SEMESTER IV

MODULE III
THE INDIAN PARTNERSHIP ACT, 1932
Q.1 Define partnership and discuss the essential elements thereof ?
Ans. Definition :- Section 4 – Of the Indian Partnership Act, 1932. Defines
Partnership, “Partnership is the relation between persons who have agreed to share the
profits of business carried on by all or any of them acting for all.”
Persons who have entered into partnership with one another are called
„partners‟. Collectively they are called a „firm‟. The name under which they carry on
the business is called “firm name”. Partnership is a relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting
for all. Partnership is abstract [ means it can be separated.] Firm is a concrete thing.

FORMATION OF PARTNERSHIP :-
Partnership may be express or implied. Two or more persons join hands to
share profits of the business carried on by all or any of them acting for all. Parties to
the Partnership must be competent to contract. However, a minor may be admitted to
the benefits of partnership with the consent of all the other partners. Partnership
business and object must be lawful. As relationship of partners to one another is that
of agency, no consideration is required to create the partnership.

(1) DEED OF PARTNERSHIP :-

It is in the interest of the parties that the agreement creating partnership must
be in writing. The document which include or makes this agreement is known as the
Deed of Partnership or the Articles of Partnership. The following matters are usually
included in the Deed of Partnership:
(i) The nature and the principal place of business and the business address;
(ii) The name of the firm;
(iii) The names and addresses of the partners;
(iv) The duration of partnership and the mode of dissolution;
(v) The amount of capital to be contributed by each partner;
(vi) The share of profits to be enjoyed by each partner;
(vii) Interest on capital and drawings;
(viii) The mode of Management;
(ix) The powers of partners;
(x) Terms on which a partner may retire;
(xi) Valuation of goodwill on the retirement or death of a partner;
(xii) Expulsing of partner;
(xiii) Introduction of new partners;
(xiv) Accounts;
(xv) Arbitration.
The Deed of Partnership must be stamped as required by the Indian Stamp
Act., 1889.

(2) WHO MAY BE PARTNERS ?

Every person, who is competent to enter into a contract, may enter into a
contract of Partnership. Section 11 - Of the Indian Contract Act, 1872 lays down that
every person is competent to contract, who is of the age of majority according to the
law to which he is Subject and who is of sound mind and is not disqualified from
contracting by any law to which he is subject.

(i) MINOR :- A minor cannot become a partner. He may be with the consent of
the other partners entered into the benefits of partnership.
(ii) PERSON OF UNSOUND MIND OR LUNATIC :- A person of unsound mind
is not Competent to contract and therefore, cannot become a partner.
(iii) WOMAN :- A woman, whether married or married, can be a partner.
However, she cannot, be a partner if she is a minor or of unsound mind.
(iv) ALIEN ENEMY :- An alien enemy cannot enter into a Contract of partnership
though an alien friend can do so.
(v) A COMPANY OR CORPORATION :- A corporation being an artificial
person can, neither become a partner nor can it enter into a partnership
agreement.
(vi) A FIRM :- A firm cannot be a partner of another firm though its partners can
be in their individual capacity.

(3) WHO ARE NOT PARTNERS ?

i) The members of a Hindu Undivided Family carrying on a family business.
ii) A Burmese, Buddhist husband and wife carrying on business
iii) Lender of money to persons engaged or about to be engaged in any business,
receiving a rate of interest.
iv) Servant or agent engaged in a business and receiving remuneration.
v) Widow or child of a deceased partner, receiving a portion of the profits as
annuity.
vi) A previous owner ( or part owner ) of the business selling his business along
with the goodwill and receiving a portion of the profits in consideration of the
sale.
vii) Joint or co-owners of property sharing profits arising from the property.

CHARACTERISTICS OR ELEMENTS OF A PARTNERSHIP OR ESSENTIAL

FEATURES OF A PARTNERSHIP :-
(1) Association of persons,
(2) Partnership is the result of an agreement,
(3) Carrying on business,
(4) Sharing of profits, and,
(5) Mutual Agency.

(1) ASSOCIATION OF TWO OR MORE PERSONS :-

At least two persons should join together to constitute a partnership. Persons
who have entered into partnership with one another are called individually
“Partnership”. Collectively, they are called „a firm‟. A firm is distinct from its
members but is not a legal entity under the Indian Partnership Act, though under the
Income Tax Act, it has an independent separate tax legal entity.
The name under which their business is carried on is called the „firm name‟.
Persons may carry on business under any name and style they may choose to adopt
provided it is not misleading.
Minimum and maximum number :- Minimum number to constitute a
partnership is „two‟. Maximum number in case of partnership firm caring on banking
business must not exceed „ten‟ and in case of any other partnership firm engaged in
any other business the maximum number must not exceed „twenty‟.
It will therefore, be seen that an individual cannot constitute a partnership.
The business run by an individual alone would be a “ Proprietary” enterprise. If the
number exceeds the maximum limit, the partnership firm should be immediately
registered as a “ Company” under the Companies Act, 1956, otherwise it will be as
“Illegal Association”.

(2) PARTNERSHIP IS THE RESULT OF AN AGREEMENT :-

There must be an agreement entered into by all the persons who came together to
form a partnership. The agreement may be express or implied. The contract may be
for a “Fixed or certain period” or for an “Uncertain period”. It may also be for a
„particular venture‟ or „at will‟. The contract which may be in writing or may be
implied from the acts of the parties must possess all the essential elements of an
ordinary contract under the Indian Contract Act, 1872.

(3) CARRYING ON BUSINESS :-

Business is another essential features of the partnership. Where a few persons
join together for some charitable purpose, the association cannot be termed as
partnership. The term “business” includes every trade, occupation and profession.
For eg., a polyclinic can be started by two or more doctors on the basis of
partnership.

(4) SHARING OF PROFITS :-

Division of profits is an essence of partnership profits mean “net profits” as
distinguished from “gross profits”. An agreement entered into by all the persons
concerned must be for sharing the profits of a business.
An agreement may not mention any thing regarding sharing of losses as an
agreement to share the losses is not essentials. Every man, who has a share in the
profits of a trade, ought also to bear his share of loss. The partners may agree to share
the profits and losses in different proportions.

(5) THE BUSINESS MUST BE CARRIED ON BY ALL OR ANY OF THEM

ACTING FOR ALL = MUTUAL AGENCY :-
The business which the partners agree to carry on must be carried or by all or
any of them acting for all. Persons, who carry on the business, do so as “agents” for
all the persons in the partnership. They are “agents” for each other and “principals”
for themselves.
Section 18 – “Subject to the provisions in this Act, a partner is the agent of the
firm for purposes of the business of firm”.

Q.2 Discuss the test of determining the existence of partnership ?

Ans. TEST FOR DETERMINING THE EXISTENCE OF PARTNERSHIP :-
Section 6
1. NATURE AND CONTENTS OF AN AGREEMENT BETWEEN PARTIES :-
Where partnership between a group of persons exists or not depends upon the
nature and contents of an agreement between them. It the agreement between them
provides for.
i) sharing of the profits of a business, and,
ii) if the business is carried on by all or any of them acting for all, it proves the
existence of partnership, otherwise not.
a) CIRCUMSTANCES WHICH THE COURT MUST TAKE INTO
CONSIDERATION :-
The difficulty, however, arises in the absence of specific agreement
constituting partnership among the partners; or where the agreement between a group
of person is such that it does not categorically speak of partnership. In such a case,
the existence of partnership is to be determined U/s 6.
“ In determining whether a group of persons is or is not a firm, or whether a
person is or is not a partner in a firm, regard shall be had to the real relation between
the parties, as shown by all relevant facts taken together.
Cox V/s Hickman (1860) 8 M.L.C. 268.
The case laid down the rule that in order to determine whether two or more
persons are partners or not, the Court must take into consideration all the relevant
circumstances taken together.

b) CASES WHERE PARTNERSHIP RELATION DOES NOT EXIST :-

Section 6 Explanation 1 – Joint or common Owners Sharing Profits or Gross
Returns :- It says that the joint or common owners of property, who share the profits
or gross returns arising from the property, do not become partners by virtue of that,
because joint-ownership is not a business.
Section 6 Explanation 2 – The receipt by a person of a share of the profits of a
business, or of a payment, contingent upon the earning of profits or varying with the
profits earned by a business, does not of it self make him a partner with the persons
carrying on the business.
No partnership exists in the following cases :-
a) Lender of money receiving a Share of Profits.
b) Servant or Agent Receiving a Share of Profits.
c) Window or Child of a Deceased Partner.
d) Seller of Goodwill.
e) Member of Hindu Undivided Family because a male child of a Hindu acquires an
interest in such business by birth, apart from any agreement to that effect.
f) A Burmese Buddhist husband and wife.

Q.3 What is Property of the Firm ? ( Section 14 & 15 )

Ans. Property of the firm includes all property, rights and interest in the property
originally brought into the stock of the firm or acquired, by purchase or otherwise, by
or for the firm, or for the purposes and it the course of the business of the firm, and
includes also the goodwill of the business. Partners by an agreement between
themselves may convert partnership property into separate property of an individual
and vice versa.
Property of the firm is therefore deemed to include :-
(1) All property, rights and interest in the property originally brought into the
common stock of the firm by the partners as their contribution.
(2) All property, rights and interest in property acquired with money belonging to the
firm, by purchase or otherwise, by or for the firm or for the purposes and in the
course of the business of the firm.
(3) Goodwill of the business.
GOODWILL :-
Goodwill is the whole advantage, whatever, it may be, of the reputation and
the connections of the firm. It means every advantage which the firm has acquired in
currying on its business with integrity, efficiency and quality products. It is an
advantage acquired in addition to the capital, stock, fund or property of the firm.
Goodwill is of two types. (i) Personal Goodwill and (ii) Firm Goodwill.
i) “Personal Goodwill” is attached to the individual. When the owner or partner
of the firm enjoys reputation in his own name, it is a case of “Personal
Goodwill”.
ii) “Firm Goodwill” is attached to the premises of the firm and it is the firm name
which enjoys the reputation or goodwill in market.
Goodwill is an assets of the firm and it can be sold either separately or along
with the other property of the firm. The property of the firm includes the goodwill of
the business.

APPLICATION OF THE PROPERTY OF THE FIRM :- Section 15 –

Subject to the contract between partners, the property of the firm shall be held
and used by the partners exclusively for the purpose of the business of the firm. This
means that if a partner derives and personal benefit from any transaction of the firm
either by the use of the property of the firm, or firm name, he is bound to reimburse
the profits of the firm account.

Q.4 TYPES OF PARTNERSHIPS AND DISTINCTION BETWEEN

PARTNERSHIP-AT-WILL AND PARTICULAR PARTNERSHIP :-
1. PARTNERSHIP FOR A FIXED TERM :-
The partners are free to fix the duration of the partnership or be silent about it.
Where partners have agreed to carry on the business for a definite period of time, the
partnership is said to be for a fixed period. It shall came to an end only after the
expiry of the stipulated period.
However, where the partners continue the business even after the expiry of the
stated period, the partnership ipso facto [ by the very fact ] gets converted into
“Partnership-at-will”. The rights and duties of the partners continue to be the same
unless they have been changed by an agreement or are inconsistent with a partnership-
at-will.
2. PARTICULAR PARTNERSHIP :- Section 8 –
A person may become a partner with another person in particular adventures
or undertaking.
Where two or more persons agree to do business in particular adventure or
undertaking, such a partnership is called a “Particular Partnership”.
3. PARTNERSHIP-AT-WILL :- Section 7 & 43 –
Where no provision is made by contract between the parties for the duration of
their partnership, or for the determination of their partnership; the partnership is
“Partnership-at-will”.
Partnership-at-will has two characteristics :
i) There is no provision in the contract between the partners for duration of the
partnership.
ii) There is not provision in the contract for determination or termination of the
partnership. The partnership-at-will has no fixed or definite date of
termination and therefore, death or retirement of any of the partner does not
affect the existence of partnership.
HOW CAN THE PARTNERSHIP-AT-WILL BE DISSOLUED ? Section 43 –
1. Where the partnership is at will, the firm may be dissolved by any partner by
giving notice in writing to all the other partners of his intention to dissolve the
firm.
2. 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.
3. Notice must be an unambiguous intimation of a final intention to dissolve
partnership. It must be explicit, precise and final.
4. Minimum 14 days notice had been held to be a reasonable notice.
5. Notice once given cannot be withdrawn unless all the other partners agree to it.
A partnership-at-will may also be dissolved by filing a suit for dissolution.
The date of dissolution will be the date fixed in the preliminary decree.

Q.5. What are the mutual rights duties and liabilities of the partners inter-se ?
Ans. RIGHTS, DUTIES AND LIABILITIES OF PARTNERS :-
Persons who join hands together and agree to do business in partnership,
should have a bond of mutual trust and confidence between each other.

In case of any difference arising as to ordinary matters connected with the

business between the partners, the majority decision is carried out which is binding on
the minority. The majority decision must be made in good faith with a view to the
collective interest of the firm. However, where unanimous consent of all the partners
is required then the partners have to confirm together. For e.g. nature of business,
admission of a new partner, transfer of a partner‟s share, constitution of partnership.

The mutual rights and duties of the partners of a firm may be determined by
contract, which may be express or implied by the Course of dealings. For e.g.
Partners may decide upon the profit sharing ratio, amount of capital contributions,
work allocation, interest on loans and capital etc.

In the absence of express contract between the partners, the relations between
the partners are governed by Sections 9 to 16 and 25 of the Act.

RIGHTS OF PARTNER :-
1. TO TAKE PART IN THE BUSINESS :- Section 12 (a) –
Every partner has a right to take part in the conduct and management of the
business.

2. TO SHARE THE PROFITS :- Section 13 (b) -

Every partner has a right to share equally in the profits of the business earned.

3. TO HAVE ACCESS TO THE ACCOUNTS :- Section 12 (d) –

Every partner has a right to have access to and inspect and copy any of the
books of the firm.

4. TO BE INDEMNIFIED :-
Every partner has a right to be indemnified by the firm in respect of
payments made and liabilities incurred by him,
 in the ordinary and proper conduct of the business; and
 in doing such act in an emergency, for the purpose of protecting the firm from
loss, as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.
For the negligence of a partner in the ordinary course of the business of the
firm, other partners are liable.

5. TO BE CONSULTED :-
Every partner has a right to be heard and to be consulted before any matter of
difference is decided which affects the business of the partnership. He has a right to
express his opinion and the same to be heard and considered by his Co-partners.

6. TO INTEREST ON LOANS AND CAPITAL :- Section 13 (c) –

A partner is entitled to interest at 6% per annum on any payment or advance
made by him beyond the capital he has agreed to subscribe. Such interest is payable
to a partner not only out of profits of the business but also out of the assets of the firm.

7. POWER IN EMERGENCY :- Section 12 & 13 –

A partners has the authority to act in an emergency to protect the firm from losses
provided he acts as a man of ordinary prudence would have acted under the similar
circumstances. Where a partner has incurred some expenses or liability for acting in
such a manner, he has the right to be indemnified by the firm

8. TO RETIRE :- Section 32 (1) –

A partner has a right to retire;
I. with the consent of all other Partners;
II. in accordance with the express agreement by the partners;
III. by giving notice in writing to all the other partners of his in tension to retire
where partnership is “at will”.

9. TO USE PARINESHIP PROPERTY :- Section 15 –

The property of the firm shall be held and used by the partners exclusively for
the purpose of the business of the firm.

10. TO HAVE BUSINESS WOUND-UP AFTER DISSOLUTION :- Section 46 –

On dissolution of a firm, every partner or his representative is entitled, as
against all the other partners or their representatives to have the property of the firm
applied in payment of the debts and liabilities of the firm and to have the surplus
distributed among the partners or their representatives according to their rights.

DUTIES AND LIABILITIES OF A PARTNER :-

1. TO CARRY ON THE BUSINESS TO COMMON ADVANTAGE :-
Every partner is bound to –
I. carry on the business of the firm to the greatest common advantage;
II. be just and faithful to each other;
III. use reasonable case and skill in the performance of his duties; and
IV. render true accounts and full information of all the things affecting the firm to
any partner, or his legal representative. [ Section 9 ]
2. TO INDEMNIFY :-
Every partner shall indemnify the firm for any loss caused to it by;
his fraud in the conduct of the business of the firm; [ Section 10 ] The partner cannot
contract himself out of his liability;
his willful neglect in the conduct of the business of the firm. [ Section 13 (f) ]
The partner will not be liable for acts done in good faith.

3. TO BE DILIGENT :- Section 12 (b) –

Every partner is bound to attend diligently to his duties in the conduct of the
business.

4. NO REMUNERATION :- Section 13 (a) –

A partner is not entitled to receive remuneration for taking part in the conduct
of the business or claim remuneration for services rendered to the firm.

5. TO ACCOUNT FOR PERSONAL PROFITS MADE :-

Every partner shall make over to the firm any personal profits made by him
without the consent of the other partners. The relationship between the partners being
a fiduciary one, no partner is entitled to make any personal profits.

6. NOT TO CARRY ON COMPETING BUSINESS :-

No partner shall carry on any business of the same nature as competing to the
business o the partnership firm. It the partner carries on the competing business, then
subject to the contract between the partners, he shall account for and pay to the firm
all the profit made by him in that business.

7. TO SHARE LOSSES :- Section 13 (b) –

Subject to the contract between the partners, a partner is liable to contribute
equally to the losses sustained by the firm. The partners may be by contract exclude
their liability to share losses and only one or two of them may be liable to share the
losses wholly. However, liability to third parties of all the partners continues.

8. LIABILITY FOR ACTS OF THE FIRM :- Section 25 –

Every partner is liable, jointly with all the other partners and also individually
for all the acts of the firm done while he is a partner.

9. NOT TO ASSIGN HIS RIGHTS :-

No partner should assign his rights and interest in the firm to an outsider so as
to constitute him the partner in the firm. But a partner may assign his share of profits
and assets in the firm to outsider.
Q.6 Short notes :-
1. DISTINCTION BETWEEN PARTNERSHIP AND JOINT HINDU FAMILY
FIRM
PARTERSHIP
1. MODE OF CREATION :-
Partnership is created by an agreement.
2. RIGHTS AND DUTIES :-
The rights and duties of the Partners
together with their liabilities are governed
by Partnership Act and by agreement
between the Partners.
3. RESPONSIBILITY :-
All partners are jointly and individually
responsible for the acts of other partners.
The are agents of the firm and of each
other.
4. ADMISSION OF NEW MEMBERS :
In partnership, new members can be
admitted only with the consent of all the
partners..
5. LIABILITIES :-
Every partner is liable to unlimited extent
for the debts of the firm.
6. MINOR MEMBERSHIP :-
A minor cannot be a member of a
partnership firm except with the consent of
all the partners.
7. NEED OF REGISTRATION :-
In directly law has made registration of a
firm compulsory because an unregistered
Firm suffers from some disabilities.
8. RIGHT TO DISSOLUTION OR
PARTITION.
In partnership, every partner has a right
to sue for dissolution and accounts of the
firm.
JOINT HINDU FAMILY FIRM
Joint Hindu Family Firm is created by
status or by operation of law i.e. Hindu
Law.
The rights and liabilities of the Co-
partners are determined by rules of
Hindu Law.
Karta or Manager of a Joint Hindu Firm
is only responsible for the acts of the
firm unless other members participate
in transactions. Co-parcener is not the
agent of other Co-parcener.
In a Joint Hindu Family business, a person
becomes a member by virtue of his birth
in the family.
Only karta has unlimited liability. Other
members or Co-parceners are liable to the
extent of their share in the Joint Family
business.
A minor of a Joint Family is a member
of the firm from the date of his birth.
No registration is required for a Joint
Hindu Family business.
In a Joint Hindu Family business, a Co-
partner has a right to sue for partition.
9. EFFECT OF DEATH OF A MEMBER.
Death of partner may dissolve a
partnership.
10. RIGHT TO DEMAND ACCOUNTS
A partner can ask for past accounts on
Severing his connections with the firm.
Death of a Co-parcener does not dissolve a
Joint Family Firm.
Member of a Joint Family Firm can not do
so

11. AUTHORITY.
Partners have authority to borrow and Only Manager or karta of the Joint
bind other partners. Family Firm has an authority to borrow
and bind other members.

2. DISTRINCTIN BETWEEN PARTNERSHIP AND COMPANY :-

PARTNERSHIP COMPANY
REGISTRATION :-
Registration of a firm is not Compulsory Registration of a company is Compulsory
under the Partner Ship Act. under the Companies Act.

MEMBERSHIP :-
Minimum two persons Constitute Minimum two and maximum fifty
Partnership. Maximum membership in case constitute a private limited Company and
of partnership doing banking business is Minimum seven and Maximum unlimited
ten persons and for other business is twenty constitute a public limited company.
persons.

LEGAL STATUS:-
A firm has no individual legal Status. A company has a separate legal existence
of its own and is considered a separate
person from its members.
PROPERTY :-
Property of the firm is the property of the Property belongs to the company.
partners.

CONTRACTS :-
A partner cannot contract with the firm. A Shareholder can contract with the
Company.
MANAGEMENT :-
Management vests in the hands of the Management vests in the Board of
partners except in the case of a dormant or Directors elected by the shareholders.
a sleeping partner.

EXISTENCE :-
Partnership has no perpetual existence. Company has a perpetual existence.

LIABILITY :-
Partners of the firm are liable to unlimited The liability of shareholders is usually
extent i.e. in partnership, there is an limited.
unlimited liability.
CREDITERS :-
Creditors of the firm are also the creditors
of the partners individually. Creditors are only the creditors of company
and not of individual shareholders.
TRANSFER OF INTEREST :-
A partner cannot transfer his the consent of
the other partners. A transferee becomes a The transferee becomes a member of the
partner of the firm only with the consent of company.
the other partners
STATUTORY OBLIGATIONS :-
Partnership has less statutory obligations. Company is regulated strictly under the
Companies Act.
DEATH :-
Death of a partner may mean dissolution of Death of a shareholder does not affect the
partnership. existence of a company.

ACCOUNTS :-
Accounts of the partnership firm need not Accounts of a company must be audited by
be audited by an auditor. an auditor.

AGENCY :-
Every partner is an agent of the other Shareholder of a company is not an agent
partner. of the company or of the other shareholder.

A partner cannot transfer his share without Shares are freely transferable is a
the consent of the other partners. Company.

3. DISTINCTION BETWEEN PARTNERSHIP-AT-WILL AND

PARTICULAR PARTNERSHIP :-

PARTICULAR PARTNERSHIP PARTNERSHIP-AT-WILL

1. DURATION :-
A particular partnership is formed for A partnership-at-will has no time limit for
carrying out particular adventure or an its existence.
undertaking. It is, therefore, dissolved
immediately on fulfillment of the venture
or if it is formed for a particular time, it is
dissolved by efflux of time.

2. NOTICE :-
No notice is necessary for effecting its Any partner may give a notice in writing to
dissolution. all the other partners of his intention to
dissolve the firm.

3. OBJECT :-
A particular partnership is formed for It may carry out any business from time to
currying out an adventure. time according to the consent and
agreement of all the partners.
 4. DISTINCTION BETWEEN PARTNERSHIP & CO-OWNERSHIP

PARTNERSHIP CO-OWNERSHIP
1. MODE OF CREATION 1. Co-ownership is not necessarily the result
Partnership is created by an agreement. of an agreement; is may arise in any other
way
2. NEED OF BUSINESS
Business is essential for existence of 2. Co-ownership can exist without business
partnership

3. COMMUNITY OF PROFIT & LOSS

Partnership necessarily involves community 3. Co-ownership does Partnership
of profit at least and not of losses necessarily involves community of profit
or losses.
4. MUTUAL AGENTS
Partners are mutual agent. 4. Co-ownership is not mutual agent.

5. TRANSFER OF INTEREST
A partner cannot transfer his interest in
partnership to a stranger without the consent
of the partners. 5. A co-ownership can transfer his interest
in co –ownership of a property to a
6.PARTITION OR DISSOLUTION stranger without the consent of the other
A partner can sue his co-partner for co-ownership
dissolution and accounts of the firm
6. A co-owner can for partition of the joint
7.LIEN FOR EXPENSES property.
A partner has a line on the partnership
property for expenses, incurred by him, on 7. A co-owner has no line on the property,
such property, on behalf of the firm owner by all the co-owners.

5. TYPES PERTNERS :-

1. ACTUAL OR ACTIVE PARTNER :-

He is the person who actively, actually or effectively a partner the conducts
the business of the firm. He the firm. He is the agent of the other partners and has
authority to bind the firm and the other partners in the ordinary course of business.
He is liable for the debts of the firm. A notice of his retirement to the general public
must be given either by him or the firm, otherwise he shall be held liable as a partner
by holding out.
2. SLEEPING OR DORMANT PARTNER :-
He takes no active interest in the affairs of the firm and the conducting the
business of the firm. He invests capital and shares profits of the firm. To the third
parties he is known, but he is liable like an actual partner for the debts of the firm. He
is like an undisclosed principal. As he is unknown to the world he need not give
notice of his retirement from the firm. He is however liable for the acts of the firm.

3. NOMINAL PARTNER :-
A person who lends his name of the firm without taking interest in the affairs
or management of the firm is called a nominal partner. Unlike sleeping partner, he is
known to the world. He however, does not share the profits of the firm like a sleeping
partner nor does he invests in the business of the firm. He is, however, liable for all
the acts of the firm.

4. PARTNERS IN PROFITS ONLY :-

Where a partner agrees with the other partners that he shall in profits only
without being liable for the losses is called partner in profits only. However, he
remains liable to the creditors for the debts of the firm since under the law the liability
of the partners is joint and several and at the same time unlimited. Normally such
partners do not take active part in the conduct of the business of the firm.

5. SUB-PARTNER :-
Where a partner agrees to share his profits earned from the firm he is called a
sub-partner enjoys no rights against the firm and cannot in any way represent the firm.
He also cannot be held liable for the debts and liabilities of the firm.

DISSOLUTION OF A FIRM
Q.7 What is meant by dissolution of a firm ?
What are the grounds for dissolution of a firm ?
Ans. Section 39 :- Dissolution of a firm means a firm ceases to exist.
The relationship existing between the partners discontinues. The whole firm is
dissolved and the partnership terminates. The dissolution of partnership between all
the partners of a firm is called the “dissolution of the firm”.
Thus, dissolution of a firm is very must different from retirement of a partner,
because in retirement, only the retiring partner goes out and the business of the firm is
continued by one or more of the partners, but in dissolution, the firm itself ceases to
exist.

Q.8 DISTINCTION BETWEEN DISSOLUTION OF A FIRM AND

DISSOLUTION OF PARTNERSHIP :

Ans.: Dissolution of a firm is different firm dissolution of partnership. Dissolution

of a firm involves total break down or severance of the relation of partnership
between all the partners. It ends the rights of partners to exist as a running concern
and is immediately followed by its liquidation, which, in turn, leads to termination of
legal existence of partnership. Dissolution of partnership on the other hand, involves
breakdown of the relation of partnership between a few and not all the partners, and
the continuance of the business by the surviving partners. It involves a changes in the
relationship of the partners, which results into the reconstitution of a new firm.
Thus, dissolution of partnership may or may not include the dissolution of the
firm; however, dissolution of the firm necessarily implies and includes the end of
partnership as well as act as to registration, subject to such conditions as it may
impose.

NEED OF GIVING A PUBLIC NOTIC

I. public notice is required to be given

 On the retirement or expulsion of a partner from a registered firm.

 On the dissolution of a registered firm .
 On the election to become or not to become a partners in the registered firm
by a miner on attaining majority .

MODE OF GIVING A PUBLIC NOTICE?

i. by notice to the registered of the firms
ii. by publication
iii. by publication in at least one vernacular newspaper

Consequences, if a public notice is not given ?

 in the case of minor {section 30(5) }
 0 in the case of a retiring partner {section 32(3) }
 in the case of expulsion of a partner {section 3325) }
 in the case of dissolution of a registered firm {section 45 }
CONSEQENCES OF DISSOLUTION OF THE FIRM
LIABILITY OF PARTNERS ON DISSOLUTION OF FIRM
1. Liability for act of partners, done after dissolution.

EXCEPTIONS
 the estate
 The insolvent partner
 the dormant
2. Continuing authority of partners for purpose of winding up.
EXCEPTION
 To wind up
 to complete transaction

RIGHTS OF PARTNER ON DISSOLUTION OF A FIRM

i. rights of partners to have business wound up (section 46)
ii. Continuing authority of partners for purpose of winding up (section 47)
iii. To account for personal profits after dissolution (section 16 &50)
iv. Right to restrain from use of firm name of the firm property (section 53)
v. Agreement in restraint of trade (section 54)

Q.9 Discuss the nature and salient features of Limited Liability Partnership.

LIMITED LIBILITY PARTNERSHIP UNDER LIMITED LIABILITY

PARTNERSHIP ACT, 2008

DEFINITION

Section 2 (d) of the LIMITED LIABILITY PARTNERSHIP ACT, 2008 defines a

Limited Liability Partnership as a partnership formed and registered under LIMITED
LIABILITY PARTNERSHIP ACT, 2008.
Section 3 of the act defines the nature of the Limited liability Partnership Act as “a
body corporate formed and incorporated under the limited liability partnership act
2008 and legal entity separate from that of its partners. Thus viewed, a limited
liability partnership is a relatively new form the business organization formed by two
or more persons to carry on lawful business, trade, profession, service or occupation
that enjoys an independent juridical entity having its own legal status.

NATURES OF LIMITESD LIABILITY PARTENERSIP

1. It is partnership, formed by any two or more person for carrying on any lawful
business, trade, profession, vacation and occultation.
2. A person forming a limited liability partnership can be natural persons or legal
entities like any other limited liability partnerships, foreign limited liability
partnerships , public limited companies or foreign companies

3. One of the natural partners must be a resident natural person ,to be named as a
Designated Partner” who is made responsible for compliance with all legal
formalities and requirement of the LLP Act 2008

4. There shall be no share capital in the LLP. All the partner will have to decide
the quantum and nature and contribution to be made by them in terms of
money and service.

5. Every LLP is required to be compulsorily registered under limited liability

partnership act 2008

6. On registration, a LLP become a body corporate, which is legal entity,

different form its members.

7. Unlike a traditional general partnership, a LLP has no limitation on the

number of its partners.

8. The relationships among partners themselves as well as vis-à-vis the LLP are
determined by an LLP Agreement in writing , which is required to be filed
with the registrar , in the absence of which , the relationships are governed by
the provision of first schedule to the LLP act.

9. There is total freedom and flexibility on internal structure and management of

LLP business.

10. Personal liability of each partner is limited only to the extent of his
contribution in the LLP.
11. No statutory ceiling is fixed on managerial package of remuneration, as under
the companies act, 1956.

12. Unlike a traditional general partnership ,the LLP enjoys the benefits of
“perpetual succession” irrespective of death , insolvency or exit of any partner
,till the same is dissolved under provisions of LLP act 2008

13. A LLP can also be created by conversion of existing traditional general

partnership firm , or private limited company , or an unlisted public limited
company with the distinct full advantage of continuity

14. The name of LLP is fully secured, as there cannot more than one LLP of the
same name.
 15. Since LLP embodies elements of a corporate structure” as well as “ a
partnership firm structure “.LLP is known as “a hybrid between a company
and the partnership”

Q.10 Short notes :-

1. SCOPE OF IMPLIED AUTHORITY OF A PARTNER

Section 19 Of the Act States – the act of the partner which is done to carry on, in the
usual way, business of the Kind carried on by the firm, binds the firm. The authority
of a partner to bind the firm is called his “implied authority

a. scope of the general commercial firm

b. scope of the firm of bankers
c. To file and defend a suit.
d. to engaged servants and agents
e. ratification of an act of partner

2. REGISTRATION OF THE FIRM

Section 58 lays down that the registration of the firm may be affected at nay time
by sending by post or delivering to registrar , a statement in the prescribed form and
accompanied by the prescribed fee, stating the following particulars
 the name
 principal place of business
 the name of any other places
 the date
 The names in full and permanent addresses
 The duration

3. EFFECTS OF NON REGISTRATION OF FIRM

1. No suit by partner : a partners of un registered firm cannot file a suit to

enforce any contractual right or right conferred by the partnership act ;
i. Against the firm or
ii. Against any past or present partner of the firm
2. No suit by the firm: no suit to enforce a right arising from the contract shall
be institute in any court by or on behalf of firm against any thirty party unless the firm
is registered and the person suing are or have been shown in the register of fir as
partners in the firms , nor can the partner file a suit in his own name instead of the
name of the firm , in the suit against the third parties , name of the partners must been
shown in the register of the firm.
3. No right to counter claim or set off : no unregistered firm and no partners of
such un registered shall when sued be entitled to counter claim or set of or
institute other proceeding to enforce right arising from the contract .( set-off
means a claim by the firm , which would reduced the amount of money
payable to the claimant ).

EXCEPTIONS
1. Suits for dissolution of the firm
2. Suits for damages for misconduct of a partner
3. Powers for an official assignee to realise property of the insolvent partner
4. Firm having no place of business in India
5. Suits for amount not exceeding rupees one hundred

DISTINCTION BETWEEN LIMITED LIBILITY PARTNERSHIP 2008 AND

PARTNERSHIP ACT 1932

LLP PARTNERSHIP ACT

1. GOVERING ACT
LLP ,2008
2. MEMBERSHIP
Minimum two persons Maximum has not
been specified
3. LEGAL STATUS
LLP on registration acquires an
independent personality of its own
distinct and different form the partners
4. PERPETUAL SUCCESSION
LLP is a body corporate with perpetual
succession.
5. REGISTRATION
Compulsory
6. LIABILITY
The liability of partners is limited to
extend of capital invested
7. LEGAL PROCEEDING
As LLP is legal entity ,it can sue and be
sued in its own name
8. PRINCIPLE OF PRINCIPAL AND
AGENT
A partner is agent of LLP and not of co-
partners. The LLP is only the principal
9. OWNERSHIP OF ASSETS
As LLP has its own entity, assets belong
to LLP and not are the partners.
1. Partnership act ,1932
2. Minimum two and maximum ten in
case of banking and twenty in all other
business.
3. Registration is not compulsory. Even
if registered, the firm does not have a
separate legal entity of its own.
4. Firm does not have perpetual
succession
5. Optional
6. The liability of partners is unlimited.
7. Only registered firm can sue third
parties
8. Every partner is an agent of every
other partner. Thus, a partner is both a
principal and an agent
9. As the firm has no separate entity, the
property collectively belong to all the
partners.,
 10. TRANSEFER OF INTERST 10. It is not permissible except with the
It is governed by agreement. consent of all partners

DISTINCTION BETWEEN LIMITED LIBILITY PARTNERSHIP AND

COMPANY
LLP COMPANY
1. GOVERNING ACT
LLP Act,2008 1. Companies act,1956
2. LIABILITY OF MEMBERS
Limited to amount of capital agreed to be 2. Liability to extend of shares invested.
contributed, according to LLP agreement.
3. CONSTITUTION
Agreement between members 3. Memorandum association and articles
recommended but not essential. In case of of association are the basic documents
no agreement, provision as per schedule 1 under which the company would
to the bill regulate its affairs
4. CAPITAL 4. Company limited by shares must
No mandatory requirement for capital. have minimum authorized and paid up
Capital if any is not divided into shares share capital .share capital has be
divided into shares
5. PROFITS 5. May pay salaries and dividends from
LLP agreement would determine all such distributable profits
issues.
6. MANAGEMENT
At least two designated partners are must. 6. Management through “board of
One of designated partners must be directors”. Privet company to have at
resident in India. Subject to this least two directors, public company to
requirement and subject to LLP have at least three directors.
agreement, all partners have equal power
7. DECISION TAKING MECHANISM 7. Majority rules prevails in directors
LLP agreements to decide decision taking meetings. In case of shareholders, there
mechanism. If no agreement except for a can be ordinary resolution or there can
few decision on which unanimous be special resolution.
approval of partners is required, majority
rule would prevail.

8. MEETINGS 8. At least one annual general meeting

No such requirement. of members required. board of directors
9. WRITTEN RESOLUTION to meet at lest four time in year.
 There is no requirements of proposed bill
of taking decision by way of written 9. Decision are taken by way of written
resolutions, resolutions
10. REGISTRATION AS NON PROFIT
ORGANISTION 10. possible for companies under sec 25
Not permitted of companies act
LIABILITY OF LIMITED LIABILITY PARTNERSHIP
The LLP is a body corporate and thus is answerable for its own acts, even the
wrongful acts or omission of the partners done in the ordinary course of business. The
obligations are to be met out of the property of the LLP. But, as the LLP is an entity,
it has to act through the agency called partners. Thus, the extent of partner‟s power
may be ascertained from the agreement or with the approval of the all partners.
However, a partner cannot do the following acts and bind LLP :
 Submission of a dispute relating to the business of the LLP to an arbitrator
 Opening a bank account on behalf of the LLP in his own name
 Relinquishment of any LLP‟s claim or portion thereof by a partner
 Winding a suit or proceeding filed by or on behalf of the LLP
 Admission of any liability in a suit or proceeding against the LLP
 Acquisition of immovable property on behalf of the LLP
 Transfer or other disposition of immovable property of the LLP
 Entering into partnership with the LLP as a partner
HOLDING OUT (S.29) : Generally a person becomes a partner by agreement.
Sometimes a person though not a partner of the LLP is held liable. This principal is
applicable under section 28 of the Indian Partnership Act, 1932.

Rules of Holding Out

 a person if liable by holding out if he has represented himself as a partners
either by express representation or by tacit representation
 the other party has given credit on the basis of such representation
 It is immaterial whether the person so representing as a partner is aware or not,
that the representation has reached the person giving credit.

 LIABILITY IN CASE OF FRAUD (S.30) The main principle of LLP, is to

make the liability of the partners limited, the liability of the partners and the LLP
shall be unlimited, where the LLP or any of its partners carry out an act with
intent to defraud creditors of the LLP or any other person or if they carry out an
act for any fraudulent purpose.
 Every person who was knowingly a party to carrying on the business with
fraudulent intent or a fraudulent purpose shall be punishable with imprisonment for a
term extending to two years and with fine which shall not be less than fifty thousand
rupees and not more than five lakh rupees.
 WHISTLE BLOWING (S.31) Whistle blowing ,means exposing a wrong doing
in the hope of bringing it to an end. This section provides the powers to the Court
or Tribunal to waive or reduce any penalty livable against any partner or
employee of a LLP if it is satisfied :
1. that the partner or employee provide useful information during the
investigation of LLP with regard to the offence
2. has provide information ,whether or not during investigation ,that leads to the
conviction of the LLP or any of its partner or employee
The whistle blower shall be granted statutory protection against discharge,
demotion, suspension, threats, harassment or discrimination in any manner.
WINDING UP OF LLP
Dissolution is complete breakdown of the LLP. Section 63 to 65 of the
LLP, 2008 along with the Companies Act, 1956 are to be looked into. There are two
modes of winding up of LLP :
1. VOUNTARY WINDING-UP OF LLP
 When the period, if any, fixed for the duration of LLP has ended
 the event, if any, has occurred ,on the occurrence of which the LLP agreement
provide that the LLP shall be wound up
 if the LLP passes a special resolution that the LLP be wound up voluntarily
 If the LLP has acted against the interest of the
Sovereignty and integrity of India, the security of
The state or public order
 if the LLP has defaulted in filing with the Registrar
i. The Statement of Account and Solvency or annual
ii. Report for any five consecutive years
 If the Tribunal is of the opinion that is just and Equitable
2. WINDING UP BY THE TRIBUNAL (S.64)
 if the LLP decides to be wound up
 LLP membership falls below two for a period of more than six months
 If LLP is unable to pay its debt.