CHAPTER

The Indian Partnership

5 Act, 1932

Unit-1: The Indian Partnership Act, 1932

PART-A

Partnership True T est of

Section 4 Partnership

Who have Carried on by Sharing of

is the relation Agr eement Agency
agreed to share all or any of Profit
between
the profits of them acting for
persons
business all

Kinds of partnership

Based on extent of
Based on duration
business

Partnership for Particular

Partnership at Will General Partnership
fixed period Partnership

Persons who entered into partnership wit h one another are

called

Individually Collectively
“partners” “firm”

Elements of
Partnership

Ass ociation of Business carried on by

Agr eement to
Agreement two or more Business all or any of them acting
share profits
persons for all
 Rate of interest on Capital, drawings & Loan etc.

2 Business Laws
Unit-1: The Indian Partnership Act, 1932 3
QUESTIONS FOR PRACTICE

PART-B

Q1. Mr. XU and Mr. YU are partners in a partnership firm. Mr. XU introduced MU (an
employee) as his partner to ZU. MU remained silent. ZU, a trader believing MU as
partner supplied 50 Laptops to the firm on credit. After expiry of credit period, ZU
did not get amount of Laptop sold to the partnership firm. ZU filed a suit against XU
and MU for the recovery of price. Does MU is liable for such purpose?

Sol.

Provision

As per Section 28 of Indian Partnership Act, 1932, Partnership by holding out is also
known as partnership by estoppel. Where a man holds himself out as a partner, or
allows others to do it, he is then stopped from denying the character he has assumed
and upon the faith of which creditors may be presumed to have acted. A person may
himself, by his words or conduct have induced others to believe that he is a partner
or he may have allowed others to represent him as a partner. The result in both the
cases is identical.

Analysis and conclusion
In the given case, MU (the Manager) is also liable for the price because he becomes a

partner by holding out as per Section 28 of Indian Partnership Act, 1932.

Q2. Ms. Lucy while drafting partnership deed taken care of few important points. What
are those points? She want to know the list of information which must be part of
partnership deed drafted by her. Also, give list of information to be included in
partnership deed?
Sol. Ms. Lucy while drafting partnership deed must take care of following important points:
 No particular formalities are required for an agreement of partnership.
 Partnership deed may be in writing or formed verbally. The document in writing
containing the various terms and conditions as to the relationship of the partners to
each other is called the ‘partnership deed’.
 Partnership deed should be drafted with care and be stamped according to the
provisions of the Stamp Act, 1899.
 If partnership comprises immovable property, the instrument of partnership must
be in writing, stamped and registered under the Registration Act.
List of information included in Partnership Deed while drafting Partnership Deed by
Ms. Lucy:
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.

4 Business Laws
 4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
Note: Ms. Lucy may add or delete any provision according to the needs of the partnership
firm.

Q3. Define partnership and name the essential elements for the existence of a partnership
as per the Indian Partnership Act, 1932. Explain any two such elements in detail.
Sol. Definition of Partnership: ‘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. (Section
4 of the Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements which must co-
exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to share Profits
5. Business carried on by all or any of them acting for all

ELEMENTS OF PARTNERSHIP

The definition of the partnership contains the following five elements which must co- exist
before a partnership can come into existence:

1. Association of two or more persons: Partnership is an association of 2 or more persons.

Again, only persons recognized by law can enter into an agreement of partnership.
Therefore, a firm, since it is not a person recognized in the eyes of law cannot be a
partner.

Again, a minor cannot be a partner in a firm, but with the consent of all the partners,

may be admitted to the benefits of partnership.

The Partnership Act is silent about the maximum number of partners but Section 464
of the Companies Act, 2013 read with the relevant Rules has now put a limit of 50
partners in any association / partnership firm.

Unit-1: The Indian Partnership Act, 1932 5

 2. Agreement: It may be observed that partnership must be the result of an agreement
between two or more persons. There must be an agreement entered into by all the
persons concerned.

This element relates to voluntary contractual nature of partnership. Thus, the nature
of the partnership is voluntary and contractual. An agreement from which relationship
of Partnership arises may be express.

It may also be implied from the act done by partners and from a consistent course of
conduct being followed, showing mutual understanding between them. It may be oral
or in writing.

3. Business: In this context, we will consider two propositions. First, there must exist a
business. For the purpose, the term ‘business’ includes every trade, occupation and
profession.

The existence of business is essential. Secondly, the motive of the business is the
“acquisition of gains” which leads to the formation of partnership. Therefore, there
can be no partnership where there is no intention to carry on the business and to share
the profit thereof.

4. Agreement to share profits: The sharing of profits is an essential feature of partnership.

There can be no partnership where only one of the partners is entitled to the whole
of the profits of the business. Partners must agree to share the profits in any manner
they choose.

But an agreement to share losses is not an essential element. It is open to one or more

partners to agree to share all the losses. However, in the event of losses, unless agreed
otherwise, these must be borne in the profit-sharing ratio.

5. Business carried on by all or any of them acting for all: The business must be carried
on by all the partners or by anyone or more of the partners acting for all. This is the
cardinal principle of the partnership Law. In other words, there should be a binding
contract of mutual agency between the partners.

An act of one partner in the course of the business of the firm is in fact an act of all

partners. Each partner carrying on the business is the principal as well as the agent for
all the other partners. He is an agent in so far as he can bind the other partners by his
acts and he is a principal to the extent that he is bound by the act of other partners.

It may be noted that the true test of partnership is mutual agency rather than sharing
of profits. If the element of mutual agency is absent, then there will be no partnership.

Q4. State whether the following are partnerships:

(i) A and B jointly own a car which they used personally on Sundays and holidays and
let it on hire as taxi on other days and equally divide the earnings.
(ii) Two firms each having 12 partners combine by an agreement into one firm.
(iii) A and B, co-owners, agree to conduct the business in common for profit.
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 (iv) Some individuals form an association to which each individual contributes Rs. 500
annually. The objective of the association is to produce clothes and distribute the
clothes free to the war widows.
(v) A and B, co-owners share between themselves the rent derived from a piece of
land.A and B buy commodity X and agree to sell t e commodity with sharing the
profits equally.
Sol.
(i) No, this is not a case of partnership because the sharing of profits or of gross returns
accruing from property holding joint or common interest in the property would
not by itself make such persons partners.
Alternatively, this part can also be answered as below:
Yes, this is a case of partnership, as the car is used personally only on Sundays
and holidays and used for most of the days as a Taxi. Hence, it is inferred that the
main purpose of owning the car is to let it for business purpose. Also, there is an
agreement for equally dividing the earnings.
(ii) Yes, this is a case of partnership because there is an agreement between two firms
to combine into one firm.
(iii) Yes, this is a case of partnership because A & B, co-owners, have agreed to conduct
a business in common for profit.
(iv) No, this is not a case of partnership as no charitable association can be floated in
partnership.
(v) No, this is not a case of partnership as they are co-owners and not the partners.
Further, there exist no business.
(vi) Yes, this is a case of partnership as there exist the element of doing business and
sharing of profits equally.

Q5. “Sharing in the profits is not conclusive evidence in the creation of partnership”.
Comment.
Sol. Sharing of profit is an essential element to constitute a partnership. But it is only a
prima facie evidence and not conclusive evidence, in that regard. The sharing of profits
or of gross returns accruing from property by persons holding joint or common interest
in the property would not by itself make such persons partners.
Although the right to participate in profits is a strong test of partnership, and there
may be cases where, upon a simple participation in profits, there is a partnership,
yet whether the relation does or does not exist must depend upon the whole contract
between the parties.
Where there is an express agreement between partners to share the profit of a business
and the business is being carried on by all or any of them acting for all , there will
be no difficulty in the light of provisions of Section 4, in determining the existence or
otherwise of partnership.
But the task becomes difficult when either there is no specific agreement or the

agreement is such as does not specifically speak of partnership. In such a case for testing
the existence or otherwise of partnership relation, Section 6 has to be referred.
Unit-1: The Indian Partnership Act, 1932 7
 According to Section 6, regard must be had to the real relation between the parties
as shown by all relevant facts taken together. The rule is easily stated and is clear but
its application is difficult.
Cumulative effect of all relevant facts such as written or verbal agreement, real intention
and conduct of the parties, other surrounding circumstances etc., are to be considered
while deciding the relationship between the parties and ascertaining the existence of
partnership.
Hence, the statement is true / correct that mere sharing in the profits is not conclusive
evidence.

Q6. What do you mean by “Particular Partnership” under the Indian Partnership Act,
1932?
Sol. Particular partnership: A partnership may be organized for the prosecution of a
single adventure as well as for the conduct of a continuous business. Where a person
becomes a partner with another person in any particular adventure or undertaking,
the partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any

agreement, dissolved by the completion of the adventure or undertaking.

Q7. Who is a nominal partner under the Indian Partnership Act, 1932 ? What are his
liabilities?
Sol. Nominal Partner: A person who lends his name to the firm, without having any real
interest in it, is called a nominal partner. Liabilities: He is not entitled to share the
profits of the firm.
Neither he invests in the firm nor takes part in the conduct of the business. He is,

however liable to third parties for all acts of the firm.

Q8. Business carried on by all or any of them acting for all.” Discuss the statement under
the Indian Partnership Act, 1932.

Sol.
(a) Business carried on by all or any of them acting for all: The business must be carried
on by all the partners or by anyone or more of the partners acting for all. In other
words, there should be a binding contract of mutual agency between the partners.
An act of one partner in the course of the business of the firm is in fact an act of all

partners. Each partner carrying on the business is the principal as well as the agent
for all the other partners.
He is an agent in so far as he can bind the other partners by his acts and he is a
principal to the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency. If the element of
mutual agency is absent, then there will be no partnership.

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 In KD Kamath & Co., the Supreme Court has held that the two essential conditions to

be satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of business; and
(2) the business must be carried on by all or any of them acting for all, within the
meaning of the definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in
one partner or the further circumstance that only one partner can operate the bank
accounts or borrow on behalf of the firm are not destructive of the theory of partnership
provided the two essential conditions, mentioned earlier, are satisfied.

Q9. What is the conclusive evidence of partnership? State the circumstances when
partnership is not considered between two or more parties.
Sol. Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect
to determination of existence of partnership. Each partner carrying on the business is
the principal as well as an agent of other partners. So, the act of one partner done on
behalf of firm, binds all the partners.
If the element of mutual agency relationship exists between the parties constituting a
group formed with a view to earn profits by running a business, a partnership may be
deemed to exist.
Circumstances when partnership is not considered between two or more parties: Various
judicial pronouncements have laid to the following factors leading to no partnership
between the parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be open
to inspection by both parties
(iii) No account of the partnership was opened with any bank
(iv) No written intimation was conveyed to the Deputy Director of Procurement with
respect to the newly created partnership.

Q10. “Whether a group of persons is or is not a firm, or whether a person is or not a partner
in a firm.” Explain the mode of determining existence of partnership as per the Indian
Partnership Act, 1932?
Sol. (b)Mode of determining existence of partnership (Section 6 of the Indian Partnership
Act, 1932): In determining whether a group of persons is or is not a firm, or whether
a person is or 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.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and
3. the business was carried on by all or any of them acting for all.
Unit-1: The Indian Partnership Act, 1932 9
 1. Agreement: Partnership is created by agreement and not by status (Section 5). The
relation of partnership arises from contract and not from status; and in particular,
the members of a Hindu Undivided family carrying on a family business as such
are not partners in such business.
2. Sharing of Profit: Sharing of profit is an essential element to constitute a partnership.
But, it is only a prima facie evidence and not conclusive evidence, in that regard.
The sharing of profits or of gross returns accruing from property by persons holding
joint or common interest in the property would not by itself make such persons
partners.
Although the right to participate in profits is a strong test of partnership, and
there may be cases where, upon a simple participation in profits, there is a
partnership, yet whether the relation does or does not exist must depend upon
the whole contract between the parties.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership
law, is very much helpful in reaching a conclusion in this regard. Each partner
carrying on the business is the principal as well as an agent of other partners. So,
the act of one partner done on behalf of firm, binds all the partners.
If the elements of mutual agency relationship exist between the parties constituting
a group formed with a view to earn profits by running a business, a partnership
may be deemed to exist

Q11. State the differences between Partnership and Hindu Undivided Family.

Sol.

Basis of difference Partnership Joint Hindu family

Mode of creation Partnership is created The right in the joint family
necessarily by an agreement. is created by status means its
creation by birth in the family.
Death of a member Death of a partner ordinarily The death of a member in the
leads to the dissolution of Hindu undivided family does not
partnership. give rise to dissolution of the
family business.
Management All the partners are equally The right of management of joint
entitled to take part in the family business generally vests in
partnership business. the Karta, the governing male
member or female member of the
family.1
Authority to bind Every partner can, by his The Karta or the manager, has
act, bind the firm. the authority to contract for the
family business and the other
members in the family.

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 Liability In a partnership, the liability In a Hindu undivided family,
of a partner is unlimited. only the liability of the Karta
is unlimited, and the other
coparcener are liable only to the
extent of their share in the profits
of the family business.
Calling for accounts A partner can bring a suit On the separation of the joint
on closure against the firm for accounts, family, a member is not entitled
provided he also seeks the to ask for account of the family
dissolution of the firm. business.
Governing Law A partnership is governed A Joint Hindu Family business is
by the Indian Partnership governed by the Hindu Law.
Act, 1932.
Minor’s capacity In a partnership, a minor In Hindu undivided family
cannot become a partner, business, a minor becomes a
though he can be admitted to member of the ancestral business
the benefits of partnership, by the incidence of birth. He does
only with the consent of all not have to wait for attaining
the partners. majority.
Continuity A firm subject to a contract A Joint Hindu family has the
between the partners continuity till it is divided. The
gets dissolved by death or status of Joint Hindu family is
insolvency of a partner. not thereby affected by the death
of a member.
Number of Members In case of Partnership Members of HUF who carry on
number of members should a business may be unlimited in
not exceed 50. number.
Share in the business In a partnership, each In a HUF, no coparceners has a
partner has a defined share definite share. His interest is a
by virtue of an agreement fluctuating one. It is capable of
between the partners. being enlarged by deaths in the
family diminished by births in
the family.

Q12. Explain the following kinds of partnership under the Indian Partnership Act, 1932:
(i) Partnership at will
(ii) Particular partnership
Sol.
1. Partnership at will: According to Section 7 of the Indian Partnership Act, 1932,
partnership at will is a partnership when:

Unit-1: The Indian Partnership Act, 1932 11

 1. no fixed period has been agreed upon for the duration of the partnership; and
2. there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as a
partnership at will. But, where there is an agreement between the partners either
for the duration of the partnership or for the determination of the partnership, the
partnership is not partnership at will.
Where a partnership entered into for a fixed term is continued after the expiry of such
term, it is to be treated as having become a partnership at will.
A partnership at will may be dissolved by any partner by giving notice in writing
to all the other partners of his intention to dissolve the same.
2. Particular partnership: A partnership may be organized for the prosecution of a
single adventure as well as for the conduct of a continuous business. Where a person
becomes a partner with another person in any particular adventure or undertaking
the partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any

agreement, dissolved by the completion of the adventure or undertaking.

Q13. Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of
Partnership by holding out.
Sol. Partnership by holding out is also known as partnership by estoppel. Where a man holds
himself out as a partner, or allows others to do it, he is then stopped from denying the
character he has assumed and upon the faith of which creditors may be presumed to
have acted.
A person may himself, by his words or conduct have induced others to believe that he

is a partner or he may have allowed others to represent him as a partner. The result
in both the cases is identical.
Example: X and Y are partners in a partnership firm. X introduced A, a manager, as
his partner to Z. A remained silent. Z, a trader believing A as partner supplied 100
T.V sets to the firm on credit. After expiry of credit period, Z did not get amount of
T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery
of price . Here, in the given case, A, the Manager is also liable for the price because he
becomes a partner by holding out (Section 28, Indian Partnership Act, 1932).
It is only the person to whom the representation has been made and who has acted
thereon that has right to enforce liability arising out of ‘holding out’.


12 Business Laws
 CHAPTER
The Indian Partnership
5 Act, 1932

Unit-2: Relations of Partners

PART-A

4 General Duties of Partner (Section

- 9):
- Bound to carry business to the greatest common advantage
- Just & faithful to each other
- To render true accounts to other partners or their legal representative
- To render full information of all things affecting firm to other partners or their legal representative
MUTUAL Mutual
RIGHTS Righ&tsLIABILITIES:
&Liabilities: SUBJECT
- Subject TO CONTRACT
to Contract,

Partner is not entitled to any remuneration for taking part in

conduct of business of firm except in case of customs

Both Profit & Losses to be shared equally amongst partners

where a partner is entitled to interest on the capital subscribed by

him such interest shall be payable only out of profits;

partner making, for the purposes of the business, any payment or

advance beyond the amount of capital he has agreed to subscribe, is
entitled to interest thereon at the rate of six percent per annum

firm shall indemnify a partner in respect of payments made and

liabilities incurred by him

CONDUCT
Conduct ofOF BUSINESS:
- : SubjectSUBJECT
Business TO CONTRACT
to Contract,

Every partner has a right to take part in the conduct of the business

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

Every partner has right to express his opinion on business matters

Ordinary matters are decided by majority of partners

Change in nature of firm business require consent of all partners

Every partner & his duly authorized agent has right to have access to / inspect
/ take copy of books of firm

In event of death, partner’s legal representative has right to have access to / inspect
/ take copy of books of firm

2 Business Laws
 Subject to Contract

If partner derives any profits

for himself from
- Any transaction of the If a partner carries on any
firm
business of the same nature
- use of property of the
as and competing with that
firm
of the firm
- business connection of
the firm
- the firm name

He shall account for that profit & pay it to firm

In case of emergency, partner has the authority to perform all

the acts to protect the firm from losses as would be done by
person of ordinary prudence whether such act falls under his
implied authority or not

with no
intention to creat
Agreement legal relation

As per section 17, subject to contract, rights & duties of partner

remain same as far as possible after there is any change in the firm
with a view to obtain assent of other

Unit-2: Relations of Partners 3

 This rule cannot
applied to all the
transations and
dealings between
the partner
themselves

8 Acts which are not in implied authority of partners

Submit a dispute relating to business of firm to arbitration

Open a bank account on behalf of firm in his own name

Compromise or relinquish any firm’s claim or its portion

Withdraw a suit or proceedings filed on behalf of firm

Admit any liability in a suit or proceedings against the firm

Acquire any immovable property on behalf of firm

Transfer immovable property belonging to the firm

Enter into partnership on behalf of firm

Implied authority can be extended or restricted by a contract

between the partners
But restriction on implied authority is only effective against
a third party if
(a) Third party knows about such restriction; or
(b) Third party does know that he is dealing with a partner of firm

4 Business Laws
Unit-2: Relations of Partners 5
 Minor cannot become a partner in firm but can be admitted as beneficiary
in the firm with the consent of all the existing partner

Within 6 months on attaining majority or obtaining knowledge that he is a

benificiary in firm, whichever date is later, such person require to give public
notice that whether he has elected to become partner or not.
If he fails to give notice within 6 months, then treated as partner of firm
on expiry of said 6 months

Minor admitted as
beneficiary with consent of
all partners

Minor As After attaining

Beneficiary Majority

Rights of Minor as Liabilities of Minor He elected not to

He becomes partner
beneficiary as beneficiary become partner

personally liable to
Right to his agreed confined only to the His rights and
third parties for all
share of the profits extent of his sharein liabilities continue
acts of the firm done
the profits and the to be those of a
since he was
property of the firm. minor up to the date
admitted to the
Liabilities of Minor of giving public
benefits of
access to, inspect as beneficiary notice
partnership
and copy the
accounts of the firm

no personal liability
for the debts of the share in the property
His share shall not
sue the partners for firm and the profits of the
be liable for any acts
accounts or for firm remains the
of the firm done
payment of his share same to which he
after the date ofthe
but only when was entitled as a
if the firm is notice.
severing his minor.
declared insolvent
connection with the
his share in the firm
firm
vests in the Official
Receiver/
Assignee

6 Business Laws
Unit-2: Relations of Partners 7
 3 Mandatory conditions
for expulsion o partner

Power of Power must be Exercised in

expulsion must exercised by Good faith
exist in the majority of (3 points for test
contract directors of good faith)

Partner must be
Expulsion is in
Partner is served given an
interest of
with the notice opportunity of
partnership
being heard

If If
thethe above
above condition
condition s are
s are not
not satisfied,
satisfied, thth e expulsion
e expulsion is is null
null && void
void

LIABILITY
LIABILITY OFOF ESTATE
ESTATE OFOF DECEAS
DECEAS EDED - - : :
PARTNER
PARTNER
Where
Where under
under a a contract
contract betweenthe
between the partners,
partners, the
the firm
firm is is not
not dissolved
dissolved bybythethe death
death of of
a a
a partner,
a partner, the
the estate
estate of of a deceased
a deceased partner
partner is is
notnotliable
liable
forfor any
any actact
of of the
the firm
firm done
done after
after
hishis death.
death.

Outgoing partner can carry

competing business,
But, Subject to contract, cannot

Represent himself as Solicit the custom of

Use the firm name carrying on the business persons who were dealing
of the firm with the firm

Outgoing partner may make an agreement with his partner that he will not be carrying
competing business and such agreement will be valid if restrictions imposed are reasonable

As per section 38, continuing guarantee given to a firm or to third party in respect of the
transaction of a firm is, in the absence of an agreement to the contrary , revoked as to
future transactions from the date of any change in the constitution of the firm.

8 Business Laws
 Effect of Insolvency of a partner

1. No public notice is required in case any partner become insolvent

2. He will be ceased to be a partner from the very date on which the order of
adjudication is made.

3. The insolvent partner cannot be continued as a partner.

4. The estate of the insolvent partner is not liable for the acts of the firm done
after the date of order of adjudication.

5. The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication,

6. Ordinarily but not invariably, the insolvency of a partner result in dissolution of a

firm; but the partners are competent to agree among themselves that the
adjudication of a partner as an insolvent will not give rise to dissolution of the firm

Unit-2: Relations of Partners 9

QUESTIONS FOR PRACTICE

PART-B

Q1. State the modes by which a partner may transfer his interest in the firm in favour of
another person under the Indian Partnership Act, 1932. What are the rights of such
a transferee?
Sol. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership
is transferable like any other property, but as the partnership relationship is based on
mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise
cannot enjoy the same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring partner and

he is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge
the accounts.
(2) On the dissolution of the firm or on the retirement of the transferring partner,
the transferee will be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner
was entitled, and
(b) for the purpose of ascertaining the share, he is entitled to an account as from
the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a firm without
the consent of all the partners.
A partner cannot by transferring his own interest, make anybody else a partner in his
place, unless the other partners agree to accept that person as a partner. At the same
time, a partner is not debarred from transferring his interest.
A partner’s interest in the partnership can be regarded as an existing interest and
tangible property which can be assigned.

Q2. Whether a minor may be admitted in the business of a partnership firm? Explain the
rights of a minor in the partnership firm.
Sol. A minor cannot be bound by a contract because a minor’s contract is void and not merely
voidable. Therefore, a minor cannot become a partner in a firm because partnership is
founded on a contract.
Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the
benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other
words, he can be validly given a share in the partnership profits.

10 Business Laws
 When this has been done and it can be done with the consent of all the partners

then the rights and liabilities of such a partner will be governed under Section 30
as follows:
Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or
not to become a partner. If he elects to become a partner, then he is entitled to
the share to which he was entitled as a minor. If he does not, then his share is
not liable for any acts of the firm after the date of the public notice served to
that effect.

Q3. M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged
in the business of carpet manufacturing and exporting to foreign countries. On 25th
August, 2018, they inducted Mr. G, an expert in the field of carpet manufacturing as
their partner. On 10th January 2020, Mr. G was blamed for unauthorized activities
and thus expelled from the partnership by united approval of rest of the partners.

Examine whether action by the partners was justified or not?

What should have the factors to be kept in mind prior expelling a partner from the
firm by other partners according to the provisions of the Indian Partnership Act,
1932?
Sol.
Provision

Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):
A partner may not be expelled from a firm by a majority of partners except in exercise,
in good faith, of powers conferred by contract between the partners.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Analysis and conclusion
(i) Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr.
G from the partnership was justified as he was expelled by united approval of the
Unit-2: Relations of Partners 11
 partners exercised in good faith to protect the interest of the partnership against
the unauthorized activities charged against Mr. G. A proper notice and opportunity
of being heard has to be given to Mr. G.
(ii) The following are the factors to be kept in mind prior expelling a partner from
the firm by other partners:
(a) the power of expulsion must have existed in a contract between the partners;
(b) the power has been exercised by a majority of the partners; and
(c) it has been exercised in good faith.

Q4. A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled
to 20 percent of the partnership property and profits. A retires from the firm and dies
after 15 days. B and C continue business of the firm without settling accounts. Explain
the rights of A’s legal representatives against the firm under the Indian Partnership
Act, 1932?
Sol.
Provision
Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or

otherwise ceases to be a partner and there is no final settlement of account between
the legal representatives of the deceased partner or the firms with the property of the
firm, then, in the absence of a contract to the contrary, the legal representatives of
the deceased partner or the retired partner are entitled to claim either.
(1) Such shares of the profits earned after the death or retirement of the partner
which is attributable to the use of his share in the property of the firm; or
(2) Interest at the rate of 6 per cent annum on the amount of his share in the property.
Analysis and conclusion
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932,
in the given problem, A’s Legal representatives shall be entitled, at their option to:
(a) the 20% shares of profits (as per the partnership deed); or
(b) interest at the rate of 6 per cent per annum on the amount of A’s share in the
property.

Q5. Master X was introduced to the benefits of partnership of M/s ABC & Co. with the
consent of all partners. After attaining majority, more than six months elapsed and
he failed to give a public notice as to whether he elected to become or not to become
a partner in the firm. Later on, Mr. L, a supplier of material to M/s ABC & Co., filed
a suit against M/s ABC & Co. for recovery of the debt due.

In the light of the Indian Partnership Act, 1932, explain:

(i) To what extent X will be liable if he failed to give public notice after attaining
majority?
(ii) Can Mr. L recover his debt from X?
12 Business Laws
Sol.
Provision
As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, at any time

within six months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such person may
give public notice that he has elected to become or that he has elected not to become a
partner in the firm, and such notice shall determine his position as regards the firm.
However, if he fails to give such notice, he shall become a partner in the firm on the
expiry of the said six months.
If the minor becomes a partner by his failure to give the public notice within specified
time, his rights and liabilities as given in Section 30(7) are as follows:
(A) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(B) His share in the property and the profits of the firm remains the same to which
he was entitled as a minor.
Analysis and conclusion
(i) In the instant case, since, X has failed to give a public notice, he shall become a
partner in the M/s ABC & Co. and becomes personally liable to Mr. L, a third
party.
(ii) In the light of the provisions of Section 30(7) read with Section 30(5) of the Indian
Partnership Act, 1932, since X has failed to give public notice that he has not
elected to not to become a partner within six months, he will be deemed to be a
partner after the period of the above six months and therefore, Mr. L can recover
his debt from him also in the same way as he can recover from any other partner.
Q6. Mr. A (transferor) transfer his share in a partnership firm to Mr. B (transferee). Mr. B is
not entitled for few rights and privileges as Mr. A (transferor) is entitled therefor. Discuss
in brief the points for which Mr. B is not entitled during continuance of partnership?
Sol.

Provision

As per Section 29 of Indian Partnership Act, 1932, a transfer by a partner of his
interest in the firm, either absolute or by mortgage, or by the creation by him of a
charge on such interest, does not entitle the transferee, during the continuance of the
firm, to interfere in the conduct of business, or to require accounts, or to inspect the
books of the firm, but entitles the transferee only to receive the share of profits of the
transferring partner, and the transferee shall accept the account of profits agreed to
by the partners.
Analysis and conclusion
In the given case during the continuance of partnership, such transferee Mr. B is not

entitled:

Unit-2: Relations of Partners 13

  to interfere with the conduct of the business.
 to require accounts.
 to inspect books of the firm.
However, Mr. B is only entitled to receive the share of the profits of the transferring
partner and he is bound to accept the profits as agreed to by the partners, i.e. he
cannot challenge the accounts.
Q7. M, N and P were partners in a firm. The firm ordered JR Limited to supply the
furniture. P dies, and M and N continues the business in the firm’s name. The firm did
not give any notice about P’s death to the public or the persons dealing with the firm.
The furniture was delivered to the firm after P’s death, fact about his death was known
to them at the time of delivery. Afterwards the firm became insolvent and failed to
pay the price of furniture to JR Limited.
Explain with reasons:
(a) Whether P’s private estate is liable for the price of furniture purchased by the firm?
(b) Whether does it make any difference if JR Limited supplied the furniture to the
firm believing that all the three partners are alive?
Sol.
Provision
According to Section 35 of the Indian Partnership Act, 1932, where under a contract
between the partners the firm is not dissolved by the death of a partner, the estate of
a deceased partner is not liable for any act of the firm done after his death.
Further, in order that the estate of the deceased partner may be absolved from liability

for the future obligations of the firm, it is not necessary to give any notice either to the
public or the persons having dealings with the firm.
Analysis and conclusion
In the given question, JR Limited has supplied furniture to the partnership firm, after

P’s death. The firm did not give notice about P’s death to public or people dealing with
the firm. Afterwards, the firm became insolvent and could not pay JR Limited.
In the light of the facts of the case and provisions of law:
(i) Since the delivery of furniture was made after P’s death, his estate would not be
liable for the debt of the firm. A suit for goods sold and delivered would not lie
against the representatives of the deceased partner. This is because there was no
debt due in respect of the goods in P’s lifetime.
(ii) It will not make any difference even if JR Limited supplied furniture to the firm
believing that all the three partners are alive, as it is not necessary to give any notice
either to the public or the persons having dealings with the firm, so the estate of
the deceased partner may be absolved from liability for the future obligations of
the firm.

14 Business Laws
Q8. Discuss the liability of a partner for the act of the firm and liability of firm for act of
a partner to third parties as per Indian Partnership Act, 1932.
Sol. Liability of a partner for acts of the firm (Section 25 of the Indian Partnership Act,
1932): Every partner is liable, jointly with all the other partners and also severally,
for all acts of the firm done while he is a partner.
The partners are jointly and severally responsible to third parties for all acts which
come under the scope of their express or implied authority. This is because that all the
acts done within the scope of authority are the acts done towards the business of the
firm.
The expression ‘act of firm’ connotes 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. Again in order to bring a case under Section 25, it is necessary that the act of
the firm, in respect of which liability is brought to be enforced against a party, must
have been done while he was a partner.

Liability of the firm for wrongful acts of a partner and for misapplication by partners
(Sections 26 & 27 of the Indian Partnership Act, 1932): Where: by the wrongful act
or omission of a partner 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 therefore to the same extent as the partner.
A partner acting within his apparent authority receives money or property from a
third party and misapplies it, or 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.

Q9. Define Implied Authority. In the absence of any usage or custom of trade to the
contrary, the implied authority of a partner does not empower him to do certain
acts. State the acts which are beyond the implied authority of a partner under the
provisions of the Indian Partnership Act, 1932?
Sol. According to Section 19 of the Indian Partnership Act, 1932, subject to the provisions
of Section 22, 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.
The authority of a partner to bind the firm conferred by this section is called his
“implied authority”.
In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to-
(a) submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceedings filed on behalf of the firm;

Unit-2: Relations of Partners 15

 (e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.

Q10. Mr. M is one of the four partners in M/s XY Enterprises. He owes a sum of Rs. 6 crore
to his friend Mr. Z which he is unable to pay on due time. So, he wants to sell his share
in the firm to Mr. Z for settling the amount. In the light of the provisions of the Indian
Partnership Act, 1932, discuss each of the following:
(i) Can Mr. M validly transfer his interest in the firm by way of sale?
(ii) What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire
from the firm after a period of 6 months from the date of transfer?
Sol.

Provision

According to Section 29 of the Indian Partnership Act, 1932,
(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or
by the creation by him of a charge on such interest, does not entitle the transferee,
during the continuance of the firm, to interfere in the conduct of business, or to
require accounts, or to inspect the books of the firm, but entitles the transferee
only to receive the share of profits of the transferring partner, and the transferee
shall accept the account of profits agreed to by the partners.
(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled as against the remaining partners to receive the share of the
assets of the firm to which the transferring partner is entitled, and, for the purpose
of ascertaining that share, to an account as from the date of the dissolution.
Analysis and conclusion
In the light of facts of the question and provision of law:
(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale.
(ii) On the retirement of the transferring partner (Mr. M), the transferee (Mr. Z) will
be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner
was entitled, and
(b) for the purpose of ascertaining the share, he is entitled to an account as from
the date of the dissolution.

So, in this case on Mr. M’s retirement, Mr. Z would be entitled to receive the value of
Mr. M’s share to the extent of Rs. 6 crore in the firm’s assets.

16 Business Laws
Q11. Sohan, Rohan and Jay were partners in a firm. The firm is dealer in office furniture.
They have regular dealings with M/s AB and Co. for the supply of furniture for their
business. On 30th June 2018, one of the partners, Mr. Jay died in a road accident.
The firm has ordered M/s AB and Co. to supply the furniture for their business on 25
May 2018, when Jay was also alive. Now Sohan and Rohan continue the business in the
firm’s name after Jay’s death. The firm did not give any notice about Jay’s death to
the public or the persons dealing with the firm. M/s AB and Co. delivered the furniture
to the firm on 25 July 2018. The fact about Jay’s death was known to them at the
time of delivery of goods. Afterwards the firm became insolvent and failed to pay the
price of furniture to M/s AB and Co. Now M/s AB and Co. has filed a case against the
firm for recovery of the price of furniture. With reference to the provisions of Indian
Partnership Act, 1932, explain whether Jay’s private estate is also liable for the price
of furniture purchased by the firm?
Sol.
Provision

According to Section 35 of the Indian Partnership Act, 1932, where under a contract

between the partners the firm is not dissolved by the death of a partner, the estate of
a deceased partner is not liable for any act of the firm done after his death.
Further, in order that the estate of the deceased partner may be absolved from liability

for the future obligations of the firm, it is not necessary to give any notice either to
the public or the persons having dealings with the firm.

Analysis and conclusion
In the light of the facts of the case and provisions of law, since the delivery of furniture

was made after Jay’s death, his estate would not be liable for the debt of the firm. A suit
for goods sold and delivered would not lie against the representatives of the deceased
partner.
This is because there was no debt due in respect of the goods in Jay’s lifetime. He

was already dead when the delivery of goods was made to the firm and also it is not
necessary to give any notice either to the public or the persons having dealings with
the firm on a death of a partner (Section 35). So, the estate of the deceased partner
may be absolved from liability for the future obligations of the firm.

Q12. X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Spouses of X and Y fought in ladies club on
their personal issue and X’s wife was hurt badly. X got angry on the incident and he
convinced Z to expel Y from their partnership firm. Y was expelled from partnership
without any notice from X and Z. Considering the provisions of the Indian Partnership
Act, 1932, state whether they can expel a partner from the firm. What are the
criteria for test of good faith in such circumstances?

Unit-2: Relations of Partners 17

Sol.
Provision
A partner may not be expelled from a firm by a majority of partners except in exercise,

in good faith, of powers conferred by contract between the partners. It is, thus, essential
that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bonafide
interest of the business of the firm.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Analysis and conclusion
Thus, according to the test of good faith as required under Section 33(1), expulsion of

Partner Y is not valid.

Q13. What is the provision related to the effect of notice to an acting partner of the firm
as per the Indian Partnership Act, 1932?
Sol. Effect of notice to an acting partner of the firm
According to Section 24 of the Indian Partnership Act, 1932, notice to a partner who
habitually acts in the business of the firm of any matter relating to the affairs of the
firm operates as notice to the firm, except in the case of a fraud on the firm committed
by or with the consent of that partner.
Thus, the notice to one is equivalent to the notice to the rest of the partners of the
firm, just as a notice to an agent is notice to his principal.
This notice must be actual and not constructive. It must further relate to the firm’s
business. Only then it would constitute a notice to the firm.

Q14. Discuss the provisions regarding personal profits earned by a partner under the Indian
Partnership Act, 1932?
Sol. Personal Profit earned by Partners (Section 16 of the Indian Partnership Act, 1932)
According to section 16, subject to contract between the partners:
(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 shall account for that profit and pay it to the firm;

18 Business Laws
 (b) If a partner carries on any business of the same nature and competing with that
of the firm, he shall account for and pay to the firm all profits made by him in
that business.

Q15. “Though a minor cannot be a partner in a firm, he can nonetheless be admitted to

the benefits of partnership.” Referring to the provisions of the Indian Partnership Act,
1932, state the rights which can be enjoyed by a minor partner.
Sol. Rights which can be enjoyed by a minor partner:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not
to become a partner. If he elects to become a partner, then he is entitled to the
share to which he was entitled as a minor.
If he does not, then his share is not liable for any acts of the firm after the date of the

public notice served to that effect.

Q16. State the liabilities of a minor partner both:

(a) Before attaining majority and
(b) After attaining majority
Sol.
(I) Liabilities of a minor partner before attaining majority:
(a) The liability of the minor is confined only to the extent of his share in the
profits and the property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred during his
minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his
share in the firm vests in the Official Receiver/ Assignee.

(ii) Liabilities of a minor partner after attaining majority:

Within 6 months of his attaining majority or on his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, the minor partner
has to decide whether he shall remain a partner or leave the firm.
Where he has elected not to become partner he may give public notice that he has

elected not to become partner and such notice shall determine his position as regards
the firm. If he fails to give such notice he shall become a partner in the firm on the
expiry of the said six months.

Unit-2: Relations of Partners 19

Q17. State the legal position of a minor partner after attaining majority:
(c) When he opts to become a partner of the same firm.
(d) When he decide not to become a partner.

Sol. When he becomes partner: If the minor becomes a partner on his own willingness or
by his failure to give the public notice within specified time, his rights and liabilities as
given in Section 30(7) of the Indian Partnership Act, 1932, are as follows:
(a) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(b) His share in the property and the profits of the firm remains the same to which
he was entitled as a minor.
When he elects not to become a partner:
(a) His rights and liabilities continue to be those of a minor up to the date of giving
public notice.
(b) His share shall not be liable for any acts of the firm done after the date of the
notice.
(c) He shall be entitled to sue the partners for his share of the property and profits.
It may be noted that such minor shall give notice to the Registrar that he has or
has not become a partner.

Q18. Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators.
On 1st October, 2018, Mr. P retired from partnership, but failed to give public notice
of his retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and
enquired about some refrigerators with latest techniques. Mr. X, who was exhibiting
his refrigerators with the new techniques was impressed with the interactions of Mr.
P and requested for the visiting card of the firm. The visiting card also included the
name of Mr. P as a partner even though he had already retired. Mr. X. supplied some
refrigerators to the firm and could not recover his dues from the firm. Now, Mr. X
wants to recover the dues not only from the firm, but also from Mr. P.

Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932
and decide whether Mr. P is liable in this situation.
Sol.

Provision
A retiring partner continues to be liable to third party for acts of the firm after his

retirement until public notice of his retirement has been given either by himself or by
any other partner. But the retired partner will not be liable to any third party if the
latter deals with the firm without knowing that the former was partner.
Also, if the partnership is at will, the partner by giving notice in writing to all the other

partners of his intention to retire will be deemed to be relieved as a partner without
giving a public notice to this effect.
20 Business Laws
 Also, as per section 28 of the Indian Partnership Act, 1932, where a man holds himself
out as a partner, or allows others to do it, he is then stopped from denying the character
he has assumed and upon the faith of which creditors may be presumed to have acted.
Analysis and conclusion
In the light of the provisions of the Act and facts of the case, Mr. P is also liable to
Mr. X.

Q19. When the continuing guarantee can be revoked under the Indian Partnership Act,
1932?
Sol. Revocation of continuing guarantee (Section 38 of the Indian Partnership Act, 1932)
According to section 38, a continuing guarantee given to a firm or to third party in
respect of the transaction of a firm is, in the absence of an agreement to the contrary,
revoked as to future transactions from the date of any change in the constitution
of the firm. Such change may occur by the death, or retirement of a partner, or by
introduction of a new partner.

Q20. Comment on ‘the right to expel partner must be exercised in good faith’ under the
Indian Partnership Act, 1932.
Sol. A partner may not be expelled from a firm by a majority of partners except in exercise,
in good faith, of powers conferred by contract between the partners. It is, thus, essential
that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bona fide
interest of the business of the firm.

Q21. P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in
trading of Washing Machines of various brands. Due to the conflict of views between
partners, P & Q decided to leave the partnership firm and started competitive business
on 31st July, 2019, in the name of M/S PQ & Co. Meanwhile, R & S have continued
using the property in the name of M/S PQRS & Co. in which P & Q also has a share.

Based on the above facts, explain in detail the rights of outgoing partners as per the
Indian Partnership Act, 1932 and comment on the following:
(i) Rights of P & Q to start a competitive business.
(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co
Sol.
Provision

Rights of outgoing partner to carry on competing business (Section 36 of the Indian
Partnership Act, 1932)
Unit-2: Relations of Partners 21
 An outgoing partner may carry on business competing with that of the firm and he
may advertise such business, but subject to contract to the contrary, he may not,-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm or
(c) solicit the custom of persons who were dealing with the firm before he ceased to
be a partner.
(1) Although this provision has imposed some restrictions on an outgoing partner,
it effectively permits him to carry on a business competing with that of the
firm. However, the partner may agree with his partners that on his ceasing
to be so, he will not carry on a business similar to that of the firm within a
specified period or within specified local limits. Such an agreement will not be
in restraint of trade if the restraint is reasonable [Section 36 (2)]

Analysis and conclusion

From the above, we can infer that P & Q can start competitive business in the name
of M/S PQ & Co after following above conditions in the absence of any agreement.
(ii)
Provision


Right of outgoing partner in certain cases to share subsequent profits (Section 37 of
the Indian Partnership Act, 1932)
According to Section 37, where any member of a firm has died or otherwise ceased
to be partner, and the surviving or continuing partners carry on the business of the
firm with the property of the firm without any final settlement of accounts as between
them and the outgoing partner or his estate, then, in the absence of a contract to the
contrary, the outgoing partner or his estate is entitled at the option of himself or his
representatives to such share of the profits made since he ceased to be a partner as
may be attributable to the use of his share of the property of the firm or to interest at
the rate of six per cent per annum on the amount of his share in the property of the
firm.
Analysis and conclusion

In the instant case, P & Q can share in property of M/s PQRS & Co. keeping in view
of the above provisions.

Q22. Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.
Sol. Where-
(a) a partner acting within his apparent authority receives money or property from
a third party and misapplies it, or

22 Business Laws
 (b) 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.
It may be observed that the workings of the two clauses of Section 27 is designed to
bring out clearly an important point of distinction between the two categories of cases
of misapplication of money by partners.
Clause (a) covers the case where a partner acts within his authority and due to his
authority as partner, he receives money or property belonging to a third party and
misapplies that money or property. For this provision to the attracted, it is not necessary
that the money should have actually come into the custody of the firm.
On the other hand, the provision of clause (b) would be attracted when such money
or property has come into the custody of the firm and it is misapplied by any of the
partners.
The firm would be liable in both the cases.

Q23. What do you mean by “implied authority” of the partners in a firm? Point out the
extent of partner’s implied authority in case of emergency, referring to the provisions
of the Indian Partnership Act, 1932.
Sol. Implied Authority of Partner as Agent of the Firm (Section 19): Subject to the provisions
of section 22, 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.
(1) The authority of a partner to bind the firm conferred by this section is called his
“implied authority”.
(2) In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to-
(a) Submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.
Mode Of Doing Act To Bind Firm (Section 22): In order to bind a firm, an act or

instrument done or executed by a partner or other person on behalf of the firm shall
be done or executed in the firm name, or in any other manner expressing or implying
an intention to bind the firm.

Unit-2: Relations of Partners 23

Q24. “Partner indeed virtually embraces the character of both a principal and an agent”.
Describe the said statement keeping in view of the provisions of the Indian Partnership
Act, 1932.
Sol. “Partner indeed virtually embraces the character of both a principal and an agent”:
Subject to the provisions of section 18 of the Indian Partnership Act, 1932, a partner
is the agent of the firm for the purposes of the business of the firm.
A partnership is the relationship between the partners who have agreed to share the
profits of the business carried on by all or any of them acting for all (Section 4). This
definition suggests that any of the partners can be the agent of the others.
Section 18 clarifies this position by providing that, subject to the provisions of the

Act, a partner is the agent of the firm for the purpose of the business of the firm. The
partner indeed virtually embraces the character of both a principal and an agent.
So far as he acts for himself and in his own interest in the common concern of the
partnership, he may properly be deemed as a principal and so far as he acts for his
partners, he may properly be deemed as an agent.
The principal distinction between him and a mere agent is that he has a community
of interest with other partners in the whole property and business and liabilities of
partnership, whereas an agent as such has no interest in either.
The rule that a partner is the agent of the firm for the purpose of the business of the
firm cannot be applied to all transactions and dealings between the partners themselves.
It is applicable only to the act done by partners for the purpose of the business of the
firm.

Q25. Moni and Tony were partners in the firm M/s MOTO & Company. They admitted
Sony as partner in the firm and he is actively engaged in day-to-day activities of
the firm. There is a tradition in the firm that all active partners will get a monthly
remuneration of Rs. 20,000 but no express agreement was there. After admission of
Sony in the firm, Moni and Tony were continuing getting salary from the firm but no
salary was given to Sony from the firm. Sony claimed his remuneration but denied by
existing partners by saying that there was no express agreement for that. Whether
under the Indian Partnership Act, 1932, Sony can claim remuneration from the firm?
Sol.
Provision

By virtue of provisions of Section 13(a) of the Indian Partnership Act, 1932 a partner
is not entitled to receive remuneration for taking part in the conduct of the business.
But this rule can always be varied by an express agreement, or by a course of dealings,
in which event the partner will be entitled to remuneration. Thus, a partner can claim
remuneration even in the absence of a contract, when such remuneration is payable
under the continued usage of the firm. In other words, where it is customary to pay
remuneration to a partner for conducting the business of the firm, he can claim it even
in the absence of a contract for the payment of the same.

24 Business Laws
 Analysis and conclusion
In the given problem, existing partners are getting regularly a monthly remuneration

from firm customarily being working partners of the firm. As Sony also admitted as
working partner of the firm, he is entitled to get remuneration like other partners.
Q26. Ram & Co., a firm consists of three partners A, B and C having one third share each
in the firm. According to A and B, the activities of C are not in the interest of the
partnership and thus want to expel C from the firm. Advise A and B whether they
can do so quoting the relevant provisions of the Indian Partnership Act, 1932.
Sol.
Provision
It is not possible for the majority of partners to expel a partner from the firm without

satisfying the conditions as laid down in Section 33 of the Indian Partnership Act,
1932. The essential conditions before expulsion can be done are:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) It has been exercised in good faith.
The test of good faith includes:
(a) that the expulsion must be in the interest of the partnership;
(b) that the partner to be expelled is served with a notice; and
(c) that the partner has been given an opportunity of being heard.
Analysis and conclusion


Thus, in the given case A and B the majority partners can expel the partner only if
the above conditions are satisfied and procedure as stated above has been followed.

Q27. State the legal consequences of the following as per the provisions of the Indian
Partnership Act, 1932:
(i) Retirement of a partner
(ii) Insolvency of a partner
Sol. Retirement of A Partner (Section 32):
(1) A partner may retire:
(a) with the consent of all the other partners;
(b) in accordance with an express agreement by the partners; or
(c) where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.
(2) A retiring partner may be discharged from any liability to any third party for acts
of the firm done before his retirement by an agreement made by him with such
third party and the partners of the reconstituted firm, and such agreement may
be implied by a course of dealing between the third party and the reconstituted
firm after he had knowledge of the retirement.

Unit-2: Relations of Partners 25

 (3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until public
notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with

the firm without knowing that he was a partner.
(4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.
Insolvency of a partner (Section 34)

(1) The insolvent partner cannot be continued as a partner.
(2) He will be ceased to be a partner from the very date on which the order of
adjudication is made.
(3) The estate of the insolvent partner is not liable for the acts of the firm done after
the date of order of adjudication.
(4) The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication,
(5) Ordinarily but not invariably, the insolvency of a partner results in dissolution
of a firm; but the partners are competent to agree among themselves that the
adjudication of a partner as an insolvent will not give rise to dissolution of the
firm

Q28. A, B and C are partners of a partnership firm carrying on the business of construction
of apartments. B who himself was a wholesale dealer of iron bars was entrusted with
the work of selection of iron bars after examining its quality. As a wholesaler, B is well
aware of the market conditions. Current market price of iron bar for construction
is Rs. 350 per Kilogram. B already had 1000 Kg of iron bars in stock which he had
purchased before price hike in the market for Rs. 200 per Kg. He supplied iron bars
to the firm without the firm realising the purchase cost. Is B liable to pay the firm the
extra money he made, or he doesn’t have to inform the firm as it is his own business
and he has not taken any amount more than the current prevailing market price of
Rs. 350? Assume there is no contract between the partners regarding the above.
Sol.
Provision

According to section 16 of the Indian Partnership Act, 1932, subject to contract
between partners –
(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 shall account for that profit and pay it to the firm;
(b) if a partner carries on any business of the same nature as and competing with
that of the firm, he shall account for and pay to the firm all profits made by him
in that business.

26 Business Laws
 Analysis and conclusion

In the given scenario, Mr. B had sold iron bar to the firm at the current prevailing

market rate of Rs. 350 per Kg though he had stock with him which he bought for Rs.
200 per Kg. Hence, he made an extra profit of Rs. 150 per Kg. This is arising purely
out of transactions with the firm. Hence, Mr. B is accountable to the firm for the extra
profit earned thereby

Q29. Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr.
B felt that the book of accounts was displaying only a small amount as profit inspite of
a huge turnover. He wanted to inspect the book of accounts of the firm arguing that
it is his entitlement as a transferee. However, the other partners were of the opinion
that Mr. B cannot challenge the books of accounts. As an advisor, help them solve the
issue applying the necessary provisions from the Indian Partnership Act, 1932.
Sol.
Provision

As per Section 29 of the Indian Partnership Act, 1932, during the continuance of the
business, a transferee is not entitled
 To interfere with the conduct of the business
 To require the accounts
 To inspect the books of the firm He is only entitled to his share of profit.
Analysis and conclusion

Keeping the above points, in the given case, since the partnership business is in
continuance, Mr. B is bound to accept the profits as agreed to by the partners. He
cannot challenge the accounts. He is only entitled to receive the share of profits of Mr.
A (transferring partner).

Q30. A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving
D, a supplier of office stationery, buys certain stationery on behalf of the ABC Firm.
The stationery is of use in the ordinary course of the firm’s business. A does not give the
stationery to the firm, instead brings it to his own use. The supplier D, who is unaware
of the private use of stationery by A, claims the price from the firm. The firm refuses
to pay for the price, on the ground that the stationery was never received by it (firm).
Referring to the provisions of the Indian Partnership Act, 1932 decide:
Whether the Firm’s contention shall be tenable?
What would be your answer if a part of the stationery so purchased by A was delivered
to the firm by him, and the rest of the stationery was used by him for private use,
about which neither the firm nor the supplier D was aware?
Sol.
Provision

The problem in the question is based on the ‘Implied Authority’ of a partner provided in
Section 19 of the Indian Partnership Act, 1932. The section provides that subject to the

Unit-2: Relations of Partners 27

 provisions of Section 22 of the Act, 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. The authority
of a partner to bind the firm conferred by this section is called his ‘Implied Authority’
[Sub-Section (1) of section 19]. Furthermore, every partner is in contemplation of law
the general and accredited agent of the partnership and may consequently bind all the
other partners by his acts in all matters which are within the scope and object of the
partnership. Hence, if the partnership is of a general commercial nature, he may buy
goods on account of the partnership.
Analysis and conclusion

Considering the above provisions and explanation, the questions as asked in the problem
may be answered as under:
(i) The firm’s contention is not tenable, for the reason that the partner, in the usual
course of the business on behalf of the firm has an implied authority to bind the
firm. The firm is, therefore, liable for the price of the goods.
(ii) In the second case also, the answer would be the same as above, i.e. the implied
authority of the partner binds the firm.
In both the cases, however, the firm ABC can take action against A, the partner but
it has to pay the price of stationery to the supplier D.

Q31. A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in office
furniture. A was in charge of purchase and sale, B was in charge of maintenance of
accounts of the firm and C was in charge of handling all legal matters. Recently through
an agreement among them, it was decided that A will be in charge of maintenance
of accounts and B will be in charge of purchase and sale. Being ignorant about such
agreement, M, a supplier supplied some furniture to A, who ultimately sold them to a
third party. Referring to the provisions of the Partnership Act, 1932, advise whether
M can recover money from the firm.

What will be your advice in case M was having knowledge about the agreement?
Sol.
Provision
According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm
may, by contract between the partners, extend or restrict implied authority of any
partners.
Not with standing any such restriction, any act done by a partner on behalf of the firm
which falls within his implied authority binds the firm, unless the person with whom
he is dealing knows of the restriction or does not know or believe that partner to be a
partner.
The implied authority of a partner may be extended or restricted by contract between

the partners. Under the following conditions, the restrictions imposed on the implied
authority of a partner by agreement shall be effective against a third party:
28 Business Laws
 1. The third party knows above the restrictions, and
2. The third party does not know that he is dealing with a partner in a firm.
Analysis and conclusion
Now, referring to the case given in the question, M supplied furniture to A, who ultimately
sold them to a third party and M was also ignorant about the agreement entered into
by the partners about the change in their role. M also is not aware that he is dealing
with a partner in a firm. Therefore, M on the basis of knowledge of implied authority
of A, can recover money from the firm.
But in the second situation, if M was having knowledge about the agreement, he cannot
recover money from the firm.

Q32. X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Due to expansion of business, they planned to
hire another partner Mr A. Now the firm has 4 partners X, Y, Z and A. The business
was continuing at normal pace. In one of formal business meeting, it was observed that
Mr. Y misbehaved with Mrs. A (wife of Mr. A). Mr. Y was badly drunk and also spoke
rudely with Mrs. A. Mrs. A felt very embarrassed and told her husband Mr. A about
the entire incident. Mr. A got angry on the incident and started arguing and fighting
with Mr. Y in the meeting place itself. Next day, in the office Mr. A convinced X and Z
that they should expel Y from their partnership firm. Y was expelled from partnership
without any notice from X, A and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they

can expel a partner from the firm. What are the criteria for test of good faith in such
circumstances?

Sol.
Provision

According to Section 33 of Indian Partnership Act, 1932, a partner may not be
expelled from a firm by a majority of partners except in exercise, in good faith, of
powers conferred by contract between the partners. It is, thus, essential that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bonafide
interest of the business of the firm.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.

Unit-2: Relations of Partners 29


Analysis and conclusion
According to the test of good faith as required under Section 33(1), expulsion of

Partner Y is not valid as he was not served any notice and also he was not given an
opportunity of being heard. Also the matter of fight between A and Y was on personal
reasons, hence not satisfying the test of good faith in the interest of partnership. Since
the conditions given under above provisions are not satisfied, the expulsion stands null
and void.

Q33. Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the
knowledge or consent of Suresh and Dinesh borrows himself Rs. 50,000 from Ramesh,
a customer of the firm, in the name of the firm. Mahesh, then buys some goods for
his personal use with that borrowed money. Can Mr. Ramesh hold Mr. Suresh & Mr.
Dinesh liable for the loan? Explain the relevant provisions of the Indian Partnership
Act,1932.
Sol.
Provision
Implied authority of a partner
As per sections 19 and 22 of the Indian Partnership Act,1932 unless otherwise provided

in the partnership deed, every partner has an implied authority to bind every other
partner for acts done in the name of the firm, provided the same falls within the
ordinary course of business and is done in a usual manner.
Analysis and conclusion
Mahesh has a right to borrow the money of Rs. 50,000/- from Ramesh on behalf of

his firm in the usual manner. Since, Ramesh has no knowledge that the amount was
borrowed by Mahesh without the consent of the other two partners, Mr. Suresh and
Mr. Dinesh, he can hold both of them (Suresh and Dinesh) liable for the re-payment of
the loan.

Q34. In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to do certain acts. State the acts which are beyond
the implied authority of a partner under the provisions of the Indian Partnership Act,
1932?
Sol. Implied authority of partner as agent of the firm (Section 19):
Subject to the provisions of section 22, 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. The
authority of a partner to bind the firm conferred by this section is called his “implied
authority”
In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to-

30 Business Laws
 (a) Submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.


Unit-2: Relations of Partners 31

 CHAPTER
The Indian Partnership
5 Act, 1932

Unit-3: Registration and Dissolution of a Firm

PART-A
 Content of Statement

01

02

The Firm's The Place of

Name Business where
the Firm is
07
The Duration Situated

of Partnership The Partners

Names & 03
Firm
Addresses
/
of nt The name of
e e e
at em f th
D c Date of the Places where
en o
m e ss the firm has
m in m Joining by
Co Bus ir
F its Branches
06 of the Partners 04
of the Firm

05

Firm name shall not contain following words:

Crown

Emperor

Empire

Imperial

King

Queen

Royal

Govt linked

State Govt can give approval to use firm name linked with
govt. by order in writing

2 Business Laws
 Rights of partner Property
after dissolution

Of firm Of partner
Property of Firm Surplus distributed
applied in debts among the partners
and payments of or representatives to First applied First applied
the firm their rights against debts of against separate
firm and then share debts and then
of each partner against each debts
against separate of firm
debts

Unit-3: Registration and Dissolution of a Firm 3

 Consequences of Non-Registration Exceptions :- Non – Registration of firm
(Section 69) does not, however the following rights
1. No suit in civil court by firm or other 1. Right of third parties to sue the firm
co-partners against third party or any partner
2. No relief to firm or partner for set-off 2. right of partners to sue for the
of claim dissolution of the firm or for the
settlement of the accounts of a dissolved
firm, or for realization of the property
of a dissolved firm.
3. Aggrieved partner cannot partner legal 3. The power of an Official Assignees,
action against firm or other partners Receiver of Court to release the
property of the insolvent partner and
to bring an action
4. Third party can sue both registered or 4. The right to sue or claim a set-off if
unregistered firm the value of suit does not exceed Rs.
100 in value
5. The right to suit and proceeding
instituted by legal representatives or
heirs of the deceased partner of a firm
for account s of the firm or to realise
the property of the firm

Modes of Dissolution of Firm

Without Court Intervention With Court Intervention (Section 44)

Insanity / Unsound Mind

Dissolution by Agreement (Section 40)

Permanent Incapacity
Dissolution by notice (in partnership at will)
(Section 43)
Persistent Breach of agreement

Compulsory dissolution of firm (Section 41) Transfer of Interest

Continuous Losses / Perpetual Losses

Dissolution on happening of certain
contingencies (Section 42) Just & equitable grounds

1. After expiry of fixed term of partnership 1. Deadlock in Management

2. Completion of adventure/undertaking 2. Partners are not in talking terms
3. Death of a partner 3. Loss of substratum
4. Adjudication of partner as insolvent 4. Gambling by partner on a stock
exchange

4 Business Laws
QUESTIONS FOR PRACTICE

PART-B

Q1. What is the procedure of registration of a partnership firm under the Indian Partnership
Act, 1932?
Sol.
(1) (SECTION 58): (1) The registration of a firm may be effected at any time by sending
by post or delivering to the Registrar of the area in which any place of business
of the firm is situated or proposed to be situated, a statement in the prescribed
form and accompanied by the prescribed fee, stating-
(a) The firm’s name
(b) The place or principal place of business of the firm,
(c) The names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.

(2) The statement shall be signed by all the partners, or by their agents specially
authorised in this behalf.
(3) Each person signing the statement shall also verify it in the manner prescribed.
(4) A firm name shall not contain any of the following words, namely:-
Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘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.

Q2. When does dissolution of a partnership firm take place under the provisions of the
Indian Partnership Act, 1932? Explain.
Sol. Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural
relation existing between all the partners of the Firm. But when only one of the partners
retires or becomes in capacitated from acting as a partner due to death, insolvency
or insanity, the partnership, i.e., the relationship between such a partner and other is
dissolved, but the rest may decide to continue.
In such cases, there is in practice, no dissolution of the firm. The particular partner
goes out, but the remaining partners carry on the business of the Firm.
In the case of dissolution of the firm, on the other hand, the whole firm is dissolved.
The partnership terminates as between each and every partner of the firm.

Unit-3: Registration and Dissolution of a Firm 5

 Dissolution of a Firm may take place (Section 39 - 44)
(a) as a result of any agreement between all the partners (i.e., dissolution by agreement);
(b) by the adjudication of all the partners, or of all the partners but one, as insolvent
(i.e., compulsory dissolution);
(c) by the business of the Firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain contingencies,
such as:
(i) effluence of time;
(ii) completion of the venture for which it was entered into;
(iii) death of a partner;
(iv) insolvency of a partner.
(e) by a partner giving notice of his intention to dissolve the firm, in case of partnership
at will and the firm being dissolved as from the date mentioned in the notice, or
if no date is mentioned, as from the date of the communication of the notice; and
(f) by intervention of court in case of:
(i) a partner becoming the unsound mind;
(ii) permanent incapacity of a partner to perform his duties as such;
(iii) Misconduct of a partner affecting the business;
(iv) willful or persistent breach of agreement by a partner;
(v) transfer or sale of the whole interest of a partner;
(vi) improbability of the business being carried on save at a loss;
(g) the court being satisfied on other equitable grounds that the firm should be dissolved.

Q3. “Indian Partnership Act does not make the registration of firms compulsory nor does
it impose any penalty for non-registration.” In light of the given statement, discuss
the consequences of non- registration of the partnership firms In India?

Or

“Indian Partnership Act does not make the registration of firms compulsory nor does
it impose any penalty for non-registration.” Explain. Discuss the various disabilities or
disadvantages that a non-registered partnership firm can face in brief?
Sol. Under the English Law, the registration of firms is compulsory. Therefore, there is a
penalty for non-registration of firms. But the Indian Partnership Act does not make the
registration of firms compulsory nor does it impose any penalty for non-registration.
However, under Section 69, non-registration of partnership gives rise to a number
of disabilities which we shall presently discuss. Although registration of firms is not

6 Business Laws
 compulsory, yet the consequences or disabilities of non-registration have a persuasive
pressure for their registration. These disabilities briefly are as follows:
(i) No suit in a civil court by firm or other co-partners against third party: The firm
or any other person on its behalf cannot bring an action against the third party
for breach of contract entered into by the firm, unless the firm is registered and
the persons suing are or have been shown in the register of firms as partners in
the firm.
In other words, a registered firm can only file a suit against a third party and the
persons suing have been in the register of firms as partners in the firm.
(ii) No relief to partners for set-off of claim: If an action is brought against the firm
by a third party, then neither the firm nor the partner can claim any set-off, if
the suit be valued for more than Rs. 100 or pursue other proceedings to enforce
the rights arising from any contract.
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm (or any other person on his behalf) is precluded
from bringing legal action against the firm or any person alleged to be or to have
been a partner in the firm. But, such a person may sue for dissolution of the firm
or for accounts and realization of his share in the firm’s property where the firm
is dissolved.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.

Q4. Subject to agreement by partners, state the rules that should be observed by the
partners in settling the accounts of the firm after dissolution under the provisions of
the Indian Partnership Act, 1932.
Sol. Mode of Settlement of partnership accounts: As per Section 48 of the Indian Partnership
Act, 1932, in settling the accounts of a firm after dissolution, the following rules shall,
subject to agreement by the partners, be observed:-
(i) Losses, including deficiencies of capital, shall be paid first out of profits, next out
of capital, and, lastly, if necessary, by the partners individually in the proportions
in which they were entitled to share profits;
(ii) The assets of the firm, including any sums contributed by the partners to make
up deficiencies of capital, must be applied in the following manner and order:
(a) in paying the debts of the firm to third parties;
(b) in paying to each partner rateably what is due to him from capital;
(c) in paying to each partner rateably what is due to him on account of capital;
and
(d) the residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits.

Unit-3: Registration and Dissolution of a Firm 7

Q5. Distinguish between dissolution of firm and dissolution of partnership.

Or

“Dissolution of a firm is different from dissolution of Partnership”. Discuss.

Sol.

S. No. Basis of Difference Dissolution of Firm Dissolution of Partnership

1. Continuation of It involves discontinuation of It does not affect continu-
business business in partnership. ation of business. It involves
only reconstitution of the
firm.
2. Winding up It involves winding up of the It involves only reconstitu-
firm and requires realization tion and requires only re-
of assets and settlement of valuation of assets and lia-
liabilities. bilities of the firm.
3. Order of court A firm may be dissolved by Dissolution of partnership
the order of the court. is not ordered by the court.
4. Scope It necessarily involves disso- It may or may not involve
lution of partnership. dissolution of firm.
5. Final closure of It involves final closure of It does not involve final
books books of the firm. closure of the books of the
firm.

Q6. Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is
engaged in the business of trading of branded furniture. The name of the partners was
clearly written along with the firm name in front of the head office of the firm as well
as on letter-head of the firm. On 1st October, 2018, Mr. C passed away. His name
was neither removed from the list of partners as stated in front of the head office nor
from the letter-heads of the firm. As per the terms of partnership, the firm continued
its operations with Mr. A and Mr. B as partners. The accounts of the firm were settled
and the amount due to the legal heirs of Mr. C was also determined on 10th October,
2018. But the same was not paid to the legal heirs of Mr. C. On 16th October, 2018,
Mr. X, a supplier supplied furniture worth Rs. 20,00,000 to M/s ABC & Co. M/s ABC &
Co. could not repay the amount due to heavy losses. Mr. X wants to recover the amount
not only from M/s ABC & Co., but also from the legal heirs of Mr. C.

Analyses the above situation in terms of the provisions of the Indian Partnership Act,
1932 and decide whether the legal heirs of Mr. C can also be held liable for the dues
towards Mr. X.
Sol.
Provision
Generally, the effect of the death of a partner is the dissolution of the partnership,

but the rule in regard to the dissolution of the partnership, by death of partner, is

8 Business Laws
 subject to a contract between the parties and the partners are competent to agree
that the death of one will not have the effect of dissolving the partnership as regards
the surviving partners unless the firm consists of only two partners. In order that the
estate of the deceased partner may be absolved from liability for the future obligations
of the firm, it is not necessary to give any notice either to the public or the persons
having dealings with the firm.

Analysis and conclusion
In the light of the provisions of the Act and the facts of the question, Mr. X (creditor)

can have only a personal decree against the surviving partners (Mr. A and Mr. B) and
a decree against the partnership assets in the hands of those partners. A suit for goods
sold and delivered would not lie against the representatives of the deceased partner.
Hence, the legal heirs of Mr. C cannot be held liable for the dues towards Mr. X.

Q7. Ram, Mohan and Gopal were partners in a firm. During the course of partnership,
the firm ordered Sunrise Ltd. to supply a machine to the firm. Before the machine
was delivered, Ram expired. The machine, however, was later delivered to the firm.
Thereafter, the remaining partners became insolvent and the firm failed to pay the
price of machine to Sunrise Ltd.

Explain with reasons:

(i) Whether Ram’s private estate is liable for the price of the machine purchased b
y
the firm?
(ii) Against whom can the creditor obtain a decree for the recovery of the price?
Sol.
Provision
Partnership Liability: The problem in question is based on the provisions of the Indian

Partnership Act, 1932 contained in Section 35. The Section provides that where under
a contract between the partners the firm is not dissolved by the death of a partner,
the estate of a deceased partner is not liable for any act of the firm done after his
death.

Analysis and conclusion

Therefore, considering the above provisions, the problem may be answered as follows:
(i) Ram’s estate in this case will not be liable for the price of the Machinery purchased.
This is because there was not debt due in respect of the goods in Ram’s life time.
(ii) The creditors in this case can have only a personal decree against the surviving
partners and decree against the partnership assets in the hands of those partners.
However, since the surviving partners are already insolvent, no suit for recovery of the

debt would lie against them. A suit for goods sold and delivered would not lie against
the representative of the deceased partner.

Unit-3: Registration and Dissolution of a Firm 9

Q8. State the grounds on which Court may dissolve a partnership firm in case any partner
files a suit for the same.

Or

What are the various grounds under the Indian Partnership Act, 1932, on which the
Court may, at the suit of the partner, dissolve a firm?
Sol. Dissolution by the Court (Section 44 of the Indian Partnership Act, 1932):
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of
unsound mind, the court may dissolve the firm on a suit of the other partners
or by the next friend of the insane partner. Temporary sickness is no ground for
dissolution of firm.
(b) Permanent incapacity: When a partner, other than the partner suing, has become
in any way permanently incapable of performing his duties as partner, then the
court may dissolve the firm. Such permanent incapacity may result from physical
disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct
which is likely to affect prejudicially the carrying on of business, the court may
order for dissolution of the firm, by giving regard to the nature of business.
It is not necessary that misconduct must relate to the conduct of the business. The

important point is the adverse effect of misconduct on the business. In each case
nature of business will decide whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the partner suing,
wilfully or persistently commits breach of agreements relating to the management
of the affairs of the firm or the conduct of its business, or otherwise so conduct
himself in matters relating to the business that it is not reasonably practicable for
other partners to carry on the business in partnership with him, then the court
may dissolve the firm at the instance of any of the partners. Following comes in
to category of breach of contract:
¾ Embezzlement,
¾ Keeping erroneous accounts
¾ Holding more cash than allowed
¾ Refusal to show accounts despite repeated request etc.
Example If one of the partners keeps erroneous accounts and omits to enter
receipts or if there is continued quarrels between the partners or there is such a
state of things that destroys the mutual confidence of partners, the court may
order for dissolution of the firm.

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 (e) Transfer of interest: Where a partner other than the partner suing, has transferred
the whole of his interest in the firm to a third party or has allowed his share to
be charged or sold by the court, in the recovery of arrears of land revenue due by
the partner, the court may dissolve the firm at the instance of any other partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on
except at a loss in future also, the court may order for its dissolution.
(g) Just and equitable grounds: Where the court considers any other ground to be just
and equitable for the dissolution of the firm, it may dissolve a firm. The following
are the cases for the just and equitable grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.

Q9. Referring to the Provisions of the Indian Partnership Act, 1932, answer the following:
(i) What are the consequences of Non-Registration of Partnership firm?
(ii) What are the rights which won’t be affected by Non-Registration of Partnership
firm?
Sol. Consequences of Non-registration of partnership firm:
Under Section 69 of the Indian Partnership Act, 1932 non-registration of partnership
gives rise to a number of disabilities.
Though registration of firms is not compulsory, yet the consequences or disabilities of
non-registration have a persuasive pressure for their registration. Following are the
consequences:
(a) No suit in a civil court by firm or other co-partners against third party: The firm
or any other person on its behalf cannot bring an action against the third party
for breach of contract entered into by the firm.
(b) No relief to partners for set-off of claim: If an action is brought against the firm
by a third party, then neither the firm nor the partner can claim any set-off, if
the suit be valued for more than Rs. 100 or pursue other proceedings to enforce
the rights arising from any contract.
(c) Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm (or any other person on his behalf) is precluded
from bringing legal action against the firm or any person alleged to be or to have
been a partner in the firm.
(d) Third-party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.

Unit-3: Registration and Dissolution of a Firm 11

 Non-registration of a firm does not, however, affect the following rights:
1. The right of third parties to sue the firm or any partner.
2. The right of partners to sue for the dissolution of the firm or for the settlement
of the accounts of a dissolved firm, or for realization of the property of a dissolved
firm.
3. The power of an Official Assignees, Receiver of Court to release the property of the
insolvent partner and to bring an action.
4. The right to sue or claim a set-off if the value of suit does not exceed Rs. 100 in
value.

Q10. A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In
2016, A dies. In 2017, B and C sue X in the name and on behalf of A & Co., without
fresh registration. Decide whether the suit is maintainable. Whether your answer would
be same if in 2017 B and C had taken a new partner D and then filed a suit against
X without fresh registration?
Sol.
Provision

As regards the question whether in the case of a registered firm (whose business was
carried on after its dissolution by death of one of the partners), a suit can be filed by
the remaining partners in respect of any subsequent dealings or transactions without
notifying to the Registrar of Firms, the changes in the constitution of the firm, it was
decided that the remaining partners should sue in respect of such subsequent dealings
or transactions even though the firm was not registered again after such dissolution
and no notice of the partner was given to the Registrar.
Analysis and conclusion
The test applied in these cases was whether the plaintiff satisfied the only two

requirements of Section 69 (2) of the Act namely,
(a) the suit must be instituted by or on behalf of the firm which had been registered;
(b) the person suing had been shown as partner in the register of firms. In view of
this position of law, the suit is in the case by B and C against X in the name and
on behalf of A & Co. is maintainable.
Now, in 2017, B and C had taken a new partner, D, and then filed a suit against X
without fresh registration. Where a new partner is introduced, the fact is to be notified
to Registrar who shall make a record of the notice in the entry relating to the firm
in the Register of firms. Therefore, the firm cannot sue as D’s (new partner’s) name
has not been entered in the register of firms. It was pointed out that in the second
requirement, the phrase “person suing” means persons in the sense of individuals whose
names appear in the register as partners and who must be all partners in the firm at
the date of the suit.

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Q11. P, X, Y and Z are partners in a registered firm A & Co. X died and P retired. Y
and Z filed a suit against W in the name and on behalf of firm without notifying to
the Registrar of firms about the changes in the constitution of the firm. Is the suit
maintainable?
Sol.
Provision

As regards the question whether in the case of a registered firm (whose business was
carried on after its dissolution by death of one of the partners), a suit can be filed by
the remaining partners in respect of any subsequent dealings or transactions without
notifying to the Registrar of Firms, the changes in the constitution of the firm, it was
decided that the remaining partners should sue in respect of such subsequent dealings
or transactions even though the firm was not registered again after such dissolution
and no notice of the partner was given to the Registrar.
The test applied in these cases was whether the plaintiff satisfied the only two
requirements of Section 69 (2) of the Act namely,
(i) the suit must be instituted by or on behalf of the firm which had been registered;
(ii) the person suing had been shown as partner in the register of firms.
Analysis and conclusion

In view of this position of law, the suit is in the case is maintainable.

Q12. M/s XYZ & Company is a partnership firm. The firm is an unregistered firm. The firm
has purchased some iron rods from another partnership firm M/s LMN & Company
which is also an unregistered firm. M/s XYZ & Company could not pay the price
within the time as decided. M/s LMN & Company has filed the suit against M/s XYZ
& Company for recovery of price. State under the provisions of the Indian Partnership
Act, 1932;
(a) Whether M/s LMN & Company can file the suit against M/s XYZ & Company?
(b) What would be your answer, in case M/s XYZ & Company is a registered firm while
M/s LMN & Company is an unregistered firm?
(c) What would be your answer, in case M/s XYZ & Company is an unregistered firm
while M/s LMN & Company is a registered firm?
Sol.
Provision
According to provisions of Section 69 of the Indian Partnership Act, 1932 an

unregistered firm cannot file a suit against a third party to enforce any right arising
from contract, e.g., for the recovery of the price of goods supplied. But this section does
not prohibit a third party to file suit against the unregistered firm or its partners.
Analysis and conclusion
(a) On the basis of above, M/s LMN & Company cannot file the suit against M/s XYZ
& Company as M/s LMN & Company is an unregistered firm.

Unit-3: Registration and Dissolution of a Firm 13

 (b) In case M/s XYZ & Company is a registered firm while M/s LMN & Company is
an unregistered firm, the answer would remain same as in point a) above.
(c) In case M/s LMN & Company is a registered firm, it can file the suit against M/s
XYZ & Company.

Q13. MN partnership firm has two different lines of manufacturing business. One line of
business is the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for
food. Another line of business is the manufacture of paper plates & cups. One fine day,
a law is passed by the Government banning Ajinomoto’ use in food and to stop its
manufacturing making it an unlawful business because it is injurious to health. Should
the firm compulsorily dissolve under the Indian Partnership Act, 1932? How will its
other line of business (paper plates & cups) be affected?
Sol.
Provision
According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily
dissolved;
(a) by the adjudication of all the partners or of all the partners but one as insolvent,
or
(b) by the happening of any event which makes it unlawful for the business of the firm
to be carried on or for the partners to carry it on in partnership.
However, where more than one separate adventure or undertaking is carried on by the

firm, the illegality of one or more shall not of itself cause the dissolution of the firm in
respect of its lawful adventures and undertakings.
Analysis and conclusion

Here, MN has to compulsorily dissolve due to happening of law which bans the usage

of ajinomoto. Else the business of the firm shall be treated as unlawful.
However, the illegality of ajinomoto business will in no way affect the legality or dissolution
of the other line of business (paper plates & cups). MN can continue with paper plates
and cup manufacture.


14 Business Laws