The Indian

Partnership Act
• A partnership is the relationship between persons who have agreed to
share the profits of a business carried on by all or any of them acting for all.
• In India it is governed by the Indian Partnership Act, 1932. It came into force
on 1st October 1932.
• ELIGIBILITY
• A partnership agreement can be entered into between persons who are
competent to contract. Every person who is of the age of majority according to
the law to which he is subject and who is of sound mind and is not disqualified
from contracting by any law to which he is subject can enter into a partnership.
• The following can enter into a partnership
• INDIVIDUAL
• FIRM
• HINDU UNDIVIDED FAMILY
• COMPANY
• TRUSTEES
• INDIVIDUAL: An individual, who is competent to contract, can become a
partner in the partnership firm. If there are more than two partners in a
firm, an individual can be a partner in his individual capacity as well as in a
representative capacity as Karta of the Hindu undivided family.
• FIRM: A partnership firm is not a person and therefore a firm can not
enter into partnership with any firm or individual. But a partner of the
partnership firm can enter into partnership with other persons and he can
share the profits of the said firm with his other co-partners of the parent
firm.
• HINDU UNDIVIDED FAMILY: A Karta of the Hindu undivided family
can become a partner in a partnership in his individual capacity, provided
the member has contributed his self acquired or personal skill and labour
• COMPANY: A company is a juristic person and therefore can become a
partner in a partnership firm, if it is authorised to do so by its objects.
• TRUSTEES: Trustees of private religious trust, family trust and trustees of
Hindu mutts or other religious endowments are juristic persons and can
therefore enter into partnership, unless their constitution or objects forbid
• NUMBER OF PARTNERS
• The number of partners in a firm shall not exceed 50 and a partnership
having more than 50 persons is illegal.
• If the partnership is between the karta or member of Hindu undivided
family the members of the joint Hindu family will not be taken into account.
ESSENTIALS OF A
PARTNERSHIP
• AGREEMENT - The relationship between partners arises
from contract and not status. If after the death of sole
proprietor of a firm, his heirs inherit firm they do not
become partners, as there is no agreement between them
• SHARING OF PROFITS – The partners may agree to share profits out
of partnership business, but not share the losses. Sharing of losses is not
necessary to constitute the partnership.The partners may agree to share
the profits of the business in any way they like.
• BUSINESS – Business includes every trade, occupation, or profession.
There must be course of dealings either actually continued or contemplated
to be continued with a profit motive and not for sport or pleasure.
• RELATION BETWEEN PARTNERS– The partner while carrying on
the business of the partnership acts a principle and an agent. He is a
principal because he acts for himself, and he is an agent as he simultaneously
acts for the rest of the partners.
GENERAL DUTIES OF A
PARTNER
• Subject to a contract to the contrary clauses
between the partners the following are the
duties of a partner.
• To carry on the business of the firm to the
greatest common advantage. Good faith
requires that a partner shall not obtain a
private advantage at the expense of the firm.
• Where a partner carries on a rival business in competition with the partnership,
the other partners are entitled to restrain him.
• To be just and faithful. Partnership as a rule is presumed to be based on
mutual trust and confidence of each partner, not only in the skill and
knowledge, but also in the integrity, of each other partner
• To render true accounts and full information of all things done by
them to their co-partners.
• To indemnify for loss caused by fraud. Every partner shall indemnify the
firm for loss caused to it by his fraud in the conduct of the business of the
firm.
• Not to carry on business competing with the firm. If a partner
carries on any business of the same nature as and competing with that of
the firm, he shall account for and pay to the firm all profits made by him in
that business.
• To indemnify the firm for willful neglect of a partner. A partner shall
indemnify the firm for any loss caused to it by his willful neglect in the
conduct of the business of the firm.
• To carry out the duties created by the contract. The partners are bound
to perform all the duties created by the agreement between the partners.
RIGHTS OF THE PARTNERS

• Subject to a contract to the contrary a partner has

the following rights.
• To take part in the conduct and management of the
business
• To express opinion in matters connected with the business.
He has a right to be consulted and heard in all matters
affecting the business of the firm
• To have free access to all the records, books of account of the firm and take
copy from them.
• To share in the profits of the business. Every partner is entitled to share in
the profits in proportion agreed to between the parties.
• To get interest on the payment of advance. Where a
partner makes for the purpose of the business, any
payment or advance beyond the amount of capital he
has agreed to subscribe, he is entitled to interest
thereon at the rate of 6% per annum.
• To be indemnified by the firm against losses or
expenses incurred by him for the benefit of the firm.
• RESTRICTIONS ON AUTHORITY OF A PARTNER -Restrictions are
governed by Contract and by the Partnership Act .
• The partners may by contract extend or restrict the implied authority of any
partner.
Under the Partnership Act in the absence of any usage of trade to the
contrary, the implied authority of a partner does not empower him to do the
following acts:
• Submit a dispute relating to the business of a firm to arbitration
• Open a bank account in his own name
• Compromise or relinquish any claim of the firm
• Withdraw a suit or proceeding on behalf of the firm
• Admit any liability in a suit or proceeding against the firm
• Acquire immovable property on behalf of the firm
• Transfer immovable property belonging to the firm, or
• Enter into partnership on behalf of the firm.
 RIGHTS OF A MINOR

• A person who is a minor according to the law to which

he is subject may not be a partner in a firm, but, with
the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.
• Such minor has a right to such share of the property and of the profits of
the firm as may be agreed upon, and he may have access to and inspect and
of the accounts of the firm
• Such minor’s share is liable for the acts of the firm, but the minor is not
personally liable for any such act.
• Such minor may not sue the partners for an account or payment of his
share of the property or profits of the firm
• At any time within six months of his attaining majority,
or of his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever
date is later, such person may give public notice that
he has elected to become or not to become a
partner in the firm, and such notice shall determine
his position as regards the firm, provided that, if he
fails to give such notice, he shall become a partner in
the firm on the expiry of the said six months.
• Where any person has been admitted as a minor to the benefits of
partnership in a firm, the burden of proving the fact that such person had
no knowledge of such admission until a particular date after the expiry of
six months of his attaining majority shall lie on the person asserting that
fact
• Where such person becomes a partner-
• his rights and liabilities as a minor continue upto the date on which he
becomes a partner, but he also becomes personally liable to third parties
for all acts of the firm done since he was admitted to the benefits of the
partnership, and
• his share in the property and profits of the firm shall be the share to which
he was entitled as a minor
• Where such person elects not to become a partner-
• his rights shall continue to be those of a minor upto the date on which he
gives public notice,
• his share shall not be liable for any acts of the firm done after the date of
the notice, and
• he shall be entitled to sue the partners for his share of the property and
profits.
 DISSOLUTION OF A FIRM

• A firm may be dissolved in the following manner

• Dissolution by Court
• Dissolution by agreement
• Dissolution by operation of law
• Dissolution on the happening of certain contingencies
• Dissolution by notice
• DISSOLUTION BY COURT
• The court may dissolve a firm at the suit of any
partners on any of the following grounds namely :
• INSANITY OF A PARTNER: that a partner has
become of unsound mind. The insanity of a partner
does not ipso facto dissolve the firm and the next
friend or continuing partners has to file suit foe
dissolution.
• PERMANENT INCAPACITY OF A PARTNER: that a
partner has become permanently incapable of
performing his duties as partner.
• CONDUCT AFFECTING PREJUDICIALLY THE
BUSINESS : that a partner is guilty of conduct, which
is likely to affect prejudicially the carrying on the
business of the firm.
• BREACH OF PARTNERSHIP AGREEMENT that a
partner willfully or persistently commits breach of
agreements relating to the management of the affairs
of the firm or the conduct of it’s business or
otherwise conducts himself in matters relating to the
business, that it is not reasonably practical for the
other partners to carry on the business with him.
• TRANSFER OF INTEREST OF A PARTNER : that a
partner has in any way transferred the whole of his
interest in the firm to a third party.
• LOSS: that the business of the firm cannot be carried
on save at a loss
• JUST AND EQUITABLE : on any other ground that
renders it just an equitable that the firm should be
dissolved
• DISSOLUTION BY AGREEMENT
• A firm may be dissolved with the consent of all the partners or in
accordance with the contract between the partners. The partnership
agreement may contain a proviso that the firm will be dissolved on the
happening of certain contingency
• DISSOLUTION BY OPERATION OF LAW
A firm is compulsorily dissolved on the following grounds
• Insolvency of partners
• By the happening of any event which makes it unlawful for the business of
the firm to be carried on.
DISSOLUTION ON THE HAPPENING OF CERTAIN
CONTINGENCIES
Subject to contract between the partners a firm is dissolved on the happening
of the following contingencies.
• If constituted for a fixed term, by the expiry of that term
• If constituted to carry out one or more adventures or undertakings, by its
completion.
• By the death of a partner
• On insolvency of a partner
• DISSOLUTION BY NOTICE
• If the partnership is at will, the same may be dissolved by service of a notice
by one partner to dissolve the firm.
REGISTRATION

• It is not compulsory to register the firm. However there

are serious effects of non-registration.
• No suit to enforce a right arising from a contract or conferred by the Indian
Partnership Act shall be instituted in any court by or on behalf of any
person suing as 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 on the Register of firms as a partner
in the firm
• Similarly, no suit to enforce a right rising 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.
• PROCEDURE FOR REGISTRATION The
registration of a firm may be effected at any time by
sending by post or delivering to the Registrar of Firms
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 :
• the firm name
• the place or principal place of business of the firm;
• the names of any other places where the firm carries on business;
• the date when each partner joined the firm;
• the names in full and permanent addresses of the partners; and
• the duration of the firm.
• The statement shall be signed by all the partners or by their agents specially
authorised in this behalf. Each person signing the statement shall also verify
in the manner prescribed.
• A firm name shall not contain any of the following words viz. "Crown",
‘Emperor", "Empress", "Empire", "Imperial", "King", "Queen", "Royal", or
words expressing or implying the sanction, approval or patronage of
Government, except when the State Government signifies its consent to
the use of such words as part of the firm name by order in writing.
• All the States have framed rules prescribing the forms, fee for registration
and verification of the statement. The application for registration has to be
made to the Registrar of Firms in the prescribed form
• When the Registrar is satisfied that the provisions have been complied with,
he shall record and enter the statement in a register called the Register of
Firms and shall file the statement. The Registrar is the competent authority
and if he acts bona fide and follows the procedure, his satisfaction cannot be
challenged.
• CHECKLIST FOR DRAFTING A PARTNERSHIP DEED
• A partnership deed should contain the following clauses
• Name of the parties
• Nature of business
• Duration of partnership
• Name of the firm
• Capital
• Share of partners in profits and losses
• Banking, Account firm
• Books of account
• Powers of partners
• Retirement and expulsion of partners
• Death of partner
• Dissolution of firm
• Settlement of disputes
• FORMATION OF PARTNERSHIP FIRM
• Basic facts of partnership:
• 1) Mutual Confidence and Utmost Good Faith .
• 2) All Essential elements of Valid Contract is must .
• 3) Mutual Rights and Obligations of Partners in form of
Partnership Deed .
• 4) Partnership firm must be registered, otherwise the firm
will not be able to enforce its legal remedies against
outsiders .

• PARTNERSHIP DEED : “ The document in writing containing

the important terms of partnership as agreed by the
partners between themselves”. Drafted, stamped & signed .

•
HANDLING OF PARTNERSHIP DEED :

• a) It should be drafted with care and be signed by all the

partners .
• b) It must be stamped according with Indian stamp act .
• c) Each partner should have a copy of deed .
• d) The firm should be registered and a copy of the deed
should be filled at the time of registration with register of
firms .
• THE PARTNERSHIP DEED SHOULD COVER :The contents
of the partnership deed .
• 1) Name, name of firm, addresses of partners .

• 2) Nature of business, town, place carried it .

• 3) Date commencement of partnership .
• 4) Duration of partnership (may /may not ) .

• 5) Amount of capital by partners and method of raising finance in future .

• 6) Ratio of sharing profits or loss .
• 7) Salaries, commission e.t.c if any payable to partners .

• 8) Interest on partners, partners loan and interest .

• 9) The method of preparing accounts and arrangement of audit and safe custody
of cash .
• 10) Division of tasks and responsibility i.e. the duties, powers, and obligations .
 11) Rules to be followed incase of retirement, death and admission of
partners .
• 12) Expulsion of partners in case of gross breach of duties and fraud .
• 13) Clearly provides that the deed may provide that a partner shall not
carry on any business other than that of the firm while he is a partner .
But agreement is restrain of trade are void .
• DURATION OF PARTNERSHIP : Which may be classified as follows:
• 1) Partnership for a firm term .

• 2) Particular partnership : Adventure or undertaking .

• 3) Partnership at will .

• CLASSES OR KINDS OF PARTNERS:

• 1) Active, Actual or Real Partners :Partner under agreement .
• 2) Sleeping or Dormant : Name not appear or not active, but liable .

• 3) Silent partners : By agreement _ no say in management .

• 4) Partnership in profits only : But liable to third parties .
• 5) Sub Partners : Share his profits with an outsider is called Sub partner .

•
• 6) Nominal partner : But liable for all acts of firm .
• 7) Partner By Estoppel or Holding Out : “Any one who by words spoken or
written or by conduct represent himself, or knowingly permit himself to be
represented to be a partner in a firm is liable as a partner in that firm to anyone.

• CONSEQUENCE OR EFFECTS ON NON_REGISTRATION :

• 1) No suit can be filled by a partner against the firm or other copartners .

• 2) No suit by the firm against third parties .

• 3) The firm or its partners cannot make a claim of set off or other proceedings .
• EXCEPTIONS : * Unregistered firm is not an illegal firm, optional.

• * Can file a suit for dissolution .

• RIGHTS , DUTIES AND LIABILITIES :

• RIGHTS OF A PARTNER :

• 1) Rights to take part in the conduct of the business .

• 2) Right to be consulted .

• 3) Right to access to books .

• 4) Rights to share the profits .

• 5) Right to interest on capital .

• 6) Right to interest on advances .

• 7) Right to indemnified .

• 8)Joint owner of partnership property .

• 9) Right not to be expel .

• 10) Right to retire .

• 11)No liability before joining .

• DUTIES OF A PARTNER : Duties of a partner can be classified in to two heads .
• A) ABSOLUTE DUTIES :

• B) QUALIFIED DUTIES :

• A) ABSOLUTE DUTIES :
• 1) Duty to carry on the business to the greatest common advantage .

• 2) Duty to be just & faithful .

• 3) Duty to render true accounts .

• 4) Duty to provide full information .

• 5) Duty to indemnify for loss caused by fraud .

• 6) Duty to be liable jointly & severally .

• 7) Duty not to assign his interest .

• B)QUALIFIED DUTIES :

• 1) Duty to attend diligently .

• 2) Duty to work without remuneration .

• 3) Duty to contribute losses .

• 4) Duty to indemnify the willful neglect .

• 5) Duty to use firms property exclusively for the firm .

• 6) Duty to account the personal profits derived .

• 7) Duty not to compete with the business of the firm .

• LIABILITIES OF PARTNERS TO THIRD PARTIES :

• 1)The liabilities of partners of third parties are divided into three categories .

• 1) Liability of a partner for acts of firm .

• 2) Liability of the firm for wrongful acts of a partner .

• 3) Liability of the firm for misapplication by partners .

•
• LIABILITY OF A RETIRING PARTNER :This can be discussed in two heads :
• A partner is said to retire when the surviving partners continue to carry on the
business. A public notice is given of retirement.

• 1) Liability Before Retirement : A retiring partner continue to be liable for all

the acts of the firm done before his retirement or acts pending at the time of his
retirement unless he is discharged from his liabilities.

• 2)Liability After Retirement : A retired partner is not liable for the act of the
firm done after his retirement. But he continues to be liable till the public notice
of retirement is given
• DISSOLUTION OF FIRM :

• A) Dissolution by the court .

• B) Dissolution without the court order.

• B) Dissolution Without The Court Order: partnership firm may be dissolved in any one of
the following :

• 1) Dissolution by agreement .

• 2) Dissolution by notice.

• 3) Dissolution on the happening of certain contingencies :

a) By the expiry of the term fixed .

• b) By the completion of the adventure or undertaking .

• c) By the death of a partner . &

• d) By the insolvency of a partner .

• 4) Compulsory Dissolution : A firm is compulsorily dissolved :

• a) Business becomes Unlawful . b) one or all insolvent .

• A) Dissolution by the court : Dissolution of a firm by the court is necessitated

when there is a difference of opinion between the partners regarding the matter
of dissolution.The court may order to dissolve the firm in the following ground.

• i) When a partner become unsound mind.

• ii) Permanent Incapacity of a partner.
• iii) Partner’s misconduct towards court and other partners.
• iv) Persistent Breach of Agreement:
• V) Transfer of interest partner without consent of other partners.
• Vi) Continuous loss in the business:
• Vii) When the court considers Just and Equitable: e.g. deadlock in the
management.
• CONSEQUENCES FOLLOWING DISSOLUTION OF FIRM: Can be studied under three
heads:

• A) Rights and Liabilities of partners after dissolution.

• B) Mode of settling Accounts upon Dissolution.
• C) Rules as Regard Sale of Goodwill.
• Explanation….
• A) Rights and Liabilities of Partners after Dissolution of the firm: are as
follows

• 1) Right to an equitable Lien: “Partner’s Lien”

• 2) right to return of premium on premature dissolution:
• 3) Right where partnership contract is rescinded for fraud etc.

• 4) right to restrain use of the firm’s name or property: except where the partner has
purchased goodwill.
• B) Mode of Settling Accounts Upon Dissolution:

• The partnership Act incorporates various sections laying down the rules for the
settlement of the accounts:
• 1) Losses: losses suffered by the firm shall be paid first out of Profits, next out of
Capital and lastly by the partners individually.
• 2) Application of Assets: Assets distributed in the following order:
• Paying debt due to third parties>Advances made by partners>Capital due to
partners> Surplus if any divided as per their ratio.
• Garner Vs Murray :
• In case a partner is insolvent and he is not in a position to contribute
towards deficiency of his capital account the solvent partners should
contribute to the deficiency of capital.
• Facts of the case; Garner ,Murray and Wilkin were partners
• Sharing profits equally, but the capital contributed by Garner is more
than Murray’s capital. After dissolution of the firm, the assets are
insufficient to pay capital in full.
• It was held that the principle of division was for each partner to be
treated as liable to contribute an equal third share, even though capital
contribution is unequal but profit sharing ratio was equal.
• C) SALE OF GOODWILL AFTER DISSOLUTION: Goodwillof a firm is the whole
advantage whatever it may be, of the reputation and connection of the
firm which may have been built up by years of honest work.
• Lord Macnavghten “ Goodwill is the advantage which is acquired by a
business beyond the mere value of capital, Stock, Fund and property
employed there in, in consequences of general public patronage and
encouragement which it receives from constant and habitual
customers”
• Rules relating to sale of Goodwill:
• i) Goodwill can be included in the Assets , and it may be sold either separately or
along with other property of the firm.
• ii) after the goodwill has been sold any partner of the dissolved firm can a) carry on
competing business and advertise such business.
• Iii) In absence of any contract , the seller of goodwill , that is partners of the
dissolved firm cannot Use the firm name; b) represent themselves as carrying on th
business of the dissolved firm; and c) cannot solicit the customers of the old firm.
• Public Notice:
• The partnership Act require the giving of public notice in each of the following cases:
• a) when a minor is admitted to benefit of partnership.
• b) When a partner retires from a partnership firm.
• c) When a partner is expelled from a partnership firm.
• d) When a partnership firm is dissolved.
• If public notice is not given the parners shall continue to be liable for any act done by
any of them before the dissolution.