PARTNERSHIP UNDER THE INDIAN PARTNERSHIP ACT, 1932

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

Definition of Partnership Section 4 of the Indian Partnership Act defines a partnership as “Partnership is the
relation between persons who have agreed to share the profits of a business carried on by all or any one of them
acting for all”.

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

Essential of Partnership

1. Contract for Partnership

A partnership is contractual in nature. As the definition states a partnership is an association of two or more persons.
So a partnership results from a contract or an agreement between two or more persons. A partnership does not arise
from the operation of law. Neither can it be inherited. It has to be a voluntary agreement between partners A
partnership agreement can be written or oral. Sometimes such an agreement is even implied by the continued
actions and mutual understanding of the partners

2. Association of two or more person

There must be at least two persons to form a partnership. As far as the maximum number of partners, in a firm is
concerned, the Partnership Act is silent. However, section 464 of the Companies Act, 2013 lays down that where the
firm is carrying any business, the number of partners should not exceed 50 (It can be increased upto 100). If the
number of maximum partners exceeds this limit, the partnership becomes an illegal association of persons.

2. Agreement between persons

A contract between partners is the foundation of a partnership. It is the documented version of all the terms and
conditions agreed upon by the partners. It contains all the basic details of the partnership firm including its name,
location, the names of partners, their rights, obligations, profit, and capital sharing ratios. A valid partnership
agreement shall be signed by all partners in the presence of a notary. Additionally, the notary is also required to
stamp the document after the payment of the applicable stamp duty. The existence of a firm depends on the
existence of the Partnership Agreement, and if the latter becomes nullified, the former will immediately cease to
exist.. The agreement of partnership may be expressed or implied.

3. Business

Partnership can be formed only for the purpose of carrying on some business. Section 2(b) of Partnership Act says
that the term ‘business’ includes every trade, occupation or profession. Thus, an association created primarily for
charitable, religious and social purposes are not regarded as partnership. Similarly, when two or more persons agree
to share the income of a joint property, it does not amount to partnership; such relationship is termed as co-
ownership.

4. Sharing of Profits

The division of profits is an essential condition of the existence of a partnership. The sharing of profits is only a prima
facie evidence of the existence of partnership, and this is not the conclusive test of it.

5. Business carried on by all or any of them acting for all (Mutual Agency)

The underlying or cardinal principle which governs partnership is the mutual agency relationship amongst the
partners. It means each partner is the agent of the firm as well as of the other partners. The business of the firm may
be carried on by all the partners or by any of them acting for all. Thus, a partner is both an agent and a principal. He
can bind the other partners by his acts and is also bound by the acts of the other partners. The law of partnership is
regarded as an extension of the general law of agency.

DISTINCTION OF PARTNERSHIP WITH JOINT HINDU FAMILY BUSINESS AND COMPANY

BASIS FOR Partnership Hindu undivided family

COMPARISON

Relationship Relation subsists between It is a single person and

the partners. it cannot have a
partnership by itself

Admission of No new partner can be HUF firm, a person

new members admitted to the existing becomes a member
partnership without the (coparcener) merely by
consent of all the other his birth.
partners.

Minor member A minor cannot become a HUF, a male child

full-fledged partner in a becomes a full-fledged
firm; he can be admitted member by birth.
only to the benefits of
partnership.

Management Management All of the Karta of HUF is

partners may involve in managing the business
the management

Liability of In a partnership, the HUF, liability of each

members liability of all the partners member, except the
is unlimited. Every partner Karta, is limited to the
is jointly and severally extent of his share in the
liable to third parties for property of the family.
the full debts of the firm.

Share of profit Partners can share profit No such sharing of

as per the agreement profits in HUF Property

Property The properties even This business is a

though in the name of species of ancestral joint
partnership firm belongs property in which every
to all partners member of a family
acquires
Authority Each partner is the agent It has implied authority
of others to contract debts and
pledge the properties
and credit of the family
for the ordinary
purposes of the family
business

DIFFERENCE BETWEEN
Basis of PARTNERSHIP AND COMPANY
Partnership Company
Difference

It is a contract in which
two or more persons It is a legal entity in which a
are agreed to share group of persons agreed to
Meaning profits/losses, share ownership but not
ownership, management for a specific
responsibilities, and purpose.
duties.

It is regulated by KINDS OF PARTNERSHIP

It is regulated by
Governed By the Partnership
the Companies Act, 2013. On the Basis of Duration
Act,1932.
1. Partnership at Will

Generally, the partnership deed

The registration of a The registration of a
has a clause regarding the
Registration Partnership firm is not Company with the registrar
expiration or dissolution of a
compulsory. of companies is compulsory.
partnership firm. However,
such a partnership for which
the said clause does not exist is
The members of a
The members of a company called a partnership at will. It
Members Partnership firm are can continue its operations for
are known as Shareholders.
known as Partners. as long as the partners want it
to, and can be terminated as
and when any one of the
partners serves a notice for
such termination. The two
conditions of Partnership at will
The liabilities of shareholders are:
are limited to the value of
There should not be a specific
shares held by them. But in
The liabilities of the date on the agreement, and
Liability the case of companies with
partners is unlimited.
unlimited liability, the The agreement should not
shareholders possess contain any information
unlimited liability. regarding the termination of
the partnership. This type of
partnership is suitable for
businesses where the partners do not have any certainty or idea about the termination of the partnership and for
businesses whose nature is non-deferring or perpetual.

It is easy for the partners to form a partnership at will, as there is no hassle in its formation and is also convenient for
the partners because of the absence of duration of the partnership. Besides, it is also easy for the partners to
dissolve the partnership easily and quickly as and when any one of the partners severs the notice of termination. This
advantage of Partnership at Will can sometimes be a big disadvantage for the partners. It is because if a partner
serves the notice of termination, even though the other partners want to continue the business, they cannot do so.
Also, the partners under Partnership at Will have unlimited liability, which means that the partners will be held
responsible for any kind of embezzlement or ethical misconduct of any of the partners.

2. Partnership for a Fixed Term

A partnership that is formed for a particular time period is known as a partnership for a fixed term. If the business is
continuing after the expiration date, the partnership is considered a partnership at will, and all the rights, duties, and
obligations of the partners are treated as such. This type of partnership is suitable for businesses for which the
partners have a clear idea about the nature of the business and its duration.

3. Particular Partnership

A particular partnership is one that is established solely for the purpose of carrying out one business venture or
completing one project. In other words, this type of partnership is formed to operate on a continuing business or to
carry out a unique project or business. It is suitable for partnerships, where the parties involved agree to dissolve the
business together and distribute the profits or losses arising out of it. Therefore, the will of the partners does not
matter in this type of partnership. Just like Partnership for a Fixed Term, the unlimited liability of partners put a huge
burden on them.

B. On the Basis of Liability of Partners

1. General Partnership

A general partnership is one where the liability of partners is unlimited and joint. The partners have the right to
engage in the firm’s management, and their actions are obligatory for both the partners and the firm. The firm’s
registration is voluntary, and its continuation depends upon the partners’ death, insanity, insolvency, or retirement.
A partnership is a mutual agency. The partners have a say in the working and management of the firm. Registration
of the firm is not mandatory, which might have an impact on any legal proceedings in case the partners choose not to
get the business registered.

2. Limited Partnership

A partnership where the liability of at least one of the partners is limited, while that of the others is unlimited is
called a limited partnership. Each partner’s personal liability is limited to the amount of his or her business stake in
the partnership. Limited partners have no management rights and their actions do not bind the firm or other
partners. It is necessary to register such a type of partnership. It is suitable for businesses in which the partners do
not have an equal profit sharing ratio.

Each partner is liable to pay or compensate only up to the amount they invested in the firm. This means that their
personal assets are not at stake in case of insolvency of the business. However, the partners whose liability is limited
do not have any say in the firm’s working and management at all. The partner(s) having unlimited liability reap all the
benefits of ownership and bear all the burden in case of insolvency.

3. Limited Liability Partnership

A limited liability partnership is one in which some or all of the partners have limited liability. Every owner is only
liable to a certain extent. It means that each partner is protected from the other partner’s mistakes. There is no
minimum capital or maximum number of partners required for the formation of a Limited Liability Partnership.
Besides, the registration cost of forming a Limited Liability Partnership is lower than the other forms of partnership.
However, equity or shareholding is not found in this type of partnership and even the tax rates are higher for Limited
Liability Partnership as compared to the other forms of partnership.

KINDS OF PARTNER

Active Partner/Managing Partner

As the name suggests he takes active participation in the firm and the running of the business. He carries on the
daily business on behalf of all the partners. This means he acts as an agent of all the other partners on a day to day
basis and with regards to all ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice about the same. This will
absolve him of the acts done by other partners after his retirement. Unless he gives a public notice he will be liable
for all acts even after his retirement.

Dormant/Sleeping Partner

This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he does not take an
active part in the daily activities of the firm. He is however bound by the action of all the other partners.

He will continue to share the profits and losses of the firm and even bring in his share of capital like any other
partner. If such a dormant partner retires he need not give a public notice of the same.

Nominal Partner

This is a partner that does not have any real or significant interest in the partnership. So, in essence, he is only
lending his name to the partnership. He will not make any capital contributions to the firm, and so he will not have a
share in the profits either. But the nominal partner will be liable to outsiders and third parties for acts done by any
other partners.

Partner by Estoppel

If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct then such a
partner cannot deny that he is not a partner. This basically means that even though such a person is not a partner he
has represented himself as such, and so he becomes partner by estoppel or partner by holding out.

Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even when dealing with third
parties he will be liable for all acts of profit only, he will share none of the liabilities.

Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be admitted to the
benefits of a partnership if all partner gives their consent for the same. He will share profits of the firm but his
liability for the losses will be limited to his share in the firm.

Such a minor partner on attaining majority (becoming 18 years of age) has six months to decide if he wishes to
become a partner of the firm. He must then declare his decision via a public notice. So whether he continues as a
partner or decides to retire, in both cases he will have to issue a public notice

THE POSITION OF MINOR IN PARTNER IN PARTNERSHIP FIRM

A minor is a person who hasn’t yet attainted the age of majority according to the Indian Majority Act, 1875. The
Indian Partnership Act governs the admittance of a minor into the partnership in Section 30. This section deals with
the rights and liabilities of a minor who is admitted un the partnership.

Minors Admitted Only For Benefits

The Indian Partnership Act was drafted by a special committee. Before the enactment of The Indian Partnership Act
the provision in partnership was governed by The Indian Contract Act and therefore the special committee thought
that there was no requirement to deviate from the principle of incapability of a minor to enter into a contract of
partnership as provided by Section 11 of The Indian Contract Act. Following this the special committee did not allow
the minors to become a partner in a partnership, although they allowed a minor to be admitted to the benefits of a
partnership with the consent of all the existing partners in the partnership.

The same kind of principle is also pronounced in judicial pronouncements like the S. C. Mandal case.It was observed
that under Section 4 of The Indian Partnership Act, a firm means a group of people who has entered into a contract
of partnership among themselves and reading it with Section 11 of the Indian Contract Act, it can be interpreted that
a minor cannot be a part of a partnership contract.

It was held that a minor can only be in the partnership only for the benefits of the partnership. It also stated that
there should be partnership between two major partners before a minor can be admitted to its benefits.

Finally, the Supreme Court in the landmark judgement of Commissioner of Income Tax vs D. Khaitan and Co took a
legal stand that in a situation where a minor is made a full-fledged partner in the firm in that case the partnership
cannot be registered by the Income Tax Department.

Rights of a minor in partnership

A Minor partner has the right to his agreed share of the profits of the firm.

He can have access to inspect and copy the accounts of the firm

He can sue the partners for accounts or for payment of his share but only when severing his connection with the
firm, and not otherwise.

On attaining majority he may within 6 months elect to become a partner or not to become a partner if he elects to
become a partner then he is entitled to the share to which he was previously entitled as a minor. If he chooses not to
be admitted as a partner then he shall not be liable for any acts of the firm after the date of a public notice served to
that effect.

Liablities of a minor in partnership

Before attaining majority:

The liability of the minor is confined only to the extent of his share the profits and property of the firm

Minor has no personal liability for the debts of the firm incurred during his minority.

Minor cannot be declared insolvent, but if the firm is declared insolvent the share of him in the firm vests with the
Official Receiver or Assignee

After attaining majority:

A minor partner in partnership within 6 months of attaining majority or on him obtaining knowledge that he had
been admitted to the benefits of the partnership whichever date is later, the minor partner has to decide if he wants
to stay as a partner or leave the firm where he has elected not to become a partner and such notice shall determine
his position as regards to the firm.

If he fails to give such a notice he shall become a partner of the firm on the expiry of the said six months.

When he becomes a partner

If the minor becomes a partner by his own will or by his failure to give public notice within the specified time his
rights and liabilities as given in Section 30(7 ) are as follows:

a. He becomes personally liable to third parties for all actions of the firm done since he was admitted to the benefits
of the partnership.

b. His share in the property and the profits of the firm remains the same to which he was entitled as a minor
When he elects not to become a partner

a. His rights and liabilities continue to be those of a minor to the date of giving public notice.

b. He shall not be liable for any acts of the firm done after the date of the public notice.

c. He shall be entitled to sue the partners for property or profits. It may be noted that such a minor shall give notice
to the registrar that he has or has not become a partner.

REGISTRATION OF THE FIRM

Introduction

Registration means to get the partnership firm registered with the registrar of the firms. Before the registration of the
partnership firm in India was governed by Indian Contract Acy 1872. Now the registration of partnership firms is
governed by the Indian Partnership Act, 1932. This present Act made the registration of a partnership firm optional
entirely at the discretion of the partners.

Types of Partnership Firms

Under the Partnership Act it is not necessary for every partnership firm to get itself registered. The partnership
business is regulated under Indian Partnership Act, 1932 which prescribes two types of partnership firms:

 Unregistered firms
 Registered firms.

An Unregistered firm is formed by entering into an agreement between two competent persons, known as partners,
where the firm is not registered with the registrar of the firms.

Whereas the firms which subsequently get registered with the registrar of the firms by submitting the copy of
partnership deed is known as Registered Partnership Firm.

Chapter VII (Section 56-71) of the Indian Partnership Act, 1932 deals with Registration of partnership firms.

Section 56 talks about the power of the State Government to exempt the application of chapter VII in that particular
state or to any part of it.

Section 57 talks about the appointment of the registrar that the State Government may appoint Registrars of Firms
for the purpose of this Act. And may define areas within which they shall exercise their powers and perform their
duties.

Also, it states that every registrar shall be deemed to be a public servant within the meaning of section 21 of the
Indian Penal Code.

Application for Registration of a Partnership Firm (Section 58)

Section 58 and 59 deal with the procedure of registration of partnership firms. The form along with registration fees
needs to submitted to Registrar of Firms who has been appointed in consonance with Sec. 57 by the State
government.

The registration of firm may be affected at any time by sending or by post or by delivering to the registrar of the area.
It is not essential that the firm should be registered from the very beginning.

When the partners decide to get the firm registered, as per the provisions of the section 58 of the Indian Partnership
Act,1932 they have to file the statement in the prescribed form. The statement must be accompanied by the
prescribed fee stating-

 The firm’s name,

  The principal place of business,
 The names of its other places of business,
 Date of joining of each partner,
 Names in full and permanent addresses of the partners, and
 Duration of the firm.

The aforesaid statement is to be signed by all the partners or by their agents specially authorizes in this behalf.

When the registrar is satisfied that the above-mentioned provisions have been complied, he shall record an entry of
this statement in the register and shall file the statement

Recording of Alteration in Firm Name and Principal Place of Business (Section 60)

When an alteration is made-

 In the firm name or

 In the location of the principal place of business of a registered firm.

A statement may be sent to the registrar specifying the alteration and signed and verified in the manner required
under section 58 accompanied by the prescribed fee.

When the registrar is satisfied that the provisions of sub-section (1) have been duly complied with, he shall amend
the entry relating to the firm in the register of firms.

Noting of Closing and Opening of Branches (Section 61)

When a registered firm discontinues business at any place or begins to carry on business at any place-

Any partner or agent of the firm may send intimation thereof to the registrar, who shall make a note of such
intimation in the entry relating to the firm in the Register of Firms and shall file the intimation along with the
statement relating to the firm filed under section 59.

How the Change in The Name and Address of Partners is Made? (Section 62)

When any partner in a registered firm alters his name or permanent address-

An intimation of the alteration may be sent by any partner or agent of the firm to the registrar, who shall deal with it
in the manner provided in the manner provided in section 61.

Rectification of Mistakes (Section 64)

The registrar shall have power at all times to rectify any mistake in order to bring the entry in the register of firms
relating to any firm into conformity with the documents relating to that firm filed under this chapter.

On application made by all the parties who have signed any document relating to a firm filed under this chapter, the
registrar may rectify any mistake in such document or in the record or note thereof made in the register of firm.

Register and Filed Documents Can Be Inspected

Section 66 gives power that-

The Register of Firms shall be open to inspection by any person.

All statements, notices and intimations filed under this chapter shall be open to inspection.

Effect of Non-Registration of Partnership Firm

Under the English law, the registration of firms is compulsory. Therefore, there is penalty for non-registration of
firms. But the Indian Partnership Act does not make the registration of the firms compulsory nor does it impose any
penalty for non-registration.

However, under section 69, the consequences of non-registration of partnership firm includes a number of
disabilities which are as follows:

No suit to enforce rights arising from a contract under this Act- A firm which has not undergone the process of
incorporation cannot file a suit against any other firm or third party. A non-registered firm does not have the privilege
to file a suit like all other registered firms. Another important essential about this sub-point is that the person or the
third party suing the non-registered firm shall be already registered in the register as a firm.

No proper relief- If the firm is not registered, the claim exceeding ₹100 cannot be set off by a third party, so there is
no relief in this regard to the party. Such a right can be only enjoyed by the registered firm.

Partners cannot bring legal action against each other– An aggrieved partner of an unregistered firm cannot bring
legal action towards each other as they are in no position to file a suit in the court or have the power to enforce any
right.

The high court dismissed the petition on the grounds of sec 69(2) as the plaintiff was not a registered firm thus the
suit was not maintainable. [6]

Hence, it is strongly recommended to register the partnership firm with the registrar of firms (ROF). An unregistered
firm can be registered at any time. Every state government has established the office of the registrar of firms, which
is vested with the powers to register the firm and issue the Certificate of Registration of the Firm and a copy of the
extracts of the register of firms where the partnership name has been entered.

Rights Not Affected By Non-Registration of Partnership Firm

Non-registration of the partnership firm does not affect the following rights:

1. The right of the partner to sue for dissolution of the firm or for accounts of and his share, the dissolved firm.

2. The rights of the firm or its partners having no place of business in India.

3. Suits not exceeding ₹100.

4. The power of an official assignee to realise the property of an insolvent partner

5. Suits arising otherwise than under a contract, for example, a suit against the third party for infringement of
trademarks of the firm.

What Is the Penalty for Furnishing False Particulars?

Section 70 of this chapter defines the penalty for furnishing false particulars.

When a person signs any statement, amending statement, notice or intimation under this chapter which he knows to
be false – shall be punishable with imprisonment which may extend to three months or with fine or with both.

Payment of Stamp Duty

As per section 71 of the act, the State government is free to make rules regarding the fess to be given to the registrar
along with the other documents for registration. Different states impose different stamp duty on the partnership
agreements/deeds, it means while creating a partnership deed the partners must purchase stamp paper of
appropriate value as may be applicable in in the respective state, to be annexed with the agreement.

Advantages of Registration of a firm

The registration of a firm is done not only for the benefit of the firm but also for those who deal with it. The following
benefits are obtained from the registration of a firm:
1. Benefits to the Firm: The firm gets an unmitigated right towards the third parties in civil suits for getting its rights
discharged. In the non-existence of registration, the firm is not entitled to sue outside partners in courts.

The mandatory requirements to be fulfilled before a suit against third party can be filed to enforce contractual rights
by the firm or on behalf of the firm are-

(a)that the firm must be a registered firm and

(b)that the persons suing are or have been shown in the Register of Firms as partners of the firm.[7]

2. Benefits to Creditors: A creditor can employ any partner for recuperating his money due from the firm. All
partners whose names are set in the registration are personally accountable to the unknowns. So, creditors can
restore their money from any partner of the firm.

3. Benefits to Partners: The partners can seek the help of a court of law against each other in case of disagreement
among partners. The partners can sue external parties also for restoring their amounts, etc.

4. Benefits to Incoming Partners: A new partner can contest for his rights in the firm if the firm is registered. If the
firm is not registered then he will have to rely upon the trustworthiness of other partners.

5. Benefits to Outward-bound Partners: The registration of a partnership firm acts as an advantage to the outward-
bound partners in numerous ways. The outward-bound partners may be divided into two categories:

(a) On the demise of a partner,

(b) On the superannuation of a partner.

On the demise of a partner his heirs are not accountable for the obligations acquired by the firm after the date of his
demise. In case of a superannuation partner, he remains to be accountable up to the time he does not give public
notice. The public notice is not recorded with the Registrar and he terminates his liabilities from the date of this
notice. So, it is vital to get a firm registered for getting this benefit.

Dissolution of a Partnership Firm: Meaning, Modes of Dissolution & Modes of Settlement (Section 48)

Dissolution of a partnership firm is the end of a business entity where partners have worked together towards shared
goals. This process involves various tasks like winding up the affairs of the partnership, settling the debts, distributing
the remaining assets belonging to the firm, and legally terminating the partnership agreement.

When the relationship between all the partners of a firm is terminated/dissolved, it is called the dissolution of a
firm. It is a formal termination of an organised body (the firm), constituted under Indian Partnership Act,1932

According to Section 39 of the Indian Partnership Act, 1932, “Dissolution of the firm means dissolution of partnership
among all the partners in the firm.”

Dissolution of partnership refers to a change in the existing relations among the various partners of a firm.

 Admission of a new partner

 Retirement of an existing partner
 Death of an existing partner
 Merger/Acquisition of the firm by another firm.
 Modes of Dissolution of a Partnership Firm
A. Voluntary Dissolution:

This refers to the situations where all the partners of a firm mutually agree to terminate its operations. These are:

1. By Agreement (Section 40)

Section 40 of the Indian Partnership Act grants the authority to the partners to dissolve their firm, provided they all
provide their consent to such dissolution. An extant contract can also be used for the purpose of officiating the
dissolution of partnership.

2. Compulsory Dissolution (Section 41)

Section 41 of the Indian Partnership Act, 1932 deals with the concept of compulsory dissolution. It states that the
dissolution of a firm becomes compulsory if the occurrence of a certain event renders its operations unlawful. In
cases where a firm owns multiple business units, and one of them becomes illegal, then it can continue to carry its
operations out of the other ones by dissolution of the existing .

3. On the happening of certain contingencies (Section 42)

This section states certain contingencies which lead to the immediate dissolution of a firm. These are:

When the tenure for which a firm was constituted comes to an end, the firm also dissolves.

The death of a partner can lead to the dissolution of the firm if the partners so decide.

Insolvency of partners.

Upon completion of undertakings.

4. By notice of partnership at will (Section 43)

Where a partnership has been constituted as per the will of the partners, any partner can serve a written notice to all
the other partners informing them about his will to dissolve the firm. The firm is dissolved on the date specified in
the notice. If no date is specified, the date of the firm’s dissolution is the date of notification.

B. Dissolution By Court Order:

A court may dissolve a partnership firm on any of the following grounds:

1. Insanity/Unsound Mind

If an active partner of the firm becomes insane or of an unsound mind, and the other partners file a suit in the court,
the court may dissolve the firm, provided such illness is permanent. It is important to note that the court may not
dissolve such a firm if any dormant/sleeping partner goes insane.

2. Permanent Incapacity

Permanent incapacity of a partner may also lead to the court dissolving a firm. Permanent incapacity refers to the
inability of a partner to perform his duties and obligations towards the firm and may be a result of physical disability,
illness, etc.

3. Misconduct

When a partner is guilty of conduct that may negatively impact the operations of the firm, and the other partners file
a suit against him, the court may dissolve the firm. It is important to note that such misconduct may or may not be
directly related to the business. It is for the court to analyze the impact of such conduct upon the business.

4. Persistent Breach of the Agreement

Where a partner has persistently and willfully breached the partnership deed, and the other partners have filed a suit
against him in court, the court may dissolve the firm. A partner can breach the agreement by way of embezzlement,
keeping erroneous accounts, holding more cash than allowed, refusing to show accounts despite repeated requests,
etc.
5. Continuous/Perpetual Losses

Where the firm has been making losses for subsequent years and the court believes that the firm would keep on
incurring losses in the future too, it may dissolve the firm.

6. Just and Equitable Grounds

A court may also order the dissolution of the firm on the basis of just and equitable grounds. Some of these are:

Management standoff

Partners not communicating with one another

Loss of the very foundation of the business

Gambling at the stock exchange

Modes of Settlement of accounts on Dissolution(Section 48)

The following rules, subject to agreement by the partners, are followed while the settlement of accounts in the event
of the dissolution of a firm:

1. Losses, particularly capital shortfalls, must be paid first from profits, then from the capital, and, if required, by the
partners personally in the proportions in which they were allowed to share earnings.

2. The firm’s assets, including any sums provided by the partners to make up capital deficits, shall be applied in the
following manner:

Firstly, the debts owed by the firm to third parties are paid off.

Secondly, each partner is paid whatever the firm owes him for advances apart from the partner’s capital.

Thirdly, each partner is to be paid whatever the firm owes him on account of his capital.

Any residue, if any, is to be divided among the partners in their profit-sharing ratio.