After College Classroom Handout

LIST OF SUBJECTIVE TOPICS

INDIAN PARTNERSHIP ACT, 1932

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.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

DEFINITION OF PARTNERSHIP

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minor will be governed by the Partnership Act, 1932 since Section 30 of the Act talks about the position of the
minor.

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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”. In a
partnership firm, two or more people come together to carry out a business for the purpose of earning profits

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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.
ESSENTIALS OF A PARTNERSHIP
1] Contract for Partnership

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A partnership is contractual in nature. As the definition states a partnership is an association of two or more
persons. So a partnership results

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from
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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

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continued actions and mutual understanding of the partners.

2] Association of Two or More Persons

A partnership is an association between two or more persons. And persons by law only includes individuals, not
other firms. The law also prohibits minors from being partners. But minors can be admitted to the benefits of a
partnership.
The Act is actually silent on the maximum number of partners. But this has been covered under the Companies Act
2013. So a partnership can only have a maximum of 10 partners in a banking firm and 20 partners in all other
kinds of firms.
3]5L
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Carrying
There are two aspects of this element. Firstly the firm must be carrying on some business. Here the business will
include any trade, profession or occupation. Only that some business must exist and the partners must participate
in the running of such business. Also, the business must be run on a profit motive. The ultimate aim of the business
should be to make gains, which are then4F distributed
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not be a partnership. If there is no intention to earn profits, there is no partnership.
4] Profit Sharing
The sharing of profits is one of the essential elements of a partnership. The profit sharing ratio or the manner of
sharing profits is not important. But one partner cannot be entitled to the entire profits of the firm. However, the
sharing of losses is not of any essence. It is up to the partners whether the losses will be shared by all the partners.
If nothing is said then the losses are also split in the profit sharing ratio. For example two individuals are operating
out of the same warehouse. So they agree to divide the rent amongst themselves. This is not a partnership since
there is no profit sharing between the two.
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 5] Mutual Agency
The definition states that the business must be carried out by the partners, or any partner/s acting for all of them.
This is a contract of mutual agency another one of the five elements of a partnership. This means that every partner
is both a principle as well as an agent for all the other partners of the firm. An act done by any of the partners is
binding on all the other partners and the firm as well. And so every partner is bound by the acts of all the other
partners. This is one of the most important aspects of a partnership. It is, in fact, the truest test of a partnership.
The principle of mutual agency was first time laid down in the case of Cox v. Hickman. In this case two persons
were partners and were trading as iron merchants. They became indebted to the creditor and subsequently
reached a compromise with them. Under the compromise the property of the firm was assigned to the creditor as
trustees. They were empowered to carry on the business and divide the profits amongst themselves. After the
discharge of debt the business was to be returned to the original partner. Trustees purchased some quantity of
coke from Hickman. Price of the product was unpaid and Hickman brought an action for recovery of price against
trustees.

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The court held that they were not partners and hence Cox was not liable. The court further held that the liability
of one partner for the acts of his co-partner is in truth the liability of rhe principle for the acts of his agents

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MEANING OF 'PARTNER', 'FIRM' AND 'FIRM NAME' [SECTION 4]

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Persons who have entered into partnership with one another are called individually ‘partners’ and
collectively ‘a firm’, and the name under which their business is carried on is called the 'firm name'.

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MAXIMUM LIMIT ON NUMBER OF PARTNERS [SECTION 11 OF THE COMPANIES ACT, 1956]
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According to Section II of the Companies Act, 1956, the maximum limit is as under:-
(a) In case of a partnership firm carrying on a banking business-10

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(b) In case of a partnership firm carrying on any other business-20

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If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal association.

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NATURE OF A PARTNERSHIP FIRM
A partnership firm is not a person in the eyes of law [except under Section 2(31) of the Income Tax Act,1961]. It

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has no separate legal entity apart from the partners constituting it [Malabar Fisheries Co. v. CIT].Thus, firms
themselves cannot enter into a contract for partnership though their partners can. For example, two firms, namely,
M/s A&B and M/s X&Y, themselves cannot form a new partnership though the partners of the individual firms can
form a partnership..
Partnership is a form of business in which two or more persons come together with their resources to invest in a
common business with the purpose of sharing the profits of the business. There are some limitations of Sole
proprietorship viz limited capital, no risk sharing, limited skill etc. Partnership is the solution to such problems
faced by a sole proprietor. In a partnership a few persons can come together to start a new business with an
agreement to share the profits and losses of the business.

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Mode of determining partnership
In determining the partnerships existence, the relationship between the parties must be scrutinized with all the
related evidence judged together which ultimately decides whether a group of individuals is or not a partnership
Explanation 1 to the Section clarifies that two or more parties who jointly own a property or have a shared interest
in a specific property do not tr-
become partners
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property.
In one instance, two people become co-owners of a home. They leased out the house and divided the rent each
month. This is not the same as forming a relationship.

Similarly, Explanation 2 of the Section includes a list of individuals who receive a share of a company's income or
fees based on the profits received by a business but are not partners in the business.
An individual who loans money to a business partner or company might be given a share of the income instead of
or in addition to the money lent. He would not, though, become a shareholder because of such a benefit split.
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 In addition to or in lieu of his normal remuneration, a servant or employee of a company might be given a part of
the business's income. But it does not make him a partner in the association.
Section 6 concludes that these essential tests must be met in order to determine the existence of a
partnership:
● An arrangement should be drawn up between the parties. (agreement)
● The primary goal of the business is to make a profit and distribute between the partners. (share profit)
[evidence of partnership]
● The agreement must be on the concept of mutual agency where partners carry out the business jointly or by
any of them acting as an agent for the others. [the truest test - (law of mutual agency)]
DURATION OF PARTNERSHIP
On the basis of duration, the partnership can be classified in to two types namely
1) Partnership at will

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2)Particular Partnership.

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Partnership at Will (Section 7)
When there is no provision in partnership agreement for duration of the partnership, the partnership is called

partners of his intention to dissolve the firm.

Particular Partnership (Section 8)

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'Partnership at Will'. A partnership at will may be dissolved by any partner by giving a notice in writing to all other

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When a partnership is formed for a specific venture or for a particular period, the partnership is called a ‘Particular
Partnership’. Such partnership comes to an end on the completion of the venture or on the expiry of the period. If

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such partnership is continued after the expiry of term or completion of the venture, it is deemed to be a partnership
at will. A particular partnership may be dissolved before the expiry of the term or completion of the venture only
by the mutual consent of all the partners.

PARTNERSHIP PROPERTY

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According to Section 14 of the Indian Partnership Act, 1932, depending upon the contract between the partners,
the property of the firm includes all the property which was originally brought into the stock of the firm, or

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acquired through purchase or some other means. It also includes all the rights and interests which are associated
with such property. Such property should have been acquired by or for the firm, or for the purposes and in course
of the business of the firm. Such property of the firm or partnership property includes the business goodwill.The
property of a firm is also known as partnership property, partnership assets, joint stock, common stock, or joint
estate. A partnership property includes all property and rights, and interest in property that the partnership firm
purchases.

In Boda Narayana Murthy & Sons v. Valluri Venkata Suguna & Others; the partners in a partnership business
purchased a property individually and not using any sort of funds from the partnership. Disputes arose when the
respondents claimed that the property so purchased using every partner’s individual monetary support belongs
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to the partnership firm.The High Court of Andhra Pradesh held that to become a property of the firm, such property
must have been brought into the stock of the firm by the partners originally, during the formation of the firm or
was subsequently acquired by purchase or any other means, in the course of business of the firm.These purchases
can also be made for the purpose and in course of the business of the firm, including the goodwill of the firm. All
partners collectively own such 6A
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Hence, a partnership property comprises of the following items if there is no agreement between the partners
showing any contrary intention:
• All property and rights and interest in property that the partners purchase in the common stock as their
contribution to the common business.
• All property and rights and interest in property that the firm purchases either for the firm or for the purpose
and in course of the business of the firm.
• Goodwill of the business.

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 Determining whether a particular property is partnership property depends on the true intention or agreement
between the partners.
Hence, if a firm uses the property of a partner for its purposes, it does not make it a partnership property unless
that was the real intention. At any time, the partners may agree to convert the property of a partner or partners
into partnership property.
If such a conversion is made in good faith, then it would be effectual between the partners and against the creditors
of the firm. The partners may also agree to convert the separate property of any partners into the property of the
firm.

GOODWILL

Section 14 specifies that the goodwill of a business is the property of the firm and is subject to a contract between
the partners. However, it does not define the term goodwill.

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Goodwill is the value of the reputation of a business in respect of the expected future profits over and above the
profits that a firm earns in the same class of business. It is a part of partnership property. The firm can sell the
goodwill separately or along with other properties.

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When a partnership firm dissolves, all partners have a right to have the goodwill sold for the benefit of all the

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partners unless there is an agreement contrary to the same. After the firm sells the goodwill, any partner may make
an agreement with the buyer to not carry on any business similar to that of the firm within a certain time-period

1872 and is valid if the restrictions are reasonable.

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or local limits. Such an agreement is notwithstanding anything contained in Section 27 of the Indian Contract Act,

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Application of Partnership Property (Section 15)

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According to section 15, the partnership property should be held and used exclusively for the purpose of the firm.

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While all partners have a community of interest in the property, during the subsistence of the partnership no
partner has a proprietary interest in

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the assets of the firm.
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Each partner has a right to his share in the profits of the firm until the firm subsists. He also has a right to see that

TYPES OF PARTNERS
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the application and use of the assets of the firm are for the purpose of the business of the partnership.

Actual or ostensible partner

● He takes an active role in the conduct of the business.
● He along with other partners is liable to third panics for all the acts of the firm.
● He must give public notice of his retirement.
● His insanity or permanent incapacity to perform his duties may be a ground for the dissolution of the firm.
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Sleeping or dormant partner
● He does not take an active pan in the conduct of the business.
● He along with other partners is liable to third panics for the acts of the firm.
● He need not give public notice of his retirement.
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● His insanity or permanent in capacity to perform his duties duties is no ground for the dissolution of the firm.
Nominal partner
● He lends his name to the firm without having any real interest in the firm. He neither contributes to the capital
nor shares the profits or takes part in the conduct of the business of the firm.
● He along with other partners is liable to third panics for all acts of the firm as if lie is an actual partner.
● He must give public notice of his retirement.
● His insanity or permanent incapacity to perform his duties is no ground for the dissolution of the firm.
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 Partner in profits only
● He shares the profits only and not losses,
● He along with other partners is liable to third parties for all the acts of the firm.
● He must give public notice of his retirement.
● His insanity or permanent incapacity to perform his duties may be a ground for the dissolution of the firm.

Sub-partner
● He is a third person with whom a partner agrees to share his profits derived from the firm.
● He has no rights against the firm nor is he liable for the acts of the firm.
● There is no question of public notice at all since he is a third person and not a partner.
● His insanity or permanent incapacity to perform his duties is no ground for the dissolution of the firm since he
is a third person and not a partner.

Partner by Estoppel or Holding out [Section 28(1)]

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A person is held liable as a partner by estoppel or holding out if the following two conditions are fulfilled:

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(a) He must have represented himself to be a partner by word spoken or written or by his conduct (such type of

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representation may be called as active representation), or He must have knowingly permitted himself to be
represented as a partner (such type of representation may be called as tacit representation); and
(b) The other person acting on the faith of such representation must have given credit to the firm. It is immaterial

other person.

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whether the person so representing to be a partner, is aware or not that the representation has reached the

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Position of a Retiring Partner as Partner by Holding Out [Section 28(2)]- Where, after the retirement of a

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partner, the firm uses the retired partner's name as a partner, the retired partner who has not given public notice

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of his retirement, is held liable on grounds of holding out to third parties who give credit to the firm on the faith
that he is still a partner.

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Exceptions to the Principle of Holding out [Sections 28(2) and 34]- The principle of holding out does not apply
in the following cases:

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(a) Where, after the death of a partner, the firm uses the deceased partner's name as a partner. the estate of the
deceased partner or his legal representatives cannot be held liable for acts of the firm done after his death. It
may be noted that a public notice of a partner's death is not required.
(b) The estate of the insolvent partner cannot be held liable for the acts of the firm done after the date of the order
of adjudication. It may be noted that a public notice of a partner's insolvency is not required.

POSITION OF MINOR AS A PARTNER

As per section 11 of Indian Contract Act 1872 minor is not capable of entering into a contract, an agreement by or
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with a minor is void ab-initio (Mohori Bibee v. Dharamdas Ghosh). partnership is a result of an agreement, a minor
cannot enter into a partnership agreement, on the basis of the general rule than a minor cannot be a promisor, but
can be a promisee or a beneficiary, Section 30 of the Indian Partnership Act 1932 highlights the following three
conditions:
i)Before admission of a minortr-as
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partner,
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ii) There must be mutual consent of all the partners;
iii) A minor can be admitted only to the benefits of partnership. In Shivaram v. Gourishankar court opined that
there cannot be a partnership consisting of all the minors or of one major and all other minors.

In Shivaram v. Gourishankar court opined that there cannot be a partnership consisting of all the minors or of
one major and all other minors.
Rights and Liabilities of' a Minor Partner before Attaining Majority

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 Rights- (a) He has a right to share the profits and property of the firm in accordance with the agreement. [Section
30(2)]
(b) He has at right to have access to, and inspect and copy, any of the accounts of the firm. But he does not enjoy
such rights in respect, of books other than account books. (Section 30(2))
(c) He has a right to file a suit for his share of profits or the property of the firm when he is not given his due share
of profits. However, he can exercise this right only when he decides to sever his connections with the firm
[Section 30(4)].

Liabilities- (a) He is liable only to the extent of his share in the profits and the property of the firm. He is not
personally liable to third parties. [Section 30(3)]
(b) He cannot be declared insolvent on declaration of firm's insolvency, his share vests in the Official Receiver or
Official Assignee.

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Rights and Liabilities of a Minor Partner on Attaining Majority [Sections 30(5), (6), (7)]
Within six months of date of his attaining majority or date of his obtaining knowledge that he had been admitted

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to the benefits of firm, whichever is-later, the minor partner has to exercise his option whether or not to become a

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partner. Such option is required to be exercised by giving a public notice within the period of six months. If he fails

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to give a public notice, he is deemed to have become a partner in the firm on the expiry of the said six months

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[Section 30(5).The various rights and liabilities of a minor partner after attaining age of majority.
When he elects to become a partner-

partnership (Section 30(7) (a)].

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(a) He becomes personally liable to third parties for all acts of the firm since he was admitted to the benefits of

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(b) His share in the property and profits of the firm remains the same as he was entitled as a minor [Section 30(7)
(b)]. When he elects not to become a partner-

(c) He is entitled to sue the partners

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(a) His rights and liabilities continue to be those of minor up to the date of giving public notice (Section 30(8) (a)).
(b) His share is not liable for any acts of the firm done after the date of the public notice [Section 30(8) (b)].
for his share of the property and profits in the firm [Section 30(8)(c)]
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RELATION OF PARTNERS INTER SE

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Although the partners are free to form a partnership agreement that defines their rights and duties, there are
certain rights and duties given under the Indian Partnership Act, 1932, that cannot be altered by the partners
entering into an agreement to the contrary (Section 11). Since all the partners are agents in a partnership firm,
they must act in good faith with each other. Any contract that is binding on one partner is binding on the other
partners as well (Section 9, Indian Partnership Act, 1932).

The partners in a partnership firm can exercise the following rights unless the partnership deed states
otherwise:
1. Right to Participate in Conducting the Business
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Section 12(a) of the act states that the partners of a firm have a right to participate in the activities/business of
the firm. Through a provision in the agreement, this right can however be curtailed, allowing only some
partners to participate actively in the business.
2. Right to have access to the Books and Accounts of the Firm
The partners, both dormant and active0K
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partners,
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of the firm.
3. Right to Express Their Opinions
All the partners of the firm are entitled to express their opinions. Any decision pertaining to the business can
be taken based on a majority view.
4. Right to Profit Sharing
The partnership deed states the profit sharing ratio of the partners. In the absence of the same in the deed, the
partners have a right to share the profits of the firm equally.
5. Right to Indemnification
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 The partners of a partnership firm have a right to be indemnified against any payments made or any liabilities
incurred by any of them in the course of business. Such a decision or act must be considered reasonable under
the normal course of business.
6. Right to Interest on Capital
The partners of a firm can take a 6% interest on any advances made by them to the firm. They are not entitled
to any interest on the capital contribution made by them but in case they wish to take an interest in the capital,
they can do so from the profits of the firm.

Duties of the Partners Inter-se

The partners of a firm must act in good faith with each other and this bestows certain duties on them:
1. Duty to Act in Good Faith -Section 9
The partners are expected to perform their general duties in good faith for the greatest common advantage of
the firm and to be faithful to each other.

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2. Duty to Render True Accounts- Section 9
The partners must not conceal any information regarding the business from the other partners. It is the duty

firm.
3. Duty to Act Diligently- Section 12 (b)

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of every partner to render true accounts of the firm and provide full disclosure regarding the business of the

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Every partner of the firm must act diligently. Any wilful neglect by any partner makes them liable to indemnify
the other partners for any losses incurred (Section 13 (f)).
4. Duty to Indemnify for Fraud- Section 10

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All the partners of a firm have a duty to indemnify the firm for any losses caused by their wrongful actions or

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fraud committed by them. Since the firm is held liable for the actions of the partners, the partners must
indemnify each other for any losses caused.
5. Duty to not Compete- Section 16 (b)

them must be accounted for to 4P

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The partners must not make any profits by undertaking any competing business. Any such profits made by

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6. Duty Regarding the Property of the Firm
The partners must use the property of the firm only for the purpose of the business of the firm. It must not be

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used for a personal purpose since the property is collectively owned by all the partners and the firm.

The Duties of the Partner

The following are the duties of a partner
1. One must always act in good faith.
2. One must be diligent
3. One must not compete
4. One must always render true accounts.
5. One must use the property of the firm properly.
6. One must not earn personal profits
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7. One must indemnify any fraud.

RELATION OF PARTNERS WITH THIRD PARTIES [SECTION 18]

The relations of partners with third parties are governed by the mutual agency relationship existing among the
partners. According to Section 18, “every partner
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firm.” In other words, every tr-partner has the capacity to bind other partners by his acts done in firm’s name.
Therefore, all partners are liable to third parties for the acts of every partner.

IMPLIED AUTHORITY OF A PARTNER [SECTION 19]

The authority of a partner means the capacity of a partner to hind the firm by his act. This authority may be express
or implied. The authority conferred on a partner by mutual agreement is called ‘express authority’. The authority
conferred on a partner by the provisions of Section 19 of the Indian Partnership Act is called ‘implied authority’.
Reading together Sections 19(1) and 22. Implied authority covers those acts of partners which fulfil the following
three conditions:
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 (a) The act must relate to the normal business of the firm;
(b) The act must have been done in the usual way of carrying on the business of the firm;
(c) The act must be done in the firm's name or in any other manner expressing or implying an intention to bind
the firm.

In Mathuranath v. Bageshwari Rani, a firm was engaged in trapping elephants. One of the partners of the firm
hired out an elephant without the consent of the other partners. Held, the act fell within the implied authority of
the partner.
Acts within the Implied Authority An implied authority of a partner of business of the firm include the following
act:
(a) To purchase goods of the kind that are used in the business of the firm;
(b) To sell the goods of the firm;
(c) To settle accounts with the persons dealing with the firm;

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(d) To receive payment of the debts due to the firm and issue receipts for the same;
(e) To engage servants for the business of the firm;
(f) To engage a lawyer to defend an action brought against the firm;
(g) To borrow money for the purpose of the firm's business;

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(h) To pledge the goods of the firm as security for the repayment of borrowings made for the purpose of firm's

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business;
(i) To draw, accept, endorse Bill of Exchange and other negotiable instruments in the name of the firm.

Restrictions on the Implied Authority of a Partner [Sections 19 and 20]-

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Restrictions on the implied authority of a partner may be of two kinds:
I) Statutory Restrictions and
II) Restrictions imposed by mutual agreement.

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I. Statutory Restrictions [Section4P19(2)]-
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In the absence of any usage or, custom of trade to the contrary, the

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implied authority of a partner does not empower him to do the following acts namely-
(a) To submit a dispute to arbitration relating to the business of the firm;

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(b) To open a Bank Account on behalf of the firm in partner's own name;
(c) To compromise or relinquish any claim or portion of the claim by the firm;
(d) To withdraw a suit or proceedings filed on behalf of the firm;
(e) To admit any liability in a suit or proceedings against the firm;
(f) To acquire immovable property on behalf of the firm;
(g) To transfer immovable property belonging to the firm; and
(h) To enter into partnership on behalf of the firm.

A partner can do above-mentioned acts only with express authority given to him to do that act or the usage or
custom0Tof
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the trade permits him to do that act.
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II) Restrictions Imposed by Mutual Agreement [Section 20] - The partners of a firm by mutual agreement may
extend or, restrict the scope of implied authority of any partner. But a third party is not bound by any such
restriction unless it has the, knowledge of such restriction. In other words, the firm is liable to third party only if
the third party has no knowledge of the restrictions.
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Implied Authority and Third Parties [Sections 20, 23 to 27]

All partners are liable to third parties for all acts of a partner which fall within the scope of his implied authority.
Their liability to third parties
(a) Effect of Restriction on Implied Authority [Section 20] - The partners of a firm by mutual agreement, may
extend or restrict the scope of implied authority of any partner. But, the third party is not bound by any
restriction imposed on the implied authority of a partner unless it has the knowledge of such restriction.
(b) Effect of Admissions by a Partner [Section 23] - Any admission or representation (e.g., acknowledgement
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 signed by a partner) by a partner is sufficient evidence against the firm if the following two conditions are
fulfilled:
(i) Such admission or representation must relate to the affairs of the firm; and
(ii) Such admission or representation must be made in the ordinary course of business.
(c) Effect of Notice to an Acting Partner [Section 24] - Any notice to a partner operates as a notice to the firm
if the following three conditions are fulfilled:
(i) Such notice must relate to the affairs of the firm;
(ii) Such notice must be given to a working partner and not to a sleeping partner.
(iii) There must not be any fraud committed by the partners and the third party against the firm.
(d) Contractual Liability [Section 25] - Every partner is liable jointly with other partners and also severally (i.e.,
individually) for all those acts of the firm which have been done while he was a partner.
(e) Liability for torts and Wrongful Acts of a Partner [Section 26] - The firm is liable to the same extent as the
partner for any loss or injury caused to any third party or any penalty by the wrongful act or omission of a

m
partner if either of the following two conditions is fulfilled:
(i) Such wrongful act or omission must have been done by a partner while he was acting in the ordinary course
of business of the firm, or

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(ii) Such wrongful act or omission must have been done by a partner with the authority of the other
partners.(Lloyd v. Grace, Smith & Co.)

.
rs
(f) Liability for misappropriation by a partner: Section 27 provides that (a) when a partner, acting within his
apparent authority, receives money or other property from a third person and misapplies it or (b) where a

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firm, in the course of its business, received money or property from a third person and the same is misapplied
by a partner, while it is in the custody of the firm, is liable to make good the loss. It may be observed that the

n
workings of the two clauses of Section 27 are designed to bring out clearly an important point of distinction
between the two categories of cases of misapplication of money by partners. Clause (a) covers the

tr-6P2T1O5L4P

p
firm. On the other hand, the provision
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misapplication of money or property belonging to a third party made by the partner receiving the same. For
this provision to attract, it is not necessary that the money should have actually come into the custody of the
0T0O of clause (b) would be attracted when such money or property has come

o
into the custody of the firm and it is misapplied by any of the partners. The firm would be liable in both the
cases. If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot

T
be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes
into their possession or under their control.
(g) Partner's Authority in Emergency- Section 21 A partner's authority in an emergency covers those acts which
fulfil the following two conditions:
(a) The act must be done to protect the firm from loss; and
(b) The act must be such as a prudent man would undertake under similar circumstances in his own case.
It may be noted that these acts do not form part of the implied authority of the partner but, nevertheless, they
would bind the firm. A partner’s authority in an emergency is similar to that of an agent in similar
circumstances u/s 189 of the Indian Contract Act.

tr-6P2T1O5L4P0T0O
DISSOLUTION OF A FIRM

Section 39 of the Indian Partnership Act defines the expression “dissolution of a firm”. According to Section 39, the
dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”.
0K 0I
tr-6A2H1I5B4F
Modes of dissolution of a firm.
The dissolution of a firm may take place by any of the following modes:
(a) Dissolution by agreement;
(b) Compulsory dissolution;
(c) Dissolution on the happening of certain contingencies;
(d) Dissolution by notice of partnership-at-will; and
(e) Dissolution by the Court.

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 Section 39 deals with the dissolution of the firm and defines that the dissolution of partnership between all the
partners of a firm is called the dissolution of the firm. Section 39 contains the definition of the dissolution of the
firm which means that on dissolution of the firm all the legal rights of the partners comes to an end that is complete
breakdown of relations between them.
Dissolution by agreement- Partnership can be dissolved with the agreement between parties. This agreement
may be either express or implied. Express agreement would be one which is either written or spoken through
words. Implied agreement is expressed through conduct of the partners. Where no term is fixed regarding duration
of partnership or where no term is fixed by the nature of business this will amount to partnership-at-Will and any
partner may dissolve it any time without consent of his co-partners. But, where the partnership is for a fixed term
no partner has a right by his own act, to dissolve the firm prior to the expiration of such term.

Compulsory dissolution.-According to Section 41 of the Partnership Act, there are following conditions for
compulsory dissolution:

(a)
(b)
(c)
When the further prosecutions of the firm becomes illegal;
When it becomes illegal for the partners to carry it on in partnership;

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Where there is an adjudication of insolvency of all the partners or of all the partners but one as insolvent; or

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(d)
and impossible to run the business further.
(e) When it becomes

rs .
When one of the partners becomes so situated that his carrying on the partnership business becomes illegal;

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In Santdas Mool Chand Jhangiani v. Shivdayal Gurudasmal Malsand, it has been held that winding up of a

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partnership has been treated in the Partnership Act as a part and parcel of dissolution of partnership and has not
been treated as a distinct, separate or independent matter or transaction.

In terms of Section 42 of the Partnership

tr-6P2T1O5L4P

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DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES
0T0OAct, subject to contract between the partners a firm is dissolved:

o
(a) if constituted for a fixed term by the expiry of that term;
(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof;

T
(c) By the death of a partner; and
(d) By the adjudication of a partner as an insolvent.

Thus, this section deals with the dissolution of a firm on the expiry of the term if constituted for a fixed term, in
case the firm is constituted to carry out one or more adventures by the completion thereof, by the death of a
partner, and by the adjudication of a partner, as insolvent.

1. Dissolution by death.-A partnership may be dissolved as regards all the partners by the death of any partner. A
partner gives a valid notice of a dissolution but dies before the receipt or the expiration of the notice, the
partnership is dissolved by the death and not by notice.
0O
5L4P0Tpartner
Where
tr-6P2T1O dies his estate is not liable for partnership debts contracted after the date of the death, and no
contract is necessary in order to determine the liability where goods are ordered before, but delivered after the
death of a partner, the debt accrues on the delivery of the goods and the vendor, therefore, although, he had notice
of the death, cannot make the deceased partner’s estate liable for the price.
tr-6A2H1I 5B4F0K0I
2. Dissolution of firm by bankruptcy.-A partnership may be dissolved among all the partners by the bankruptcy
of any partner, and the estate of the bankrupt thereupon ceases to be liable for the partnership debts incurred after
the bankruptcy. If a charging order is made upon a partner's share in respect of his separate debt, the other
partners may at their option dissolve the partnership.

3. Efflux of time.-When a partnership is constituted for a fixed time it stands automatically dissolved at the
expiration of that time, but if there is a contract to the contrary the firm will not be dissolved even after that. It has
been held by the Supreme Court in the case of Saligram v. Rajnath, that where a partnership is constituted for a
fixed time it will stand dissolved at the expiration of that time.
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 4. Expiration of term fixed.-Where a partnership comes to an end by expiry of the term fixed, it will be deemed
to have been dissolved as provided in Section 42 of the Act and the partners would be entitled to realise their
outstanding commission earned by them as partners by a suit from defendant who had appointed them as his
agents for sale of his goods even though their firm is not registered.

5. Dissolution by notice of partnership-at-will.-Section 43 deals with dissolution of a partnership-at-will by

notice. Thus, a partnership-at-will may be terminated by notice.
According to sub-section (1) of this section, where the partnership is at will the firm may be dissolved by any
partner giving notice in writing to all the other partners of his intention to dissolve the firm.
According to sub-section (2) of this section, the firm is dissolved as from the date mentioned in the notice as the
date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.
In case of Arunachalam & Co. v. M. Sadasivam AIR 1958 Mad. 354 it was held that Section 43 of the Act, does
not control the other provisions of Chapter VI (i.e. Dissolution of the firm), and that it is possible to have

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partnership of a firm dissolved even where no notice in writing has been given under Section 43 of the Act.

6. Dissolution of a partnership firm by the court.-Provisions for the dissolution of a firm by the court have been

c
.
given under Section 44 of the Partnership Act. According to which, at the suit of partner, the court may dissolve a

rs
firm on any of the following grounds, namely -
(i) That a partner has become of unsound mind, in which case, the suit may be brought as well by the next friend

e
of the partner who has become of unsound mind as by any other partner;
(ii) That a partner, other than the partner suing has become in any way permanently incapable of performing his

(iii)
duties as partner;

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That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the

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carrying on of the business, regard being had to the nature of the business;

tr-6Pfor
2T1Othe

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(iv) Tthat a partner other than the partner suing, wilfully or persistently commits breach of agreements relating
to the management of the affairs of the firm, or otherwise so conduct himself in matters relating to the business
that it is not reasonable other
5L4P0T0O partners to carry on the business in partnership with him;

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(v) That a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to

T
a third party, or has allowed his share to be charged under the provisions of Order XXI of the First Schedule of
the Code of Civil Procedure, 1908 (V of 1908) or has allowed it to be sold in the recovery of arrears of land
revenue or of dues recoverable as arrears of land revenue due by the partner;
(vi) That the business of the firm cannot be carried on save at a loss; or
(vii) On any other ground which renders it just and equitable that the firm should be dissolved.

Thus, from the aforesaid judgement and provisions of Section 44 of the Partnership Act, 1932, it is clear that a
partnership at will may be dissolved either by giving notice as provided under Section 43 of the Act or by the court
as provided under Section 44 of the Act.

5L4P0T0O FOR ACT OF PARTNERS DONE AFTER DISSOLUTION

LIABILITY
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Section 45 deals with the liability for acts of partners done after dissolution. Section 32, i.e., retirement of a partner,
is based on the rule of estoppel also, because in the absence of compliance of the provision of notice third parties
may deal with the firm or partners to their disadvantage on the belief that the firm or all the partners continue.
But, when third parties know well by individual
0K0I notice what the real position is there is no question of themselves
tr-6A2H1I5B4F
being led into wrong belief and acting to their detriment. If so, in such cases there is no question of application of
the rule of estoppel to make the retired partners or the partners of a dissolved firm liable. Liability arises only
when a third party acts to his detriment on the basis of a mistaken impression regarding the continuance of the
firm or all its partners to which he was misled by the acts or omissions of the persons responsible for bringing the
real facts to his notice by public or individual notice. Even if public notice is given a third-party who had individual
notice cannot complain.

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 CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP Section 47 of the Partnership Act
deals with the continuing authority of the partners for the purposes of winding up of the firm.
Authority of partners. When a firm is dissolved the authority of each partner to wind-up the firm, and the other
mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary
to wind up the affairs of the firm.
In Laxminarayan v. Sanwal Ram, it has been held that the provisions of Section 47 of the Partnership Act
specifically provide that even after the dissolution of a firm the authority of each partner to wind-up the firm and
the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be
necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the
dissolution, but not otherwise. In view of this provision, therefore, it is evident that during the process of winding
up of the firm and settlement of accounts finally all the assets and liabilities of the firm continue to remain as those
of partnership. It cannot, therefore, be urged that after the dissolution of partnership, whether by virtue of the
decree of the Court or by virtue of the adjudication of the partner as insolvent, the rice mill ceased to be partnership

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property or assets.

RIGHTS OF THE CREDITOR OF THE FIRM

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Section 49 of the Partnership Act lays down a rule regarding payment of joint debts due from the firm.

.
The right of the creditor of the firm is to have the separate estate of the deceased ascertained and applied in

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payment of his separate debts and liabilities and to the surplus applied in payment of his joint liabilities. If an action
has already been brought for the administration of the estate of the deceased, a creditor of the firm can obtain an

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order to the above effect without being compelled to bring a separate action.

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RETURN OF PREMIUM ON PREMATURE DISSOLUTION
Section 51 lays down provision regarding return of premium on premature dissolution. Ingredients. For exercising

(i) Premium must have been paid;

(ii) Such premium must have been4P
tr-6P2T1O5L
paid

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discretion by the Court under Section 51 the following are the essential ingredients:

0T0Ofor a fixed term;

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(iii) Partnership must have been dissolved before expiry of such term;
(iv) Such dissolution must not be due to death of any of the partner;

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(v) No misconduct should have taken place in such transaction; and
(vi) Such dissolution must not have taken place in pursuance of some agreement.

REGISTRATION OF FIRM

Procedure of Registration of firm: - The Partnership Act authorises the state Government to appoint Registrars
of firms for the purpose of registering partnership firm. Accordingly an office of the Registrar of Firms exists in
every State. Registration is obtained by filing an application with the Registrar. The application should be on
prescribed form and accompanied with the prescribed fee. The application has to State the particulars mentioned
in section
0T0O
58 of the Indian Partnership Act.
tr-6P2T1O5L4P

Change of Particulars Section 60:- Any change of name or of the location of the principal place of business
requires almost a new registration and therefore a statement to that effect signed by all the partners and
accompanied by prescribed fee should be sent to the registrar. There is no time limit prescribed for filing the
particulars. tr-6A2H1I5B4F
0K0I

Penalty for false particulars section 70:- The statements in the application form or amending forms and in
notices sent to Registrar should be true and complete. If any person knowingly or without belief in its truth,
furnishes false or incomplete information he is liable to a penalty of three months imprisonment or fine or both.

Rule of Evidence Section 68:-Any statement, notice of intimation recorded with the Registrar by any person is a
conclusive proof against him of the fact stated. Entries relating to a firm in the registrar of Firms may be proved by
producing certified copies of the entries.
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 Effect of Non-Registration Section 69:-Registration of firms is not compulsory. It is optional and there is no
penalty for non-registration. Yet registration becomes necessary at one time or the other because section 69
seriously cuts short the capacity of an unregistered firm and its partners to sue. This disability is too great a
compelling force to bring the firm to the Register.

The effects of non-Registration may now be stated:

1. Suits between Partners and Firm Section 69(1):- A partner of an unregistered firm can not sue the firm or
his present or past co-partners for the enforcement of any right arising from a contract or conferred by the
partnership Act. Only a partner of a registered firm whose name appears in registration can sue for the
enforcement of such rights.

This difficulty may be overcome by getting the firm registered before an action is brought. But once a dispute
between the partners has arisen, all-of them may not sign the application form and consequently the firm may

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remain unregistered. It is therefore advisable to have the firm registered as soon as it is constituted.

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2. Suits between firm and third parties Section 69 (2):- An unregistered firm cannot sue any third party for the

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enforcement of any right arising from contract. A suit can be brought only by or on behalf of a registered firm and
that also by persons whose names appear as partners in the Register of Firms.

.
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This difficulty once again can be overcome by getting the firm registered before an action is brought. The action of
an unregistered firm is, however, liable to be dismissed and it cannot be rectified by subsequent registration. The

e
Andhra Pradesh High court has held that registration during pendency of suit would also have the rectifying effect.

k
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3. Set-off and Other Proceedings Section 69 (3):- The above two disabilities also apply to a claim of set-off or
other proceedings to enforce a right arising from a contract. The Words. “Other proceedings” had created some

Settled the controversy. Court held4Pthat

tr-6P2T1O5L

p r a
difficulty as to their import particularly in reference to the question whether they included “Arbitration
Proceedings” The Supreme Court by its decision in Jagdish Chnadra Gupta v. Kajaria Traders (India) Ltd.
0T0Oif the arbitration proceedings were allowed, an unregistered firm would

o
by providing for arbitration in the partnership deed escape the disability contained in the section because of the
words of section 69 (3) or other proceedings' to enforce a right arising from a contract.

could do so.
T
Ram Nandan Prasad Sinha v. K.M. Consultants, 2003
Where reference to arbitration was possible without recourse to the court, the court said that an unregistered firm

Exceptions:- The section, however admits of the following exceptions:

(a) Action for dissolution and Accounts:-An unregistered firm and its partners can bring an action for the
dissolution of the firm or for accounts of a dissolved firm. They can also enforce any right or power to realise
the property to sue disappears with the dissolution of the firm.
(b) Where the partners went on retiring from the firm one after the other so that ultimately only one partner was
left and the firm for that reason became automatically dissolved. It was held that the suit filed by the sale
4P0T0O
tr-6P2T1O5Lremaining partner to recover from the defendant the dues to the firm was maintainable..
(c) Recovery of insolvent Share: -The official assignee, receiver or court acting for an insolvent partner may
bring an action for realisation of the insolvent share whether the firm was registered or not.
(d) Value of suit Rs.100:-An unregistered firm or its partners may sue or claim a where the subject-matter of the
suit does not exceed Rs.100 in value Section
tr-6A2H1I5B4F
0K0I 69(4)(b).
(e) Statutory and No-Contractual Rights:-Statutory and Non-Contractual rights are outside the scope of the
disability inflicted by the section. If a person damages the property of the firm he can be sued whether the firm
is registered or not. An unregistered firm has been allowed to sue to enforce the payment of a cheque in its
capacity as a payee, it being a statutory right under the Negotiable Instrument Act. A similar firm has been
allowed to sue a carrier for loss of goods of which the firm was the bailee, it being a statutory right under
section 180 of Indian Contract Act.
(f) Criminal Proceedings:-Criminal prosecution under section 138 of the Negotiable Instrument Act 1881, for
the dishonour of a cheque is not in the nature of a civil suit. The bar of section 69 would not prevent an
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 unregistered firm from launching a prosecution under this Act.
(g) Suit by third parties:-Third parties can always sue a firm whether registered or not. The disability is that of
firm and not of persons outside it:

Moving of public notice section 72:- For the purpose of formalities that must accompany a public notice:
Formalities in case of a registered firm are:
1. Notice to Registrar
2. Publication in the official Gazette
3. Publication in a vernacular newspaper circulating in the district where the firm has its place or principal place
of business.
In case of an unregistered firm the formality of informing the Registrar is not necessary because the name of the
firm is not there on registrar:

m
A public notice is necessary in the following cases
1. When a partner retires
2. When the firm is dissolved

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3. When a minor has been admitted to the benefits of the firm and on attaining majority has to give public notice
of his decision to become or not to become a partner.

.
INCOMING AND OUTGOING PARTNERS

MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP

k e rs
Section 30 of Indian Partnership Act lays down the rights and liabilities of a minor admitted to the benefits of
partnership. The section provides thus:

an
(a) A minor cannot be a partner in a firm. It is clear from the first Chapter that the partnership is a result of

r
contracts. Indian Contract Act provides that a party to contract must be competent to make a valid contract
and a minor is not competent to a contract.
(b) According to Sectiontr-

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30(1)
consent of all partners.
6P2T1Oof5Lthe

p
4P0TPartnership
0O Act, a minor can be admitted to the benefits of the firm with the

(c) A minor so admitted has a right to receive such share of the property and profits of the firm as the partners

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agreed to and has also a right to inspect the books of account of the firm.
(d) A minor who receives such share of the property or the profits of the firm is only liable to the acts of the firm.
He is not personally liable for the debts and obligations of the firm, his share is only liable for that.
(e) A minor cannot sue his co-partners for an account or payment of his share of the property or profits of the
firm. He can only sue them when he intends to severe his connection from the firm.
(f) Clause (5) of Section 30 provides that at any time within six months of his attaining majority or of his obtaining
knowledge that he had been admitted to the benefits of the property or profits of the firm, he must give public
notice that he has elected to become a partner or that he has elected not to become a partner in the firm, and
such notice shall determine his position as regards the firm. In case he fails to give such public notice, he shall
tr-6P2T1O 4P
5Lbe0Tdeemed
0O to be a partner in the firm after the expiry of the said six months.
(g) Where such person becomes a partner in the firm he shall become personally liable to third parties for all the
debts and obligations of the firm incurred since the date of his admission to the benefits of the partnership.
(h) Where such person elected not to become a partner and he has served a public notice in that connection, his
share shall not be liable for any debts or obligations of the firm from the date of the notice and he shall also be
4F0K0I
entitled to sue his partners for
tr-6A 2Hhis
1I5Bshare of property and profits.
(i) A minor may be liable to other persons to whom he represents himself as a partner in the firm after attaining
majority on the ground of holding out.

Liabilities of a minor. - In general a Hindu minor is not competent to carry on his business and thus his guardian
is only competent to maintain the business on his behalf. Thus, the minor is not personally liable for the debts and
obligations of his business. On being admitted as a partner to the benefits of the firm his share of property or profits
shall alone be liable. A minor becomes liable for the debts and obligations of the firm only when he has attained
majority.
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 Sharing of losses. - Where the facts were that under the partnership deed in question the minors were to share
losses as well. In Additional Commissioner of Income-tax v. Uttam Kumar Pramod Kumar, it has been held that
under general law of partnership a minor cannot be a full partner liable to share in the losses. He can only be
admitted to the benefits of the partnership.

Agreement with minor.-

In Additional Commissioner of Income-tax v. Uttam Kumar Pramod Kumar, AIR 1978 All 397 it has been held that
when no one acting as the minor’s guardian signed the document, no agreement with the minors come into
existence. The deed purporting to be a partnership with the minors was wholly invalid and cannot be registered.

INTRODUCTION OF A PARTNER
The provision laid down under sub-section (1) comes out from clause (7) of Section 24 of the English Act, and sub-
section (6) of Section 253 of Indian Contract Act. There is a general idea that for a firm to work harmoniously it is

m
necessary to obtain the consent of its existing partners before introducing a person as a new partner. However, if
the partners are under contract previously to that effect, the contract will be binding on the partners.

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Sub-section (2) says that a person is not liable for the debts and obligations of the firm before he became a partner;

c
this provision has been taken from Section 17(1) of the English Act and the later portion of Section 249 of the
Indian Contract Act.

.
rs
Generally, partners of a firm by their mutual agreement have power to nominate their successor, and the successor

e
after the death of that partner, which the Court will enforce by way of appropriate specific relief though it cannot

k
force an agreement to enter into partnership, because the foundation of partnership is mutual confidence.

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So far as the question relating to the rights and liabilities to an assignee of the share of a partner is concerned the
transferee has very limited rights in this connection. He can claim only a share in the profits of the firm to which

a
the transferring partner would be entitled to. He has no right to interfere in the course of business nor he can

r
inspect the books of accounts of the firm, nor he requires his co-partners to render him the accounts of the firm.

p
6P2T1O5L4P0T
0O

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tr-
The liability of a transferee is also limited. He is not personally liable for the debts and obligations of the firm. The
liability arises on him only when he becomes a partner in the firm. Thus, the provision laid down under sub-section

T
(2) of Section 31 is not an absolute rule but it is subject to the provisions of Section 30 of the Act.

In Gur Dayal Khanna v. Malti Devi , while interpreting the word “business” in reference to Section 12(2) of the
U.P. Urban Building Rent Act, 1972 (13 of 1972), the Court said that the expression, where a tenant carrying on
business in the building admits a person who is not a member of his family as a partner or a new partner as used
in Section 12(2) of the Act has to be understood taking into consideration the provisions contained in Section 31
of the Indian Partnership Act. The word ‘business’ is a word of wide import and represents some organised activity.
So long as there is some real substantive systematic and organised course of activity with a set purpose it would
constitute ‘business’.

tr-6P2T1O5L4P0T0O
Section 31 of the Indian Partnership Act deals with the introduction of a partner and provides that subject to
contract between partners and to the provisions of Section 30 no person shall be introduced as a partner into a
firm without the consent of all the existing partners. Admission of a partner is nothing else but the introduction of
a partner. Introduction of a partner as envisaged under Section 31 of the Partnership Act can be in any existing
partnership firm. Section 12(2), therefore,0Kcontemplates
tr-6A2H1I5B4F
0I carrying on business in a non-residential building by an
existing Partnership Act and admission of a person who is not a member of the family of the partners already doing
business in that building and occupying the whole of it, as a partner or a new partner, as the case may be, as
envisaged under Section 31 of the said Act. It is in this event alone that the tenant, which may include all the
partners, can be deemed to have ceased to occupy the building as a whole.

The Act of introducing/admitting a partner as envisaged under Section 12(2) of the U.P. Urban Building Rent Act,
1972 (13 of 1972), as indicated above, is by itself sufficient to render the building in question vacant as a whole
with a further presumption in regard to the coming into existence of an illegal sub-tenancy. It cannot be overlooked
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 that the malady of passing over rented premises by a tenant to another person under the garb of forming a
partnership with him and violation of the provisions of the Act regulating letting of building, etc. was such to be
remedied by introducing the legal fiction in question.

Active business partner of the firm.-The bank account of any partnership firm was to be opened under the
signatures of the partners and business was to be conducted jointly. From the Deed of the Partnership, it is very
clear and evident that she is an active business partner of the firm which runs the dealership of a Government Oil
Company.² Status of petitioner in partnership firm.-As per the terms of the Deed of Partnership, the petitioner
cannot be described to be a sleeping partner inasmuch she has rights and liabilities in equal share with her husband
including the profit and loss at the rate of 45% from the business of the dealership.¹

AN OUTGOING PARTNER OR RETIREMENT OF A PARTNER

A partner of a firm makes himself separate from the firm by any of the following modes:

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1. by Retirement;
2. by Expulsion;
3. by Insolvency; and
4. by Death.

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A partner may retire from the firm with the consent of the other partners in accordance with an express agreement
by the partners or where the partnership is at Will, he may retire by giving notice in writing to all the other partners

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of his intention to do so. A retiring partner may be exempted from any liability to a third party for the act of the
firm done before his retirement by an agreement made by him with such third party. Such agreement may be either

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expressed or implied.

the acts of the firm to the same extent

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After the retirement of a partner from a firm he is not discharged from his liability unless he has delivered a public
notice in that connection showing his intention, he and other existing partners or any of them would be liable for
as that work would have been done before his retirement from the firm.

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However, such a retired partner is not liable to any third party who deals with the firm without knowing that he
was a partner. It is necessary for a retiring partner to give public notice about his retirement to such a class of

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persons who might be concerned in firm business transactions.

LIABILITY OF A RETIRING PARTNER

Liability of a retiring partner is of two types:
(a) Liability for an act done before retirement; and
(b) Liability for an act done after retirement.
The general rule is that a retiring partner is only liable for the act of the firm done during partnership. However,
there is an exception to this rule. That is, a partner may be discharged from his liability to third party for the acts
of the firm done before his retirement by an agreement made with the existing partners. This agreement may be
express or implied.
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A partner to be discharged from liability to third party for the acts of the firm must give notice to various kind of
persons showing his intention to do so. Otherwise he will be liable for the acts of the firm done after his retirement.
Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he
was a partner. tr-6A2H1I5B4F
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Such public notice should be given according to the provisos laid down under Section 32 of the Partnership Act. In
this connection, it must be noted that the rule laid down in the proviso engrafts an important exception upon the
general rule contained in Section 32(3) of the Act. A person who is not known to be a partner in a firm cannot be
said to owe any duty to give notice of his retirement to persons who do not know that he has been a partner. The
proviso is to the effect that even where there is failure to give public notice a retired partner will not be liable to a
third party who did not know of such person being a partner and deals with the firm after such retirement.

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 LIABILITY OF ESTATE OF DECEASED PARTNER Section 35 of the Partnership Act deals with cases where under
a contract between the partners the firm is not dissolved by the death of a partner. In such case, the estate of the
deceased partner is not liable for any act of the firm done after his death. A similar rule has been inserted in proviso
to Section 45 which lays down that where the death of a partner has caused dissolution of the firm, it is not
necessary to give a public notice to absolve the estate of a deceased partner from liability for the act of the firm.

RIGHTS OF OUTGOING PARTNERS TO CARRY ON COMPETING BUSINESS

Under Indian Partnership Act the outgoing partners have certain rights which are enunciated under Sections 36
and 37 of the Partnership Act. Section 36 deals with the rights of an outgoing partner to carry on a competing
business. Ingredients. Section 36 of the Partnership Act authorises an outgoing partner to carry on a business
competing with that of the firm and he may advertise his business, but subject to contract to the contrary he may
not
(a) Use the firm name;

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(b) Represent himself as carrying on business who were dealing with the firm; or
(c) Solicit the customer who were dealing with the firm before he ceased to be a partner.

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Section 36(2) allows a partner to enter into an agreement with his co-partner that on ceasing to be a partner he

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will not carry on any business similar to that of the firm, within a specified period or within specified local limits.

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Such agreement is valid and shall not be considered as violative of the restraint of trade, provided the restrictions
imposed are reasonable.

RIGHT OF OUTGOING PARTNER TO SHARE SUBSEQUENT PROFIT

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Section 37 of the Indian Partnership Act deals with the right of an outgoing partner in certain cases to share
subsequent profits from the firm or other partners. Section 37 provides that where any member of a firm has died

tr-6P2T1O5L4P

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estate, then in the absence of the contract
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or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with
the property of the firm without any final settlement of accounts as between them and the outgoing partner or his
0T0Oto the contrary, the outgoing partner or his estate is entitled to the option

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of himself or his representative to such share of the profits made since he ceased to be a partner as may be
attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum

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on the amount of his share in the property of the firm.

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM

Section 38 of the Indian Partnership Act deals with the cases of revocation of the continuing guarantee given to a
firm. Section 38 lays down that continuing guarantee given to a firm or to a third party in respect of the transactions
of a firm is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any
change in the constitution of the firm.

N.C. Mukherjee v. Biro Das ILR 1901 Cal. 397. In this case ‘A’ was a surety to the firm “N.C. Mukherjee” for the
conduct of B, a cashier in the firm of “N.C. Mukherjee”. Later on a change took place in the constitution of the firm
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and
tr-6P2T1O5Lits name was altered to “N.C. Mukherjee and Sons”. It was held that the surety was not liable for B’s defamation
subsequent to the change in the constitution of the firm.

Effect of change. - Section 38 of the Partnership Act deals with the effect of the change in the constitution of a firm
on continuing guarantee and provides that any change in the constitution of a firm will have the effect of revoking
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a continuing guarantee giventr-to6Athat firm
2H1I5B or to a third party in respect of transactions of a firm, from the date of
change in the constitution of the firm, unless there is an agreement to the contrary.

The provision of Section 38 is based on well-established rule that any change in the constitution of a firm without
the consent of surety will alter risk of surety. The rule laid down in Section 38 is that a change in the constitution
of the firm will have effect of revoking as to a future transaction any continuing guarantee that may have been
given to the firm or to a third party in respect of any transaction of the firm unless there is an agreement to the
contrary.
Relation of partners inter se
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