THE INDIAN PARTNERSHIP ACT, 1932

3.1 GENERAL NATURE OF A PARTNERSHIP

3.1.1 3.1.2 3.1.3 3.1.4
Meaning of Partnership. Essential Elements of Partnership True test of partnership. Difference between partnership and other various Forms of organizations 3.1.5 Types of partners. 3.1.6 Minors position in partnership (sec 30)

TABLE OF CONTENT

3.2 RELATIONS OF PARTNERS & RECONSTITUTION

3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 3.2.8
Mutual rights & duties of partners. Partnership property (sec. 14) Personal profit earned by Partners (sec. 16) Rights and duties of partners after the change in constitution of firm (sec. 17). Implied authority of a partner of the firm. Acts beyond implied authority. Implied authority to third parties. Reconstitution.

3.3 REVOCATION OF OFFER & ACCEPTANCE

[Sees. 5 & 6] 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6
Registration procedure. Consequences of Non-registration. Registration of changes. Dissolution. Consequences of dissolution. Mode of giving public notice (Sec. 72).

THE INDIAN PARTNERSHIP ACT, 1932

3.1

CHAPTER - 3

GENERAL NATURE OF PARTNERSHIP

Introduction: This Act extends to the whole of India, except the State of Jammu and Kashmir. This Act came in to force w.e.f 1-10-1932. Partnership Act, 1932 is to define and amend the law relating to Partnerships. Topics Covered : Meaning of Partnership and its essential elements. Principal Agent relationship between partners. True test of partnership. Difference between partnership and other various forms of organizations. Types of partners.

3.1.1 3.1.2 3.1.3 3.1.4 3.1.5

3.1.1 Meaning of Partnership

Section 4: Partnership is - A relation - between two or more persons - who have agreed to share the profits of a business, - Carried on by all or any of them acting for all. Partnership consists of following essential elements: a) b) c) d) There must be agreement between two or more persons. There must be some business. The business must be carried on by all or any one of them acting for all . The agreement must be to share the profits of the business.

3.1.2 Essential Elements of Partnership

1) Agreement: The relation between partners is created by an Agreement, i.e the Partnership deed. It can arise only form a contract and not from status. It may be express i.e oral or written or implied from the act done by partners showing mutual understanding between them (written agreement is advisable). The nature of partnership is voluntary and contractual. 2) Association of two or more persons: There should be at least two competent persons to form a partnership. One person alone cannot become a partner with himself. Maximum number of partners: In case of banking business, the maximum number of partners should not exceed 10 and In case of any other business the number of partners should not exceed 20. (If number of partners exceeds this limit, the partnership will become illegal association) Maximum limits are given in Companies act, 1956. 3) There must exist a business: Partnership cannot be formed for social welfare activity. The term business is used in wide sense, and it must be taken in practical sense. It includes every lawful trade, occupation and profession. (Unlawful business activity will not be governed by this act, e.g partnership business of trading in alcohol in State or provinces were alcohol trading is banned). Therefore there can be no partnership where there is no intention to carry on a business.
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4) There must be an agreement to share profits: There must be an agreement to share the profits of a business. The sharing of profits also includes the sharing of losses. But an agreement to share the losses is not an essential element. 5) There must be mutual agency between partners: The agency relationship is foundation of partnership. In simple terms, in a partnership, a person must not act only for himself, but for other partners also. Thus, each partner is a representative of all other partners.

3.1.3 True Test of Partnership

We have understood that sharing of profit is an essential element to constitute a partnership. But it is only a prima facie evidence and not a conclusive evidence. The true test of partnership is agency relationship between partners. As per section 6, following points are to be taken care for true test of partnership.

a) The partnership is determined from the real relation between partners and such relation should be that of agency. (Joint owners of property, sharing profits or income arising from property do not become partners.) b) The share of profit is not a conclusive test of partnership. And every person who receives a share of profits is not a partner. Check examples based on true test of partnership : A- No.

1. A and B have purchased a big cruise as joint owners.

2. R, a software engineer, plans to introduce new software in market of Q and decided to pay 10% share in profit to Q. A- No. 3. X sold his business to Y along with its goodwill and receives portion of profit as consideration for sales of business. A- No. 4. A and B are co-owners of vacant land given to circus team for two months on rent. A and B divides rent between themselves equally. A- No. 5. A and B are co-owners of vacant land, decided to use it for marriage and other occasions on rental basis, to divide the rent income equally after deducting the cost incurred incidental for decoration and other expenses. A- Yes. 6. P and Q starts intercity taxi services decided to share petrol and repair expenses equally and share income received from these services. A-Yes. 7. An agent is engaged in business and receives his remuneration as a share of profit. A- No. 8. Widow or child getting profits of a deceased partner. A- No.

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Multiple Choice Questions

1. The most important element in partnership is: a. Business b. Sharing of profits c. Agreement d. Business to be carried on by all or any of them acting for all The maximum number of partners is specified in a. The partnership Act b. The general clauses Act c. The companies Act d. The societies registration Act The firm is the name of the: a. Partners b. Minors in the firm c. Business under which the firm carries on the business d. Collective name under which it carries on business In the absence of agreement to the contrary all partners are: a. Not entitled to share profits b. Entitled to share in capital ratio c. Entitled to share in proportion to their ages d. Entitled to share profits equally X agrees with Y to carry passengers by taxi from Delhi to Gurgaon on the following terms, namely, Y is to pay X Rs. 100 per mile per annum, and X and Y are to share the costs of repairing and replacement of the cars, and to divide equally between them the proceeds of fares received from passengers. Choose the correct alternative. a. X and Y are partners b. X and Y are cab owners c. X and Y are co-owners d. None of the above X and Y agree to work together as carpenters but X shall receive all profit and shall pay wages to Y. The relation between X and Y is that a. Partners b. Carpenters c. Laborers d. Master-Servant Match the following: 1. Partnership a) Arises by operation of law 2. Co-ownership b) Comes into existence only after registration. 3. Hindu Undivided Family c) Can arise by agreement or otherwise 4. Company d) Arise by way of an agreement only a. (A) (3) b. (B) (4) c. (C) (2) d. (D) (1) Match the following: 1. Partnership business carried on
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2.

3.

4.

5.

6.

7.

8.

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2. 3. 4. a. b. c. d. by all or by any one of them acting for all Sharing of Profits Registration of Firm Contract of Partnership (A) (2) (B) (3) (C) (4) (D) (1)

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a) Evidence of Partnership b) Not necessary c) Does not arise form operation of law d) Test of Partnership

Distinction between partnership and firm:

Persons who have entered into partnership with one another are called individually Partners and collectively a Firm and the name under which the business is carried on is called the firm name.

3.1.4 Difference Between partnership and various other organizations

(A) Partnership and Joint stock company: 1. Legal Entity : A partnership firm has no legal entity distinct from the partners. A registered company is a judicial person distinct from its members. 2. Number of Members : In Banking business number of members must not exceed 10 and in case of any other business, it must not exist 20. A private company may have maximum 50 members and minimum 2. In case of public limited minimum 7 and no upper limit specified. 3. Transfer of shares : Transfer of shares is possible only with the consent of all partners. In company transfer of shares is possible as per provisions contained in its Articles. In public company whose shares are quoted in a stock exchange, shares can be transferred without any restrictions 4. Agency : In a firm, each partner acts for all and thus each partner represents all, as well as the firm. Hence each partner is an agent of the other partners, as well as of the firm. In case a company, members are not agents of the other members or of the company. 5. Distribution of Profits: In partnership distribution of profits is must between partners as per partnership deed. There is no compulsion in a company to distribute profits. If company earns profits, then some part of profits but not the entire profits become distributable only when dividend is declared. 6. In case of Dissolution : Firms property is joint property of all partners, in case of dissolution insolvency liability is paid off initially from joint property and thereafter from partners personal property if required. In case of company, members property and companys property are separate, in case of dissolution only refund of capital is allowed. 7. Extent of liability : In a partnership, the liability of partners is unlimited. Therefore each partner is liable to pay debts of a firm incurred in the course of business of the firm and those
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THE INDIAN PARTNERSHIP ACT, 1932

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debts can be recovered from his private property. The liability of shareholder is limited to the amount, if any, unpaid on his shares, in the case of company limited by shares, but in case of a guarantee company, the liability is limited to the amount for which he has agreed to be liable. However, there may be companies where the liability of members is unlimited. (B) Partnership and Hindu Undivided family (HUF): 1. Creation : The relation of partnership is created by an agreement. The right in HUF is created by status i.e. by birth in the family 2. Management : In Partnership, all the partners are equally entitled to take part in business. In HUF all power vests with Karta, the senior most or governing male member of the family. 3. Liability : In Partnership, the liability of partner is unlimited. In HUF, liability of Karta is unlimited and other co-partners are liable to extent of their share in profits of the family business. 4. Governing Act : Partnership firm are governed by Partnership Act, 1932. HUF family business is governed by Hindu law. 5.Asking for accounts details : Partners are allowed to ask details of accounts, in case of separation from firm, he can also file suit against firm for accounts and ask for dissolution for firm. In joint family business, a member is not entitled to ask for accounts of the family business. 6. Death : Death of partner may lead to dissolution of partnership. Death of members of HUF does not give rise to dissolution of family business. HUF continues till its divided. 7. Minor : A minor cannot become a partner, but minor can be admitted to the benefits of partnership, only with consent of all the partners. In HUF business, minor becomes member by incidence of birth. He does not have to wait for attaining majority. (C) Partnership and Co-ownership: 1. Partnership arises out of agreement, contract expressed or implied. Co-ownership may arise either from agreement or by operation of law like inheritance. 2. Profit and losses must be shared in Partnership. Profit sharing is not necessary in co-ownership. (E.g. 200 sq. ft land received by A & B inheritance, selling of As part of land at high profit doesnt bind A to share profit with B. 3. Agency relationship is there among partners. Co-owners are not agent of each other. 4. Share in Partnership can be transferred only after consent of other partner.
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Co-ownership, co-owners may transfer his interest, share or rights without consent of other coowners.

3.1.5 Types of partners

1. Active/Ostensible/Actual Partner : He becomes partner by an agreement, and He is actively engaged in the conduct of the business of the partnership firm. If such partner retires, he has to give public notice of his retirement; otherwise he will continue to be liable for the acts of the firm. 2. Sleeping\Dormant Partner : Partner who does not take an active part in the conduct of the firms business. Sleeping partner is not in need to give public notice before retirement from firm. He invests capital and has a share in profits of the business. Sleeping partners is responsible to third parties for the acts of the firm, even if the third parties have no knowledge of the existence of the sleeping partner. 3. Nominal Partner : Partner who does not have any interest in business, still he lends his name to the firm, is known as nominal partner. He is liable to the outsiders for all debts of the firm. He neither invests capital nor does he share profits or loss of firm. 4. Partners in profit only : Partners who is entitled to share only the profits of the firm and is not liable for losses. Generally such partners have no interest in the management of business. However, they are liable to third parties for all the acts of the firm. 5. Sub-partner : Sub-partner is not a partner in the original firm. A sub-partner is one who shares the profits of another partner. Sometimes, a partner of firm agrees to share his own share of profits with an outsider, and such an outsider is called sub-partner. E.g. A & B are partners in XYZ firm. A agrees to share 5% of his profit to D who would bring business for firm. Here D is sub-partner. 6. Minor partner : A partner who is below the age of 18 years is called minor partner. It may, however noted that minor partner can be admitted only for the benefits. 7. Partner by Estoppel or Holding out ( sec 28 ) : A holding out partner is one who represents himself to be partner in the firm, but in reality he is not partner. If third party/outsider acted on the faith of such representation and give credit to the firm than such partner may be liable for the debts of the firm, as if he is a real partner. Example: A & B are partners in Partnership firm. A introduces K, a businessman as his partner to Q (trader). K remains silent, Q, a trader believing K to be a partner supplied goods of Rs. 80,000/- on credit. After expiry of credit period, Q did not received money for his sales. Q filed suit against K & A for recovery of his price. State whether K is liable to pay?
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THE INDIAN PARTNERSHIP ACT, 1932

Yes, K is liable for price u/s 28. (Cross Reference, Indian Contract Act, 1872)

CHAPTER - 3

3.1.6 Minors position in partnership (sec 30)

As per Indian contract Act, (sec 11) an agreement by or with a minor is void ab-initio. He is incapable to enter into a contract. However as per Sec 30, a minor can be admitted to the benefits of partnership with the consent of all the partners. A new partnership cannot be formed with minor partners. Also, there cannot be a partnership of minors among themselves as they are incapable of entering into a contract. Position of a Minor before attaining majority: RIGHTS: Minor partner has a right to share the property & profits of the firm in an agreed proportion. He has right to access, inspect and copy the accounts of firm, but not books. When he is not given his share of profit, he has right to file suit against firm. LIABILITIES: A liability of minor partner is upto the extent of his share in profits and property of the firm. He is personally not liable nor his private property. Position of a Minor after attaining majority: On attaining majority, minor partner has to decide whether he shall continue in the firm or leave partnership, within 6 months from the following whichever is later.'

1. From the date of attaining majority ( complete 18 years) OR 2. From the date when he first comes to know that he had been admitted to the benefits of partnership. He may give a public notice within 6 months period about his decision whether he has elected to become a partner or not, if he fails to do so, he is deemed to have become a partner after the expiry of the above period. Say no, or by default partner. Rights & liabilities where he becomes a partner: His rights & liabilities will be similar to those of a major partner. He will be personally liable for all the acts of the firm from the date he was admitted since he was admitted to the benefits of the firm. His share in the property & profits of the firm remains the same as before. Rights & liabilities where he decides not to become a partner: His rights and liabilities continue to be those of a minor up to the date of giving public notice. His share shall not be liable for any acts of the firm done after the date of the notice. He shall be entitled to sue the partners for his share in property & profits. Note: It may be noted that such minor shall give notice to the Registrar that he has or has not become a partner.

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THE INDIAN PARTNERSHIP ACT, 1932

WHO CAN BE A PARTNER IN A FIRM?

CHAPTER - 3

A person if competent to enter into contract can be partner in firm. One person can be partners in any number of firms. Minor cannot be partner in firm but he can be admitted to the benefit of partnership firm. Company or corporation or body corporate can become partner in partnership firm. Partnership Firm cannot enter into partnership with another partnership firm. HUF can't be a partner in partnership firm. However, karta of HUF can become a partner in partnership firm in his individual capacity. Trust can't become partner in partnership firm. Foreigner or NRI can become partner in partnership firm.

Multiple Choice Questions

1. A minor is: a. A partner of a firm b. Representative of the firm c. Entitled to carry on business of the firm d. Entitled to the benefits of the firm 2. A partnership at will is one: a. Which does not have any deed b. Which does not have any partner c. Which does not provide for how long the business will continue d. Which cannot be dissolved 3. Active partner is one who: a. Takes part in the business of the firm b. Actively participates in co-curricular activities c. Actively shares the profits d. Makes a show of authority 4. Which of the following statements is not true about minor's position as a partner? a. He cannot become a full-fledged partner in a new firm b. He can become a full-fledged partner in an existing firm c. He can be admitted only to the benefits of any existing firm d. He can become partner on becoming a major 5. Suppose you have entered into a partnership agreement with me and the partnership- deed provides neither for the duration nor for the determination of our partnership. What is the technical expression for this kind of partnership? a. Partnership for a fixed term b. Partnership at will c. Particular Partnership d. Any of these 6. A partnership at will is one 1. Duration not fixed 2. Duration fixed 3. Dissolved at any time 4. Can be dissolved only on the happening of an event
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a. 1 & 2 b. 2 & 3 c. 3 & 4 d. 1 & 3 7. The position of a minor in a partnership firm is to be determined taking into account 1. The Indian Contract Act, 1872 2. The Indian Partnership Act, 1932 3. Minor's agreement 4. The Majority Act, 1875 a. 1 & 2 b. 2 & 3 c. 3 & 4 d. 1 & 4 8. Which of the following statement is not true about minor's position as a partner? 1. He cannot become a full fledged partner in a new firm 2. He can become a full fledged partner in an existing firm 3. He has to bear all liabilities like other partners 4. He can become a partner on becoming a major a. 1 & 2 b. 2 & 3 c. 3 & 4 d. 1 & 4 9. Match the following: 1. Firm is bound by all acts of a partner done within the scope a) Partnership at Will 2. No duration for partnership b) Particular Partnership 3. Duration for a period c) Sub-Partner 4. Share of profits by an outsider d) Implied Authority a. (A) (2) b. (B) (3) c. (C) (4) d. (D) (1) 10. Match the following: 1. Full Fledged Partner a) Does not disclose his name 2. Sleeping Partner b) Known to outside world 3. Partner by holding out c) Minor 4. Partner to benefits of partnership d) Active Partner a. (A) (2) b. (B) (3) c. (C) (4) d. (D) (1)

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THE INDIAN PARTNERSHIP ACT, 1932

3.2
3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 3.2.8

CHAPTER - 3

RELATIONS OF PARTNERS & RECONSTITUTION

Topics Covered : Mutual rights & duties of partners. Partnership property (sec. 14) Personal profit earned by Partners (sec. 16) Rights and duties of partners after the change in constitution of firm (sec. 17). Implied authority of a partner of the firm. Acts beyond implied authority. Implied authority to third parties. Reconstitution.

3.2.1 Mutual rights & duties of partners

Mutual rights and duties of partners shall be governed by the agreement among the partners. Such agreement may be express or implied. However, where the agreement is silent, the following provisions of the Act shall apply.

1) Right to take part in the conduct of business: In absence of contact between partners, every partner has a right to take part in the conduct of business. 2) Right to access the books: Every partner has a right to access, inspect and take copy of the books of firm. Although it shall be noted that a minor partner has a right to inspect and copy the accounts of the firm, but not the books. 3) Right to share profit equally: Partners hare profit and losses equally, if contract specifies profit sharing in different proportion, than it is allowed to share as per contract. 4) Right to be consulted: It in case of difference of opinion in ordinary matters, it shall be settled by majority of partners is right of partner to be consulted in all matters affecting business of the firm and every partner shall have a right to express his views before the matter is decided. In case of difference of opinion in fundamental matters (affecting the nature of business), shall be settled by consent of all the partners.

5) Right to interest on capital: Generally partners do not have right to receive any interest on their capital. However if partners agreement provides clause to pay interest on capital at certain rate, than it shall be paid only out of profits of firms. 6) Right to interest on loans / advance ( section 13(d) ) When any partner gives advance or loan to firm for business purpose, he is entitled to get 6% interest per annum on the same, such is payable even if firm is incurring loss.

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THE INDIAN PARTNERSHIP ACT, 1932

7) Right to be indemnity (Recover):

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Every partner has a right to recover expenses incurred by him in ordinary course of Business and expenses incurred to protect the loss of firm under some emergency situation. 8) Right to Remuneration: Any partners of firms are not entitled to receive any remuneration for participating in a business of firm, although if partnership agreement is having clause expressly to provide right of remuneration to working partners than it is allowed.

9)

Right to stop admission of new partners: It is a right of every partner to be consulted at the time of admitting a new partner in firm. Where the partner is introduced in firm, he is not liable for any act of the firm done before he becomes a partner. It is a right of every partner to retire from the firm if he finds difficulty to adjust with other partners, if partnership is at will, then partner can retire by giving notice to all partners.

10) Right to retire:

11) Right not to be expelled:

Every partner has a right not to be expelled from the firm by any majority of partners, however the partners may enter into a contract providing for the expulsion of a partner by majority of partners. (refer page no. 3.16)

12) Right of outgoing partner:

Where the other partners continue business without final settlement of outgoing partner, then in absence of any agreement, the outgoing partner or his legal representative shall be entitled at his option, toShare such profits in proportion to his share in the property of the firm, or Interest @ 6% pa on the amount of his share in the property of firm.

13) Right to dissolve the firm:

Every partner has a right to dissolve the partnership with the consent of all partners (sec-40) But where the partnership is at will any partner can give notice in writing to all other partners of his intention to dissolve the firm.

3.2.2 Duties of partners

To be faithful to each other. 1) To carry on business with greatest common advantage for firm. 2) To indemnify for fraud: 3) It is duty of every partner to compensate the loss suffered by firm due to his fraud. It is absolute duty and cannot be changed by contract. 4) To share losses equally. 5) Duty to use firms property exclusively for firm. 6) To act within authority : It is duty of every partner that he should act within the scope of actual or implied authority.
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7) Duty to give account for personal profits: It is duty on the principle of good faith that if partners make any personal profit from partnership transactions or from any use of partnership property, name or business connection; he must account for it and pay it to firm. 8) To account in profits in competing business: Is the duty of a partner that he cannot carry on competing business, if he does, he is bound to account for such profits and pay the same to the firm. However, by a contract, the partner may allow all or any of them to carry on any business whether or not competing with his business of the firm.

9) Duty to act diligently: It is the duty of every partner to act diligently in all activities of firm.

3.2.3 Partnership property: [Sec-14]

Partnership properly refers to - Partnership assets - Joint stock or - Common stock or - Joint estate -Includes all property rights and interest in which all partners are entitled to share In absence of any agreement following is termed as partnership property. a) All property rights and interests which partner may have brought into the common stock as their contribution to the common business. b) All property rights and interest acquired or purchase by or for the firm, or for the purpose and in the course of business of the firm; and c) Goodwill of the business. Goodwill: - It may be defined as the reputation of a business. However in respect of profits expected on future above normal profits. When partnership is dissolved every partner has a right in absence of any agreement, to share or have goodwill of business sold for all partners.

3.2.4 Personal profit earned by partners: [Sec-16]

Partner should not make any personal profit for himself from any transaction of the firm or as from the use of the property or business connection of the firm or firms name, and if he does so he should pay back to firm. E.g. P, Q and R are partners, selling wheat at wholesale price, Ps relative K is having large fields of wheat, in season K purchases large quantity at very lower price as he was aware that in off season Ps firm buys wheat with high prices from farmers. K sells wheat to firm in off season.
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This transaction will make his personal profit of P by misusing relation with his relative, as P is purchase manager of partnership firm. As per the section 16, P is bound to account to the firm for the profit so made. Same is case for partners carries on a competing business and push his private trade and profit better instead of firm growth. However it should be noted that this rule is also subject to contract between partners if contract allows doing competiting business partners will not be liable to surrender his personal profits.

3.2.5 Implied authority of a partner of the firm

Implied Authority: There is an authority, which is not given to a partner by an agreement, but by law. The act of the partner will be within the implied authority, if following conditions are satisfied:

1. The act must be done in the firms name, and 2. It must be done in ordinary course of business. E.g. - Partner cannot sign documents of firms by writing Proprietor describing himself. Partner of furniture merchants firm place an order for ten computers and server for office in firms name. Some examples which are within acts of implied authority: Purchase and sale of goods on behalf of firms. Receiving amount from debtors and paying to creditors. Hire an advocate/solicitor to defend an action against the firm. Drawing, accepting, endorsing negotiable instruments in the name of firm. He may borrow money, contract debts and pay debts on account of the partnership. He can hire servant or employee for routine or ordinary works.

Acts beyond implied authority:[sec-19] In absence of any trade or customs of business, the implied authority of a partner does not empower him to do the following acts. Withdraw a suit or proceeding filed on behalf of the firm. Admit any liability in a suit or proceeding against the firm. Acquire immovable property on behalf of the firm. Transfer/sale of immovable property belonging to the firm. Enter into partnership with someone on behalf of firm. Open a bank account on behalf of the firm in his own name. Settlement or compromise or relinquish of any claim or portion of the claim by the firm against a third party.
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Although one should note that above acts can be done by partners, if any of the following two conditions are satisfied. Partners is having express authority, or Usage or customs of trade permits. ( E.g. Partner in the business of contractor in purchase and sale of flats and shops, can sale immovable assets under their stock without informing other partners.) Implied authority and third party: Extension and restriction of partners implied authority (sec-20): Restriction on the implied authority of a partner is possible by partnership agreement. However such restrictions are valid only if the third parties have that knowledge. Acts in emergency (sec-21): Partnership act specifies that each partner can bind the firm by all of his acts done in an emergency, with an intention to protect firm from any monetary loss or loss of reputation, provided he has acted in the same manner like ordinary man of prudence would have acted in such circumstances. Effect of notice to active partner (sec-24): Notice to an active partner operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. E.g. - Active partner of firm bought certain goods for firm, although he knew of a particular defect in goods, but he conceal as he had good terms with seller. This rule will be inoperative and other partners can reject the goods upon detection by them. Liability of partners for acts of the firms (sec-25) : Every partner is jointly liable with all the other partners and also severally, for all acts of the firm, done while he was a partner. Liability for wrongful acts of partners(sec-26); Firm is liable for any loss caused to a third party by the wrongful act or omission of a partner, when 1) partner is acting in ordinary course of business, or 2) acting within the authority. E.g.: -A and B dealing in retail crackers selling business. Q a customer purchased crackers worth Rs 1000 and informed B to keep it at their shop for one day and paid money. B kept same box under cooler in corner, which got wet at night time, due to leakage. Here firm is liable to compensate Q. Liability of firm for misappropriation by partners (sec-27) The firm is liable to compensate the loss in the following 2 conditions: When partner is acting within his authority , receives money or property from a third party and misappropriates it, or Where a firm in the course of its business receives money or property from a third party, and the money or property is misappropriate by any of the partners while it is in possession of the firm.

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Multiple Choice Questions

1. Every partner has the right to: a. Take part in the business of the firm b. To share exclusive profits c. To use the property of the firm for personal purposes d. Pay taxes Each of the Partner is a. Principal as well agent b. Only Agents of the firm c. Only Representatives of the firm d. Only Co-partners of the firm Which of the following is not the right of a partner i.e., which he cannot claim as a matter of right? a. Right to take part in business b. Right to have access to account books c. Right to share profits d. Right to receive remuneration Which of the following acts are not included in the implied authority of a partner? a. To buy or sell goods on accounts of partners b. To borrow money for the purposes of firm c. To enter into partnership on behalf of firm d. To engage a lawyer to defend actions against firm What is Reconstitution? On any of the following changes occur; we can say that the firm is reconstituted. Admission of partner (sec-31) Retirement of partner (sec-32) Expulsion of partner (sec-33) Insolvency of partner (sec-34) Death of partner (sec-35) Transfer of partners share (sec-36)

2.

3.

4.

1) 2) 3) 4) 5) 6)

1) Admission of partner: (sec-31) A person can be admitted as new partner:1) In accordance to partnership deed or 2) With consent of all existing partners. Liability of incoming partner: Generally new partner is not liable for any liability of firm before his admission date, although incoming partners may by agreement agrees to liable for acts before his admission provided. a) The new firm is agreed to pay the debt and b) Creditors have agreed to accept the new firm as the debtors and discharge the old firms liability.

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THE INDIAN PARTNERSHIP ACT, 1932

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NOTE: However, when minor partners attains majority and elect to become partner. Minor partners on attaining maturity shall be liable for all acts of the firms done since he was admitted to the benefit of the partnership and not from the date he becomes major. Retirement of a partner(sec-32) When can a partner retire:

a) In accordance to partnership deed or term. or b) With consent of all other partners. or c) When partnership at will, by giving notice in writing to all other partners. Liability of retired partner: For the acts done before retirement: Even after retirement, a partner continues to be liable for all the act of the firm done before his retirement unless he is discharged. He may be discharged by express or implied agreement with continuing partner and third parties. E.g. - P,Q and R are partners , R retired and B is admitted . Bank authority, from which firm had taken loan accepts the reconstituted firm with partners P, Q and B it implies that R is discharged. b) For the acts done after retirement : A retired partner can never be held liable for the act of firm done after his retirement, but he may be held responsible on the ground estopple in the following cases : Public notice of his Retirement is not given. The outsider has given credit to the firm in Good faith that he is still partner in firm. Rights of retired partner : SEC-37 To share subsequent profit When continuing partners carry on business Without final settlement of outgoing partners than in absence of agreement. Outgoing partners or His legal heir shall be entitled; at his option to:

Sec-36 To carry competing business. Start competing business subject to contact, that he will not - Use firm name - Represent himself as partner of old firms. - To attract old customers base to his new business.

Share of profit of his share in property of firm. FOUNTAINHEAD CMA -FOUNDATION

Interest @ 6% pa on the amount of his share in the property of the firm.

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THE INDIAN PARTNERSHIP ACT, 1932

Sec-:33

CHAPTER - 3

Expulsion of a partner When can be partner expelled from firm?

A partner can be expelled subject to following 3 conditions: Power should be exercised by majority partners and Power of expulsion should be a specific clause in partnership deed. and Power should be exercised in Good faith , Good faith Criteria consists of all following 3 test

Expulsion must be in interest of partnership.

Proper notice to be served to expelled partners

Should be given opportunity of being heard.

NOTE : If partner is expelled without complying with above condition, the expulsion will be treated as irregular expulsion, and in such a case expelled partner can Sue for the refund of his share in capital and profit of firms, or Claim restatement as a partner.

Insolvency of a partner (Sec: 34)

When a partner in a firm is adjudicated insolvent, he ceases to be a partner on the date on which order of adjudication is passed. Firm is not liable for any of the act of insolvent partners after the date of the order of adjudication. Estate of insolvent- partner is not liable for the act of the firm done after the date of the order of adjudication. A public notice is not required in this case. It shall be noted that ordinarily, the insolvency of a partner result in dissolution of a firm, but the partners are competent to agree among themselves and ready to recover than adjudication of insolvent partners may not give rise to dissolution of firm. Death of partner: (Sec: 35) Estate of deceased partner is not liable for act of firm after his death, where partnership firm does not dissolve because of death of partner, incase where there are three or more partners. E.g.- K was the partner in the firm ,the firm ordered goods in Ks lifetime, but delivery was made after Ks death .It was held that Ks estate was not liable for the price of goods sold and deliver. Its because there was no debt due in respect of goods in Ks lifetime. NOTE: In above example, creditor can have only a personal decree against the surviving partners and decree against partnership assets of those partners.
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THE INDIAN PARTNERSHIP ACT, 1932

CHAPTER - 3

On a death of partner, their legal heirs do not become partners. If they wish to become partner, a fresh contract has to be made.
Sec-29

Transfer of partners interest: When existing partners of firms agree to share his own share of profit and assets with outsiders, it is known as Sub-partnership, and the outsider is called sub-partner. Existing partners can be termed as transferor and sub-partner as transferee.

Rights and scopes of transferee: Transferee have right to receive share of profit from transferor (partners) .In case of dissolution, to receive the transferor partners shares in assets, but transferee is not entitled for: 1) To ask for the accounts of firm, or to challenge the accounts. 2) To inspect the books of the firms, or 3) To interfere in the conduct of the business of firm. NOTE: A partner cannot assign the whole of his right and interest in the firm to an outsider. Where a partner, other than a partner suing has transferred the whole of interest in the firm to the third party, or where his share has been attached with third party, the court may dissolve the firm at the instance of any other partner. Rights and duties of partners after change in constitution:[sec-17 Change in Constitution

New admission of partner

Death or Retirement of partner

Where the partnership Concerned carries some New business in addition To original

Partnership business carried on and after the expiry of fixed term

Constitution in those 3 ways will be same as they were before the change, mutual rights and duties will be same in reconstituted firm.

When the partners carry on the

Business after the expiry of the Agreed fixed, period, it becomes Partnership at will, in case of partnership at will, partner Desiring to retire shall give notice Of his intention of the same at a Certain time before hand.

Revocation of continuing guarantee by change in firm: (Sec: 38) Where a continuing guarantee given to a firm or to a third party, and thereafter there is change in constitution of firm, Then in the absence of agreement to the contrary, the continuing guarantee is revoked for all future dealings from the date of any change in constitution of the firm.
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THE INDIAN PARTNERSHIP ACT, 1932

CHAPTER - 3

Multiple Choice Questions

1. A partner can retire on a. Reaching the age of superannuation b. On the balance in the capital account reaching a certain amount c. In accordance with the Partnership Deed d. On the condition of his nominee becoming a partner A partner can be expelled if _________________ a. Such expulsion is in good faith b. The majority of the partner agree on such expulsion c. The expelled partner is given an opportunity to start a business competing with that of the firm d. Compensation is paid Death of partner has the effect of____________ a. Dissolving the firm b. Result in continuance of the business of the firm c. His heirs joining the firm d. Computation of profits up to the date of death After retirement from firm, which of the following partners is not liable by holding out, even if the public notice of retirement is not given? a. Active partner b. Sleeping partner c. Representative of deceased partner d. Both (b) and (c) The reconstitution of the firm takes place in case a. Admission of a partner b. Retirement of a partner c. Expulsion or death of a partner d. All of the above A new partner can be admitted in the firm with the consent of a. All the partners b. Simple majority of partners c. Special majority of partners d. New partner only A partner may retire from an existing firm a. with consent of all partners b. as per express agreement c. by written notice in partnership at will d. all of the above A partner may be expelled from the firm on the fulfillment of the condition that the expulsion power is exercised. a. As given by express contract b. By majority of partners c. In absolute good faith d. All of the above

2.

3.

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THE INDIAN PARTNERSHIP ACT, 1932

3.3
3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6

CHAPTER - 3

REGISTRATION AND DISSOLUTION OF A FIRM

Topics Covered : Registration procedure. Consequences of Non-registration. Registration of changes. Dissolution. Consequences of dissolution. Mode of giving public notice (Sec. 72).

3.3.1 Registration Procedure: (Sec. 58)

Registration of partnership firm is not compulsory and its registration is powered by State government. - Application for registration:- Application should be in prescribed format. - Accompanied by prescribed fees. - Application is to be made to Registrar of firms, with following details. The firm name. Principal place of business of firm. Other places of business where business is carried on. Date when each partner joined the firm. Full name and permanent address of all partners, and The duration of firm, (if any).

Application shall be signed by all the partners or by their agents authorized in this behalf. While selecting firms name, one has to take care of following: It should not be similar with the name of any existing firm. Firm name shall not contain any of the following words without consent of State government: - like Crown, Emperor, Empress, Empire, Imperial, King, Queen, Royal or words affecting the patronage of government. Further the requirement of Name & Emblems Act, 1950 should also be satisfied.

Registration Certificate: Once Registrar office of firms is satisfied with application, they shall make entry in register of firms, then he shall issue certificate of registration.

Note:Registration is effective from the date when registrar makes entries in register and not from the date of application made.

3.3.2 Effects of Non- Registration of firm: (Sec.69)

Law has not prescribed any time limit for registration, so partners can register firm any time. No suit against third party:An unregistered firm or its partners cannot file a suit against third parties to enforce a right arising out of contract or in relation to this Act.
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THE INDIAN PARTNERSHIP ACT, 1932

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No suit against other partners and firm:In unregistered firm or its partners cannot file a suit against other past or present partners or the firm to enforce a right arising out of contract or conferred by this Act. No claim of set off:Unregistered firm or its partners cannot claim for set-off in a suit filed against firm by a third party except for sum not exceeding Rs. 100/E.g.: - ABC unregistered firm purchased goods of Rs. 1,000/- from Mr. A, goods received by ABC were having damaged goods worth Rs. 300/-. ABC will need to pay Rs. 900/- and not Rs. 700/against adjustment of set off possible, because their firm is unregistered, so maximum set off permissible is Rs. 100/Non-registration however, does not affect the following:a) b) c) d) Right of third parties to sue the firm or its partners The power of official assignee or receiver to realize the property of an insolvent partner. Rights of firms or partners of firms having business place outside India. The right of partner to :- Sue for dissolution of firm, - Sue for accounts of dissolved firm, - to enforce any right or power to realize the dissolved firms property. e) Right to set off, where the claim does not exceed Rs. 100/-

3.3.3 Registration of Changes or Alterations

Types of Alteration a) When new branch is opened or closed or changes in name and address of partners. Change in firms name or change in principal place of registered firm. Changes in constitution of registered firm due to admission and retirement of partners. Withdrawal or Continuation by a minor on attaining majority. Approval & Sign for alteration Any partner or agent of firm

b) c)

All the partners or by their agents. Any of the partner or agents of such partners.

d)

Major partner (who was earlier minor) or his agent.

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THE INDIAN PARTNERSHIP ACT, 1932

CHAPTER - 3

Multiple Choice Questions

1. Registration of a firm is a. Compulsory b. Optional c. Occasional d. None of the above An unregistered firm cannot claim____________ a. Set on b. Set off c. Set on and Set off d. None of the above On dissolution the partners remain liable until a. Accounts are settled b. Partners dues are paid off c. Public notice is given d. The registrar strikes off the name Which of the following statements, about the registration of firm, is not true: a. It must be done at the time of its formation. b. It may be done at the time of formation. c. It may be done before filing a suit against third party. d. It may be done at any time after its formation. As per the accepted view, the registration of the firm is considered complete when. a. Complete application for registration is filed with the Registrar b. Registrar files the statement and makes entries in the Register of Firms c. Registrar gives notice of registration to all partners d. Court records the statement and certifies the entries in Register of Firms Which of the following is not a disability of an unregistered firm? a. It cannot file a suit against third parties b. Its partners cannot file a suit against the firm c. It cannot claim a set-off exceeding Rs. 100 d. It cannot be sued by a third party A partnership firm is compulsorily dissolved where a. All partners have become insolvent b. Firm's business has become unlawful c. The fixed term has expired d. In cases (a) and (b) only On which of the following grounds, a partner may apply to the court for dissolution of the firm? a. Insanity of a partner b. Misconduct of a partner c. Perpetual losses in business d. All of the above Dissolution of firm : (Sec-39) Dissolution of partnership among all the partners of a firm is called Dissolution of firm. Thus, the partnership ends among all partners which leads to closure of business. There are two modes of dissolution of a partnership firm:
CMA -FOUNDATION 3.22

2.

3.

4.

5.

6.

7.

8.

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THE INDIAN PARTNERSHIP ACT, 1932

CHAPTER - 3

Dissolution without the Order of court (Sec- 40 to 43)

Dissolution With the order of court (Sec-44)

Sec-40: Dissolution by agreement. Sec-41: Compulsory dissolution. Sec-42: On happening of certain contingencies Sec-43: Dissolution by notice when Partnership at will

a) Insanity of partner. b) Permanent incapacity. c) Misconduct. d) Persistent breach of agreement e) Transfer of interest. f) Business is at loss. g) Any other ground (just and equitable)

3.3.4 Dissolution without the order of court

1) Dissolution by agreement ( Sec-40):- If in partnership deed, it is specifically said about the dissolution on completion of 2 years time duration. - When all partners mutually agrees to dissolve firm. 2) Compulsory Dissolution ( Sec-41): When all partners of firm are declared insolvent by court. When all partners of firm except one are declared insolvent, as partnership cannot sustain with one partner, as its essential for partnership that there should be minimum 2 partners. When nature of business becomes unlawful.

Note: - If 2 or more separate business adventures are carried on by partnership firm, than on happening of one business, will not affect other lawful business carried by firm.

3) On happening of certain contingencies ( Sec-42):If there is not specific clause in contract of partnership, firm will get dissolved in following cases:-On expiry of the partnership duration. - On death of one partner, where 2 partners are running firm. - On completion of partnership adventure.
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THE INDIAN PARTNERSHIP ACT, 1932

4) Dissolution by notice ( Sec-43):

CHAPTER - 3

A firm can be dissolved by any partner by giving a notice to dissolution to other partners. However, the firm can be dissolved by notice only where the partnership firm is at will. If the firm is not at will, then it cannot be dissolved by notice of dissolution.

3. Rights of partner on dissolution : Right to enforce winding up: - On dissolution of firm, after generating cash flow by sale of partnership property and setting all debts of firm, the surplus should be distributed among the partners as per their right and share. Right of partner is called Partners lien. Right to settled private debts from private estate first: - Debts of firm shall be paid first out of the property of the firm and if there is any surplus left than it will be distributed among partners. - Private debts of the partners shall be paid first out of the private estate of the partner and if there is any surplus than it will be utilized towards payment of liabilities of firm. Right to share personal profits earned after dissolution(Sec-50): - If firm get dissolved due to the death of a partner and the legal heirs of deceased partner or continuing partner have earned any personal profit from use of firms property or firms na me before the firm has been completely wound up, a partner has a right to share such profit. 4) Right to receive premium on premature dissolution (Sec-51): - If a partner enters into partnership for a fixed term paying premium, and if firm dissolves before the expiration of term, he is entitled for repayment of his whole or part premium. - However, there will be no premium paid back, where dissolution is:a) Due to death of partner, or b) Due to misconduct of partner who paid premium, or c) If agreement does not contain any provision about refunding premium. 5) When partnership contract gets cancel because of fraud or misrepresentation (Sec-52): - When one partner cancels contract because of fraud by another partner, than the partner misguided has following rights: A lien on surplus, after payment of firms debt, for any sum paid by him as share and for any capital contribution by him. If he had paid any amount to creditor from his pocket, he becomes creditor of the firm for that specific amount. He had right to indemnity from fraud partner or his misrepresentation against all the debts of the firm.
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3.3.5 Liabilities of partner on dissolution
Liabilities for acts of partners done after dissolution:

CHAPTER - 3

Public notice for dissolution is mandatory, if it is not given, the partners continue to be liable for any act done by any of them to third parties, even after dissolution. In such cases, it is deemed that acts has been done before dissolution. e.g :- P and Q partners, agree to dissolve partnership on 15 th aug, 2009. But they did not give public notice of dissolution. P takes credit loan on firms name from Z. In this case firm is liable to pay Z his total dues. Following are not liable for acts done after the dissolution of the firm and no notice of dissolution need to given: a) Estate of deceased partner. b) An insolvent partner. c) Sleeping/dormant partner who retires.

Continuing authority for winding up : On dissolution, the authority of each partner to bind the firm and their mutual right and obligations continue for the following purpose:a) To wind up affairs of firm, and b) It is necessary to complete the transactions started not completed at the time of dissolution.

Public Notice :- ( Sec-72) Public notice is required in following situations:a) Retirement and Expulsion of partner, b) Dissolution of firm, c) Election to become partner or not by minor on attaining majority.

3.3.6 Modes of Public notice

For Registered Firm: a) Notice to registrar of firms. b) Publication in the Official gazette. c) Publication in at least one vernacular newspaper circulating in district, where principal place of business exist For Unregistered Firm: a) Publication in the Official gazette. b) Publication in at least one vernacular newspaper circulating in district, where principal place of business exist.
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THE INDIAN PARTNERSHIP ACT, 1932

Settlement of Accounts :-

CHAPTER - 3

If absence of any agreement, the accounts are settled accordingly to the fundamental rules under section 48 of partnership Act. 1) Payment of losses: The losses of the firm, including the deficiencies of capital shall be paid in the following order: a) First out of profits, b) Out of capital ( if profits are not sufficient), c) If still some balance remains, it shall be in profit sharing ratio. E.g. K & L are partners, sharing profit and loss equally. K dies and it was found that capital contribution of K was Rs. 2,000/- and of L was Rs. 200/-. The assets were of value Rs. 500/-. The deficiency of =1,700(2000+200-500), it must be shared equally by L and Ks estate.

2) Utilization of Assets: Assets sold, its value should be applied in following order.

Paying debts to third parties

Loans and advances of partners proportionately. Flowchart flows down step by step if balance value of assets remains after payments chronologically, it keeps going down Share among partners in profit sharing ratio Payment of capital in their proportion

Addition reading Notes:Garner Vs Murray Rule

G, M and W were partners in a firm on the terms that profits should be divided equally. The capital was contributed in unequal shares. The capital contributed by G was more than the capital contributed by M. On the dissolution of the firm, the assets were insufficient to repay the capital in full. W became insolvent. The following decisions are given in this case: - The solvent partners should bring the share of their loss in cash. - The solvent partners shall bear the deficiency of capital of insolvent partner in the ratio of their capitals. It is to be noted that the rule of Garner vs Murray is applicable only when there is no other agreement between the partners. Again, this rule is not strictly applied in India in as much as the solvent partners are not asked to bring the share of their loss in cash.
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