CHAPTER-VII

The 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provision of India Contract Act which is not repealed will be applicable on Partnership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.

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.
 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

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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
 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

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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:
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

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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:
 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.

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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.
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.
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,

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 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 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

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 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 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.

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 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.
 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

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 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.
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

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 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.
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.

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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.
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
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

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partnership is dissolved then it gives certain rights and liabilities to the partners.
Lets us understand the concept of dissolution in detail through the Power point
Presentation given below.
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

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separate debts from the partner is to be paid off.
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.

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