THE INDIAN PARTNERSHIP ACT, 1932
7.1
Introduction
7.2
Definition under the Act
7.3
Definition of
“Partnership”, “Partner”, “Firm” and “Firm-Name”
(Sec. 4)
7.4
Essential Characteristics of Partnership
7.5
Registration of a Partnership Firm
7.5.1
Penalty for Furnishing False
Particulars (Sec. 70)
7.5.2
Alterations
7.5.3
Effects of Non-Registration (Sec. 69)
7.6
Partnership and Other Associations
7.6.1
Distinction between Partnership and HUF
7.6.2
Distinction between Company and Partnership
7.7
Types of Partnership
7.7.1
On the Basis of Duration
7.7.2
On the Basis of Liability of Partners
7.8
Types of Partners
7.9
Rights and Duties of Partners
7.10
Liabilities of a Partnership to
Third Parties
7.11
Dissolution of Partnership and
Dissolution of Firm
7.11.1
Dissolution of Partnership
7.11.2
Dissolution of Firm
7.11.3
Modes of Dissolution of Firm
7.11.4
Sales of Good will after Dissolution
In India partnership forms of business is widespread.
Partnership business in India is governed by the Indian Partnership Act, 1932,
which came in to effect from 1st October, 1932, Except Section 69 relating to
registration of firm which came in to force on 1st October, 1933. This Act
repeals Sec. 239 to Sec. 266 of the existing Contract Act. The Act extends to
the whole of India except the state of Jammu & Kashmir.
In this chapter we will discuss about various provisions of partnership
Act. Which deal with formation of partnership, rights and liabilities of
parterner, dissolution of partnership etc.
7.1 DEFINITION
UNDER THE ACT
In the Act, unless
there is anything repugnant in the subject or context,
a) an “act of a
firm” means any act or omission by all the partners, or by any partner or agent
of the firm which gives rise to a right enforceable by or against the firm;
b) “business”
includes every trade, occupation and profession;
c) “prescribed” means prescribed by rules made under this Act;
(c-1) “Registrar” means the Registrar of Firms appointed under sub- section (1)
of section 57 and includes the Deputy Registrar of Firms and Assistant
Registrar of Firms appointed under sub-section (2) of that section;
a) “third party”
used in relation to a firm or to a partner therein means any person who is not
a partner in the firm.
7.1 DEFINITION
OF “PARTNERSHIP”, “PARTNER”, “FIRM” AND “FIRM-NAME” (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 who have entered into partnership with one another are called
individually, “partners” and collectively “a firm”, and the name under which their
business is carried on is called the “firm-name”.
A partnership firm has no separate legal entity distinct from
its members. Hence, unlike a company which has a separate legal entity distinct
from its member, a partnership firm cannot posses property. While selecting the
name of the firm the partners need to keep in mind the following points :
1) The name must
not be too identical to the name of another existing firm doing similar
business.
2) The name must
not contain words like King, Queen, Crown, Emperor, Empress, Empire, Imperial,
Royal or words expressing or implying, the sanction, approval or patronage of
government except when the state government signifies its consent to the use of
such words as part of the firm name by order in writing.
7.1 ESSENTIAL
CHARACTERISTICS OF PARTNERSHIP
After having understood
the meaning of the term partnership as defined in section 4 of the Act, let us
discuss the essential characteristic of a partnership, which are discussed as
under :
A) Agreement : Partnership is the outcome of an agreement or
contract between persons. The relation of partnership arises from the formation
of a contract and not from status or birth. The agreement may be oral or in
writing but it must satisfy all the essentials of a valid contract. If a
proprietor gives a share in profits to his employee it will not be called a
partnership unless there is an agreement of partnership between the two.
B) Association of two or more Persons : To form a partnership
there must be at least two persons. According to Sec 11 of the Indian
Partnership Act, 1932, the maximum number of persons in a partnership should
not exceed 10 in case of banking business and 20 in other types of business. If
the number of partners exceeds the prescribed limit, it would become an illegal
association of persons. A firm cannot become a partner of another firm though
its partners can join any other firm as partners.
C) Carrying on of Business : A partnership can be formed only
for the purpose of carrying on a business. An association of persons who
jointly own a house without carrying on a business is not partnership.
Moreover, the business carried on by the partners must be lawful. Illegal acts
such as theft, dacoity, smuggling, etc., cannot be called partnership. Associations
created for charitable, religious or social purpose are not regarded as
partnership because such organisations are not associated with business. It may
also be noted that an agreement to carry on business at a future time does not
result in partnership unless that time arrives and the business is started. [ R
R Same, vs. Heuberr] Another point which is worth noting is whether business
should be temporary or permanent. So long there is a valid agreement to carry
on legal business there exist a partnership. An agreement for Partnership can
be for a specified period, specified project or for an undefined period or
purpose. Example : Two brothers were living together with their father. The
father who was a proprietor of a business dies. The sons inherited the business
but does not become partners automatically after death of their father unless
there is an agreement between them expressed or implied to carry on the
business as partners.
D) Sharing of Profits : The agreement between the partners must
be to share the profits of business. There can be no partnership without the
intention of mutual gain. The profits must be distributed among the partners in
an agreed ratio. The section does not insist upon loss sharing. Thus a,
provision for loss sharing is not essential [Walker West Development vs. FJ
Emmett (1978)252EG1171] However, sharing of profits is not a conclusive proof
of partnership. For example, a manager may be given a share in profits of the
firm, it does not mean that the manager is a partner of the firm.
E) Mutual Agency : Partnership business can be carried on by all
the partners or by any of them acting on behalf of the others. In other words,
every partner is an implied agent of the other partners and of the firm. Each
partner is liable for acts performed by other partners on behalf of the firm.
The use of the words ‘carried on by all or any of them acting for all’ in Sec 4
clearly emphasizes the agency relationship. The partners are agent for each
other and principals for themselves. Their relationship is governed by the law
of agency. The partners are largely regulated by the law of Principal and
agent. The above mentioned features are the real tests of partnership.
F) Utmost Good Faith : The relations between partners are based
upon mutual trust and confidence. Every partner is expected to act in the best
interests of other partners and of the firm as a whole. He must observe utmost
good faith in all the dealings with his co- partners. He must render true
accounts and make no secret profits from the business. The concept of utmost
good faith is stressed in section 9 of the Partnership Act which lays down
general duties of a partner. Section 9 lays down that partners are bound to
carry on the business of the firm to the greatest common advantage to be just
and faithful to each other and to render true accounts and full information of
all things affecting the firm to any partner or his legal representatives. This
we will be discussing in subsequent section dealing with right and duties of partners.
G) Unlimited Liability : Every partner is jointly and severally
liable to an unlimited extent for the debts of the partnership firm. In case
the assets of the firm are insufficient
to pay the debts in full, the personal property of each partner can be used to
pay the creditors of the firm.
H) Restriction on Transfer of Interest : No partner can transfer
his share in the partnership without the prior consent of all other partners.
As per Section 29 a partner cannot assign his rights and interest in the firm
to an outsider so as to make him the partners of the firm. He can however,
assign his share in the profits and share in the assets of the firm. But the
transferee will not be entitled to take part in the business of the firm, but
in the share of profit only.
7.1 REGISTRATION
OF A PARTNERSHIP FIRM
According to the Partnership Act, 1932 it is
not legally compulsory to register the firm for its formation. But if the
registration is not done then there may arise some difficulties. So, it is
always useful to get the firm registered. The Partnership Act, 1932 provides
that if the partners so desire, may register their firm with the “Registrar of
Firms” of the state in which the partnership firm is situated.
In order to get itself registered, a partnership firm must
submit an application in a prescribed form along with the prescribed fee to the
“Registrar of Firms”. The application must contain the following details:
• Name of the
firm
• The head
office of the business
• Names of the
other places where the firm has business
• Full names
and addresses of the partners
• Date of entry of the partners in the
firm
• Period of the
firm, if any
• Signatures of
every partner or his representatives.
When the Registrar of the Firm,
after scrutiny, is satisfied with the statements, he shall make entry of the
firm in the register of firms and the firm gets registered and certificate
which is called “Certificate of Registration” which is issued by the Registrar.
After getting the certificate, the firm becomes a registered firm.
7.6.1 Penalty
for Furnishing False Particulars (Section 70)
Any person who signs
any statement, amending statement, notice or intimation under this Chapter
containing any particular which he knows to be false or does not believe to be
true or containing particulars which he knows to be incomplete or does not
believe to be complete, shall be punishable with imprisonment which may extend
to three months, or with a fine or with both.
7.6.2 Alterations
Any alterations,
subsequent to Registration shall be notified to the registrar.
➢ Change in firm name and principal place
of business
(Section 60) shall require sending of a new application form
to the registrar along with the prescribed fee, duly signed and verified by all
the partners.
➢ Change relating to opening and closing
of branches.
(Section 61) : When a registered firm discontinues business at
any place or begins to carry on business at any place, such place not being its
principal place of business, any partner or agent of the firm may send
intimation thereof to the Registrar.
➢ Change in the name and permanent address
of any partner
(Section 62) : When any partner in a registered firm alters
his name or permanent address, an intimation of the alteration may be sent by
any partner or agent of the firm to the Registrar
➢ Under Section 63(2), when a minor who
has been admitted to the benefits of partnership in a firm attains majority and
elects to become or not to become a partner, he or his agent specially
authorized in this behalf, may give notice to the Registrar that he has or has
not become a partner.
7.6.3 Effect
of Non-Registration (Section 69)
Through registration of
partnership firm in not necessery. But a non registered. firm canont avail some
fecility. These are discuss bellow:
➢ A partner of an unregistered firm cannot
file a suit in any court
against the firm or other partners for the enforcement of any
right arising from a contract or right conferred by the Partnership Act unless
the firm is registered and the person suing is or has been shown in the
Register of Firms as a partner in the firm.
➢ No suits to enforce a right arising from
a contract shall be instituted in any Court by or on behalf of a firm against
any third party unless the firm is registered and the persons suing are or have
been shown in the Register of Firms as partners in the firm.
➢ An unregistered firm or any of its
partners cannot claim a set
off (i.e. mutual adjustment of debts owned by the disputant
parties to one another) or other proceedings in a dispute with a third party.
Hence, every firm finds it advisable to get itself registered sooner or later.
However, non-registration of a Partnership firm shall not affect.
❍ The rights of third parties to sue the
firm and/or its partners.
❍ The firms or partners in the firms
which have no place of business in the territories to which this Act extends,
or whose places of business in the said territories are situated in areas to
which the act does not apply.
❍ The enforcement of any right to sue for
the dissolution of a firm or for accounts of a dissolved firm, or any right or
power to realise the property of a dissolved firm.
❍ The powers of an official assignee,
receiver or Court under the Presidency-towns Insolvency Act, 1909 (3 of 1909),
or the Provincial Insolvency Act, 1920 (5 of 1920), to realise the property of
an insolvent partner.
7.7.1 Distinction
Between Partnership and HUF
Partnership and Hindu
Undivided Family (HUF) : In Hindu Undivided Family business all members of an
Undivided Hindu family are engaged in the business. The business is manage and
controlled by the eldest male member of the family. Following are:
Differences between Partnership and HUF Business
The main points of differences between a partnership and HUF business are as follows.
1. Basis of formation
A partnership arises out of a contract between partners. Whereas an HUF arises by the operation of Hindu Law. It is created by status or birth in the family, no agreement is needed for it.
2. Regulating law
A partnership is governed by the provisions of the Indian Partnership Act, 1932. An HUF business is governed by Hindu Law Succession Act.
3. Number of members
In a partnership business, the number of members cannot exceed 20 in case of non-banking business and 10 in case of banking business. But there is no such ceiling on the number of members (coparceners) in HUF.
4. Admission of new members
No new partner can be admitted to the existing partnership without the consent of all the other partners. In case of HUF firm, a person becomes a member (coparcener) merely by his birth.
5. Minor member
A minor cannot become a full-fledged partner in a firm; he can be admitted only to the benefits of partnership. In an HUF, a male child becomes a full-fledged member by birth.
6. Rights of females
In a partnership, women can become partners and they enjoy the same rights and privileges, as do male partners. In case of an HUF business, on the other hand, the membership is restricted to male members only. However, as per Hindu Law Succession Act,1956, a female relative of a deceased male member gets a coparcenery interest in the event of his death.
7. Implied agency
In a partnership, every partner has implied authority to represent the firm and bind the other partners by his acts. In HUF this right rests with the Karta only, other members may be allowed by Karta expressly or impliedly to contract debts on behalf of the firm.
8. Liability of members
In a partnership, the liability of all the partners is unlimited. Every partner is jointly and severally liable to third parties for the full debts of the firm. Whereas in case of HUF, liability of each member, except the Karta, is limited to the extent of his share in the property of the family.
9. Right to accounts
Each partner not only enjoys a right to inspect the books of account of the firm and demand a copy thereof, he can even demand the accounts of the past dealings. But a coparcener has no right to ask for the accounts of past dealings. He can ask for the position of the existing assets only.
10. Mode of dissolution
A partnership firm is dissolved on the insolvency or death of a partner. But the death, lunacy or insolvency of a coparcener does not affect an HUF. It continues to operate even after the death of a coparcener.
Differences between Partnership and Company
Although the differences between Partnership and Company are plenty, we have summarized the main differences between the two which may affect the decision of the owners on whether to opt for a Company or a Partnership.
1. Number of Members:
The new Companies Act 2013 has prescribed the maximum number of members in case of a partnership firm should not be more than 100 in case of partnerships. As per the previous Companies Act 1956, the maximum limit in case of partnerships was 10 and 20 for banking business and other businesses respectively.
In case of private companies, the maximum limit has been increased by the new Companies Act, 2013 from 50 to 200. There is however no maximum limit on the no. of members in a public company.
The minimum number of members in case of a public company is seven and in case of a private company is 2. In case of a partnership, the minimum number of partners is 2.
2. Separate Legal Entity
A Partnership Firm has no separate legal entity distinct from its partners. A Company, on the other hand, is a separate legal entity different from its members.
3. Liability
In partnership each partner has unlimited liability and is personally liable for all the debts of the firm. In a company, on the other hand, a shareholder has limited liability – limited to the extent of the share capital.
To facilitate the concept of limited liability in partnerships as well, a new form of partnership entity has been introduced under which the liability of the partners in a partnership firm is also limited and such form of organisation is called Limited Liability Partnership.
- Recommended Read: Benefits of forming a Limited Liability Partnership
4. Management
All the partners in a partnership firm are entitled to take part in the management of a business (unless stated otherwise); but in the case of a company the right to control and manage the business is vested in the hands of the Board of Directors elected by the shareholders.
5. Transfer of Interest
A partner cannot transfer his interest in the firm without the consent of all the partners. He may, of course, assign his share in the partnership but the assignee merely becomes entitled to the financial benefits in respect of the share and does not become a partner unless the other members of the firm agree.
In case of a private company also the transfer of shares requires the prior permission of the Board of Directors. But, in case of a public company a shareholder can transfer his shares freely without restriction and the transferee succeeds to all rights of membership
6. Audit of Accounts
In case of companies, annual audits of accounts are a necessity. However, in case of Partnership Firms, audit of accounts is required to be conducted only if the turnover exceeds Rs. 25 Lakhs/ Rs. 1 Crore
- Recommended Read: When is Tax Audit under Section 44AB required to be conducted
7. Registration
A Partnership Firm may or may not be registered. However, in case of a company – registration is essential.
8. Minimum Paid up capital
There is no minimum prescribed capital in case of a Partnership Firm. However, in case of a Private Company, the minimum paid up capital is Rs. 1 Lakh and in case of a Public Company, the minimum paid up capital is Rs. 5 Lakhs
9. Distribution of Profits
In a partnership firm, the profits are distributed among the partners as per the partnership deed. However in a company, the members get a share in profits only when dividend is declared by the Board of Directors and approved by all the members.
10. Winding up
A Partnership Firm can be wound up any time by any partner if it is ‘at will’ without legal formalities. In the case of company, no one member can require it to be wound up at will and winding up involves legal formalities.
7.1 TYPES
OF PARTNERSHIP
Various types of
partnership can be classified on the basis of duration of partnership and
liability of partners. They are :
7.8.1 On
the Basis of Duration
➢ Partnership at Will : When a partnership
is formed which is not for a specific period of time or for a particular
project but for an indefinite period of time such partnership is termed as
partnership at will. Continuity of such partnership depends on the will of the
partners. It may be dissolved, if any partner gives notice of withdrawing from
the partnership.
➢ Particular Partnership : When a
partnership is formed to complete a particular venture, trade or project, such
partnership is called particular partnership. As soon as the objective of
forming the partnership is achived the partnership comes to an end. For
example, if a partnership is formed to construct a bridge, it will be the case
of a particular partnership and it will come to an end as soon as the construction
of the bridge is completed.
7.8.2 On the
Basis of Liability of Partners
➢ General
Partnership : In a general partnership, partners have unlimited liability and they enjoy the right
to participate in the management of the firm. Partners are bound together with
mutual agency. Withdrawal of any partner from the partnership due to death,
lunacy or any other reason leads to dissolution of the firm.
➢ Limited Partnership : In a partnership
where all the partners
except one, have their liability
limited to the capital invested by them such partnership is known as limited
liability partnership. A limited partner has no right to participate in the management
of the firm. Death, lunacy or insolvency of a limited partner has no effect on
the existence of the partnership firm.
7.2 TYPES
OF PARTNERS
There are various types
of partners in a partnership firm. They are as follows :
a) Active Partner
: An active partner is one who not only contributes capital in the firm but
also takes active part in management and day to day functioning of the firm. He
may also be called ‘actual’ or ‘ostensible’ partner. He is an agent of the
other partners in the ordinary course of business of the firm and considered as
a full fledged partner in the real sense of the term. His liability is
unlimited for all the debts of the firm.
b) Nominal Partner
: A nominal partner neither contributes any capital nor shares in the profits
or take part the management of the firm. He only allows the firm to use his
name and the firm take advantage of the goodwill of that person. Though he is
not given any right in the firm but he is liable to the third parties for all
the liabilities of the partnership.
c) Sleeping or
Dormant Partner : A sleeping or dormant partner does not take any active part
in the management of the business. He contributes capital and shares the
profits which are usually less than that of the active partners. A sleeping
partner has unlimited liability for the debt of the firm but his relationship
with the firm is not disclosed to the general public.
d) Partner in Profits only : A partner who
shares in the profits only without being liable for the losses is known as partner
in profits. He does not take part in the management of the firm but his
liability for all the debts of the firm is unlimited.
e) Secret Partner
: Partners who contributes capital and actively participate in the activity of
the firm but his association with the firm is not disclosed to the public such
partners are known as secret partner. His liability for all the debts of the
firm is unlimited.
f) Partner by Estoppel : When a person falsely represents
himself as a partner or acts in such a way that others have on impression that
he is a partner of the partnership firm, such a person is called partner by
estoppel. The third parties who deal with such a partner and suffers loss, can
held the partner by estoppel liable for the less. For example : A and B are
partners in a partnership firm and if C (an outsider) represents himself as a
partner of the firm and transacts with X (third party) and if X suffers loss,
he can held C liable for such loss.
g) Partner by Holding out : If the partners of a partnership
firm declares another person as a partner of the firm and the person remains
silent, such a partner is called partner by holding out. Any third party
transacting with the firm on the pritext that the partner by holding out is a
real partner of the firm, the third party can held the partner by holding out
liable for any loss. For example : A and B are partners in a partnership firm
and declares C as a partner and C remains silent, C is called the partner by
holding out.
h) Minor Partner : A partner is called a minor partner if his
age is less than 18 years. Partnership arises from contract and a minor is not
competent to enter into contract. Therefore, strictly speaking, a minor cannot
be full-fledged partners. But with the consent of all the partners he can be
admitted into partnership for benefits only. He is not personally liable for
the debts of the firm, his liability is limited only to the amount he has
invested in the firm as capital. He has no right to buy or sell goods or sign
any contract with any other party on behalf of the firm. During minority a
minor has right to receive agreed share of
profit, right to have access and copy of the account of the firm. Section 30
lays down the rights and liabilities of a minor who has been admitted in the partnership
which are:
1) The minor is
entitled to receive his agreed share of the property and of the profits of the
firm.
2) The minor has
the right to inspect and take copies of the books of accounts of the firm.
However, he has no such right in respect of books other than accounts.
3) The minor is
not personally liable to the third parties for the debts of the firm, but his
liability is limited only up to his share in the partnership assets and profit.
If the assets of partnership fall short in discharging the debts of the firm
the personal property of the minor cannot be applied for payment of the firm
debt.
4) The minor is
not entitled to take part in conduct of the business as he has no
representative capacity to bind the firm.
5) The minor
cannot bring about any suit against the partners for an account or payment of
his share of the property or profits of the firm except when he severs his
connection with the firm.
6) On attaining
majority, if he continues as a partner, his liability will become unlimited
with effect from the date of his original admission into the firm and he will
be having all the rights which are available to a normal partner. For this, he
has to give his consent or public notice or declaration that he wants to
continue in the firm as a partner. If he does not give his consent it will be
assumed that he wants to continue as a partner and in that case his liability
will be unlimited.
7) Where the
minor does not become a partner:
i) His rights and
liabilities continue to be those of a minor up to the date of his giving public
notice;
ii) After the date
of the public notice his share is not liable for any acts of the firm;
iii) He can sue the
other partners for his share of the property and profit in the firm;
8) After attaining
majority but before choosing to become a partner If, the minor represents or
knowingly permits himself to be represented as a partner in the firm, he will
be personally liable to anyone who has on the faith of such representation
granted credit to the firm on the ground of ‘holding out’.
7.1 RIGHTS
AND DUTIES OF PARTNERS: MUTUAL RIGHTS AND DUTIES
“Subject to the
provisions of this Act, the mutual rights and duties of the partners of a firm
may be determined by contract between the partners, and such contract may be
express or may be implied by a course of dealing.
Rights of Partners : The Partnership Act confers the following
rights upon the partners of a firm:
1) Right to take
part in the conduct of the business [Sec. 12 (a)]. Every partner, irrespective
of the amount of capital contribution, has an inherent right to take part in
the conduct of the business of the firm. Although one may not to participate in
the management of the business.
2) Right to express
opinion [Sec. 12 (c)]. Every partner has a right to be consulted and heard
before any matter is decided. Any difference arising as to ordinary matters
connected with the business may be decided by a majority of the partners. But
no change may be made in the nature of the business or the constitution of the
partnership, e.g., admission of a new partner, without the consent of all the
partners.
3) Right of access
to books [Sec. 12(d)]. Every partner has a right to have access to and to
inspect and copy any of the books of the firm.
4) Right to share
the profits [Sec. 13(b)]. Every partner, irrespective of the amount of capital
contribution or business expertise, has a right to share equally in the profits
earned by the firm.
5) Right to
interest on capital [Sec. 13(c)]. Where a partner is entitle to interest on
capital subscribed by him, such interest shall be payable only out of profits.
6) Right to
interest on advances [Sec. 13(d)]. Where a partner makes, for the purpose of
the business, any payment or advance beyond the amount of capital he has agreed
to subscribe, he is entitled to interest thereon at the rate of six per cent
per annum.
7) Right to
indemnity [Sec. 13(e)]. Every partner has a right to claim indemnity from the
firm in respect of payments made or liabilities incurred by him (a) in the
ordinary and proper conduct of the business, and (b) 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.
Duties of Partners : For the sake of clarity we shall be
studying the duties of partners inter se under the following two heads: ‘
I) Absolute
duties.
II) Qualified
duties.
I) Absolute
Duties : These duties are mandatory in nature imposed by law and are not
subject to a contract to the contrary. Being mandatory in nature, these duties
are applicable to all partnership and cannot be varied by agreement among the
partners. The following are the absolute duties of partners:
1) Duty to carry
on the business to the greatest common advantage (Sec. 9). Every partner is
bound to carry on the business of the firm to the greatest common advantage. It
implies that every partner must use his knowledge and skill for the benefit of
the firm and not for his personal gain.
2) Duty to be just
and faithful inter-se (Sec. 9). An ideal partnership is one where there is
mutual trust and confidence, and spirit of helpfulness and goodwill among the
partners. As such every partner must be just and faithful to his co-partners.
3) Duty to render true accounts (Sec. 9).
Every partner must render true and proper accounts to his co-partners. It
implies that each partner must be ready to explain the accounts of the firm and
produce vouchers in support of the entries. No partner should think of making a
secret profit at the expense of the firm.
4) Duty to provide
full information (Sec. 9). Every partner must give full information of all
things affecting the firm to his co- partners.
5) Duty to
indemnify for loss caused by fraud (Sec. 10). A partner can cause loss to the
firm by hi’s neglect or want of skill or omission or fraud while acting in the
ordinary course of business. The general practice is that where a partner acts
bona fide the loss caused by his neglect or want of skill or omission is borne
by the firm. But when the loss is caused by fraud committed against a third
party by a partner, the same must be recovered from the guilty partner and
cannot be shared among all the partners.
6) Duty to be
liable jointly and severally (Sec. 25). Every partner is liable, jointly with
all other partners and also severally, to third parties for all acts of the
firm done while he is a partner. The liability of all the partners is not only
joint and several but is also unlimited.
7) Duty not to
assign his interest (Sec. 29). No partner can assign or transfer his
partnership interest to any other person so as to make him a partner in the
business without the consent of all other partners. He can, however, assign his
share of the profit and his share in the assets of the firm but the transferee
shall not have any right to interfere in the conduct of the business.
II) Qualified
Duties : Qualified duties are those which depend upon the contract between the partners
and it is only in the absence of a contract to the contrary that these duties,
as laid down by the Partnership Act, are applicable. In other words, the
partners are free to vary these duties by mutual agreement, express or implied,
and if the partnership agreement is silent then only the duties contained in the
Partnership Act will be the duties of the partners. Subject to contract between
the partners, the Partnership Act prescribes the following duties of partners :
1) Duty to attend
diligently to his duties [Sec. 12(b)]. Every partner is bound to attend
diligently to his duties in the conduct of the business.
2) Duty to work
without remuneration [Sec. 13(a)]. A partner is not entitled to receive
remuneration for taking part in the conduct of the business.
3) Duty to
contribute to the losses [Sec. 13(b)]. The partners are bound to contribute
equally to the losses sustained by the firm, irrespective of the amount of
capital contribution by each one of them.
4) Duty to
indemnify for willful neglect [Sec. 13(/)]. Every partner is under a duty to
indemnify the firm for any loss caused to it by his wilful neglect in the
conduct of the business of the firm. The expression ‘wilful neglect’ means the
failure to perform a duty, or to do something which a partner ought to have
done, intentionally and deliberately. An act done in good faith and bona fide
or a mere error of judgment cannot be termed as wilful neglect.
5) Duty to use
firm ‘s property exclusively for the firm (Sec. 15). It is the duty of every
partner to use the property of the firm exclusively for the purposes of the
business. No partner should use property of the firm for his personal benefit.
6) Duty to account
for personal profits derived [Sec. 16(a)]. If a partner derives any profit for
himself from any transaction of the firm or from the use of the property or
business connection of the firm or the firm name, he must account for that
profit and pay it back to the firm.
7) Duty not to
compete with the business of the firm [Sec. 16(b)]. A partner must not carry on
any business which is similar to or likely to compete with the business of the
firm. If he does that, he is bound to account for and pay to the firm all
profits made by him in that business. A partner may, however, carry on a non-
competing business and may retain the profits of that business to himself.
7.1 LIABILITIES
OF A PARTNER / PARTNERSHIP TO THIRD PARTIES
i) Liability of a
Partner for Acts of the Firm (Sec. 25) : Every partner is liable, jointly and
severally with all other partners for all acts of the firm done while he is a
partner. Further, the liability of all the partners is unlimited. Because of
this liability, the creditor of the firm can sue all the partners jointly or
individually.
ii) Liability of
the Firm for Wrongful Act of a Partner (Sec. 26) : If any loss or injury is
caused to any third party or any penalty is imposed because of wrongful act or
omission of a partner, the firm is liable to the same extent as the partner.
However, the partner must act in the ordinary course of business of the firm or
with authority of his partners.
iii) Liability of
the Firm for Misutilisation by Partners (Sec. 27) : Where (a) a partner acting
within his apparent authority receives money or property from a third party and
misutilises it, or (b) a firm receives money or property from a third party in
the course of its business and any of the partners misutilises such money or
property, then the firm is liable to make good the loss.
iv) Liability of an
Incoming Partner : An incoming partner is liable for the debts and acts of the
firm from the date of his admission into the firm. However, the incoming
partner may agree to be liable for debts prior to his admission. Such agreeing
will not empower the prior creditor to sue the incoming partner. He will be
liable only to the other co-partners.
v) Liability of a
Retiring Partner : A retiring partner is liable for the acts of the firm done
before his retirement. But a retiring partner may not be liable for the debts
incurred before his retirement if an agreement is reached between the third
parties and the remaining partners of the firm discharging the retiring partner
from all liabilities. After retirement the retiring partner shall be liable
unless a public notice of his retirement is given. No such notice is required
in case of retirement of a sleeping or dormant partner.
7.2 DISSOLUTION
OF PARTNERSHIP AND DISSOLUTION OF FIRM
7.12.1 Dissolution of Partnership
Dissolution
of partnership refers to the change in the existing relations of the partners.
The firm continues its business after being reconstituted. This may happen on
admission, retirement or death of a partner or change in profit sharing ratio
in the firm. Example: L, M and N are three partners in a firm. M retires. The
partnership between L M N comes to an end and new partnership between M and N
comes into existence. This new partnership between M and N shall be known as
reconstituted firm’. Thus, on retirement of partner, the old partnership stands
dissolved but the firm continues its business with remaining partners M and N.
This is a case of dissolution of partnership.
Partnership may be dissolved in the following circumstances :
a) At the time of
admission of a new partner;
b) On the
retirement/death of an old partner;
c) At the time of change in profit sharing
ratio among existing partners;
d) If any partner
is declared insolvent;
e) On the
expulsion of any partner;
f) On the expiry
of the period of partnership.
Thus this is clear from the above discussion that in the case
of dissolution of the partnership the firm may continue under a new agreement
whereas in the case of dissolution of partnership firm the business of the firm
comes to an end.
7.12.2 Dissolution
of Firm
Dissolution of a firm
means the dissolution of partnership between all the partners of a firm. In
such a situation, the business of the firm is discontinued, its assets are
realised, the liabilities are paid off and the surplus (if any) is distributed
among the partners according to their rights.
7.12.3 Modes
of Dissolution of Firm
A partnership firm can
be dissolved in any of the following ways :
A) By the order of
the Court : Any partner to firm may apply to the court for getting the firm
dissolved. On getting such application by any of the partner the court may
proceed to order the dissolution of the firm in the following circumstances:
(Sec. 44)
i) If any of the
partner becomes insane. [Sec. 44(a)]
ii) If a partner,
other than the partner filing the suit has become disabled to perform his
duties as a partner. [Sec. 44(b)]
iii) If a partner,
other than the partner filing the suit is guilty of misconduct. [Sec. 44(c)]
iv) If a partner,
other than the partner filing the suit is guilty of intentionally and
persistently committing a breach of the partnership agreement. [Sec. 44(d)]
v) If a partner,
other than the partner filing the suit has transferred whole of his interest in
the firm to a third party without the consent of the other partners.[Sec.
44(e)]
vi) If the court is
satisfied that the business of the firm cannot be carried on except with a
loss. [Sec. 44(e)]
vii) If the court
considers it just and equitable to dissolve the firm due to some other reasons.
[Sec. 44(f)]
B) Without the
Intervention of the Court
i) Dissolution by
Agreement : A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners.
ii) Compulsory
Dissolution : (Sec. 41) A firm is compulsorily dissolved under any of the
following circumstances:
a) When all the
partners or all except one partner, become insolvent or insane making them
incompetent to sign a contract;
b) Where the
business becomes illegal;
c) Where all the
partners except one decide to retire from the firm;
d) Where all the
partners or all except one partner dies;
e) Where the
partnership deed includes any provision regarding the happening of the
following :
i) Expiry of the
period for which the partnership was formed;
ii) Completion of
the specific venture or project for which the firm was formed.
C) Dissolution on
the Happening of Certain Contingencies (Sec. 42) : Subject to contract between
the partners a firm is dissolved:
a) if constituted
for a fixed term, by the expiry of that term;
b) if constituted
to carry out one or more adventures or undertakings, by the completion thereof;
c) by the death
of a partner; and
d) by the
adjudication of a partner as an insolvent.
D) Dissolution by Notice of Partnership at
Will (Sec. 43) : Where the partnership is at will, the firm may be dissolved by
any partner giving notice in writing to all the other partners of his intention
to dissolve the firm. 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.
7.12.4 Sales of Good
will after Dissolution
The provisions relating
to sales of good will after dissolution of a firm are as follows :
1) In settling
the accounts of the firm after dissolution, the good will shall, subject to
contract between the partners, be included in the assets, and it may be sold
either separately or along with other property of the firm.
2) Where the
goodwill of the firm is sold after dissolution, a partner may carry on a
business competing with that of the buyer and he may advertise such business,
but, subject to agreement between him and the buyer, he may not– (a) use the
firm name,
(b) represent
himself as carrying on the business of the firm, or
(c) solicit the c
7.1 LET
US SUM UP
• Partnership business in India is
governed by the Indian Partnership Act, 1932, which came in to effect from 1st
October, 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.
• Essential
characteristics of a partnership firm are presence of agreement, association of
two or more persons, sharing of profit, unlimited liability, utmost good faith
etc.
• Registration
of a partnership firm is not mandatory. But, provisions in the Indian
Partnership Act has been made in such a way, that if a firm is registered, the
firm avail certain privileges and firms which are not registered they cannot
avail those privileges.
• Depending
upon nature of participation and functions partners are classified as active
partner, sleeping partner, silent partner, partner for profit only, partner by
estoppels etc.
• With the
consent of all the partners a minor can be admitted into partnership for
benefits only.
• A partnership
firm can be dissolved in any of the two ways: A) By the order of the court; B)
without the intervention of the court.
1) Indian Partnership
Act, 1932, (2014). New Delhi : Lawmann’s.
2) Kapoor, N. D.,
Elements of Mercantile Law. New Delhi : S. Chand & Co. ltd.
3) Shukla, M. C.
(2007), Mercantile Law, New Delhi : S. Chand & Co. Ltd.
7.15 ANSWERS TO CHECK YOUR PROGRESS
Ans. to Q. No. 1 : Four essential characteristics of a
partnership firm are presence of an agreement, association of two or more
persons, sharing of profit, unlimited liability.
Ans. to Q. No. 2 : Following are the two differences between
company and partnership firm :
i) A Company is
treated as an artificial legal person but Partnership is not a legal person.
ii) Company has
perpetual succession but Partnership firm does not have perpetual succession.
Ans. to Q. No. 3 : A sleeping or dormant partner does not take
any active part in the management of the business.
Ans. to Q. No. 4 : i) Right to take part in the conduct of
the business
ii) Right to express opinion.
Ans. to Q. No. 5 : i) Duty to work without remuneration
ii) Duty to attend diligently to his duties.
Q.1 : Define partnership. What are the
essential elements of a partnership?
Q.2 : What are the differences between
partnership and joint stock company?
Q.3 : Discuss the various kinds of partners
in a partnership firm?
Q.4 : Can a minor be admitted to a partnership?
Discuss.
Q.5 : What is the procedure for the
registration of a firm? What are the consequences of non-registration of a
firm?
Q.6 : What are the mutual rights and duties
in between the partners in a partnership firm?
Q.7 : What are the different modes in which
a firm may be dissolved?
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