ST.

MOTHER TERESA LAW DEGREE COLLEGE

LONAPUR, GOMTI NAGAR, LUCKNOW

L.L.B.(3 YEARS) 3rd SEMESTER COURSE

FACULTY OF LAW

ASSIGNMENT FILE
ON
COMMERCIAL LAW

INDIAN PARTNERSHIP ACT 1932

SUBMITTED TO – SUBMITTED BY –

YOGESH MISHRA PANKAJ KUMAR JAISWAL

1|Page
 Acknowledgement

I would like to thank Mr. YOGESH

MISHRA for his valuable guidance
and help. He clarified all my
queries about the project without
which I would have not been able
to complete the project. I would
also like to thank my family for
providing all necessary materials
and my friends for helping me
with this project.

2|Page
 INDIAN PARTNERSHIP ACT 1932

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provision of India Contract Act which is not repealed will be applicable on Partnership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

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

Meaning

According to Section 4 of the Partnership Act,1932

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

Essential requirements of a partnership

 It must be an association of two or more persons.

 There must exist an agreement between the partners.
 There must be a business undertaking or a commercial activity that is
lawful.
 The motive must be to earn the profit and share between the partners.

3|Page
  The agreement must be to carry out the business jointly or by any of them
acting on the behalf of all i.e., there must be mutual agency.

Examples:

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

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

Number of members

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

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

 Banking purpose-10 persons

 Other purposes- 20 persons

Agreement

The partnership is an agreement in which two or more person has decided to carry out
business and share the profit and losses equally. To create a legal relationship it is
necessary to form a partnership agreement.
The partnership agreement becomes the foundation or the basis on which it is based.
It can be either written or oral. The written agreement is known as a partnership
deed. Partnership deed mainly consists of the following details:

 Name and address of its firm and business

 Name and address of its partner
 Capital contributed by each partner
 Profit and loss sharing ratio
 Rate of interest on capital, loan, drawings etc
 Rights, duties and obligation of partners
 Settlement of accounts on the dissolution of the firm
 Salaries, commission payable to partners

4|Page
  Rules to be followed in case of admission, retirement and death of a partner
 Mode of settlement on disputes among partner.
 Any other affecting the rights of the partners.

Business (Section 12)

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

Mutual agency (Section 13)

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

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

Sharing of profit

The agreement is to share profit and losses among the partners. The sharing of profit
and losses can be according to the ratio of the capital contributed or equally.
It helps to distribute the burden among the partners in the case when the partnership
suffers losses.

Liability of partnership

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

Test of partnership

Section 6

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

5|Page
 1. While determining whether an association of persons is a firm or if a person
is a partner to a firm, the real relation shown by relevant facts between the
parties must be examined.
2. Sharing profits from a property held by persons jointly does not
automatically qualify such persons as partners.
3. A person can hold a receipt of the share in profits or receipt of payment
that is contingent upon the profits, but that does not make him a partner.
The following are such persons:

 Servant or agent who receives remuneration or commission.

 Widow or child of a deceased partner who receives an annuity.
 Moneylender to the partnership business.
 The previous owner or part owner who has consideration for the sale of the
goodwill of the business or share of it.

Real criteria for determining partnership

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

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

Kinds of partnership

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

With regard to the duration of the term of partnership:

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

6|Page
  No agreement about the determination of the fixed period of partnership
 No clause with respect to the determination of partnership.

Partnership for a fixed period

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

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

Particular Partnership (Section 8)

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

General Partnership

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

Scope of Partnership Act (Section 5)

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

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

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

7|Page
Partners

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

 Active/managing partner: The partner who takes participation in the

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

Relation of partner with one another

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

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

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

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

Section 27 of the Indian Contract Act,1872

Agreement in restraint of trade is void

All the agreements which restrain the person from carrying any lawful profession,
trade or business are void.
But Section 11 of the Partnership Act states that the partners can restrain each other
from carrying a business other than the firm. but such restraint must contain in the
partnership deed.

Rights of the Partners

 Right to take part in the conduct of the firm’s business: Section

12(a) provides that every partner has the right to be involved in the conduct
of the firm’s business. All partners have the right to manage the firm’s
business.
 Right to express opinion: Section 12(c) provides that all partners can freely
express their opinion in matters concerning the firm’s business. However,
before a decision is made based on an opinion of a partner, the consent of
other partners must be obtained.
 Right to have access to books of the firm: Section 12(d) of the Act provides
that every partner has the right to look into the books of the firm, whether
the books concern the accounts of the firm or not.
 Right to profit: As per Section 13(b), all partners must equally share profits
earned through the business.
 Right to interest on capital: Section 13(c) provides that on an agreement,
the partners of a firm have the right to claim interest on the firm’s profits
from the capital.
 Right to interest on advances made by partner: In some cases the firm
may need extra money apart from the capital. In such cases, a partner may
make advances to the firm and he may also claim interest on such
advances.
 Right to indemnity: Section 13(e) of the Act provides that a partner may
make some payments and incur liabilities while acting on behalf of the firm.
The firm shall indemnify a partner in respect of such payments and

9|Page
 liabilities, whether it was made in ordinary course of business or in
emergency.
 Right to dissolve the partnership: Section 44 provides that a partner has
the right to file a suit to dissolve the partnership. The court may dissolve
firm on any of the grounds given below:

1. Unsoundness of mind of a partner, where the suit shall be brought by

another partner or the next friend of the unsound partner;
2. Permanent incapability of another partner to perform his duties;
3. Another partner is guilty of conduct that prejudices the business of the firm;
4. Committing breach of agreement by another partner by wilfully or
persistently;
5. Transfer of interest in firm by another partner to a third person;
6. Business of firm cannot be carried on due to losses;
7. Any other ground which makes it just and equitable to dissolve the
partnership.

 Section 46 provides that after dissolution, a partner has the right to wind up
the business of the firm. On dissolution, every partner or his
representative is entitled, as against all the other partners, to have the
firm’s property applied in payment of debts and liabilities of the firm, and
then have the surplus distributed among the partners or their
representatives.
 Right to not get expelled: Section 33 provides that all partners have right
to not get expelled except on certain grounds and they must be given
reasonable warning and opportunity of explanation before the expulsion.
 Right to prevent introduction of new person: Section 31 provides that
every partner has the right to prevent the introduction of a new partner
without his consent to the firm, unless the agreement has expressly
provided that such introduction is permitted.
 Right to retire: Section 32 of the Act provides that a person has right to
retire with the consent of other partners, unless the requirement of consent
is waived by the agreement. The partners can retire by simply providing a
notice to other partners in partnerships at will.

Relations of partners to third parties

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

Section 18 prescribes that the partners are an agent of the firm for the purpose of
conducting the affairs of the business. The partners act as the principal and agent as
well. when he performs the act in his own interest he is the principal and when he

10 | P a g e
does in the interest of another partner then he is an agent. He is not an agent for the
dealings or the transactions between the partners themselves.

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

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

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

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

Duties of partners

 Duty of greatest common advantage: As per Section 9 of the Act, it is

incumbent upon the partners to carry on their business for the greatest
common advantage of the firm. The partners must act so that all the
partners benefit and secure the maximum profits. No partner should act for
their personal gain.
 Duty of good faith: As per Section 9, the partners must act just to each
other. The relationship of partnership is on mutual trust and hence, there
must be good faith between them. A partnership is of fiduciary nature and
thus, at every stage of a partnership, the partners must act just and faithful
to one another.
 Duty to render true accounts: Partners of a firm have a duty to render true
accounts as per Section 9. A partner of a firm must keep and render true
and complete accounts of the partnership firm’s business. He must make it
available to other partners or their representatives when required.
 Duty to render full information: As per Section 9, partners of a firm have a
duty to provide true and full information regarding the business. Partners
are agents of each other and hence, partners must communicate all
information regarding the running of the business in a complete and truthful
manner to each other.
 Duty to not carry another business: As per Section 11(2) of the Act, a
partner must not conduct a business other than that of the firm. Partners
can restrain one another from carrying on another business, provided that
such restraint is reasonable.

11 | P a g e
  Duty to act diligently: As per Section 12(b), a firm’s partner must act
diligently in the business.
 Duty to perform without remuneration: As per Section 13(a), every partner
must perform and attend to the firm’s business without expecting
remuneration. There is a presumption that all partners are to work for the
common advantage of the firm.
 Duty to share losses: As per Section 13(b) of the Act, partners must share
losses in the proportions as provided by the partnership agreement. If the
agreement does not provide it, it must be shared in the proportion that they
share the profits.
 Duty to indemnify for wilful neglect: As per Section 13(f), a partner shall
indemnify his firm for any of the losses caused to it due to his wilful neglect
during the course of the business. Wilful neglect refers to an act that is
deliberate and intentional.
 Duty to not assign his rights: No partner can assign his rights in a
partnership firm to a third person in order to make him a partner.
 Duty to act within authority: Every person has to act within the authority
that he has conferred upon him as per the partnership agreement.
 Duty to account private profits: Section 16(a) provides that no partner can
use the partnership firm’s property for private use, or use any profits
derived from the partnership business for his own advantage. If the property
of profits of a firm is ever used for personal advantage, it must be
accounted for.
 Duty not to compete: Section 16(b) states that no partner of a firm can
carry on another business simultaneously, except with the consent of other
partners. On the failure of obtaining the consent, he must account for all
the profits he made as a result of that and must compensate for the losses
sustained by the firm if any.
 Duty to properly use the firm’s property: Sections 14 and 15 of the Act
provide that the property of the firm must be used solely for the purpose of
the firm’s business and not for private purposes. The term ‘property of the
firm’ covers all properties and rights and interests in a property originally
acquired by the firm for the purpose of running the business. The goodwill
of the business is also a property of the firm.

When do Rights and Duties change?

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

12 | P a g e
  Expiration of term of the firm.
 Carrying out the additional business other than agreed upon.
 Changes in the composition of members due to admission, retirement or the
death of a partner.
The duties and rights of partners remain the same until there is any change in
agreement but such right and duties may vary or modified by creating a fresh
agreement.

Status of a minor
Section 30 states the legal provision related to the minor according to Section 18 of
the Indian Contract act 1872, no person below the age of 18 years can enter into the
contract which implies that no minor can enter into a contract. But Section 30 states
that the minor cannot be a partner in a partnership firm but he can be admitted to
benefit from the partnership firm. The minor will be liable to get only the benefits
from the partnership but is not liable for any losses or liability. The minor can be
admitted to the partnership only with the consent of all the partners.

There are various rights that are granted to the minor.

Various rights are as follows:

 Right to inspect the books of account

 Rights to share the profits from the firm
 Rights to sue any partner or all for his share of benefit or profit
 He has a limited liability which means his personal assets may not be
disposed of to pay the firm debts
 A minor has a right to become a partner on attaining the age of 18 years.

Liabilities of a minor

 A minor has Limited liability. If minor is declared as insolvent his share will
be kept in the possession of official liquidator.
 If after attaining the age of 18 years he decided to become the partner then
he has to give public notice within 6 months of attaining the majority. If
notice not given then minor will become liable for all the acts of others until
the notice is given
 When a minor partner becomes the major he will be liable for the acts of all
partners to the third parties.
 If he decided to become a full-time partner then he will be considered as a
normal partner and will take part in the conduct of the business.

13 | P a g e
Liabilities

 Liability of partners for the acts of the firm (Section 25): All the partners
is jointly and severally liable for the acts of the firms. He is liable only for
those acts which are done at the time he is a partner.
 Liability of a firm for the wrongful act of partner (Section 26): When any
wrongful act or omission is done by any of its partners in the ordinary course
of its business or with the consent of others partners then the firm is liable
to the same extent as a partner.
 Liability of a firm for the misapplications by partner (Section 27): when
any partner acting as an agent receives the money from the third party and
misapplies it or the firm receives the money and money are misappropriated
by any of its partners then the firm is liable to pay for the loss suffered.

How is registration done?

Section 58 explains the procedure of the registration of a partnership firm.

 Making an application to Registrar: Any of its partners can send an

application along with the prescribed fee and copy of partnership deed o the
registrar of the area in which any place of business is proposed to be
situated or is situated. Such a statement shall be signed by all of its
partners. Such a statement should contain:
 Name of the firm
 Principal place of business
 Any other place where the business is carried on
 Duration of partnership firm
 Name and address of all partners of a firm
 The date on which each partner joined the firm
 Verification: Each partner who has signed the statements needs to be
verified.
 The name of the firm shall not contain any name resembling the name of
Crown, Emperor, king, Royal, Emperors’, or any other words implying or
expressing the sanction of the government.

Section 59 states that when the Registrar is satisfied that the conditions of Section
58 are complied with then he shall record an entry of the statement in a register
called the Register of Firms, and shall file the statement.

14 | P a g e
Non-registration of partnership firm

In India, it is not compulsory to register the partnership and no penalty is being

imposed for non-registration but if we talk about English law it is compulsory to
register partnership firm and if it is not registered then the penalty is imposed. Non-
registration leads to a certain disability in accordance with Section 69 of the Act.

Effect of non-registration (Section 69)

 No suit can be initiated in civil court by the firm or other co-partners against
the third party
 In case of breach of contract by the third party; the suit cannot be brought
in any civil suit. The suit must be filed by the one whose name is registered
as a partner in a register of the firm.
 No partners can claim a relief of set-off.
 Any action which is brought out by the third party against the firm having a
value of Rs 100 cannot be set off by the firm or any of its partners.
 An aggrieved person cannot sue against firms or other partners
Generally, no action can be brought against the firm or the partners but there is
an exception to it. In a case when the firm is dissolved it can bring a suit for the
realization of his share in the firm’s property.

Non-registrations do not affect the following rights

 A third party can bring a suit against the firm

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

Introduction or Admission of partner (Section 31)

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

15 | P a g e
Modes of introduction

The following are the modes of introduction of a partner:

1. With the consent of all partners

2. Introduction as per the contract between partners
3. A minor admitted to the benefit of the partnership becoming a partner

Rights of incoming partner

1. Right to manage partnership business

2. Right to access books of firm
3. Right to capital, profit and loss
4. Right to dissolve partnership
5. Right to indemnification of losses

Liabilities of incoming partner

A partner’s liabilities are only with respect to transactions subsequent to becoming a

partner. The same is provided under Section 30(2). However, the incoming partner
and co-partners can enter into an agreement where it provides that the incoming
partner can be held liable for obligations of the firm prior to his arrival.

Retirement of partner (Section 32)

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

Any partner may retire:

 When there is a partnership at will, by serving a notice to all the existing

partners
 When there is an express agreement among the partners
 When the consent of all the partners is given

16 | P a g e
Liabilities of retired partner

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

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

Expulsion of partner (Section 33)

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

 Expulsion of the partner is necessary for the interest of the partnership

 Notice is served to the expelled partner
 An opportunity of being heard is given to the expelled partner
If the above three conditions are not fulfilled then such expulsion will be considered
as null and void.

Insolvency of a partner (Section 34)

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

 He ceases to be the partner of a partnership firm from the date of

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

Liability of estate of a deceased person (Section 35)

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

17 | P a g e
Liability of outgoing partner (Section 36)

The outgoing partner is restricted to perform acts like:

 Using the name of the firm

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

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

Liabilities of outgoing partner to subsequent profits (Section 37)

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

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

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

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

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

Lets us understand the concept of dissolution in detail through the Powerpoint

Presentation given below.

18 | P a g e
Dissolution of a firm ( Section 39 to Section 44)

Liability of partners in Different Situations

Liabilities of partners after the dissolution of the partnership firm (Section 45)

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

Wind up the Business Post-Dissolution (Section 46)

When the firm is dissolved every partner has a right to apply for the firm’s property in
the payment of debts and liabilities. If there is any surplus it needs to be distributed
among the partners.
The partners have mutual obligations and rights until the affairs of the firm is wound
up.

Settlement of partnership account (Section 48)

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

If there is a deficiency in capital or loss is incurred when it is paid out of profit. If

profit is not sufficient or no profit is earned then it is paid out by the capital and by
the partners if necessary. The partners contribute to the proportion of the profit
sharing ratio.

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

 Repayment to third parties

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

Paying Firm Debts and Separate Debts (Section 49)

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

19 | P a g e
The property of the individual partners is applied firstly for the payment of separate
debts.

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

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

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

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

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

Misconduct of partner paying a premium (Section 52)

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

Contract Rescinded for Fraud or Misrepresentation
When the partnership arising from the contract is rescinded due to fraud and
misrepresentation then the party who has rescinded the contract will be liable as:
After the debt of the firm is paid the lien on remaining assets. He will be treated as a
creditor for the payment of any debts made by him.
An indemnity from the partners guilty of misrepresentation or fraud against all debts
of firms.

Sale of Goodwill After Dissolution of Firm (Section 55)

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

 To use the name of the firm

 To represent himself as carrying the business

20 | P a g e
  To solicit the customers of the firm dealing before dissolution.

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

21 | P a g e
22 | P a g e