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PARTNERSHIP ACT

Definition :- Section 4

"Partnership is the relation between persons who have agreed to share the
profit of business carried on by all or any one of them acting for all."

In short the term is defined as a voluntary contract between two or more

competent persons to place their money, effects, labour and skill or some or
all of them in lawful business with the understanding that there shall be
sharing of profit between them.

Partners firm and firm’s 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.

* Essential elements of partnership :

(i) Association two or more persons :

At least two persons should join together to constitute a partnership. The

'person' under the Partnership Act means either an individual or any other
legal entity such as a Limited Company registered under the Companies Act,
or any other Corporation constituted by or under any act of the Legislature
as a body corporate.

A firm as such cannot enter into an agreement as a partner with another

firm or individuals.

The Supreme Court has held that the word 'person' in section 4 of the
Partnership Act contemplates only natural or artificial or legal person and a
firm is not a person and as such not entitled to enter into a partnership with
another firm or H. U. F. or individual.

Minimum two persons are required to constitute a partnership and

maximum no. of members is 50 If the number of member exceeds 50 the
partnership firm has to be converted into private limited company , otherwise
it is consider as illegal association. ( Actually there is no maximum limit was
mentioned in partnership act , it was earlier mentioned in Companies Act
1956 and now Companies Act 2013 amended and as per Section 464 , the
limit is increased up to 100 but thereafter 2014 Rules are made and in that
Central Govt. reduced the limit up to 50 )

(ii) Agreement :

As stated above a partnership is constituted by an agreement between the

partners. The agreement may be in writing or oral. But from the practical
point of view and particularly in view of the provisions of other Acts such as
the Income Tax Act as well as Partnership Act an oral partnership is not
practicable, and therefore, a partnership agreement is necessarily required to
be in writing.

Being an agreement and an agreement enforceable at law, such an

agreement must fulfil the basic requirements of a valid contract, as required
by the Contract Act

For example, if a person dies leaving a running business and his heirs
continue to carry on such business, it will not be a business carried on in
partnership and if they want to do so they will have to enter into a regular
agreement of partnership.
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Therefore the relation of partnership arises from a contract and not from
status. The document containing the terms of the partnership agreement,
powers of the partners and objectives of the partnership is known as a
“partnership deed”.

(iii) Sharing of profit :

Basically, the word, ‘partnership’ is derived from the word, ‘To Part’ means
‘To Divide’. Thus division of profit is one of the most important feature of
partnership Section 4 only says about the sharing of profit and is silent
about the sharing of losses. But Section 48. of partnership Act provides that
“ In the absence of a contract to the contrary the losses are to be shared in
the proportion in which they were entitled to share profit ”.It means a person
may become a partner with clear understanding that he shall not be liable to
share the losses but it will be binding to partners only and not for third
party. However if two or more persons associate for charitable or religious
purpose they can not be called as a partner because such association do not
have an intention of making profit and sharing them.

(iv) Existence of a business :

A term ‘Business’ has been defined is Section 2 to include every trade,

occupation and profession. This definition which has been adopted from the
English Act is very general and offers very little assistance while dealing with
borderline cases. The object of the agreement or contract is to carry on
business and the business which the partners carry on must of of-course be
legal. However the mere fact that several persons own something in common
which produces returns and that such persons divide those returns
according to their respective interest does not make them partners.
* For Example : ‘A’ and ‘B’ are co-owners of a house net rent between
themselves. A and B are not partners because receiving the rent of house let
at a tenant is not a business. Business may be temporary or permanent but
it must be in existence. In agreement to carry on business at a future time
does not result in a present partnership.

(v) Mutual Agency :

The another essential of a partnership is that a partnership business

actually may be carried on by all the partners together or by any one or more
partners for all and on behalf of the others, in which case each partner is an
implied agent of the other partners. It is not. therefore, necessary that all the
partners take part in the business of the partnership firm. Some partners
can be active partners and others can be sleeping partners. But it must be
clear that there is an implied or express agency constituted in favour of one
partner by the other partners. If there is no element of agency, even if there
is any agreement to share profits, there will be no partnership. So a partner
has a double capacity, he is the principal so far as he is concerned and the
agent so far as other partners are concerned.

* Test of Partnership :
In order to determine the existence of partnership between a group of
persons a definition in Section 4. is used as a test i.e. one must look to the
agreement between them. If the agreement is to share the profit of a business
and the business is carried on by all or any of them acting for all, there is a
partnership otherwise not.

Section 5 lays down that the relation of partnership arises from contract
and not from status.

Section 6 lays down that in determining whether a group of parsons is or is

not a firm or whether a person is or is not a partner in a firm.
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* It is expressed laid down that the following are not partners :

(i) Joint owners sharing gross returns : Joint owners of some property
sharing profits or gross returns arising from the property do not become
partners.
(ii) Sharing of Profits : The sharing of profits is a prima face a powerful
evidence of partnership. But the fact that there is sharing of profits between
some person will not automatically make them the partners. Therefore,
receipt by a person of share of the Profits of a business or payment
contingent upon the earning of profit or varying with the profits earned by a
business does not of it self make him a partner with the person carrying one
business.

(a) When a person has lent money to person engaged or about to engage
business, and received a rate of interest varying with the profit.
*Example : A advanced money to two merchants who agreed to carry on
the business subject to the control of in several respects. A was to
receive commission of 20% on total profit. Held there was no partnership.

(b) Where a servant or, agent is engaged in business & receives his
remuneration as a share of profit.
Example : A contractor for loading & unloading railway wagons
appointed a servant to manage it. The servant was to receive 50% of
the profit and was to bear all losses if any. Held the servant was the
agent of and not his partner.

(c) Where a widow or child of a diseased partner receives a portion of the

profit.

(d) Where a person has sold his business along with its goodwill and
receives a portion of the profit in consideration of the sale. Although the
sharing of profit of a business is a strong test of partnership, yet whether the
relation of partnership does or does not exist must depend upon the real
intention and conduct of the parties.

TYPES OF PARTNER :

There are various types of partners in a partnership firm. They are as follows:

Active Partner:

Partner who takes an active part in the management of the business is called
active partner. He may also be called 'actual' or 'ostensible' partner. He is an
agent of the other partners in the ordinary course of business of the firm and
considered a full fledged partner in the real sense of the term.

Sleeping or Dormant Partner:

A sleeping or dormant partner is one who does not take any active part in the
management of the business. He contributes capital and shares the profits
which is usually less than that of the active partners. He is liable for all the
de of the firm but his relationship with the firm is not disclosed to the
general public.

Nominal Partner:

A partner who simply lends his name to the firm is called nominal partner.
He neither contributes any capital nor shares in the profits or take part the
management of the business. But he is liable to third parties like other
partners. A nominal partner must be distinguished from the sleeping
partner. While the nominal partner is known to the outsiders and does not
share in the profits, the sleeping partner shares in the profit a his
relationship is kept secret.
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Partner in Profits:
A partner who shares in the profits only without being liable of the losses is
known as partner in profits. He does not take part in the management of the
business but he is liable to third parties for all the debts of the firm.
Sub-partner:

When a stranger shares the profits derived from the firm by a partner he is
regarded as a sub-partner. A sub-partner is in no way connected with the
firm or he not a partner of the firm. He is simply a partners' partner.
Therefore, he has no rights again the firm nor he is liable for the debts of the
firm. He only shares profits from a partner.

Partner by Estoppel or Holding out:

When a partner is not a partner but represent to the outside world that he is
a partner in a firm, he is stopped or prevented from denying the truth. He is
considered as a partner in the eyes of law. Similarly, if a person is declared i
be a partner by a partner of a firm and such person remained silent without
denying it, he also considered a partner by holding out. Thus, such persons
are liable to outsiders i partners on the principle of estoppel or holding out
because on faith of their representation action outsiders have granted credit
to the firm.

Minor Partner:

Partnership arises from contract and a minor is not competent to enter into
contract. Therefore, strictly speaking, a minor cannot be a full-fledged
partners. But with the consent of all the partners he can be admitted into
partnership for benefits only. He is not personally liable to third parties for
the debts of the firm, on attaining majority, if he continues as a partner, his
liability will become unlimited with effect from the date of hi original
admission into the firm

TYPES OF PARTNERSHIP

1] Partnership at Will

When forming a partnership if there is no clause about the expiration of such a

partnership, we call it a partnership at will. According to Section 7 of
the Indian Partnership Act 1932, there are two conditions to be fulfilled for a
partnership to be a partnership at will. These are

 There is no agreement about a fixed period for the existence of a

partnership.

 No provision with regards to the determination of a partnership

2] Partnership for a Fixed Term

Now during the creation of a partnership, the partners may agree on the
duration of this arrangement. This would mean the partnership was created for
a fixed duration of time. After the expiration of such a duration, the
partnership shall also end.

3] Particular Partnership

A partnership can be formed for carrying on continuous business , or it can be

formed for one particular venture or undertaking. If the partnership is formed
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only to carry out one business venture or to complete one undertaking such a
partnership is known as a particular partnership.

REGISTRATION OF FIRM :

Before the Amendment Act 1984 Indian partnership Act 1932 does not make
registration of a firm compulsory nor does it impose any penalty for non-
registration. It is optional for a firm to get it self registered or not.

Section 58 of partnership Act as amended by the Maharashtra Amendment

Act 1984 maintains the same position that is registration of a firm is not
compulsory but said amendment provides, those who want the firm to be
registered, should send the statements in prescribed form to the registrar of
the firm within a period of one year from date of constitution of the firm and
of there is a delay. Late registration can be done under new section 59A-1
but a penalty of Rs. 100/- per year delay has to be paid.

Effects of Registration :
Section 68 lays down a rule of conclusive proof and enable a certified copy of
an entry in the Registrar of the firm to be tendered in evidence of
(a) The registration of the firm to which the entry relates.
(b) The contents of any statement, intimation or notice recorded or, noted
there in.

The result is that although the law does not make registration of a firm
compulsory, from the practical angle, it is highly advisable to do so.

Effects of Non-registration :
As seen above Indian Partnership Act has provided for the registration of
firm but has not imposed any penalties for non-registration. Non-registration
does not make the partnership agreement of any transaction between the
partner and the third parties, void. But no prudent partner or a firm should
hesitate to get his or its name registered at the earliest possible
opportunities, for the effect of non-registration is rather serious.

(i) No suits by partners :

A partner of an unregistered firm can not sue the firm or any of his present
or past co-partner to enforce a right arising from a contract or confirmed by
this act. Unless the firm is registered and the name of the partner suing
appears in the register of the firm as a partner in the firm. But Maharashra
State Amendment provides, suit filed by the legal heirs of a diseased partner
registration of firm is not required.

(ii) No-suits by a firm :

An unregistered firm can not sue any third party for enforcement of a right
arising from a contract unless the firm is registered and the persons suing
are or have been shown in the register of a firm as partners in the firm. But
unregistered firm can sue to enforce a right arising otherwise than from
contract i.e. injunction against infringement of trademarks, trade name and
patent. It is also important to note that the act does not lay down that any
transaction of an unregistered firm will be invalid. if merely says that a firm
will not be allowed to take the assistance of a civil court.

(iii) No right to counter claim or set off :

No unregistered firm or partner, when sued, be entitled to counter claim or

set off to enforce a right arising from a contract.

Exceptions :
Non-registration of firm does not affect following rights.
a) The right of third parties to sue the unregistered firm or its Partners.
b) The right of partner to sue for dissolution of firm.
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c) The power of official Assignee, court receiver to realise the property of

an insolvent partner.
d) Suit for amount not exceeding Rs.100/-

Rights and Duties of Partners

The mutual right & duties of partners of a firm may be determined by

contract between the parties. In the absence of express contract between the
partners, the relation between partners are governed by section 9 to 16 & 25
of the act.

RIGHT OF A PARTNERS :
(1) To take part in the business : Every partner has a right to take part in
the conduct & management of the business, subject to any contract between
the partners.
(2) To share the Profit : In the absence of any agreement the partner has a
right to share equally in the profits of the business earned & are liable to
contribute equally to the losses sustained by the firm.
(3) To have access to the accounts : Every partner has a right to have
access to & to inspect & copy any of the books of the firm.
(4) To be indemnified : Every partner has a right to be indemnified by the
firm in respect of payment made & liabilities incurred in the ordinary
conduct of business or doing any act in emergency.
(5) To be Consulted : Every partner has a right to be heard & to be
consulted if the matter's differences of opinion & also has a right to express
his opinion.
(6) To interest on Capital : The partnership agreement may contain a
clause to the right of the partners to claim interest on capital at a certain
rate such interest subject to contract between the partners is payable only
out of profit, if any, earned in the firm.
(7) To retire : A partner has a right to retire according to the nature of
partnership.
(8) To use Partnership property : The property of the firm shall be held &
used by the partners exclusively for the purpose of business. No partner
has a right to treat it as his individual property.
(9) To have business wound up after dissolution :
On the dissolution of a firm every partner or his representative, to have the
property of firm applied in payment of the debts & liabilities of firm & to have
the surplus distributed among the partners or representatives.
(10) Right to interest on advances :
Where a partner makes for the purposes of the business of the firm any
advances beyond the amount of capital he is entitled to interest on each
advance at the rate of 6% P.A. such interest is not only payable out of the
profit of the business but also act the assets of the firm.

DUTIES & LIABILITIES OF A PARTNER :

(1) To carry on a business to common advantage :

Every partner is bound to:
(a) Carry on the business to the greatest common advantage.
(b) Be just & faithful to each other.
(c) Use reasonable care & skill in performing his duties.
(d) Render true account & full information.

(2) To indemnify :
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* Every partner shall indemnify the firm for any loss caused to it
by :
(a) His fraud in the conduct of the business of the firm .
(b) Wilful neglect of duty conduct of the business of the firm. All
partner are jointly & severally liable for acts of the firm.
(3) To be diligent :
Every partners is bound to attend diligently to his duties in the conduct of
the business.
(4) No remuneration :
A partner is not entitled to receive remuneration for taking part in the
conduct of the business. It is, however, usual to allow some remuneration to
the working partners provided there is a specific agreement to that effect.
(5) To account for personal profit made :
If a partners derives any benefit, with all the consent of the other partners
from partnership transaction or by used of partnership property name or
business connection, he must account for it & pay ‘A’ Tao the firm.
(6) Not to Carry on competing business :
No partners shall carry on any business of the same nature as competing to
the business of the partnership firm. If partners carries the business & then
he shall account for & pay to the firm all the profit made by him in that
business.
(7) To share losses :
Subject to the contract between the partners, partner in liable to contribute
equally to the losses sustained by the firm, some partners may exclude their
liability to share losses.
(8) Liable for acts of the firm :
Every partner has implied. authority, where he exceeds the authority
conferred on him & the firm, suffers a loss, he shall have to compensate the
firm for any such loss.

DISSOLUTION OF A FIRM
Meaning :

Dissolution of a firm- means a firm ceases to exist. The relationship

existing between the partner discontinues. The dissolution of partnership
between all the partners of a firm is called the dissolution of the firm.

Dissolution of a firm is different from dissolution of partnership. Dissolution

of a firm involves total breakdown or, relation of partnership between all the
partners comes to an end. On dissolution of partnership relation of
partnership between a few partners comes to an end.

Mode of Dissolution :

Section 40 to 44 lays down various modes of dissolution of a firm, which can

be classified as follows :

1. By an act of the Parties :

(a)By Agreement : A firm can be dissolved as per the mutual agreement

between the parties or expressed terms in the partnership deed.

(b)By Consent : A firm may be dissolved at any time with the

consent of all partners. This applies to all cases, whether firm is for
a fixed period or otherwise.
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(c)By Notice : In case of “partnership at will” the firm may be dissolved

by any partner giving notice in writing to all other partners of his
intention to dissolve the firm. A notice once given cannot be
withdraw with at consent of all the partners.

2. By Operation of Law :
.

(a) Compulsory dissolution :

(i) Insolvency of partner : When all the partners or all the

partner except one, are adjudicated insolvent, the firm is
compulsory dissolved.

(ii) When some event making partnership business unlawful :

When some event happens, which makes it unlawful for the
business to be carried on in partnership.
E.g. A wine shop carrying on the business of selling liquor is
valid when business started, but new legislation comes into
force which prohibits the sale of liquor, it would become an unlawful
business. Where business is declared as unlawful, the firm must
be compulsorily dissolved.

(iii) Illegal Partnerships : Where two partners in a firm are

carrying on business & one of the partner is a foreigner & there was
a outbreak of war between the country, foreign countries declare as
an enemy country the partnership between the two partner become
an illegal partnership & firm has to be compulsory dissolved.

(B) On happening of certain contingencies :

(i) By expire of term : Where a partnership has been

constituted for a fixed period, the firm is automatically dissolved
on the expire of such fixed period .

(ii) By completion of undertaking : Where a partnership has

been constituted to carry out one or more adventures or
undertaking the firm is automatically dissolved on completion of
such adventure or undertaking.

(iii) By Death of a partners : Where a partner in a firm dies, the

firm is automatically dissolved on the death of the partner.

(iv) By insolvency of a Partner : In the absence of where a

partner is declared insolvent by a court he ceases to be a partner
forthwith & the firm is dissolved.

3. By Intervention of the Court :

(a) By insanity of a partner : When a partner becomes a lunatic, either

his relative or friend or any other partner can file a suit for
dissolution this is because a contract by a lunatic is void & so
business cannot be carried on with such person
(b) Permanent incapacity of Partner : Where a partner becomes
permanently incapable of performing his duties as a partner, on suit
being filed by other partner, the court may order a dissolution of firm.

(c) By mis-conduct of a partner : If a partner is guilty of conduct

which is likely to affect prejudicially the business of the firm, any
other partner can sue for dissolution of the firm E.g. Mis
appropriation of customer money.

(d) By persistent breach of agreement : Where a partner wilfully or

continuously commits breach of partnership agreement, relating to
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the management of the affairs, of the firm or the conduct of the

business, any partner can file a suit for dissolution.

(e) By transfer of interest :

(i) When one partner has transferred the whole of his interest in the
firm to a third party.
(ii) allowed his interest to be charged in execution of a decree
against him
(iii) He has allowed his share to be in recovery of arrears of
land revenue. Any other partner can sue for dissolution .

(f) Business Running at loss : When the business of the firm can not
be carried on except at the loss then the firm can be dissolved. The
object of partnership is to earn profit & if it cannot be fulfilled then
the firm cannot exist.

(g) Just & Equitable ground : When on any other ground the court
finds it just & equitable to dissolve a firm, it can order so. E.g.
dead lock in the management.

Consequences of Dissolution :
On dissolution, the firm comes to an end. When the firm is dissolved by the
order of the court, the dissolution stands from the date of the judgement.

A partnership deed and its contents

Partnership is an agreement that is made between two or more partners of a

firm and it outlines the various terms and conditions of the partnership
among the partners.
The contents of a partnership deed are as follows:

 Title of the documents and date

 Name and details of all the partners of the firm.
 Name of the firm as determined by all the partners.
 Nature of Partnership business
 The date on which business commenced.
 Type of Partnership (duration.)
 Rights of operating Bank account
 Accounting Year
 Amount of capital contributed by each partner.
 Profit sharing ratio between the partners.
 Duties, obligations and power of each partner of the firm.
 The salary and commission (if applicable) that is payable to partners.
 The process of admission or retirement of a partner.
 The method used for calculating goodwill.
 The procedure that must be followed in cases of dispute arising
between partners.
 Procedure for instances when a partner becomes insolvent.
 Procedure for settlement of accounts in the event of dissolution of a
firm.