Business Law

Lecture 22-23
Partnership Act
Session Objectives

By the end of this class, we will be able to:

▪ Understand the Indian Partnership Act, 1932

and its nature and formation

▪ Describe the Rights, Duties and Liabilities

of Partners

▪ Distinction between Partnership and Co-

ownership

▪ Define the Relations of Partners to Third

Parties
A partnership company can be created when two or more persons join forces as
partners. The Indian Partnership Act of 1932 applies to this partnership firm.
Partnership

▪ Section 4 of the Indian Partnership Act defines a

partnership as “Partnership is the relation between
persons who have agreed to share the profits of a
business carried on by all or any one of them acting
for all”.
Example

▪ For example, if three sons of the same father sign an

agreement to operate a cafe in the building they
inherited from their father and split the profits, they
will be treated as partners as soon as the shop opens.
Essentials of partnership

▪ To operate the partnership firm's business, the

partners must agree.

▪ Making money and distributing it among the partners

should be the goal of each partnership.

▪ The Partnership Act of 1932's Section 13 states a

mutual agency between the partners.

▪ The partners jointly and severally owe all business

obligations.
No. of partners in partnership

▪ Minimum number of partners should be 2

▪ No. of partners should not exceed 100

▪ If it exceeds than 100 then it is termed as illegal

association
Features of partnership

▪ Two or more than two persons

▪ Legal agreement

▪ Partners in business

▪ Mutual agreement
Partnership Deed

▪ The foundation of a partnership is the partnership

agreement. To conduct the operations of the partnership
firm, the foundation establishes a legal connection between
the partners.

▪ An oral or written partnership agreement is known as a

partnership deed when it is written down.
Partnership Deed (Details)
▪ Name and address of the company, as well as that of the partnering firm

▪ Addresses and terms of each partner

▪ Rights, obligations, and commitments of partners

▪ The ratio of sharing profits and losses

▪ Capital investment made by each partner

▪ Interest rates for loans, capital, and draws

▪ Account reconciliation in the case of a firm's breakup

▪ Procedure for resolving partner disagreements

▪ Payable to partners are salaries and commissions.

▪ Guidelines to follow in the case of a new partner's admission, retirement, or death

of an existing partner

▪ Any additional clauses impacting the partners' rights

 Activity

▪ Without a partnership document, Arti and Anita are

partners in the company with capital of Rs.
5,00,000 and Rs. 3,000,000, respectively.

▪ Arti desires a profit split according to the capital

ratio. Whether the allegation is true or not, explain
why.
Rights, Duties and Liabilities Of Partners
Rights of a Partner:

▪ They are entitled to participate in the operation and

administration of the company's affairs.

▪ Every partner is entitled to input and consultation on any

topic about the company. In cases of disagreement, the
decision must often be made by a majority.

▪ Every partner has the right to view and copy any of the
firm's books of accounts and records.

▪ Unless the partners agree differently, each partner is

entitled to an equal share of the firm's earnings.
Rights of a Partner:

▪ Each partner is entitled to interest on any loans and

advances he makes to the company. Unless otherwise
agreed by the partners, the interest rate shall be 6%.

▪ Every partner has the right to be reimbursed for the costs he

incurs and losses he suffers while carrying out the regular
operations of the firm.

▪ Unless they are dismissed in line with the partnership

agreement, every partner has the right to remain a company
member.

▪ According to the rules of the partnership agreement or with

the approval of the other partners, each partner has the right
to retire.
Duties and Liabilities of Partners

▪ To the greatest extent possible, each partner shall behave

honestly and conscientiously in performing their
obligations.

▪ Each spouse must treat the other with justice and loyalty.

▪ Each partner must operate only within the bounds of the

power granted to him.

▪ Unless otherwise agreed, each partner must contribute

equally to the firm's losses.

▪ Each partner is responsible for covering the firm for

damages incurred due to their deliberate negligence during
normal business operations.
Duties and Liabilities of Partners

▪ Without the approval of the other partners, no partner may

transfer or assign his stake in the company to third parties.

▪ Each partner is responsible for keeping and submitting

accurate records of the firm's financial transactions.

▪ Any partner that conducts business in opposition to the

company is liable for any losses incurred by the company.

▪ Each partner shall only utilize company assets for business

and interests related to the company.

▪ No partner should get unreported commissions or other

benefits from the company's operations.

▪ Each partner is responsible for the firm's debts jointly and

severally with the other partners.
Difference between Partnership and Co-Owners

Partnership Co-Owner

Agreement Required Not required

Sharing of Profit and Loss Profit/Loss is shared according to It is not based on profit/Loss
the percentage

Transfer of Interest Can transfer interest only with Transfer interest without consent
consent of other members of other members

Lien on Property Have lien on property Do not have lien on property

Maximum no. of members 20 No pre-defined limit

Claim of partition of property Cannot claim of partition of Can claim of partition of property
property
Recall
 Do you know the Section 18 concept is the
foundation for the relationship between partners
and third parties?
Partner is an Agent of the Firm (Section 18)

▪ A partnership is a relationship between two or

more people who have agreed to split a
company's revenues. According to this concept, a
partner may act as an agent for the other
partners.

▪ A partner is the firm's agent for the firm's

business, according to Section 18.
Partner is an Agent of the Firm (Section 18)

▪ A partner adopts the roles of both the principal

and the agent.

▪ As a result, he functions as a principal if he

represents himself and his interests in the
partnership's primary objective.

▪ On the other hand, he is working as an agent if

he works on behalf of and in the best interests of
his partners.
Implied Authority of a Partner (Section 19)

▪ Send a disagreement involving the firm's operations to arbitration.

▪ Create a bank account in his name for the business.

▪ Compromise or renounce, in whole or in part, a claim made by the

company

▪ To withdraw a lawsuit or other legal action brought by the company.

▪ Admit any culpability in a lawsuit or other legal action against the

company.

▪ purchase a real estate asset for the company

▪ Transfer a company-owned immovable property

▪ Make a partnership agreement on the company's behalf.

Partner’s Authority in an Emergency (Section 21)

▪ According to Section 21 of the Indian Partnership Act 1932,

each partner has the power to take any action necessary to
prevent a loss for the company in the event of an
emergency.
 Activity

1. In a law firm, Rahul has a partner position. He signs an

unauthorized promissory note in the company's name and
borrows Rs. 50,000 from Akshay. Do additional partners
share the note's liability?

2. Shiv is a firm partner. He exceeds his borrowing limit by

asking Varun for a loan of Rs. 50,000. He then utilizes this
cash to settle the company's obligations. Is the business
responsible for paying Varun's money back?
Can you recall what is section 25?
Section 25

▪ All actions within the partners' stated or inferred authority

are held jointly and severally liable to third parties.

▪ This is because all actions taken within the area of power

are directed at the company's operations (section 25).
Liability for tort or wrongful act:

▪ Section 26: Liability of the firm for wrongful acts of a

partner-Where, by the wrongful act or omission of a partner
acting in the ordinary course of the business of a firm, or
with the authority of his partners, loss or injury is caused to
any third party, or any penalty is incurred, the firm is liable
therefor to the same extent as the partner.
Example

▪ For example, a coal mine manager with two partners was

personally negligent in failing to fence the mine shaft
securely. Consequently, a worker was hurt as a result. The
same was demanded of the other partners.
Liability for misappropriation by a partner:

Section 27: Liability of firm for misapplication by partners.

Where:

▪ A partner acting within his apparent authority receives

money or property from a third party and misapplies it

▪ A firm in the course of its business receives money or

property from a third party, and the money or property is
misapplied by any of the partners while it is in the custody
of the firm, the firm is liable to make good the loss.
Example

▪ For example, A, B, and C are partners in a parking lot where P

parks his car, but A sold the automobile to a total stranger. The
firm is responsible for A's actions concerning this liability.