BBA Business Laws

Unit 12 - Partnership Act 1932

12.1 Introduction

Starting, owning, and operating a business can be a complicated process. The process involves
taking decisions right from choosing a name for the business to deciding what type of shares to
issue. All of these decisions must be made in the backdrop of a multitude of legal and practical
considerations.
One of the first decisions an entrepreneur must take is to determine the legal structure i.e.,
sole proprietorship, partnership, corporation, etc., that is right for the objectives of the
business and all of those involved. The most appropriate form is determined by weighing the
advantages and disadvantages of each type of organization against one’s own requirements.
Taking such a decision can be sometimes cumbersome because business law incorporates
aspects of statutory law, case law, procedural rules, and common law concepts.
Let us now take a look at the various forms of business organizations from which one can choose:
a. Sole proprietorship,
b. Joint Hindu family business,
c. Partnership,
d. Cooperative society, and
e. Joint stock company.

This unit discusses on the partnership form of business organization.

12.2 Learning Objectives

12.3 Definition of Partnership

Partnership is a form of business organization. Due to the limitations of sole proprietorship

such as, limited capital, unlimited liability, uncertainty etc., partnership has come into
existence. When two or more persons come together with an object of carrying on the
business, it is called Partnership. Partnerships in India are governed by the Partnership Act of
1932.
According to Section 4 of the Partnership Act, 1932 “partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all”. Persons entering into partnership with one another are individually called
partners and collectively a “firm”. For example, if A, B and C are working together in a firm
by contributing capital then A, B and C are called partners and the firm ABC & Co. is called
a partnership firm.
 Essential Characteristics of Partnership
 Association of Two or More Persons: A person cannot enter into partnership by
himself only. To constitute a partnership there must be at least two persons. The
maximum number of persons doing ordinary business should not exceed 20 and in
banking business 10. In simple words, the minimum number is 2 and the maximum
number is 20.
 Agreement is entered by all the Concerned Persons: Partnership comes into
existence through a contract and not by operation of law. In order to form the
partnership, partners must enter into a contract voluntarily. The agreement may be
expressed or implied.
 Sharing of Profits: It is one of the most important elements of any business and
partnership is not an exception to it. Profits of partnership are shared by the partners as
per the terms of agreement or equally in the absence of it.
 Business: The term business includes trade, vocation and profession, but it must be a
lawful one.
 Business is carried on by all or any one of them acting for all: Management of the
partnership is done either by all the partners or any of the persons concerned, acting for
all. Partners of the firm act in the capacity of agent and principal. They are agents for
each other and have the authority of binding other partners for their acts in the ordinary
course of business.
 Unlimited Liability: The liability of the partners is unlimited like in Sole
Proprietorship. A Partner’s liability is not limited to his share in the business but his
personal property or assets also.
Partnership Property
All property originally brought into the partnership, or subsequently acquired by purchase or
otherwise on account of the partnership, is partnership property. Partners by mutual agreement
amongst themselves can determine what shall be the property of the firm and what shall be the
separate property of one or more of the partners. If there is no express agreement, Section 14
provides that the property of the firm in the absence of a contract to the contrary includes –
i. Property originally brought into the common stock of the firm.
ii. Rights and interest in the property originally brought.
iii. Property acquired by purchaser or otherwise by or for the firm and all rights and interest
in any property so acquired.
iv. Property acquired for the purpose and in the course of the business of the firm, and all
rights and interests in any property so acquired, and
v. Goodwill of the business of the firm.
Agreement between Partners in Restraint of Trade: As per Section 27 of the Indian Contract
Act, an agreement would be void if anyone is restrained from exercising a lawful profession,
trade or business of any kind. But in case of partnership, partners of a firm may agree that a
partner shall not carry on any business other than that of the firm while he is a partner.

12.4 Types of Partners and Partnerships

Let us understand the different types of partners and partnerships as discussed below-

 Types of Partners
Every person who is competent to enter into a contract may become a partner in a
partnership firm. A minor, who is not competent to enter into contracts, cannot become a
partner, but may be admitted to the profits of the partnership with the consent of all the
 partners.
A partnership firm can have different types of partners with different roles and liabilities -
i. Active Partner: A partner who actively participates in the day-to-day operations of the
business is known as active partner. Therefore, an active partner not only contributes capital
but also actively participates in the management of the firm, shares its profits and losses, and
is liable to an unlimited extent to the creditors of the firm.
ii. Sleeping or Dormant Partner: Partners who do not take part in the
day-to-day activities of the partnership firm are referred to as sleeping partners. A sleeping
partner, also contributes capital to the firm, shares its profits and losses, and has unlimited
liability.
iii. Sec
ret Partner: A secret partner in all aspects is like the rest of the partners. He contributes to
the capital of the firm, takes part in the management, shares its profits and losses, and has
unlimited liability towards the creditors. The only difference is his association with the firm
is unknown to the general public.
iv. Nominal Partner: A nominal partner is one who allows the use of his/her name by a
firm. He has no real interest in the business of the firm. He does not contribute to its capital.
He neither participates in the management, nor shares its profits or losses but is liable, like
other partners, to the third parties, for the repayment of the firm’s debts.
v. Partner by Estoppel: A person is considered a partner by estoppel if the conduct or
behavior of the person gives an impression to others that he is a partner of the firm. As the
third party considers the person as a partner, he can be held liable for the debts of the firm.
vi. Partner by Holding Out: A person, who though is not a partner, knowingly allows the
firm to represent him as a partner is called as a partner by holding out. Such a partner is liable
to the third party who has extended debt to the firm on the basis of such representation.

Insolvency of a Partner
A partner ceases to be a partner from the date he is declared insolvent,
whether or not the firm is dissolved by such insolvency [Section 34]. In
the absence of any agreement to the contrary, a partnership firm shall
stand dissolved on the insolvency of any partner. Where the partnership
deed, contains a provision that the firm shall not be dissolved on the
insolvency of a partner, the insolvent partner shall not be liable for any
act of the firm nor shall the firm be liable for any act of the insolvent done
after the date of his insolvency.

 Types of Partnerships
Partnerships can be classified on the basis of two factors, viz., duration and liability.
Classification on the Basis of Duration
i. Partnership for a Fixed Term: A partnership can be entered into for a fixed period of
time, after which the partnership is terminated. However, partners may continue to carry on
the business after the expiry of the fixed period. The rights and duties of the partners would
be the same as before. The partnership would be then considered as partnership at will.
ii. Partnership at Will: This type of partnership exists at the will of the partners. It can
continue as long as the partners want and is terminated when any partner gives a notice of
withdrawal from partnership to the firm.
iii. Particular Partnership: When a partnership is formed for the accomplishment of a
particular undertaking, it is referred to as particular partnership. The partnership comes to
an end when the undertaken project is accomplished. If it continues even after that, then it
becomes a partnership at will. An example of such partnership is partnership formed for a
construction project.
 Classification on the Basis of Liability
i. General Partnership: The liability of partners is unlimited severally and jointly in
general partnership. The partners enjoy the right to participate in the management of the firm
and their acts are binding on each other as well as on the firm. Registration of the firm is
optional. The existence of the firm is affected by the death, lunacy, insolvency or retirement
of the partners.
ii. Limited Partnership: In this type of partnerships, the liability of at least one partner is
unlimited whereas the others may have limited liability. Death, lunacy or insolvency of the
limited partners does not terminate the partnership. Limited partners do not enjoy the right of
management and their acts are not binding on the firm or the other partners. Registration of
such partnership is compulsory.

12.5 Relations of Partners

Let us understand the relations of partners to one another and to third parties as discussed below-

 Relations of Partners to One Another

The partnership agreement governs the relations of the partners with one another. Where there is
no specific agreement or the agreement is silent on a particular issue, the relations of partners to
one another with regard to their rights and duties are governed by Section 9 to Section 17 of the
Partnership Act, 1932.
Rights of a Partner
 Every partner has a right to take part in the partnership business.
 Every partner is bestowed with the right to be consulted in matters of
partnership business and has the freedom to express his views before
any decision is taken by the other partners.
 A partner has the right to have access to and inspect and take copy of
any books of accounts of the firm. A minor partner may access to and
inspect any of the accounts of the firm but not the ‘books’.
 In the absence of any agreement to the contrary, the partners are
entitled to an equal share in the profits and losses of the firm.
 A partner has the right to be indemnified for the losses incurred by
him in the course of business. This right of indemnification extends
to acts done in emergency to protect the firm from a probable loss.
 A partner has a right to receive interest on capital, if the same is
agreed in the partnership agreement.
 A partner has the authority to do all acts necessary to protect the firm
from losses, as would have done by a man of ordinary prudence.
 Every partner has a right not to be expelled unless on the exercise of
powers in good faith. [Section 33(1)]
 Every partner has a right to retire from the firm,
 with the consent of all the other partners, or,
 in accordance with the terms of the deed, or,
 by giving notice to all the other partners. [Section 32(1)]
 In case of a partnership at will, every partner has a right to dissolve
the firm by giving a notice to all the other partners specifying his
intention to dissolve the firm [Section 43].

Duties of a Partner
 To conduct the business to the greatest common advantage of all the partners.
 To attend diligently to his duties in the conduct of the business.
 To be just and faithful to each other.
  To render true accounts and full information, relating to and,
affecting the firm or any partner of the firm, or his legal
representative.
 To indemnify the other partners for the fraud or willful neglect
committed by him in the course of business activities.
 Unless there is an agreement to the contrary, a partner shall not ask
for any remuneration for the purpose of taking part in the conduct of
the business.
 A partner is under an obligation to contribute towards the losses
sustained by the firm.
 A partner is prohibited to acquire any secret profits from any
transactions of the firm, or from the use of the property of the firm or
by using the firm name or any of its business connections, except
when there is a contract to the contrary.
 A partner is not supposed to carry on a business which competes to
the present business of the firm. This can be done if there is an
agreement to the contrary.

 Relations of Partners to Third Parties

Every partner of the firm is considered as an agent for the purpose of the business of the firm. The
partners of the firm have authority to bind the firm for the act done by them on behalf of the firm
provided it is done for carrying on, in the usual, way, business of the firm, and the act is done in
the name of the firm.
Authority of partners to bind the partnership can be classified as actual and apparent.
a. Partner’s Actual Authority:
i. Express authority: The authority specifically set forth in an agreement among the
partners is referred to as express authority. It may also arise from the decisions taken by
majority of the partners regarding the conduct of the partnership business.
ii. Implied authority: When the partnership agreement is silent in this regard, the act
of a partner which is done to carry on, in the usual way, business of the kind carried on by the
firm, binds the firm. This authority of the partner to bind the firm for his act is known as
implied authority.
b. Partner’s Apparent Authority: The actions of a partner which are not actually
authorized but are apparent for the carrying on of the partnership’s business in the usual way
is referred to as apparent authority. Such actions will bind the partnership if the third party is
ignorant about the fact that the partner is lacking the actual authority. But if the third party
knows that the partner’s dealings is outside the scope of the partner’s actual authority, the
other partners are not liable.
Termination of Authority: The authority of a partner can be terminated by majority of the
partners if this action would not be contrary to a previous agreement.

12.6 Creation and Registration of Partnership

A partnership is created by an agreement but it is not necessary to have the agreement in writing.
An agreement may be written or oral. Written agreement is usually preferred to avoid future
disputes. The document containing the important terms and conditions as agreed upon by the
partners for conducting the partnership business is known as the Partnership Deed or Deed of
Partnership. These terms and conditions are incorporated in the deed in the form of clauses.
These clauses should be properly drafted and stamped. The important clauses inserted in
Partnership Deed are:
i. Name of the firm.
ii. Nature of the business to be carried on by the firm and also the place of the firm’s
business.
iii. Names of the partners.
 iv. Amount of capital contributed by each partner.
v. Date of commencement of partnership and its business.
vi. Ratio or the proportion in which the partners will share profits and losses.
vii. Duration of the firm, when the business can be dissolved at will or is for a fixed term or
happening of an event or on the completion of a specified venture.
viii. The amount of money that a partner can draw and the rate of interest charged on it.
ix. Interest on capital, loans to be allowed.
x. Rules regarding the ascertainment of goodwill amount at the time of change in time
ratio, admission, retirement and death of partners.
xi. Salary, remuneration or the commission, if any, payable to the partners for their active
work.
xii. In case of retirement or death of a partner, how the amount is payable to the partner or
the executor of the deceased partner.
xiii. Circumstances in which the firm will be dissolved and the settlement of account on the
dissolution of the firm.
xiv. Arbitration clauses to be followed in case of disputes arising among the partners.
xv. Authority and duties of the partners and the restrictions imposed on them.
xvi. Application of Garner vs Murray rule in case of partner’s insolvency.
xvii. Rules regarding the operation of joint bank account of the firm.

According to the Partnership Act, 1932 following rules will be applicable in the absence of
agreement among the partners:
 The partners share profits and losses of the firm equally.
 No interest is allowed on partners’ capital. If agreed, then it will be allowed only if
the firm earns profit i.e., it is a charge on the profits.
 Interest on the partner’s loan, if any, given to the firm should not exceed 6%.
 No salary, or remuneration is allowed to the partner for taking part in the conduct of
the business. It will be allowed only if there is a profit.
 Without the consent of all the partners, a new person cannot be admitted.
 Books of accounts are kept at the place of the business and every partner has a right
to access, inspect and copy any of them.
Registration of Partnership

The Partnership Act does provide for the compulsory registration of firms. The process of
entering of the firm’s name, along with the relevant prescribed particulars, in the Register of firms
kept with the Registrar of Firms is known as Registration. It provides conclusive proof of the
existence of a partnership firm. A non-registered firm would suffer from certain disability such as:
a. A partner of an unregistered firm cannot file a suit against the firm or other partners,
b. The firm cannot file a suit against third parties, and
c. The firm cannot file a case against the partners.
These disabilities make the registration of a firm almost compulsory. The partners may get the
firm registered with the Registrar of Firms of the state in which the firm is situated. The
registration can be at the time of formation or at any time during its existence. The procedure
for getting a firm registered is as follows:
i. Submission of application in the prescribed form to the Registrar of Firms. The
application should contain the following particulars:
 Name of the firm
 Location of the firm
 Names of other places where the firm carries on business
 The date when each partner joined the firm
 Names and addresses of the partners
  Duration of partnership.
This application should be signed by all the partners.
ii. Deposit of required fees with the Registrar of Firms.
iii. The Registrar after approval will make an entry in the register of firms and will subsequently
issue a certificate of registration.

Effects of Non-Registration [Section 69]

A partner of an unregistered firm cannot sue the firm or any partner of such a firm by
way of a civil suit to enforce any right accrued from a contract, i.e. a partnership deed
or conferred by the Partnership Act. However, the aggrieved partner can institute
criminal proceedings against such firm or any of its partners.
An unregistered firm cannot sue a third party for any right arising out of a contract.
However, a third party/outsider can sue such an unregistered firm for any right acquired
therein.
An unregistered firm or its partners cannot claim a set-off or other proceeding based on
a contract. Where an outsider sues the firm to recover a sum of money, the firm cannot
claim a set-off, which means the firm cannot ask the outsider who is also to pay some
money to the firm to adjust the amount due on him towards the amount which the firm
has to pay to the outsider. If an unregistered firm institutes a suit for the reduction of
rent against its landlord, such a suit is not maintainable as the suit falls under the
disability relating to ‘other proceeding’ to enforce a right arising from a contract.

Exceptions
There are certain exceptional circumstances wherein the non-registration of a firm does not
affect the following rights:
 The right of third parties/outsiders to sue the firm or any partner.
 The right of a firm or partners of a firm having no place of business in India.
 The partners have the option to sue for the criminal proceedings
against the other partners of the firm or against the third parties.
 The right of a deceased partner to sue for the dissolution of the firm,
or for the accounts of a dissolved firm, or for share of the property of
the dissolved firm, where his/her legal heirs/ legal representatives
filed a suit on his/her behalf.
 The powers of an official assignee, Receiver or the Court to realize
the property of an insolvent partner of an unregistered firm.

12.7 Dissolution of a Partnership and Dissolution of a Firm

The dissolution of partnership between all the partners of a firm is called the dissolution of the
firm. As per Section 4, Partnership is the relation between persons who have agreed to share
profits of business carried on by all or any of them acting for all. Thus, if some partner is
changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is
dissolved, but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’.
However, complete breakage between relations of all partners is termed as ‘dissolution of firm’.
After such dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different
from ‘Dissolution of Firm’. ‘Dissolution of Partnership’ is only reconstruction of a firm, while
‘Dissolution of Firm’ means the firm no more exists after dissolution. Dissolution of a firm may
be either without the order of court or with the order of court.
 12.8 Distinction between a Partnership and a Company

The principal points of distinction between a partnership firm and a company are:

Partnership Firm Company

A partnership firm is not distinct from the A company is a distinct legal person.
several persons who compose it.
In a partnership, the property of the firm is the In a company, the property belongs to the
property of the individuals comprising it. company and not to the individuals comprising
it.
Creditors of a partnership firm are creditors of The creditors of a company can proceed only
individual partners and a decree against the firm against the company and not against its
can be executed against the partners jointly and members.
severally.
Partners are the agents of the firm. A partner can Members of a company are not its agents to
dispose the property and incur liabilities as long dispose of the properties and incur the
as he acts in the course of the firm’s business. liabilities of a company.
A partner cannot contract with his firm. A member of a company may contract with
his firm.
A partner cannot transfer his share and make the Transferability of shares is one of the key
transferee a member of the firm without the consent characteristics of a company.
of the other partners.
Restrictions on a partner’s authority contained in Restrictions incorporated in the articles are
the partnership contract do not bind outsiders. effective, as the public are bound to augment
themselves with them.
A partner’s liability is always unlimited. Shareholder may be limited either by shares
or by guarantee.
The death or insolvency of a partner dissolves the A company has perpetual succession, i.e., the
firm, unless otherwise provided in the partnership death or insolvency of a shareholder or all of
deed. them does not affect the life of the company.
A partnership firm cannot have more than 20 A company may have any number of members
members in any business other than banking and as laid down under the Companies Act 2013.
cannot have more than 10 in the case of banking
business.

The accounts of a firm are audited at the A company is legally required to have its
discretion of the partners. accounts audited annually by a chartered
accountant.
A partnership firm is the result of an agreement A company, being a creation of law, can only
and can be dissolved at any time by agreement. be dissolved as laid down by law.