and for
other firms it is 20, while the maximum number of members for a private company is 50 and a
public company can have any number of members.
 Change in a Firm :
The Indian Partnership Act, 1932, contemplates the following changes in a partnership firm:
(1) Changes in the constitution of a firm.
(2) Changes in the nature of a business or undertakings.
(3) Changes in the duration of a firm.
A change in the constitution of a firm takes place when :
(a) a new partner is introduced as a partner in a firm (Section 31)
(b) a partner retires from a firm (Section 32)
(c) a partner is expelled from a firm (Section 33)
(d) a partner is adjudicated as an insolvent (Section 34)
(e) a partner dies (Section 35)
A change in the nature of the business can only be brought about by the consent of all the
partners. Thus, a partnership formed for a definite purpose, agreed upon at the time of formation
of the partnership, cannot depart from the agreed purpose without the consent of all the partners

Unique Academy 2.6 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

[Section 12(c)1. Section 17(c) provides for a case whether a partnership firm is formed for a
particular undertaking or undertaking, it proceeds to carry on the undertaking or undertakings, in
that event the mutual rights and duties of the partners in respect of the other adventures or
undertakings are the same as those in respect of the original adventures of undertakings.
 Partnership Property :
It is open to the partners to agree among themselves as to what is to be treated as the property
of the firm, and what is to be separate property of one or more partners, although employed for
the purposes of the firm. In the absence of any such agreement, express or implied, the
property of the firm is deemed to include:
(a) all property, rights and interests which have been brought into the common stock for the
purposes of the partnership by individual partners, whether at the commencement of the
business or subsequently added thereto.
(b) those acquired in the course of the business with money belonging to the firm
(c) the goodwill of the business (Section 14)
 KINDS OF PARTNERS :
The following kinds of partners generally exist in a partnership :
(i) Actual, Active or Ostensible Partner :
These are the ordinary types of partners who invest money into the business of the firm, actively
participate in the functioning and management of the business and share its profits or losses.
Section 12(a) lays down that Subject to contract between the partners, every partner is entitled to
take part in the conduct of the business of the firm. Such partner as actively participates in the firm's
business, binds himself and other partners by all his acts done in the usual course of partnership
business. Such partner must give a public notice of his retirement from the firm in order to absolve
(free) himself from liability for the acts of the other partners done after his retirement.
(ii) Sleeping or Dormant Partner :
These partners invest money in the firm's business and take their share of profits but do not
participate in the functioning and management of the business. But even then their liability is
unlimited. The Act specially provides that if an act is binding on the firm, every partner is liable for it.
A sleeping partner can retire from the firm without giving any public notice to this effect. His liability
for the acts of the firm ceases soon after retirement. Such partner has no duties to perform but is
entitled to have access to books and accounts of the firm and he can have a copy of them.
(iii) Nominal Partner :
Some people do not invest or participate in the management of the firm but only give their name to
the business or firm. They are nominal partners but are liable to third parties for all the acts of the
firm. Unlike a sleeping partner, they are known to the outsiders as partners in the firm, whereas
actually they are not.
(iv) Partner in Profits Only :
A partner who is entitled to share in the profits of a partnership firm without being liable to share the
losses, is called a partner in profits only. Thus, a person who has sufficient capital but is not
prepared to take risk may be admitted to the partnership by the other partners. Inspite of his specific
position, he continues to be liable to the third parties for all acts of the firm, just like other parties.

Unique Academy 2.7 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(v) Sub-Partner :
Where a partner agrees to share his profits in the firm with a third person, that third person is called
a sub-partner. Such a sub-partner has no rights or duties towards the firm and does not carry any
liability for the debts of the firm. Also he cannot bind the firm or other partners by his acts.
(vi) Partner by estoppels or Holding Out :
If the behaviour of a person arouses misunderstanding that he is a partner in a firm (when actually
he is not), such a person is estopped from later on denying the liabilities for the acts of the firm.
Such person is called partner by estoppels and is liable to all third parties.
Similarly, if a person who is declared to be a partner (when actually he is not) does not deny the is a
partner, he being held out as a partner is responsible for all liability of the business. The law relating
to partners by holding out is contained in Section 28 of the Act which lays down thus: "Any one who
by words, spoken or written or by conduct represents himself, or knowingly permits himself to be
represented to be a partner in a firm, is liable as a partner in that firm to anyone who has on the
faith of any such representation given credit to the firm, whether the person representing himself or
represented to be a partner does or does not know that the representation has reached the person
so giving credit". The rule as to holding out is based on the doctrine of estoppel as contained in
Section 115 of the Indian Evidence Act.
Holding Out means "to represent". Strangers, who hold themselves out or represent themselves to
be partners in a firm, whereby they induce others to give credit to the partnership are called
"Partners by Holding Out".
In case of "Partnership by Estoppel', the representation is made by partners about a stranger within
his knowledge and hearing and he does not contradict it. He is then held liable as a partner.
Effects of Holding out :
The Holding Out partner becomes personally and individually liable for the acts of the firm. But he
does not become a partner in the firm and is not entitled to any rights or claim upon the firm. An
outsider, who has given credit to the firm thinking him to be a partner, can hold him liable as if he is
a partner in that firm. As the liability of the partners is joint and several he can be held liable to pay
the entire amount. But under the doctrine of subrogation as well as on the basis of quasi-contract,
he can recover the amount so paid from the partners of the firm, if they are solvent.
 Exceptions to Holding Out :
The doctrine of Holding Out is not applicable in the following cases :
1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be
held liable for the torts of another simply because that other person held himself to be his
partner.
2. It does not extend to bind the estate of a deceased partner, where after a partner's death the
business of the firm is continued in the old firm name. [Section 28(2)]
3. It also does not apply where the Holding Out partner has been adjudicated insolvent
(Section 45)
Minor Admitted to the Benefits of Partnership :
In view of Section 11 of the Indian Contract Act, 1872, and the decision of the Privy Council in Mohri
Bibi v. Dharmo Das Ghose (1903) 30 I.A 114, a minor's agreement is altogether void and

Unique Academy 2.8 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

unenforceable. An agreement is an essential ingredient in a partnership, it follows that a minor

cannot enter into an agreement of partnership. On the same principle, a minor cannot be clothed
with all the rights and obligations of a full-fledged partner through a guardian. Section 5 states "The
relation of partnership arises from a contract..." The minor is incompetent to contract and, therefore,
partnership cannot come into existence if the parties to a contract of partnership consist of one
major and one minor. The only provision that Section 30 makes is that with the consent of all the
partners for the time being, a minor can be admitted into the benefits of partnership to which a minor
is going to be admitted. A partnership firm cannot be formed with only minors as partners. There
must be at least two major partners before a minor is admitted into the benefits of partnership.
 Rights of a Minor in a Firm :
He is entitled to his agreed share and can inspect books of account of the firm [Section 30(2)].
He can bring a suit for account and his share when he intends to sever his connections with the
firm, but not otherwise. [Section 304)]
A minor who was admitted to the benefits during his minority within six months of his attaining
the age of majority or when he comes to know of his being so admitted (whichever date is later),
he has to elect whether he wants to become a partner, or sever his connection with the firm. He
may give public notice of his election to continue or repudiate, but if he fails to give any public
notice within the period stated above, he will be deemed to have elected to become a partner in
the firm. [Section 30(5)]
 Liabilities of Minor :
(i) Share in Liability : A minor partner's liability is confined only to the extent of his share in the
firm. Section 30(3) provides that a minor's share is liable for the acts of the firm. But a minor
is not personally liable in any such act. Thus, he is neither personally liable nor is his private
estate liable for the acts of the firm.
(ii) Personal Liabilities : Where a minor on attaining majority, elects to become a partner, he
becomes personally liable as other partners to the third parties for all the acts of the firm
done since he was admitted to the benefits of partnership.
(iii) Election by Minor : A minor who was admitted to the benefits during his minority within six
months of his attaining the age of majority or when he comes to know of his being so
admitted (whichever date is later), he has to elect whether he wants to become a partner, or
sever his connection with the firm. He may give public notice of his election to continue or
repudiate, but if he fails to give any public notice within the period stated above, he will be
deemed to have elected to become a partner in the firm. [Section 30(5)]
If he becomes or elects to become a partner, his position will be as under :
1. His rights and liabilities will be similar to those of a full-fledged partner.
2. He will be personally liable for all the acts of the firm, done since he was first admitted to the
benefits of the partnership.
3. His share of profits and property remains the same as was before, unless altered by
agreement.
If he elects not to become a partner, then :
i. His rights and liabilities shall continue to be those of a minor upto the date of his giving
public notice.

Unique Academy 2.9 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

ii. His share shall not be liable for any acts of the firm done after the date of the public notice.
iii. He is entitled to sue the partners for his share of the property and profits in the firm. [Section
30(8)]
 Relation of Partners to one another :
The relation of partnership arises through an agreement between the parties and such an
agreement normally provides for mutual rights and obligations, or duties of the partners. Where,
however, partnership arises by implication, or wherever the articles of Partnership are silent, or
where they do not exist, the rights and duties of partners are governed by the Act.
 Rights of Partners :
Unless otherwise agreed by the partners, the following rules apply :
(a) Every partner has a right to take part in the conduct and management of the business.
[Section 12(a)]
(b) Every partner whether active or dormant, has a right of free access to all records, books and
accounts of the business and also to examine and copy them. [Section 12(d)]
(c) Every partner is entitled to share in the profits equally, unless different proportions are
stipulated. Section 13(b)]
(d) A partner who has contributed more than the share of the capital for the purpose of the
business is entitled to an interest at a rate agreed upon, and where no rate is stipulated for,
at six per cent per annum. But a partner cannot claim interest on capital, unless there is an
agreement to pay it. Section 13(d)]
(e) A partner is entitled to be indemnified by the firm for all expenses incurred by him in the
course of the business, for all payments made by him in respect of partnership debts or
liabilities and disbursements made in an emergency for protecting the firm from loss.
[Section 13(e)]
(f) Every partner is, as a rule, a joint owner of the partnership property, and have it applied
exclusively for the purposes of the partnership. [Section 15]
(g) A partner has power to act in an emergency for protecting the firm from loss. [Section 21]
(h) Every partner is entitled to prevent the introduction of a new partner into the firm without his
consent. [Section 31]
(i) Every partner has a right to retire by giving notice where the partnership is at will. [Section
32(1)(c)]
(j) Every partner has a right to continue in the partnership and not to be expelled from it.
[Section 33 (1)]
(k) An incoming partner will not be liable for any debts or liabilities of the firm before he
becomes a partner. [Section 31 (2)]
(l) Every outgoing partner has a right to carry on a competitive business under certain
conditions. [Section 36]
 Duties of a Partner :
Apart from any duties imposed by the partnership articles, the following statutory duties are
implied :

Unique Academy 2.10 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(a) Every partner is bound to carry on the business of the firm to the greatest common
advantage. [Section 9]
(b) Every partner must be just and faithful to other partners. Section 9]
(c) A partner is bound to keep and render true, proper and correct accounts of the partnership.
[Section 9]
(d) Utmost good faith between the partners is the rule and one partner must not take advantage
of the other. As an agent of other partners, every partner is bound to communicate full
information to them. [Section 9]
(e) Every partner must account for any benefits derived from the partnership business without
the consent of the other partners, i.e., a partner must not make "secret profits". [Section
16(a)]
(f) A partner must not compete with the firm. without the consent of the other partners. Any
profits made by such unauthorized competition can be claimed by the firm. [Section 16(b)]
(g) Every partner is bound to attend diligently to the business of the firm and in the absence6 of
any agreement to the contrary, he is not entitled to receive any remuneration. [Sections
12(b) and 13(a)]
(h) In the absence of an agreement to the contrary, every partner is bound to share losses
equally with the others. [Section 13(b)]
(i) Every partner must hold and use the partnership property exclusively for the firm.
[Section 15]
(j) Every partner is bound to indemnify the firm for any loss caused by fraud in the conduct of
the business. [Section 10]
(k) A partner who is guilty of willful neglect in the conduct of the business and the firm suffers
loss in consequence, is bound to make compensation to the firm and other partners.
[Section 13 (f)]
(l) No partner can assign or transfer his partnership interest to any other person, so as to make
him a partner in the business. [Section 29]
(m) But a partner may assign the profits and share in the partnership assets. But the assignee
or transferee will have no right to ask for the accounts or to interfere in the management of
the business; he would be entitled only to share the actual profits. On dissolution of the firm,
he will be entitled to the share of the assets and also to accounts but only from the date of
dissolution. I Section 29]
(n) Every partner is bound to act within the scope of his actual authority. If he exceeds his
authority, he shall compensate the other partners for loss unless they ratify his act.
 Relation of a Partner to Third Parties :
Every partner is an agent of the firm and of other partners for the purpose of the business of the
firm (Section 18). In the case of a partnership each partner is a principal and each one is an
agent for the other partners. A partner is both a principal and an agent. Thus, the general law of
agency is incorporated into the law of partnership. The law of partnership is often regarded as
branch of the law of agency. The acts of every partner who does any act for carrying on in the
usual way the business of the kind carried on by the firm bind the firm and his partners unless :

Unique Academy 2.11 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(i) The partner so acting has no authority to act for the firm in that matter, and
(ii) The person with whom he is dealing knows that he has no authority; or
(iii) Does not know or believe him to be a partner.
 Authority of a Partner :
The authority of a partner means the capacity of a partner to bind the firm by his act. This
authority may be express or implied. Authority is said to be express when it is given by words,
spoken or written. The firm is bound by all acts of a partner done within the scope of his express
authority even if the acts are not within the scope of the partnership business. The implied
authority of a partner is also known as ostensible or apparent authority, Sections 19 and 22
contain provisions regarding the scope of the implied authority of a partner. The implied
authority is subject to the following conditions :
(1) the act done must relate to the "normal business" of the firm;
(2) the act must be done in the usual way;
(3) the act must be done in the name of the firm.
 Implied Authority of a Partner :
Subject to the limitations mentioned above, every partner has an implied authority to bind the
firm by the following acts :
(i) By selling firm's goods;
(ii) By purchasing goods for the firm;
(iii) By accepting any payment of debts due to the firm; and
(iv) By engaging and discharging employees.
In a Trading Firm (one which carries on business of buying and selling goods), a partner has the
following additional powers :
(i) To borrow money on the firm's credit and to pledge the firm's goods for that purpose;
(ii) To accept, make and issue negotiable instruments in the firm's name, and
(iii) To employ a solicitor or attorney on behalf of the firm (Bank of Australasia Berilial (1847) 6
Moor, P.С. 152 at pp. 193-94.
 No Implied Authority :
Section 19(2) states that in the absence of any usage or custom or trade to the contrary the
implied authority of
A partner does not empower him to :
(a) submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceeding filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into a partnership on behalf of the firm.

Unique Academy 2.12 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

 Extent of Partners' Liability :

It is, however, open to the partners by means of an express contract to extend or limit the
implied authority, but third parties will be bound by such limitations only when they have notice
of such curtailment. All partners are liable jointly and severally for all acts or omissions binding
on the firm including liabilities arising from contracts as well as torts (Section 25). This is known
as the liability of partners for the acts of the firm. But in order that an act done may be an act of
the firm and, therefore, binding on the firm, it is necessary that the partner doing the act on
behalf of the firm must have done that act in the name of and on behalf of the firm and not in his
personal capacity. And the act must have been done in the ordinary course of the business of
the firm. [Sections 19(1) and 22].
 Liability of the Firm for Torts :
Every partner is liable for the negligence and fraud of the other partners in the course of the
management of business. A partner charges the firm if he acts as an agent for it. The firm is
similarly liable where a partner commits a tort with the authority of his co-partners. [Section 26].
If a partner acting within the scope of his apparent authority receives the property of a third
person and misapplies it, or it the firm in the course of its business receives the property of a
third person and, while it is in the firm's custody, a partner misapplies it, in each case the firm is
liable to make good the loss. [Section 27].
 Liability of an Incoming Partner :
As a general rule, an incoming partner is not liable for the debts incurred before he jointed the
firm as a partner [Section 31(2)]. The incoming partner may, however, assume liability for past
debts by novation, i.e., by a tripartite agreement between (i) the creditor of the firm, (i) the
partners existing at the time the debt was incurred, and (iii) the incoming partner.
 Liability of an Outgoing or Retiring Partner :
An outgoing partner remains liable for the partnership debts contracted while he was a partner.
He may, however, be discharged by novation, i.e., by an agreement between himself, the new
firm and the creditors. He may also continue to be liable after retirement if he allows himself to
be held out as a partner, e.g. by allowing his name to remain the firm name. To protect himself
from his liability, he should give express notice of his retirement to the persons who were
dealing with the firm before his retirement or give public notice in the manner as laid down in
Section 72 of the Act, that is to say, by publishing it in the Official Gazette and in at least one
vernacular newspaper where the firm carries on the business. [Section 32(3)]
Death or Insolvency :
The estate of a partner who dies, or who becomes insolvent, is not liable for partnership debts
contracted after the date of the death or insolvency. It will, however, be liable for debts incurred
before death or insolvency. [Sections 34 and 35]
 DISSOLUTION :
According to Section 39 "The dissolution of partnership between all the partners of a firm" is called the
"Dissolution of the Firm". Dissolution does not necessarily follow because the partnership has ceased to
do business, for the partnership may continue for the purpose of realizing the assets. The Partnership
Act makes a distinction between the "dissolution of partnership" and "dissolution of firm. Where there is
dissolution of partnership between all the partners of a firm, it is dissolution of the firm (Section 39),

Unique Academy 2.13 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

Where there is an extinction of relationship between some of the partners only, it is dissolution of
partnership. So the dissolution of a partnership may or may not include the dissolution of the firm, but
the dissolution of the firm necessarily means the dissolution of the partnership as well.
 Dissolution of Partnership :
The dissolution of partnership takes place (even when there is no dissolution of the firm) in the
following circumstances :
(a) By the expiry of the fixed term for which the partnership was formed. [Section 42 (a)]
(b) By the completion of the adventure. [Section 42(b)]
(c) By the death of a partner. [Section 42(c)]
(d) By the insolvency of a partner. [Section 42(d)]
(e) By the retirement of a partner. [Section 42(e)]
In all the above cases, the remaining partners may continue the firm in pursuance of an agreement
to that effect.
 Dissolution of the Firm :
In the following cases there is necessarily a breaking up or extinction of the relationship between all
the partners of the firm, and closing up of the business :
(a) By mutual agreement : A firm may be dissolved where all the partners agree that it shall be
dissolved. [Section 40]
(b) By the insolvency of all the partners but one : If all the partners except one become
insolvent, the firm must come to an end, as a partnership firm with one partner cannot continue.
[Section 41(a)]
(c) By business becoming illegal : If the business of the firm becomes illegal because of some
subsequent events, such as change of law, it is automatically or compulsorily dissolved by the
operation of law. [Section 41(b)]
(d) By notice of dissolution : Where the partnership is at will, the firm may be dissolved at any
time, by any partner giving notice is writing of his intention to dissolve the firm, to all the other
partners. The dissolution will take place from the date motioned in the notice or, if no such date
is mentioned, as from the date of the communication of the notice. [Section 43]
 Dissolution of the Firm through Court :
Unlike a partnership at will, the partnership for a fixed period cannot be dissolved by a notice. It
could only be dissolved by Court in a suit by a partner. Though remedy of dissolution by suit is
available in case of all kinds of partnership, it is of practical importance in case of partnership for a
fixed period.
As per section 44, the Court may order dissolution of the firm in the following circumstances:
(a) When a partner becomes of unsound mind : A the insanity of a partner does not
automatically dissolve the firm, either the lunatic through his guardian or other partners may file
a suit for the dissolution of the firm, in either case the Court may order dissolution which will take
effect from the date of the order.

Unique Academy 2.14 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(b) Permanent incapacity of a partner : Where a partner has become permanently incapable of
performing his duties as a partner, e.g., he become blind, paralytic, etc., the Court may, at the
instance of any of the other partners, order the dissolution of the firm.
(c) Misconduct of a partner affecting the business : Where a partner is guilty of misconduct,
which is likely to affect prejudicially the business of the firm, the Court may dissolve the firm at
the instance of any of the other partners. Gambling by a partner or conviction of a partner for
travelling without ticket would be sufficient ground for dissolution.
(d) Persistent disregard of partnership agreement by a partner : Where a partner frequently
commits breaches of the partnership agreement and the other partners find it impossible to carry
on the business, the Court may order dissolution at the instance of the other partners.
(e) Transfer of interest or share by a partner : A partner is not entitled to assign away his interest
so as to introduce a new partner into the firm. Where a partner has transferred the whole of his
interest to a third person or where his interest has been attached under a decree or sold under a
process of law, the other partners may sue for dissolution.
(f) Business working at a loss : The Court may dissolve a partnership firm where it is satisfied
that the business of the firm cannot be carried on except at a loss.
(g) Where just and equitable : As the grounds mentioned are not exhaustive, the Court may
dissolve a firm on any other ground if it is satisfied that it would be just and equitable to dissolve
the firm. The Court may order dissolution where the substratum of the partnership firm has gone
or where there is a complete deadlock and destruction of confidence between the partners [re.
Yenidjee Tobacco Co. Ltd. (1916) 2 Ch. 426].
 Effect of Dissolution :
(i) Continuing Authority of Partners : The authority of partners to bind the firm continues so long
as is necessary to wind up the business, provided that the firm is in no case bound by the acts
of a partner who has been adjudged an insolvent except on the principle of holding out.
[Section 47]
Also each partner has an equitable lien over the firm's assets entitling him to have them applied
in payment of the firm's debts, and in payment of whatever is due to partner. This lien can be
enforced by injunction forbidding unfair distribution. [Section 46]
(ii) Continuing Liability of Partners : The partners continue to be liable to outsiders for any act
done by any of them which would have been an act of the firm if done before the dissolution,
unless a public notice is given of the dissolution.
After dissolution the rights and obligations of partners continue in all things necessary for the
winding up of the business. The partners may complete unfinished transactions. But this authority is
only for the winding up of the affairs of the firm and not for new transactions.
Settlement of Accounts on Dissolution :
Section 48 of the Act provides that in settling accounts between the partners after a dissolution of
partnership, the following rules shall, subject to any agreement, be observed :
(a) Losses, including deficiencies of capital shall be paid first out of undistributed profits, next out of
capital, and lastly, if necessary, by the partners individually in the proportion in which they were
entitled to share profits.

Unique Academy 2.15 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

(b) The assets of the firm, including the sums, contributed by the partners to make up losses or
deficiencies of capital shall be applied in the following manner and order :
(i) in paying outside creditors;
(ii) in repaying advances made by partners (distinct from investment of capital);
(iii) in repaying capital to partners; and
(iv) the ultimate residue, if any, shall be divided among the partners in the proportions in which
profits are divisible. Where the assets are not sufficient, the partners have to bear the loss in
equal shares. After they have contributed their share of the deficiency they will be paid
ratably the amount due to them by way of their capital (The Rule followed in the case of
Garner v. Murray 1904 L.J. Ch. 66).
Remaining Deficiencies of Capital :
Where after paying outside creditors and repaying advances made by partners, as in (i) and (iii)
above, there remains insufficient capital to repay all the partners, in full, deficiencies are shared in
the same way as profits, in other words, the partners are paid rateably each according to his share
in the capital.
But under the Rule in Garner v. Murray, if such deficiency is attributable to the insolvency of one of
the partners, that deficiency must be borne by the other partners in the proportion of their last
agreed shares in the capital, and not in the proportion in which they share profits and losses.
Goodwill :
This a partnership asset and means the benefit arising from a firm's business connections or
reputation. "It is the advantage which is acquired by a business, beyond the mere value of the
capital, stock fund and properly employed therein, in consequence of the general public patronage
and encouragement which it receives from constant or habitual customers". Though an intangible
asset, it has value; and unless otherwise agreed in the partnership articles, upon dissolution it must
be sold and the proceeds of sale distributed as capital. Where dissolution is caused by death, the
estate of the deceased partner is entitled to share in the proceeds of the sale.
If the goodwill is sold and there is no agreement as to its disposal, any partner can carry on the
business, provided that by doing so he does not expose former partners to liability. But if by
agreement the goodwill is assigned to any person, he can restrain partners as explained in the next
para.
Sale of Goodwill : Where goodwill is sold, cither to a partner or to an outsider, the value is divisible
among the partners in the same manner as they share profits and losses, unless otherwise agreed.
The rights of the buyer and seller of the goodwill are as follows :
(a) Buyer's Rights: On the sale of goodwill the buyer may, unless the terms in the contract of s ale
provide otherwise :
(i) represent himself in continuing the business,
(ii) maintain his exclusive rights to the use of the firm name, and
(iii) solicit former customers of the business and restrain the seller of the goodwill from doing so.
(b) Seller's Rights : The vendors may enter into competition with the purchaser unless he is
prevented by a valid restraint clause in the contract of sale.

Unique Academy 2.16 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

Registration of the Firm :

Sections 56-71 deal with the registration of a firm and consequences of non-registration.
Registration : The registration of a firm may be effected at any time by sending by post or delivering
to the Registrar of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form and accompanied by the prescribed fee, stating :
(a) the name of the firm;
(b) the place or principal place of business of the firm;
(c) the names of any other places where the firm carries on business;
(d) the date when each partner joined the firm;
(e) the names in full and permanent addresses of the partners; and
(f) the duration of the firm
The statement shall be signed and verified by all the partners or by their agents specially authorized
in this behalf. (Section 58).
The Partnership Act, 1932, does not make registration of a firm compulsory but it introduces certain
disabilities, which makes registration necessary at one time or other. An unregistered firm is not an
illegal association.
Effects of Non-Registration :
The following are the effects of non-registration of a firm :
1. Sub-section (1) of Section 69 places a bar on the right of the partners of a firm to sue each other
or the firm for enforcing any right arising from a contract or conferred by the Partnership Act, if
the firm is not registered and the person suing is or has not been shown in the Register of Firms
as a partners in the firm.
2. Sub-section (2) of Section 69 places a bar on the institution of a suit by or on behalf of a firm
against a third-party if the firm is not registered and the persons suing are or have not been
shown in the Register of Firms as partners in the firm.
3. There is no bar on the right of third-parties to sue the firm or any partner. However, the Act
allows the following suits :
(a) A suit for the dissolution of a firm.
(b) A suit for rendering of accounts of a dissolved firm
(c) A suit for realization of the property of a dissolved firm.
(d) A suit or claim of set-off, the value of which does not exceed one hundred rupees,
(e) A proceeding in execution or other proceeding incidental to or arising from a suit or claim for
not exceeding one hundred rupees in value.
(f) A suit by a firm which has not place of business min the territories to which the Indian
Partnership Act extends.
(g) A suit for the realization of the property of an insolvent partner.
(h) A suit by a firm whose places of business are situated in areas which are exempted from the
application of Chapter VII of the Indian Partnership Act, 1932.

Unique Academy 2.17 CS Shubham Modi

Business Environment & Entrepreneurship Indian Partnership Act, 1932

Specific Performance of Partnership Agreement :

It is not allowed. The working of a partnership depends upon the personal inclination of the partners;
there can be no specific performance of a partnership agreement (Scott v. Reymont, 1868, 7 Fq.
112). Suit for Libel or Slander A firm is merely a collection of partners and cannot bring a suit for
libel or slander. Libel or slander against a firm implies a libel or slander of its partners. Such
partners themselves or any one may file the suit for libel or slander. (P.K. Oswal Hosiery Mills v.
Tilak Chand AIR 1969 Punj. 150).

Unique Academy 2.18 CS Shubham Modi