THE INDIAN PARTNERSHIP ACT, 1932

Unit IV
 Concept of partnership
Sec 4
“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 are individually called ‘partners’ and collectively
called a ‘firm’.
 Characteristics

• Association of two or more persons

• Agreement
• Business
• Sharing of profits
• Mutual agency
Formation of partnership
• Partnership is formed on an agreement – oral,
written or implied.
• All essential elements of a contract to be met
Exceptions – (i) Minor (ii) Consideration
• Partnership deed: In the interest of the
partners, the agreement must be in writing.
The document containing the agreement is
called ‘partnership deed’.
 Who may be partners?
• Any person who is competent to enter into a
contract, may be a partner.
Who can Who can’t

An individual An alien enemy

A corporation Any one of unsound mind

Minor may be admitted to the Minor in the regular role of a

benefits of partnership partner
 Registration of firms
• The partnership does not provide for
compulsory registration of firms.
• However, by creating some disabilities for
unregistered firms, it has made registration
compulsory.
• Registration is effected by filing an application
with Registrar of firms; containing essential
details of the firm.
Effects of non-registration
• Suits between the partner and the firm
• Suits between firm and third parties
• Claim of set off upto Rs. 100 in value
Non registration does not affect;
• Rights of a firm having no place of business in India
• Claim of set-off exceeding Rs. 100 in value
• Right of a partner to sue for dissolution of the firm
• Powers of official receiver to realize property of
partners
• Rights of third party to proceed against the
firm/partners
Rights of the partner

• Right to take part in business

• Right to be consulted
• Right of access to accounts
• Right to share in profits
• Right to interest on capital
• Right to interest on advances
• Right to be indemnified
Rights of the partner contd. …

• Right to the use of partnership property

• Right of partner as agent of the firm
• No new partner to be introduced
• No liability before joining
• Right to retire
• Right not to be expelled
• Right of outgoing partner to share in the
subsequent profits
 Duties of a partner
• To carry on the business to the greatest
common advantage
• To be just and faithful to each other
• To render true accounts and full information
of all things affecting the firm
• To indemnify for fraud
• To attend diligently
• Not to claim remuneration
• To share losses
Duties of a partner contd. …
• To indemnify for wilful neglect
• To hold and use the firm’s property exclusively
for the firm
• To account for personal profits
• To account for profits in competing business
• To act within authority
• To be liable jointly and severally
• Not to assign his rights
Reconstitution of the firm
Reconstitution when any of the following
changes occur and the firm continues;
• Introduction of a partner
• Retirement of a partner
• Expulsion of a partner
• Insolvency of a partner
• Death of a partner
• Transfer of a partner’s share
 Reconstitution - Admission

• A person may be admitted as a new partner either

– With the consent of all the existing partners, or
– In accordance with a contract already entered into
between the existing partners for the admission of a
new partner.
• Liability of the incoming partner:
– Not liable for any acts done prior to admission unless
he agrees with old partners to be liable for past acts
of the firm
Reconstitution - Admission
Liability of the incoming partner:
• Where he agrees to be liable for past acts, it does
not give creditors, a right to proceed against new
partner for recovery of debts
• He is liable for acts of the old firm only if;
– The new firm assumes the liabilities of the old
firm
– Creditors accept the new firm as their debtor
and discharge the old firm from liability.
Reconstitution - Retirement
• A partner may retire from a firm
– With the consent of all the partners
– In accordance with an express agreement by
the partners
– Where the partnership is at will, by giving
notice in writing to all partners of his intention
to retire
Reconstitution - Retirement
Liability of retired partner:
• He continues to be liable for all acts of the
firm done before his retirement
• A retired partner continues to be liable for
acts done by any of the other partners after
the retirement, until a public notice is given
of the retirement
• Retired partner need not give notice of
retirement to persons who are ignorant of his
being a partner in the firm.
 Reconstitution - Retirement
Rights of the retired partner:
• To carry on competing business; as long as he does not
– Use the firm name
– Represent himself as partner of the firm
– Solicit the custom of persons who were dealing with
the firm before he retired
• To share subsequent profits where there has been no
final settlement of accounts . He is entitled to such share
of profits which is attributable to the use of his share of
property; or interest @ 6% p.a. thereof.
 Reconstitution - Expulsion
• A partner may be expelled from partnership subject to
the following conditions
– The power to expel a partner should be conferred by the
contract between partners
– The power should be exercised by a majority of partners
– The power should be exercised in good faith
• The test of good faith is that
– The expulsion must be in the interest of the firm
– The partner to be expelled is served with a notice
– Such partner is given an opportunity of being heard
Rights and duties of partners after
change in constitution
• Where a change occurs in the constitution,
the mutual rights and duties of the partners
remain the same as they were immediately
before the change.
• Where a firm constituted for a fixed term,
continues to function beyond the expiry of
that term, the mutual rights and duties
remain the same.
• Where a firm is constituted to carry out one
or more adventures, and it carries out other
adventures, the rights and duties are same.
 Dissolution of the firm

• It is the dissolution of the partnership between

all the partners of the firm.
• Dissolution of the firm means complete
breakdown or extinction of the relationship of
partnership between all the partners of the firm.
• Dissolution of partnership involves only a change
in the relationship of the partners.
Dissolution of the firm

• Dissolution by court
– By insanity
– By permanent incapacity
– By misconduct
– By persistent breach of agreement
– By transfer of interest
– By business working at loss
– Any other ground
 Dissolution of the firm
• Dissolution without the order of court
– By agreement
– Compulsory dissolution
– On the happening of certain contingencies
– By notice
 Dissolution of the firm
Rights of partners on dissolution
• To have the business wound up
• To have debts of the firm settled out of the property of
the firm
• To personal profits earned after dissolution
• To return the premium on premature dissolution
• Right to restrain partners from use of firm name or
property
 Dissolution of the firm
Where the partnership contract is rescinded for fraud
or misrepresentation
• Right of lien on surplus assets
• Right of subrogation
• Right to be indemnified
 Dissolution of the firm
Liabilities of a partner on dissolution
• For acts of partners done after dissolution
• Continuing authority of partners for the purpose of
winding up