Essentials of Partnership (Section 4, 5 and 6)

The term “Partnership” has been defined under section 4.

Section 4 - Partnership” is the relation between persons who have agreed to share the profits
of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually as
“partners” and collectively “a firm”, and the name under which their business is carried on is
called the “firm name”.
Essential requirements of a partnership

●​ It must be an association of two or more persons.

●​ There must exist an agreement between the partners.
●​ There must be a business undertaking or a commercial activity
that is lawful.
●​ The motive must be to earn the profit and share between the
partners.
The agreement must be to carry out the business jointly or by
●​
any of them acting on the behalf of all i.e., there must be mutual
agency.
Examples:

A and B buy 100 tons of oil which they agree to sell for their joint account. This forms
a partnership and A and B are considered as partners.

A and B buy 100 tons of oil and agreed to share it among them. It does not form a
partnership as they had no intention to carry out business.

Two or More Persons

act has put no constraints on most extreme quantities of partners in a

firm. Be that as it may, nonetheless, the Indian Companies Act, 2013 puts
a point of confinement on some of the partners in a firm as pursuing.

For Banking Business, Partners must be not exactly or equivalent to 10.

For Any Other Business, Partners must be not exactly or equivalent to

20.

●​ The maximum no of partners in partnership firms as approved

by the “Companies Act 2013” is 100. The previous no was 10

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 to 20 for banking business and other types of businesses as
decided by the “Companies Act 1956”.
On the off chance when the number of partners surpasses the limits, the
partnership ends up unlawful.

Agreement

must be a result of a valid agreement which must be mutually agreed by

all the partners. In various judicial pronouncements, it has been ruled
that if there is no agreement, then the arrangement will not be
considered as an partnership. The written agreement is known as a partnership
deed. Partnership deed mainly consists of the following details:

●​ Name and address of its firm and business

●​ Name and address of its partner
●​ Capital contributed by each partner
●​ Profit and loss sharing ratio
●​ Rate of interest on capital, loan, drawings etc
●​ Rights, duties and obligation of partners
●​ Settlement of accounts on the dissolution of the firm
●​ Salaries, commission payable to partners
●​ Rules to be followed in case of admission, retirement and death of a
partner
●​ Mode of settlement on disputes among partner.
●​ Any other affecting the rights of the partners

It is to be noted that Partnership must not be created by any status. E.g.

The members of HUF will not be considered as the partners, also if
husband and wife are carrying on any business, then they will also be not
considered as partners unless there is an agreement governing them. The
requirements of the same have been specified by the Supreme Court
in CST vs K. Kelukutty(1). It has been clarified by the courts’, section 4
itself uses the word “Who have agreed”. Therefore families carrying on
business will not be governed by Partnership provisions. The interests of
partners in the firm are governed by the rules of Contract for which they
have entered.

By: Sagar Jain

The partnership between Family Members can be termed as a partnership
only after they agree to draft an agreement and contract, then only they
will be governed under the provisions of the Indian Partnership Act.

Business

The partnership must be created for the purpose of carrying the business which is
legal in nature. Co-ownership of property does not amount to the partnership. a
business includes any trade, occupation or profession. It is any kind of
occupation that is not something done just for pleasure. It is an operation
conducted by a particular method that is continuous, and from which
income or profits can be derived.

This should not be judged with a strict interpretation. In some of the

judicial pronouncements, it has been ruled by the judiciary that the term
business is the activity which results in accruing more and more profits by
a particular organisation. However, it is not necessary that a business
must have long chains and ventures. A partnership may even exist in a
single venture business. It is the carrying on business in a particular way,
which constitutes a valid partnership.

Sharing of profits

The word partnership per se means to part and which means division. The
division of profits between two or more members is a prerequisite to
constitute a valid partnership as a whole. It has been ruled that any man
who has earned out of the activity of the partnership must share the
same with the other partners.

Sharing of Losses

To establish a partnership it is not essential that the partners ought to

consent to share the losses. It is available to at least one partner to
consent to hold up under every one of the losses of the business. The Act,
accordingly, does not try to make consent to share losses, a test of the
presence of partnership.

Section 13(6) of the Partnership Act states that partners are entitled to share equally in the
profits and must contribute equally to the losses unless otherwise agreed. This means that if
the partnership agreement does not specify how losses will be shared, it is assumed that
partners will share losses in the same proportion as profits.
Even if a partner does not share in the losses of the business internally (as per an agreement
with other partners), their liability to outsiders remains unlimited. This is because the concept
of "limited partnerships" does not exist under the Partnership Act, meaning all partners are
fully liable for the debts of the firm to third parties.

By: Sagar Jain

Example: If two partners agree to share profits equally but do not mention losses, both will
also share the losses equally. Even if they agree internally that one partner won’t bear any
loss, both will still be liable to creditors if the firm incurs debt.

Mutual agency/section 6 test of partnership

Mutual agency is the fifth key component in the definition of a partnership. It means that the
business must be carried on by all the partners or any one (or more) of them acting for all. In
other words, each partner is both an agent and principal for themselves and the other partners.
This means that a partner can bind other partners by their actions, and similarly, can be bound
by the actions of other partners when acting in the regular course of the business.
For example, the widow of a deceased partner or a director who only shares in the profits is
not considered a partner because the business is not conducted on their behalf. If such a
person does something on behalf of the business, the firm is not legally bound by it.
The importance of mutual agency lies in the fact that it allows each partner to conduct
business on behalf of the others. Partners may agree among themselves that one of them will
not enter into any contracts on behalf of the firm. However, because of the principle of
mutual agency, such a partner can still bind the firm to third parties in contracts made during
the ordinary course of business, even if the other partners were unaware of it.
If a partner exceeds their authority, they can be held accountable by the other partners

Simply sharing profits is not sufficient to conclude that persons are partners.  Real
Relationship of the Parties: When determining whether an association of persons is a firm,
the actual relationship and conduct of the parties must be evaluated. The focus is on their
intention, the agreements they have made, and how they operate together. It’s not just about
profits but their role and involvement in the business.

Example: Two siblings jointly own a commercial building and share the rental income
equally. Even though they share the profits (rent), this does not make them business partners
in the legal sense.

 Receipt of Profit Does Not Mean Partnership: A person can receive a share of profits
or payment dependent on the profits, but this alone does not make them a partner. The
following examples demonstrate this:

●​ A servant or agent receiving a commission from the firm's profits is not considered a
partner, even though their payment is linked to the business’s success.
●​ A widow or child of a deceased partner who receives an annuity (a fixed sum of
money regularly paid) from the firm is also not considered a partner.
●​ A moneylender who lends money to the firm and receives interest based on the firm’s
profits does not become a partner just because their payment depends on the
business's performance.

Types of partnership

1.​ With Regard to the Duration – either Partnership at Will or Partnership for Fixed
Duration

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 2.​ With regards to the extent of the business carried by the partnership – either
General Partnership or Particular Partnership

1] Partnership at Will
When forming a partnership if there is no clause about the expiration of such a partnership,
we call it a partnership at will. According to Section 7 of the Indian Partnership Act 1932,
there are two conditions to be fulfilled for a partnership to be a partnership at will. These are

●​ There is no agreement about a fixed period for the existence of a partnership.

●​ This type of partnership is suitable for businesses where the partners do not have
any certainty or idea about the termination of the partnership and for businesses
whose nature is non-deferring or perpetual.
So if there is an agreement between the partners about the duration or the determination of
the firm, this will not be a partnership at will. But if a partnership was entered into a fixed
term and continues to operate beyond this term it will become a partnership at will from the
expiration of this term. Such partnership is based upon the will of the partners
and it can be brought to an end whenever any of the partners serves a
notice depicting intention for the same. This partnership is created to
conduct a lawful business for an indefinite period.

Furthermore, the dissolution of a partnership is not pre-decided and it is

taken into consideration when the need arises. It’s upon the partners to
decide among themselves the requisite time period of partnership. the
partners under Partnership at Will have unlimited liability, which means that the partners will
be held responsible for any kind of embezzlement or ethical misconduct of any of the
partners. This advantage of Partnership at Will can sometimes be a big disadvantage for the
partners. It is because if a partner serves the notice of termination, even though the other
partners want to continue the business, they cannot do so.

2] Partnership for a Fixed Term

Now during the creation of a partnership, the partners may agree on the duration of this
arrangement. This would mean the partnership was created for a fixed duration of time.

Hence such a partnership will not be a partnership at will, it will be a partnership for a fixed
term. After the expiration of such a duration, the partnership shall also end.

However, there may be cases when the partners continue their business even after the
expiration of the duration. They continue to share profits and there is an element of mutual
agency. Then in such a case, the partnership will now be a partnership at will. This type of
partnership is suitable for businesses for which the partners have a clear idea about
the nature of the business and its duration.
It has an edge over a Partnership at Will since its dissolution is a unanimous
decision and not one-sided. Besides, setting up a fixed-term renders, some certainty

By: Sagar Jain

and direction to the business as opposed to a partnership at will, where it depends
upon the will of the partners involved.

Particular Partnership (Section 8)

A partnership can be formed for carrying on continuous business, or it can be formed for one
particular venture or undertaking. If the partnership is formed only to carry out one
business venture or to complete one undertaking such a partnership is known as a particular
partnership. After the completion of the said venture or activity, the partnership will
be dissolved. However, the partners can come to an agreement to continue the
said partnership. But in the absence of this, the partnership ends when the task is complete.

General Partnership

When the purpose for the formation of the partnership is to carry out the business, in general,
it is said to be a general partnership. Unlike a particular partnership in a general partnership
the scope of the business to be carried out is not defined. So all the partners will be liable for
all the actions of the partnership. The task is general in nature.

Relation of Partners to one another (Section 9-17)

There are two fundamental principles which govern the relation of

partners to one another. The first principle provides that all the are free to
form an agreement with regard to their mutual rights and duties.
However, certain duties can not be altered by entering into an agreement
to the contrary. Section 11 of the Act gives statutory recognition to this
principle.

The second principle is of fundamental nature. It provides that the

relation of partners to one another is of the utmost good faith. It provides
that every partner is an agent of each other, therefore, the contract
entered by one of the partners will bind all the partners. Thus, the
relation of partners to one another is based on mutual trust and
confidence. The principle is recognised by Section 9 of the Partnership
Act.

Duties of Partners
All the duties of partners emerge from the second principle i.e. the
relation of partners to one another is of utmost good faith. Following are
the duties of partners:

1.​ Duty to act in good faith

2.​ Duty not to compete
3.​ Duty to be diligent

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 4.​ Duty to indemnify for fraud
5.​ Duty to render true accounts
6.​ Duty to properly use the property of the firm
7.​ Duty not to earn personal profits

Duty to act in good faith

●​ Section 9 of the act provides that it is the duty of partners to act

for the greatest common advantage of the firm. Therefore,
the partner should work to secure maximum profits for the firm.
A partner should not secure secret profits at the expense of the
firm.
●​ In Bentley v. Craven,[1] there was a partnership in a sugar
refinery firm. One of the partners was skilled in buying and
selling sugar. Therefore, he was entrusted with the task of buying
and selling sugar. However, the partner sold the sugar from his
own stock and thus, gained profit. When the partners discovered
this fact, they brought an action to recover profits earned by the
partner. It was held by the court that the partner can not make
secret profits and therefore, the firm was held entitled for profits
earned by the partner.
●​ The duty continues to exist even after the partnership has ceased
to exist. The partners owe the duty to legal representatives of the
partner as well as the former partner

Duty not to compete

●​ if the partner makes a profit by engaging in a business which is

similar to or competing with the firm, then the partner should
account for such profits.
●​ there was a partnership for buying and selling of the salt. One of
the partners while buying the salt for the firm, bought some
quantity of salt for himself and then gained profit by selling it on
his personal account. He was held to be liable to account to his
co-partners for the profits earned.
●​ However, a partner can carry on any business which is outside
the scope of the business of the firm.
●​ The duty can be altered by the partnership deed. The partners
may enter into an agreement which allows a partner to carry the
business competing with the business or can restrict the partner
from carrying any business other than that of the firm. such an

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 agreement will be valid and can not be considered as a restraint
in trade.
●​ If a person breaches such agreement and carries on a personal
business which not competing to the business of the firm then
such a partner will not be liable to account for the profits, but his
co-partners can apply for dissolution of the partnership.

Duty to be Diligent

●​ a partner is bound to diligently attend his duties. Section

13(f) states that a person should indemnify the firm for any loss
caused to the firm because of his wilful neglect
●​ A partner cannot be made liable for mere errors of judgment or
acts done in good faith.
●​ In Cragg v. Ford, the plaintiff and defendant were partners in a business, with the
defendant serving as the managing director. During the dissolution process of the
firm, the plaintiff advised the defendant to sell certain bales of cotton. The defendant,
however, postponed the sale until after the dissolution was finalized. During this
delay, the market price of cotton dropped, resulting in a significantly lower amount
being realized from the sale.
●​ In situations like these, an action for indemnity can only be brought by the firm or on
behalf of the firm. A partner, acting in their personal capacity, cannot independently
pursue a claim for indemnity. This reflects the principle that indemnity claims arising
from the conduct of firm business must be directed through the firm as a whole, not
on an individual basis by any partner.

Duty to indemnify for fraud

●​ if a loss is caused to the business of the firm because of the act

of the partner then he shall indemnify his co-partners for such
loss.

●​ The purpose of this section is to induce partners to deal fairly and

honestly with the customers.
●​ Illustration: A, B, C, and D entered into a partnership for the
banking business. A committed fraud of ₹30,000 against one of
the customers. As a result, all the co-partners i.e. B, C, and D
were held liable. Here, A is bound to indemnify the firm for the
loss caused to the firm because of fraud committed by him.
●​ The liability to indemnify for fraud cannot be excluded by
entering into an agreement to the contrary. Because entering into
any such agreement is opposed to public policy

By: Sagar Jain

Duty to render true accounts

●​ Section 9 of the Act, provides that the partners are bound to

disclose and provide full information about the things that affect
the firm to any partner or his legal representatives. This means
that a partner should not conceal things from other co-partners
in relation to the business of the firm.

●​ Every partner has the right to access the accounts of the firm.

●​ In Law v. Law,[4] it was held by the court that if a partner is in

possession of some extra information then he is bound to deliver
it to the co-partners. If the partner enters into a contract with
other co-partners without furnishing them the material details
which is known to him but not his co-partners then such a
contract is voidable.

The idea behind this provision is to maintain trust and prevent any partner from
withholding critical details that could affect the partnership's affairs. Each partner is
expected to exercise honesty and fairness by disclosing any dealings, financial
transactions, or relevant business information that could potentially affect the other
partners or the firm's overall interests. Moreover, Section 9 recognizes that every
partner has an inherent right to access the firm's accounts. This right is crucial for
partners to make informed decisions regarding the firm’s operations, monitor
financial performance, and ensure that their interests in the firm are safeguarded.

Duty to properly use the property of the firm

●​ Section 15 of the act, provides that property of the firm should

be held and used by the firm only for the business of the firm.

●​ A partner can not make use of the property for his personal
purpose and if does so, then he will be accountable to all the
co-partners. He could be made liable for the losses caused
because of any such use.

●​ This duty can be avoided by entering into an agreement to the

contrary.

Duty to account for personal profits

●​ Section 16 of the Partnership Act, provides that:

●​ If a partner makes the use of the property of the firm and earns
profit out of it, then he should account for the property. This duty
arises because of the fiduciary relationship between the partners.

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 ●​ Illustration: A, B, and C were partners in a firm. Goods were
supplied to a person D. D paid some extra commission to A, for
using his influence to deliver the goods to D. Here, A has the
duty towards the co-partners to account for the commission.
●​ If a partner enters into a business which is competing with the
business of the firm then the partner should account for the profit
earned from any such business.
●​ Illustration: A, B, and C were partners in the business of sale of
bottles. B started to carry on the same business and started to
influence the customers to buy the bottle from him rather than
the firm. Here, B has a duty to account for the profits earned
from the business.
●​ However, a competing business can be carried out after the
dissolution of the partnership. The firm has the right to put
reasonable restrictions on carrying the competing business by the
ex-partners such as, any reasonable time for which the
ex-partners can’t carry the competing business or the
geographical limits where he can’t carry the business.
●​ This is not a compulsory duty and thus, can be avoided by
entering into an agreement to the contrary

Rights of Partners
Mutual Rights of the partners generally depend upon the provisions of the
agreement. But subject to their agreement, the law confers following
rights on partners:

1.​ Right to take part in the conduct of the business

2.​ Right to be consulted
3.​ Right to access and inspect books
4.​ Right to indemnity
5.​ Right to share profits
6.​ Right to Interest
7.​ Right to remuneration

Right to take part in the conduct of the business

●​ Section 12(a) of the act, provides that every partner has a right
to take part in the conduct to the business of the firm. This right
can be curtailed by the provisions of the agreement. Thus,

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 allowing only a few partners to actively participate in the
functioning of the business.

●​ This right should be used by the partners for promoting the

business of the firm and not for damaging the business.
●​ a partner in order to undermine the position of the managing
partner wrote to the principals to not supply motor vehicles to
the firm and to the banker’s to not to honour the cheques of the
firm. The Delhi High Court provided an injunction against the
partner saying that the partner’s act was to damage the business
of the firm.

Right to be consulted

●​ Section 12(c) provides for resolving disputes relating to the

ordinary course of business between the partners by the
majority. It states that every partner shall have the right to
express an opinion before the matter is decided.
●​ If for example, there is a difference in opinion among the
partners for introducing the son of one of the partners for
the purpose of learning business then the majority decision will
prevail.
●​ However, if the dispute is related to the Fundamental matter of
the business i.e. the nature of the business then the consent of
every partner is required. unamimous

Right to access, inspect and copy books

●​ Section 12(d) of the act, provides the right to partners to access,

inspect and copy account books.

●​ A partner can exercise this right by himself or by his agent but

none of them is authorised to use the gained information against
the interest of the firm.
●​ Example: If a dormant partner wants to sell his shares to a
co-partner and appoints an expert to inspect the account and his
share in the firm then, co-partners can not object to same.
●​ For raising an objection the co-partners should provide
reasonable grounds such as protection of trade.

Right to be Indemnified

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 ●​ Section 13(e) provides the right to be indemnified to the
partners. This section provides the right to indemnity under two
circumstances:
●​ A partner is entitled to recover for any expenses incurred by him
in the ordinary and proper conduct of the business.
●​ Illustration: There was a partnership between A, B, C, and D.
The firm has incurred a debt of ₹2,00,000 from the bank. A paid
the debt in the name of the firm. In this case, B is entitled to be
indemnified from his co-partners.
●​ When a partner has incurred expenses in an emergency in order
to protect the firm from loss; provided that the partner must
have acted in a reasonable manner.
●​ The right to be Indemnified is not lost with the dissolution of the
firm.
●​ The rationale behind this right is that the burden of expenses of
helping partnership should not be borne by a single partner.

Right to share profits

●​ partners are entitled to share the profits and losses equally. Right
to share profits is not affected by the fact that the partners have
contributed unequally in the firm, possess different skills, have
laboured unequally in the firm.
●​ where there was no satisfactory evidence to show that in what
proportion the partners were to divide the remuneration. It was
held by the Punjab and Haryana High Court that the partners
were entitled to share equal profits irrespective of the fact that
they had been paid separately and had done unequal work.
●​ However, the right to share profits equally can be altered by the
partners by entering into an agreement to the contrary. Thus, the
partners can fix the share of profits or agree to be paid by way of
salary rather than profits.

Right to Interest

●​ Interest on Capital: a partner is generally not entitled to claim

on the capital. But if there is an express agreement between
partners that allows interest on capital then, such an interest will
be paid only out of the profits of the firm. because a partner is
deemed to be an adventurer rather than the creditor.

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 ●​ Interest on Advances: a partner is entitled to the interest of six
percent per annum for the advances made by him to the firm
beyond the capital he had agreed to subscribe.
●​ Illustration: A person X, invests ₹50,000 in a partnership firm
and provides ₹60,000 to the firm as advance. In this case, X will
receive interest from the profits of the firm for ₹50,000 which he
had invested in the firm and will get 6% interest on the advances
made by him to the firm.
●​ It must be noted that the interest in capital ceases after the
dissolution of the firm, but the interest on advances exist until it
is paid. Thus, the dissolution of a firm has no impact on the
Interest on Advances.

●​ Section 13(a) provides that no partner in a firm is entitled to

claim remuneration for taking part in the conduct of business.
However, the remuneration can be provided to certain partners
along with the share in profits if they have entered into an
agreement to that effect or when such remuneration is payable
under the continued usage of the firm.
●​ For Example, there is a firm consisting of Active and Dormant
partners. In such a case, the partners can form an agreement
entitling the active partners to receive a particular sum as
remuneration.
What is Partnership Property?
It becomes important to determine the property of the firm as opposed to
the personal property of partners. For example, when the partnership is
dissolved then the debts are first paid out of the property of the firm.
Again, the partnership property should be used only for the business
purpose and not for personal purposes.

A partnership is not a legal person and is, therefore, incapable of holding

any personal property. Partnership property is nothing but the joint
property of all the partners, however, none of the partners can personally
claim the property. Thus, when one of the partners brings his personal
property for the purpose of the partnership, he loses his personal rights
over it. He will only get the share of profits which may be agreed by the
partners.

What constitutes the Partnership Property?

Generally, it is an agreement between the partners which specifies what

shall constitute a partnership property. Section 14 of the Act, provides
what shall constitute the partnership property. It must be noted that this
is subject to the agreement, and the partners can explicitly mention in the

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contract that what will be the partnership property. Hence, Section 14 will
apply only in the cases when there was no agreement between the
partners stating that what would be the partnership property.

The property originally brought in

The property of the firm includes all property which were originally
brought into the stock of the firm by the partners at the commencement
of the business.

In Boda Narayana Murthy and sons, there were five people who
purchased a land jointly and subsequently constructed a cinema hall with
the joint money. Then all the five persons entered into a partnership to
form firm to exhibit the film there. It was held by the Andhra Pradesh
High Court that the land and the hall was not the property of the firm but
subject to co-ownership, as there was no intention could be inferred to
convert the property into the firm’s property.

●​ Goodwill of the firm

Goodwill of the firm is treated as the property of the firm. Goodwill is

nothing but the reputation of the firm. When a partner buys the firm
then he is entitled to the goodwill as well. say, for example, there were
two partners in a firm, A and B, B sold his partnership shares to A, A will
be entitled to the goodwill of the firm as well i.e. B cannot use the name
of the firm when he opens the business and cannot represent himself as a
partner of the firm.

If a person dies or retires, then he or his legal representatives will be

entitled to claim for the goodwill. This is because the goodwill of the firm
is the result of his joint efforts along with other partners.

Property subsequently acquired

When a property is subsequently brought for the purposes of the firm or

in the ordinary course of the business, then it would constitute the
property of the firm. Any property bought by the firm’s money will be the
property of the firm,

In Mohan Lal Bahri v. K.L. Bahri,[8] a chief working partner bought

property by the firm’s money in his own name without the consent of
other partners. It was held by the court that, the fact that the property is
not included in the assets for income tax purposes is immaterial and
hence, the property belonged to the firm and not to the partner.

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Relation of Partners to third party (Section 18-30)

A partner is considered to be an agent of the firm as per Section 18. that

partner is granted a real or apparent authority to act on behalf of the firm
and hence he represents the firm through his actions. A partner is
granted permission to make moves, conduct business as usual with
certain limitations being put in some ordinary or extraordinary situations

Implied authority of partner as agent of the firm

Acts done by the partner of the firm in the usual course of business binds
the firm but this implied authority ceases to exist when there is already a
contrary agreement in existence. Section 19(2) of the Indian Partnership
Act, 1932, puts forth a list of things which a partner cannot do on behalf
of the firm:

1.​ Submit a dispute relating to the business of the firm to

arbitration,
2.​ Open a bank account on behalf of the firm in his own name,
3.​ Compromise or relinquish any claim or portion of a claim by the
firm,
4.​ Withdraw a suit or proceeding filed on behalf of the firm,
5.​ Admit any liability in a suit or proceeding against the firm,
6.​ Acquire immovable property on behalf of the firm,
7.​ Enter into partnership on behalf of the firm,
8.​ Transfer immovable property belonging to the firm.
Extension and restriction of partner’s implied authority
●​ The terms of the current contract between the various partners in the firm
determine how much authority a partner may extend or restrict.
Nonetheless, a partner may act on his own behalf if he has the
express consent of another partner, as granted by an agreement or if the
trade’s conventions allow it.
●​ A firm’s partners may agree in writing to increase or decrease a partner’s
implied power under Section 20 of the Indian Partnership Act, 1932. Only
in situations where the third party is aware of the restrictions or is
unaware that he is interacting with a partner of the firm do these
limitations or extensions apply to them.

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Partner’s authority in an emergency
In cases of emergency, a partner has to do all such acts to protect the
firm from occurring any loss which a person of ordinary prudence will do
under the similar circumstances and that action will be binding on the
firm. The requirements of the section are:

1.​ There was an emergency situation.

2.​ The partner acted in light of that situation.
3.​ The partner did that to protect the firm from losses.
4.​ The act was reasonable under those circumstances.

The business will be bound by the partner’s actions.

Mode of doing the act to bind the firm
the act is done or executed by the partner in the firm should be done in
the name of the firm or should be done in a manner which expresses or
implies an intention to bind the firm.

Effect of admissions by a partner

admissions made by a partner concerning the affairs of the firms if made
in the ordinary course of the partnership business are evidence against
the firm. Such admissions made by the partners will bind the firm.
However, the thing that needs to be noticed here is that if the admission
made by a person of the firm was before the time he became a partner
then it cannot be considered to be evidence against the firm.

Effect of notice to acting partner

Notice to one partner relating to the business of the firm operates as a
notice to the firm. The partners to whom such notice is given must be
acting in the business at that time. So notice to a dormant or a sleeping
partner would not operate as a notice to the firm. A dormant or sleeping
partner is someone who takes his share of the profit and of losses but is
not a party to the active share of the business or partnership.

Consider a situation where the firm has appointed a person to manage its
work and the person does that. What will happen if a notice is sent to
such a person? This is clarified under Section 24 of the Indian Partnership
Act, 1932, Section 24 explains what is the effect of the notice sent to an
acting partner. It first explains what an acting partner means. An acting
partner is a person 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. If
a notice is sent to such a person, it will be considered as a notice sent to
a firm.

By: Sagar Jain

The section also provides for an exception whereby a fraud is committed
on the firm by or with the consent of that partner.

Liability of a partner for acts of the firm

that every partner of the firm can be held liable jointly or severally for all
acts done by the firm while he or she is a partner of the firm. Such acts
must be made in the name of the firm and under an ordinary course of
business of the firm. Partners can be held liable jointly or individually
depending on the act that has been performed and the decision made by
the third party. This means that even if a partner had no role to play while
deciding the act on behalf of the firm, he or she can be held liable to the
third party if such act causes damage to them and they wish to sue all
partners for the same.

●​ a retiring partner cannot be held accountable for an act performed after

retirement under section 25 if the partner leaves on April 1, 1982, and
the act is completed by the business on March 1, 1985.
●​ Even if one of the partners may have carried out the firm’s actions, they
are all jointly and severally liable. As a result, a third party may, if desired,
file a lawsuit against any one of them singly or against any two or more of
them collectively.

Liability of the firm

For wrongful acts of a partner

Section 26 of the same act deals with the liability of the firm as a whole
for an act or omission of a partner in the ordinary course of the business
of the firm. Such an act may be passed with the authority of other
partners and if such act causes loss or damage to the third party, then the
firm shall be held liable to the same extent to which the partner is held
liable. The reason is that such an act or omission is made in the name of
the firm in due course of the ordinary nature of business. The firm is here
to be assumed as a separate entity with powers and can be sued for the
loss sustained by a third party. It establishes a relationship between the
partner, the firm and the third party.

For misapplication by partners

when a partner with relevant authority receives money or property from a third
party. If the partner misapplies the money or property after receiving it on behalf of
the firm, the firm becomes liable for the partner's misconduct if the third party

By: Sagar Jain

 sustains a loss. The key point here is that the firm can be held liable even if only one
partner misuses the funds.

o​ Example: If a partner receives payment from a client for services or goods,

but later uses that payment for personal purposes, the firm is still responsible
for making good the loss to the client.

when the firm itself receives money or property, and while in the firm's custody, a
partner with relevant authority misapplies it. The firm is also liable in this case for the
partner’s misconduct, but the distinction is that here the money or property was first in
the firm's possession, not just the partner's.

o​ Example: If money or property is received by the firm and is kept in the firm's
account or possession, but later a partner misuses it, the firm will still be liable
to the third party for the loss caused by that partner.

Section 28 holding out

This provision is designed to protect third parties who deal with a partnership based
on representations made by individuals associated with the firm, whether they are
actual partners or not. The section is divided into two main parts.
Part 1: Liability of a person held out as a partner
The first part of Section 28 focuses on the liability of individuals who are represented as
partners, whether by their own actions or with their knowledge and permission. This
provision is crucial for protecting third parties who engage in business with a firm based on
such representations.
first part applies to anyone who either actively represents themselves as a partner in
a firm or knowingly permits themselves to be represented as such. The
representation can be made through conduct, spoken words, or written
communication. If a third party extends credit to the firm based on the belief that this
person is a partner, that person becomes liable for the credit extended. The third
party must have acted in good faith, genuinely believing the representation. The
liability of the person held out as a partner is similar to that of an actual partner under
Section 25 of the Act. It is irrelevant whether the person represented as a partner is
aware that the third party extended credit based on this belief.
Illustrations for Part 1:
1.​ Active Representation: Ravi works at XYZ Shop but is not a partner. He often tells
customers he's a partner to seem more important. Sita, a supplier, believes Ravi and
gives XYZ Shop goods on credit. Even though Ravi isn't really a partner, he can be
held responsible for the credit given by Sita.
2.​ Passive Permission: Priya, a former employee of ABC Consultants, overhears her
ex-colleague introducing her to a client as "one of our partners" during a chance
meeting. Priya doesn't correct this misrepresentation. Later, the client, relying on this
information, extends a large credit to ABC Consultants. Despite not being an actual
partner, Priya could be held liable for knowingly permitting herself to be represented
as a partner.
In both cases, Section 28 serves to protect third parties who act in good faith based on
representations made by or about individuals associated with a firm. It ensures that these third
parties have recourse even if the person they dealt with turns out not to be a formal partner in
the firm.

By: Sagar Jain

The second part of Section 28 addresses the liability (or lack thereof) of a deceased
partner's estate when the firm continues to operate under the original name. When a
partner dies, the partnership is automatically cancelled. However, if the firm
continues to operate under the old name, including the deceased partner's name,
this does not create liability for the deceased partner's estate. The legal
representatives of the deceased partner are protected and are not liable for any acts
of the firm occurring after the partner's death. This protection extends to both joint
and several liabilities arising from the firm's actions after the partner's death.
Illustration for Part 2:
Let's consider a scenario with Amit, Bhanu, and Chitra running a firm called "ABC & Co."
Amit passes away, but Bhanu and Chitra decide to continue operating the business under the
same name, "ABC & Co." A new client, Dev, does business with the firm after Amit's death,
assuming all three original partners are still involved because the firm name hasn't changed.
If any issues arise from this new business interaction with Dev, Amit's family or estate cannot
be held responsible for any new debts or problems. This protection exists even though the
firm continues to use Amit's initial in its name. The liability for any new transactions or
issues falls solely on the surviving partners and the firm itself.
Minors admitted as partners
According to Section 30 of the Partnership Act, 1932, someone who is
recognised as a minor by the law may not be a partner of the firm but the
minor with the consent of all the partners in the firm can be given the
benefits of the partnership. Minors are considered to be unfit to be able to
make decisions for themselves by the law. Keeping that in mind, when a
minor is admitted in a partnership setup, he is liable for his shares in the
partnership but not liable for his actions.

After the minor has attained majority, at any time within six months or of
his obtaining the knowledge that he has been admitted to the benefits of
the partnership, whichever date is later, the minor has to issue a public
notice announcing that he has elected to become a partner in the firm.
Another option available to him is declaring that he has elected not to
become a partner in the firm, in case if he fails to give that notice, he
shall be admitted into the firm as a partner after the expiration of the said
six-month term.

In cases when the minor decides to be a partner in the firm, as mentioned

in Section 30 (7) of the said Act, the minor from then onwards personally
becomes responsible towards the third parties in relation to all the acts
done by the firm and his share in the profits and property remain the
same as they were when he was a minor.
 If the minor chooses not to become a partner, the following occurs: a) They become
eligible to sue the partners of the firm regarding their share of the property and profits. b)
Their rights and liabilities continue as they were when they were a minor. c) These rights and
liabilities are subject to change only when they give public notice of their decision.
 Section 30(8) adds an important legal aspect to this situation: a) If someone claims that
the former minor has become a full partner, the burden of proof lies on that person. b)
Similarly, if someone claims that the former minor has received payment for their share in the

By: Sagar Jain

property and profits, they must prove it. In essence, Section 30(8) complements the
other provisions by adding a layer of legal protection for the former minor, ensuring
that their rights are preserved unless there's clear evidence to the contrary.

Section 29
1.​ Transfer of Interest:
A partner's interest in a firm represents their share in the partnership, including their right to
profits and assets. Section 29 recognizes three ways a partner can transfer this interest:
a) Absolute transfer: This is a complete sale or gift of the partner's interest to another person.
b) Mortgage: The partner uses their interest as collateral for a loan. c) Creation of a charge:
The partner grants a creditor a right over their interest as security for a debt.
It's important to note that this transfer doesn't make the transferee a partner in the firm. It only
transfers the financial rights associated with the partner's share.
2.​ Rights of the Transferee During the Firm's Continuance:
The law explicitly limits the rights of the transferee while the firm continues to operate. This
is to protect the partnership's integrity and the rights of other partners. The transferee does
NOT have the right to:
a) Interfere in the conduct of the business: They cannot participate in management decisions,
attend partner meetings, or influence the firm's operations in any way. b) Require accounts:
They cannot demand financial statements or reports from the firm. c) Inspect the books of the
firm: They have no right to examine the partnership's financial records or other documents.
These restrictions ensure that the day-to-day operations and decision-making processes of the
firm remain unaffected by the transfer of a partner's interest.
3.​ Entitlements of the Transferee:
While the transferee's rights are limited, they do gain certain financial entitlements:
a) Receive the share of profits of the transferring partner: The transferee steps into the shoes
of the transferring partner, but only in terms of receiving profits. If the transferring partner
was entitled to 30% of the profits, the transferee would now receive that 30%.
b) Accept the account of profits agreed to by the partners: The transferee must accept the
profit calculations as determined by the partners. They cannot dispute or demand a
recalculation of these figures.
This arrangement allows the partner to monetize their interest without disrupting the
partnership's operations.
4.​ Rights of the Transferee Upon Dissolution or Partner's Exit:
The transferee's rights significantly expand in two scenarios:
●​ If the firm is dissolved
●​ If the transferring partner ceases to be a partner (e.g., through retirement, expulsion,
or death)
In these cases, the transferee gains the right to:
a) Receive the share of assets of the firm to which the transferring partner is entitled: This
includes not just future profits, but a portion of the firm's tangible and intangible assets.
b) Request an account from the date of dissolution or exit: The transferee can demand a
detailed financial accounting to determine the exact value of their share. This right ensures
transparency and fair distribution of assets.

 utgoing and Incoming partners (Section 31-38)

O
Incoming
An Incoming Partner can be defined as a partner who has recently joined the company with
the consent of all the partners. However, the onboarding of such new members is subject to
any procedure which has been already established by the firm and its already existing

By: Sagar Jain

members to adopt any new member. Moreover, the rules regarding the inclusion of new
members into the firm find their place under Section 31 of the Partnership Act, of 1932.
Fundamentally, new members can only be admitted to the firm with the consent of all the
members existing in the firm. Furthermore, once a person is admitted as a partner to the firm
then he shall be jointly liable to the acts of the form only taking place from the date at which
he has joined the firm. Therefore, it can be said that the legal liabilities of the partners who
have recently joined begin only after he is admitted to the firm and not before that
Outgoing partner
A Retired or Outgoing Partner can be defined as a partner who has retired or left the company
or left the partnership firm, and the business is carried on by the remaining partners.
Under the Indian Partnership Act, of 1932, there are four possible situations where a partner
is single or dismissed from the company. Its legitimacy is regulated by Sections 32, 33, 34,
and 35 of the partnership act. These are:
1.​ Retirement of a Partner (Section 32)​
2. Removal or Expulsion of a Partner (Section 33)​
3. Bankruptcy or Insolvency of a Partner (Section 34) 4.
2.​ deceased Partner (Section 35)
32 retirement
Sub-section (1): Retirement of a Partner A partner can retire from a partnership in three
ways:

1.​ With Consent: If all the other partners agree, a partner may retire.
2.​ By Express Agreement: If there is an express agreement among the partners
regarding retirement, it must be followed.
3.​ By Notice (in a Partnership at Will): In a partnership at will (i.e., without a fixed
term), a partner can retire by giving written notice to all other partners of their intent
to retire.

Sub-section (2): Discharge of Liability

●​ A retiring partner can be freed from liability for actions taken by the firm prior to their
retirement.
●​ This discharge happens if there is an agreement between the retiring partner, the
remaining partners, and the third party (e.g., creditors).
●​ Such an agreement can also be implied by how the third party deals with the
reconstituted firm after knowing of the retirement.

Sub-section (3): Liability Until Public Notice

●​ Even after retiring, a partner remains liable to third parties for actions done in the
name of the firm until a public notice of their retirement is issued.
●​ This ensures that third parties relying on the firm's creditworthiness aren't misled
about the retired partner's involvement.
●​ However, a retired partner is not liable to third parties unaware of their partnership
status.

Sub-section (4): Who Can Give the Notice?

●​ The responsibility of giving public notice lies with either the retired partner or the
remaining partners of the reconstituted firm.

By: Sagar Jain

Illustration:
1.​ Retirement by Consent:
o​ A partnership firm "ABC & Co." has three partners: A, B, and C. Partner A
wishes to retire. If B and C agree, A can retire.
2.​ Retirement as per Agreement:
o​ In "XYZ & Co.," the partnership deed states that partners can retire after
serving a one-month notice. Partner X wants to retire and follows this
procedure.
3.​ Retirement in a Partnership at Will:
o​ In a partnership without a fixed term, Partner M sends a written notice to
Partners N and O expressing their intent to retire. This constitutes a valid
retirement.
4.​ Liability Before Retirement:
o​ Before retiring, Partner P signed a contract with Vendor V on behalf of "PQR
& Co." Even after retirement, P is liable unless:
▪​ Vendor V, P, and the remaining partners of the firm agree to release P.

▪​ This can also be implied if Vendor V continues to deal with the firm
knowing P has retired.
5.​ Liability Without Public Notice:
o​ Partner Q retires without giving public notice. A third party, T, unaware of Q's
retirement, continues to rely on Q’s involvement in the firm. Q will be liable
for T’s claims until public notice is issued.
6.​ Exemption from Liability:
o​ After giving public notice, Partner R retires. A third party, Z, who begins
dealing with the firm later, cannot hold R liable since Z was aware R was no
longer a partner.

33
Explanation:
Sub-section (1): Expulsion of a Partner

●​ Restriction on Expulsion: A partner cannot be expelled from a firm by a majority of

partners unless:
1.​ Good Faith: The expulsion is exercised in good faith.
2.​ Authority by Contract: There is a specific clause in the partnership
agreement that allows for expulsion.
●​ This ensures fairness and prevents abuse of power by the majority. Expulsion must
align with the best interests of the firm and not be for personal reasons or malice.

Sub-section (2): Application of Retirement Provisions

●​ The provisions applicable to a retired partner under Section 32(2), (3), and (4) are
also extended to an expelled partner.
●​ Invalid Expulsion:

By: Sagar Jain

 ●​ In the same firm, Partner B dislikes Partner C for personal reasons and persuades
Partner A to expel C without just cause. Since this expulsion is not in good faith and
is not authorized by the agreement, it would be invalid.

34 Explanation:
Sub-section (1): Cessation of Partnership on Insolvency

●​ When a partner is declared insolvent by a court (adjudicated as an insolvent), they

automatically cease to be a partner from the date of the adjudication order.
●​ This applies regardless of whether the partnership itself is dissolved.
o​ If the partnership agreement or the nature of the business provides for
continuity despite the insolvency, the firm may continue without the insolvent
partner.
o​ Otherwise, the firm may be dissolved as per Section 42 of the Indian
Partnership Act, 1932.

Sub-section (2): Limited Liability Post-Adjudication

●​ Estate of the Insolvent Partner: The property or assets of the insolvent partner are
no longer liable for any obligations or debts incurred by the firm after the date of
adjudication.
●​ Liability of the Firm: Similarly, the firm is not liable for any actions or debts
incurred by the insolvent partner after their adjudication.
o​ This ensures a clear demarcation of liability and protects the remaining
partners and third parties from complications caused by the insolvent partner’s
financial incapacity.

Illustration:
1.​ Cessation of Partnership on Insolvency:
o​ A partnership firm "XYZ & Co." has three partners: X, Y, and Z. On 1
November, Partner X is adjudicated insolvent by the court. From this date, X
ceases to be a partner in the firm.
o​ If the partnership agreement specifies that the firm will not dissolve upon
insolvency, the remaining partners Y and Z can continue the firm without X.
2.​ Liability of the Insolvent Partner’s Estate:
o​ Before insolvency, Partner A (from "ABC & Co.") had signed a contract with
Vendor V on behalf of the firm. The firm owes ₹5 lakhs to V.
o​ On 1 December, A is adjudicated insolvent. A's estate remains liable for the ₹5
lakhs owed to V since it pertains to an act before adjudication. However, for
any further debts incurred by the firm after 1 December, A's estate will not be
liable.
3.​ No Liability of the Firm for Acts of the Insolvent Partner:
o​ Continuing from the previous example, if Partner A, after being declared
insolvent, independently signs a loan agreement with a bank, the firm "ABC &
Co." is not liable for this loan as it was done post-adjudication.
4.​ Continuing the Firm Without Dissolution:
o​ Suppose the partnership agreement in "PQR & Co." explicitly states that
insolvency of a partner does not dissolve the firm. If Partner P is adjudicated
insolvent, the firm continues with Q and R as partners. The estate of P is no

By: Sagar Jain

 longer liable for any actions of the firm post-insolvency, and the firm is not
responsible for any new obligations taken on by P.

35
Explanation:
●​ Contractual Provision for Continuity:​
If there is an agreement between the partners that the firm will not be dissolved upon
the death of a partner, the firm may continue its operations with the surviving
partners.
●​ Limited Liability of the Deceased Partner's Estate:​
In such cases, the deceased partner's estate (his assets or property) is not liable for
any acts of the firm performed after their death.
o​ The rationale is that the deceased partner cannot consent to or participate in
the firm’s actions after their death, and liability for those actions is limited to
the surviving partners.
●​ Implication for Third Parties:​
Any third party dealing with the firm after the partner’s death must rely on the
remaining partners and the firm's assets for any claims arising from such dealings.

Illustration:
1.​ Firm Continues Without Dissolution:
o​ "XYZ & Co." is a partnership firm consisting of X, Y, and Z. The partnership
agreement states that the firm will continue even if a partner dies.
o​ Partner X passes away on 1 November. The firm continues its business with Y
and Z.
o​ On 5 November, the firm borrows ₹10 lakhs from a bank. The estate of X will
not be liable for this loan since it was incurred after X’s death.
2.​ Liability for Acts Before Death:
o​ Suppose before X’s death, on 25 October, the firm had borrowed ₹5 lakhs
from Vendor V. X's estate would still be liable for this debt because it pertains
to an act of the firm before X’s death.
3.​ Firm Without Continuity Agreement:
o​ If the partnership agreement in "ABC & Co." does not provide for continuity,
the firm dissolves upon Partner A's death. In this case, the deceased partner's
estate is liable for settling all debts and liabilities incurred by the firm up to the
point of dissolution.

RIGHTS OF OUTGOING PARTNER:

Section 36 of the Partnership Act of India deals with the rights of a departing partner. It
imposes certain restrictions but allows the retiring partner to do business in competition with
the company.
Explanation:
Sub-section (1): Right to Compete

●​ An outgoing partner can start and operate a competing business independently of the
firm.

By: Sagar Jain

 ●​ However, certain restrictions apply unless otherwise agreed in the partnership
contract:
o​ (a) The outgoing partner cannot use the firm's name for their business.
o​ (b) They cannot represent themselves as if they are still conducting business
on behalf of the firm.
o​ (c) They cannot solicit customers who were clients of the firm before their
departure.

These restrictions are designed to protect the firm's goodwill and existing customer base from
exploitation by the outgoing partner.
Sub-section (2): Agreements Restraining Trade

●​ Partners may agree that, upon leaving the firm, the outgoing partner will refrain from
starting a competing business:
o​ For a specific duration or
o​ Within a defined geographical area.
●​ Such agreements, even though restrictive, are valid as long as the restrictions are
deemed reasonable.
●​ This provision serves as an exception to Section 27 of the Indian Contract Act,
1872, which generally voids agreements that restrain trade.

Example of Reasonableness:

●​ If an outgoing partner agrees not to compete within the same city for two years, this
may be considered reasonable. However, if the restriction extends indefinitely or
covers an unreasonably large geographical area, it might be considered excessive and
invalid.

37

 Entitlement to Profits or Interest:

●​ If the surviving or continuing partners continue the business without settling accounts
with the outgoing partner or their estate:
o​ The outgoing partner or their estate is entitled to either:
▪​ A share of the profits made after their departure, proportional to their
share of the firm's property, or
▪​ Interest at 6% per annum on their share of the firm's property.
●​ The choice between profits or interest lies with the outgoing partner or their estate.

 Exceptions Through Contract:

●​ If the partnership agreement gives the continuing partners an option to buy the
outgoing/deceased partner’s interest, and this option is duly exercised, then:
o​ The outgoing partner or their estate is not entitled to further profits after the
purchase.
●​ However, if the continuing partners fail to comply with the terms of the buy-out
agreement, they remain liable to account for profits or interest under this section.

By: Sagar Jain

38
A continuing guarantee is a type of guarantee where a person agrees to be responsible for
the debts or obligations of a firm (or individual) over a period of time, rather than for a single
transaction. The guarantee remains in force for ongoing or future transactions, until it is
specifically revoked or cancelled.
For example, if someone provides a continuing guarantee for a firm's loans, they are agreeing
to cover any loans the firm takes in the future, not just a one-time loan.
 Change in Firm's Constitution:

●​ If there is any change in the composition of the firm (e.g., through the addition or
removal of partners), the continuing guarantee is revoked with respect to any future
transactions.
●​ This means that the guarantor is no longer liable for transactions that occur after the
change, unless there is a specific agreement stating otherwise.

 Scope of Revocation:

●​ The revocation only applies to future transactions after the change in the firm's
constitution. The guarantee would still be applicable for transactions that
occurred prior to the change.

Modes of Dissolution of a Firm (Section 39- 44)

Section 39:- Dissolution

Section 39 of the Indian Partnership Act says that’ the dissolution of a partnership
among with the entire partners of a firm is known as the ‘dissolution of the firm’. This Act
defines the termination of the partnership relationship. The matters of dissolution occur
due to the death of a partner or retirement and if any of the partners become an
insolvent.
The accurate meaning of the dissolution of partnership is the formal ending of a
partnership. The word dissolution means that the act of officially finishing a formal
agreement.
Methods of Dissolution of a firm –
The partnership firm can be dissolves by agreement and permission or consent, on the
happening of assured contingencies. It can be also dissolved by the Court and by notice
of partnership at will under the partnership act.
Dissolution of a partnership firm can be done in 2 following methods:-

●​ Dissolution without the intervention of the court which provide under section
(40-43).
●​ Dissolution by the Court which provide under Section 44 of this act.

Illustration: A firm with three partners unanimously decides to end their

partnership due to retirement and mutual understanding. Once they settle
all debts and divide assets, the firm ceases to exist.

Section 40 – Dissolution by agreement

By: Sagar Jain

According to Section 40 of the said Act, a firm may be dissolved with the consent of all
the partners or in accordance with a contract between the partners.
This is the uncomplicated process of dissolution of partnership firm and intervention of
the court is not requisite in this. In this merely dissolution by mutual consent of all
partners and it comes in the section 40.
Illustration: Partner A, B, and C agree in their partnership deed that the firm
will dissolve automatically if annual profits fall below ₹50,000 for three
consecutive years. Upon such an event occurring, they mutually decide to
dissolve the firm.
Section 41– Compulsory dissolution due to any
unlawful business activities (Section 41)
A firm may be dissolved by the following points:-

●​ Insolvency of partner:-

In this case all the partners turn into insolvent or all the partners except one partner
become insolvent then firm may be dissolved. Illustration: A firm with three
partners is declared insolvent by a court due to unpaid debts. Since they
cannot lawfully continue business, the firm dissolves.

●​ Unlawful business: –

In this case any act which is against the law are happening in the business of the firm to
be running or else for the partners to keep it on in partnership, the firm may be
dissolved. Unlawful activities like selling of drugs, trading with alien countries, dealing in
illegal products etc, all activities which is illegal.

●​ For example:-

P is a resident of India and Q is a resident of Bangladesh are partners. If war breaks out
between these two countries then the partnership will become unlawful and hence it is
dissolved automatically according to this act.
 Illustration: A firm manufacturing plastic items is dissolved after the government bans
single-use plastics, making their business illegal.
 Proviso Illustration: If the firm also deals in textiles (a legal business), only the plastic
manufacturing division ceases, and the firm continues operating in textiles.
Section 42 – Dissolution on the happening of certain
contingencies
Under this act, the partnership is breaking up or dissolved on the happening of some
contingency.
The certain contingency contains that:-

●​ On the ending of fixed term; when the partnership is created for the fixed term.
If the agreement of a partnership firm is on a fixed term then ending of that firm
will take place on the expiry of that contract or agreement. llustration: A

By: Sagar Jain

 partnership formed for five years automatically dissolves at the end of
the fifth year unless renewed.
●​ On the death of the partner, the dissolution of firm can take place only when the
other partner prefer too. If the other partner wishes to continue the firm even after
the death of a partner then there will be no option to dissolution the firm. Merely
the partnership will be dissolved. llustration: In a two-person partnership, if
one partner passes away, the firm is dissolved unless there’s a
clause allowing continuity with legal heirs.
●​ The completion of project or undertaking; when the partnership was formed
for the use of finishing undertaking or project. If the firm was produced for a
definite number of duty or task then on completion of the duty or task, the
partnership firm ends to exist. Illustration: A firm formed to construct a
shopping mall dissolves once the mall is completed and handed over.
●​ The adjudication of partners as an insolvent; When in the firm, one of the
partners or all the partners is insolvent then dissolution can take place. Even
dissolution can take place if any one of the partners resigns. Illustration:
Partner A in a three-person firm is adjudicated insolvent, and the
partnership dissolves as per the contract terms.

Section 43
According to this act, when any partner wants to dissolve the partnership he provides a
notice to all other partners conveying his intention to dissolve the partnership. If all the
partners provide his consent then the partnership can be dissolved. The partnership is
dissolved on the date of agreed in that notice moreover if no such date is mentioned in
that notice then date of dissolution of partnership firm is the date of declaration of note.

 (1) A partnership at will may be dissolved when one partner gives written notice to others.

●​ Illustration: Partner A sends a written notice to partners B and C stating his intention
to dissolve the partnership immediately. The firm dissolves on the date specified or
the date of communication of the notice.

 (2) If no date is mentioned in the notice, dissolution occurs on the date the notice is
communicated.

●​ Illustration: Partner A’s notice does not mention a dissolution date, so the partnership
dissolves on the day partners B and C receive the notice.

Section 44:- Dissolution by the Court

●​ Unsound mind/insanity:-

When any partner becomes unsound mind or insane then a suit is taken by a next friend
of a partner who has become unsound mind or insane or any other partner. Partner A
suffers from a mental illness, making it impossible for others to work with
him. Partner B files a suit, and the court dissolves the firm.

By: Sagar Jain

 ●​ Incapacity :-

●​ When the partners, other than a suing partner become permanent incapable to
do his duties and responsibilities as a partner.  Partner A suffers a severe
disability that prevents him from contributing to the firm’s activities. Partner B seeks
court intervention, leading to dissolution.

 Misconduct of Partner:-
When the partners, other than suing partner is blameworthy or guilty of any act which
have an effect on the running on a business with respect to the nature of business.
Partner A is involved in illegal activities, damaging the firm’s reputation.
The court dissolves the firm on Partner B’s application.

●​ Constant breach of agreement by partner:-

The court may order for the ending of the firm if the partner other than the suing partner
is found guilty for constant breach of agreement on the subject of the conduct of
business or the managing of the affairs of the partnership firm and it becomes not
possible to continue the business with such partners. Partner A repeatedly violates
partnership agreements and refuses to maintain proper financial records.
Partner B files a case, and the court orders dissolution.

●​ Transfer of interest:-

When a partner has transfer his entire interest to the third party with no consent of other
partners or else gives an authorization to the Court to charge his share for the recovery
of land. Partner A sells his share in the firm to an outsider without informing
other partners. Partner B files a suit, and the court dissolves the firm.

●​ Perpetual or Continuous losses:-

In this when the business is constantly suffering loss and the court believes that the firm
cannot going on in the upcoming future due to continuous losses and cannot renew to its
original position.

●​ Just and equitable ground :-

This is a ground in which the court may order for dissolution on any other ground which
court think is just, fair and equitable. Like:-

●​ Conflict between the partners

●​ Deadlock in the management
●​ Offence committed by any of its partner
●​ Loss of foundation of business.

By: Sagar Jain

 (f) Business cannot be carried on except at a loss.

●​ Illustration: The firm faces continued losses due to poor market conditions, and the
court dissolves the firm upon application by a partner.

 (g) Just and equitable reasons.

●​ Illustration: Partners have irreconcilable differences, and the business cannot operate
smoothly. The court finds it just and equitable to dissolve the firm.

 egistration of a Firm (Section 56-59)

R
56

This section provides the State Government with the authority to exempt its entire state or a
specific part of it from the provisions of Chapter VII of the Indian Partnership Act, 1932,
which deals with the registration of firms. This exemption is granted through a notification
published in the Official Gazette.

The purpose of this provision is to give flexibility to state governments to modify the
application of laws based on regional circumstances or administrative requirements.

For example:

1.​ If a state finds the mandatory registration of firms to be impractical in a remote or

tribal region due to logistical issues, it may exempt that region.
2.​ If a state intends to promote small-scale industries or businesses by reducing
regulatory requirements, it may choose to exempt those areas or specific districts from
the provisions of Chapter VII.

Illustration:
1.​ Scenario 1 (Exemption for Remote Regions):
o​ The government of State X identifies that certain remote tribal areas in its
state lack access to resources for registering firms due to inadequate
administrative infrastructure.
o​ The government, through a notification in the Official Gazette, exempts those
areas from the requirement of firm registration under Chapter VII of the Act.
As a result, partnerships in those areas can function legally without
registration.
2.​ Scenario 2 (Policy-Based Exemption):
o​ The government of State Y aims to encourage start-ups and small businesses
in a specific district. To simplify the regulatory framework, it exempts that
district from the application of Chapter VII. This allows small businesses to
operate without the obligation of registering their partnership firms, reducing
costs and encouraging entrepreneurship.
3.​ Scenario 3 (Selective Exemption):
o​ In State Z, the government decides that rural agricultural partnerships should
not require registration due to their informal nature and lack of formal legal
disputes. The government issues a notification exempting all agricultural firms
in rural areas from Chapter VII provisions.

By: Sagar Jain

57
Section 57 of the Indian Partnership Act, 1932, consists of two subsections detailing
the appointment, powers, and status of Registrars responsible for firm registration \

Subsection (1): Appointment and Jurisdiction

1.​ State Government Authority:
o​ The State Government has the power to appoint individuals as Registrars of
Firms to execute the provisions of the Partnership Act.
o​ The State Government may assign each Registrar a specific area of
jurisdiction, such as districts, zones, or regions. This ensures decentralized
and efficient administration.
o​ Registrars handle tasks related to the registration of firms, including:
▪​ Maintaining records of registered firms.

▪​ Processing applications for registration or amendment.

▪​ Keeping records of dissolution and other changes in partnership.

Subsection (2): Registrar as a Public Servant

1.​ Public Servant Status:
o​ Every Registrar appointed under the Act is considered a public servant as
per Section 21 of the Indian Penal Code (IPC), 1860.
2.​ Implications of Public Servant Status:
o​ The Registrar is bound by the duties and ethical obligations of a public
servant, which include:
▪​ Acting in an unbiased manner.

▪​ Avoiding corruption or misuse of office.

▪​ Maintaining confidentiality and transparency in official duties.

58
Section 58 , deals with the procedure for the registration of a partnership firm. It explains the
details required for registration, the method of submission, the necessity of verification, and
the restrictions on the names a firm can adopt. Registration under this section is optional but
confers significant legal benefits, such as the ability to enforce rights against third parties and
partners.
1.​ Timing of Registration:
o​ A partnership firm can register at any time after its formation. This means
there is no mandatory deadline to register a firm; registration can happen
either at the beginning of the business or even later when needed.
2.​ :
o​ The partners must prepare a statement in the prescribed format and submit it to
the Registrar of Firms in the region where the firm's business is carried on or
proposed to be carried on.
o​ The statement can be:

By: Sagar Jain

 ▪​ Delivered in person, or
▪​ Sent by post.
3.​ Details to Be Included:​
The statement must contain all relevant details about the firm, including:
o​ Firm Name: The name under which the firm operates. It should not violate
the restrictions under Subsection (3).
o​ Principal Place of Business: The main address where the firm's operations
take place.
o​ Other Business Locations: Addresses of any branch offices or other places
where the firm conducts business.
o​ Date When Each Partner Joined: Accurate dates of when each partner
became a part of the firm are to be provided.
o​ Names and Permanent Addresses of Partners: The full legal name and
address of each partner must be listed.
o​ Duration of the Firm: Whether the firm is formed for a fixed term, for a
specific venture, or is intended to continue indefinitely must be mentioned.
4.​ Signatures of Partners:
o​ The statement must be signed by all partners of the firm.
o​ If a partner cannot sign, an agent with specific authorization may sign on
their behalf.

Subsection (2): Verification of Statement

●​ Requirement of Verification:​
Each person signing the registration statement must also verify the information
provided. This verification ensures that all details are true and correct to the best of
their knowledge and belief.
●​ Verification gives legal weight to the statement and holds the signatories accountable
for the truthfulness of the provided information.

Subsection (3): Restrictions on Firm Names

1.​ Prohibited Words:​
A firm cannot use certain words in its name unless special permission is obtained.
These include words that imply:
o​ A connection with the Crown, such as "Royal" or "Imperial."
o​ Affiliation with the Government, such as "Emperor," "King," or "Queen."​
These words are restricted to avoid misleading the public into believing that
the firm has government approval or patronage.
2.​ Exception:​
If the State Government permits, a firm can use these words, but only after
obtaining written consent from the State Government.
Section 59
This section of the Indian Partnership Act, 1932, describes the procedure the Registrar of
Firms follows after ensuring compliance with Section 58. It establishes the formality of
officially entering the firm's details into the Register of Firms.

By: Sagar Jain

Explanation
1.​ Role of the Registrar:
o​ Once the application for registration is submitted under Section 58, the
Registrar verifies whether all requirements have been fulfilled.
o​ The verification includes checking whether the application:
▪​ Contains the prescribed details, such as firm name, addresses, partner
details, etc.
▪​ Is signed and verified by all partners or their authorized agents.

▪​ Is accompanied by the prescribed fee.

o​ If the application meets all these conditions, the Registrar proceeds to record
the firm’s details.
2.​ Entry in the Register of Firms:
o​ After satisfying himself that the application complies with Section 58, the
Registrar records the firm’s details in the Register of Firms.
o​ The Register of Firms is an official document maintained by the Registrar’s
office. It contains a record of all registered firms within the specified area.
3.​ Filing the Statement:
o​ After making the entry in the Register of Firms, the Registrar physically files
the statement submitted by the firm as a part of the office records.
o​ This ensures that the original statement is preserved as evidence in case of any
disputes or verification required in the future.

 ffects of Non-Registration of a Firm (Section 69)

E
This section explains what happens if a firm is not registered but wants to take legal action
in court. Here's how it works:
1. No Lawsuits Against the Firm or Its Partners:
●​ If a firm is not registered, then partners cannot take the firm to court to enforce
any contract-related rights (like demanding money or enforcing agreements) unless:
o​ The firm is registered.
o​ The person suing is listed as a partner in the Register of Firms (a record
maintained by the government).
●​ Example:​
Let’s say there’s a firm called ABC Traders that is not registered. If Partner A wants
to sue ABC Traders (the firm) or another partner for money owed to him, Partner A
cannot do this in court because the firm is unregistered. The firm has to be registered
first for the lawsuit to be valid.

2. No Lawsuits by the Firm Against Third Parties:

●​ If a firm is not registered, it cannot file a lawsuit against any third party (someone
who is not a partner) to enforce a contract unless:
o​ The firm is registered.
o​ The persons suing (the partners) are listed as partners in the Register of
Firms.
●​ Example:​
Suppose ABC Traders (an unregistered firm) wants to sue a customer, Mr. X, for
failing to pay a bill. ABC Traders can’t take Mr. X to court because the firm is
unregistered. But if ABC Traders gets registered, it can go to court to sue Mr. X for
the money.

By: Sagar Jain

3. Applies to Set-Off or Other Claims:

●​ This rule also applies to situations where:

o​ Someone wants to use set-off (a situation where they offset money owed to
them against money they owe to someone else).
o​ Any other legal claim involving a contract.

However, there are exceptions for some cases, explained below.

Even though this rule says a firm must be registered to sue or be sued, there are some
exceptions:
a) Dissolution of the Firm and Realization of Its Assets:
●​ : If the firm is being closed or dissolved, it can still go to court, even if it
is unregistered, to divide its assets and settle the affairs of the business.
b) Bankruptcy of a Partner:
●​ If one of the partners is going bankrupt (unable to pay their debts), the firm can
still claim money from that partner, even if the firm is unregistered.
●​ Example:​
If Partner B of XYZ Ltd. goes bankrupt, the other partners can still go to court to
collect the share of the business that belongs to Partner B, even though the firm is
not registered.
c) Small Claims (Less Than ₹100):
●​ If the claim is for a very small amount (less than ₹100), the firm can still file a
lawsuit in court without being registered. But this only applies in special small cause
courts (courts that deal with small claims).
●​ Example:​
If XYZ Ltd. is trying to recover ₹50 from a customer, it can still go to a small cause
court to sue for the ₹50, even if the firm is not registered.

5. Geographical and Monetary Exemptions:

There are also some situations where the rule about registration doesn't apply:
a) No Business in the Area:
●​ What It Means: If the firm does not have any business activity in the area where the
law applies, then the registration rule doesn’t affect them.
●​ Example:​
If ABC Traders only does business in a foreign country and has no business in India,
the rule about needing to be registered doesn’t apply.
b) Small Claims Under ₹100 in Specific Courts:
●​ What It Means: If the claim is for a small amount (under ₹100), the rule about
needing to be registered doesn’t apply in certain small claims courts (like
the Presidency Small Cause Court or Provincial Small Cause Court).
●​ Example:​
If the firm is suing for ₹50 in a small cause court, it doesn’t matter if the firm is
registered or not.
Cox v. Hickman (1860)

Facts:​
A and B, facing financial difficulties, assigned their business assets to trustees, including C,

By: Sagar Jain

under a deed of arrangement to repay creditors using business profits. The trustees, acting as
fiduciaries, managed the business for the creditors’ benefit without assuming ownership or
partnership roles. D, a creditor, argued that the trustees should be liable as partners for the
business debts since they participated in the profits.

Lower Court Decision:​

The lower court ruled in favor of D, holding that the trustees were partners based on their
receipt of profits, which was seen as a strong indicator of partnership.

House of Lords Decision:​

The House of Lords reversed the lower court's ruling, emphasizing that:

1.​ Receipt of profits alone does not create a partnership. Partnership requires an
intention to share both profits and risks as co-owners.
2.​ The trustees were fiduciaries managing the business on behalf of the creditors without
forming a partnership or assuming ownership.​
This decision clarified that merely sharing profits is not sufficient to establish a
partnership unless it is accompanied by an agreement to share management and risks
of the business.

Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983

the question before SC was whether a partner was entitled to retire on the
basis of partnership deed. The deed provided that a partner may retire by
giving one month’s notice and that a partner cannot retire within one year
of commencement of business and if he does so, his capital will not be
returned. SC held that it is consistent with the provisions of section 31(1)(b)
and the partner can retire according to the deed.
The case began when Partner A, who was part of a brick manufacturing business, decided he
wanted to exit the partnership. However, the way he chose to do this would lead to a
fascinating legal journey through India's courts.
Initially, Partner A approached the Trial Court with two requests - he wanted the entire
partnership dissolved and asked for a complete accounting of the business's finances. The
Trial Court agreed with him, but this was just the beginning of the legal battle. The other
partners, unhappy with this decision, took the matter to the High Court, which completely
reversed the lower court's decision and dismissed A's claims.
The heart of the dispute lay in how a partner could exit the business. Partner A had claimed
the partnership was "at will" - meaning any partner could dissolve it whenever they wanted.
The other partners strongly disagreed with this interpretation. The case eventually reached the
Supreme Court, where the judges took a fresh look at the situation.
What makes this case particularly interesting is how the Supreme Court approached the
problem. Instead of getting caught up in whether the partnership was "at will" or not, they
focused on a more fundamental question: Could Partner A retire from the partnership? To
answer this, they carefully examined two important parts of the original partnership
agreement (Clauses 18 and 20) alongside Section 32(1)(b) of the Indian Partnership Act.

By: Sagar Jain

The Supreme Court found that the High Court had made a crucial error in its thinking. The
High Court had treated Partner A's attempt to leave as a potential breach of contract.
However, the Supreme Court saw it differently - they recognized that the partnership
agreement actually gave partners the right to leave the business. While there were some
financial consequences to leaving early (partners couldn't get their capital back immediately),
this didn't mean they couldn't leave at all.
In their final decision, the Supreme Court took a balanced approach. They said Partner A
could retire from the partnership (effective from when he first filed his court case), but this
wouldn't dissolve the entire partnership. The remaining partners could continue the business.
They also ordered that the business accounts should be prepared up until the day before A
filed his court case, ensuring a clear financial cut-off point.
Dhulia-Amalner Motor Transport ... vs Raychand Rupsi Dharamsiand 1952
This case dealt with the improper dissolution of a partnership firm under the Indian
Partnership Act, 1932. The majority partners attempted to dissolve the partnership firm and
transfer its assets to a newly formed private company. The minority partners opposed the
move, claiming the dissolution was invalid as it did not comply with Section 43, which
requires proper written notice of dissolution.
The Bombay High Court ruled in favor of the minority partners, holding that the partnership
was not validly dissolved. It stated that the majority partners could not transfer the firm's
assets without accounting for the interests of the minority partners. The court also recognized
the minority partners' right to an account of the profits derived from the firm's assets by the
new company.
The court established a clear three-part test for proper dissolution notice:
1.​ There must be a notice
2.​ The notice must be in writing
3.​ The notice must explicitly express an intention to dissolve the firm
Key Legal Principle Established: The court clarified that all three requirements must be met
simultaneously - simply meeting one or two conditions is insufficient to trigger Section 43.
The absence of any single element means Section 43 cannot come into operation.

By: Sagar Jain