the-indian-partnership-act, Business Law

THE INDIAN
PARTNERSHIP ACT
ASSISTANT PROFESSOR- RENU SONI

• A partnership is the relationship between persons who have agreed to
share the profits of a business carried on by all or any of them acting or all.

Features of a Partnership
1] Formation/Partnership Agreement
A partnership firm is not a separate legal entity. But according to the
act, a firm must be formed via a legal agreement between all the
partners. So a contract must be entered into to form a partnership
firm.
2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business.
The partners are all individually and jointly liable for the firm and the
payment of all debts. This means that even personal assets of a
partner can be liquidated to meet the debts of the firm.
3] Continuity
A partnership cannot carry out in perpetuity. The death or retirement
or bankruptcy or insolvency or insanity of a partner will dissolve the
firm. The remaining partners may continue the partnership if they so
choose, but a new contract must be drawn up

4] Number of Members
As we know that there should be a minimum of two members. However,
the maximum number will vary according to a few conditions. The
Partnership Act itself is silent on this issue, but the Companies Act, 2013
provides clarity.
For a banking business, the number of partners must not exceed ten. For a
business of any other nature, the maximum number is twenty. If the
number of partners increases it will become an illegal entity or association.
5] Mutual Agency
In this type of organisation, the business must be carried out by all the
partners together. Or alternatively, it can be carried out by any of the
partners (one or several) acting for all of them or on behalf of all of them.
So this means every partner is an agent as well as the principal of the
partnership.
He represents the other partners in some cases so he is their agent. But
in other circumstances, he is bound by the actions of any of the other
partners aking him the principal as well.

• In India it is governed by the Indian Partnership Act, 1932, which extends
to the whole of India except the State of Jammu and Kashmir. It came into
force on 1st October 1932.

• ELIGIBILITY
• A partnership agreement can be entered into between persons who are
competent to contract. Every person who is of the age of majority according to
the law to which he is subject and who is of sound mind and is not disqualified
from contracting by any law to which he is subject can enter into a partnership.

• The following can enter into a partnership
• INDIVIDUAL
• FIRM
• HINDU UNDIVIDED FAMILY
• COMPANY
• TRUSTEES

• INDIVIDUAL: An individual, who is competent to contract, can become
a partner in the partnership firm. If there are more than two partners in a
firm, an individual can be a partner in his individual capacity as well as in a
representative capacity as Karta of the Hindu undivided family.

• FIRM: A partnership firm is not a person and therefore a firm can not
enter into partnership with any firm or individual. But a partner of the
partnership firm can enter into partnership with other persons and he can
share the profits of the said firm with his other co-partners of the parent
firm.

• HINDU UNDIVIDED FAMILY: A Karta of the Hindu undivided family
can become a partner in a partnership in his individual capacity, provided
the member has contributed his self acquired or personal skill and labour

HINDU UNDIVIDED FAMILY PARTNERSHIP FIRM
Regulating Law
A joint Hindu family business is
governed by the principles of Hindu
law.
A partnership is governed by the
provisions of the partnership
Act,1932
Creation It arises by status. It arises from an agreement.
Admission of new
Members.
A new member is admitted just by
birth.
No new partners are admitted
without the consent of all the
partners
Liability. The liability of the Karta is unlimited,
and the other coparceners are liable
only to the extent of their share in the
profits of the family business unless
they take part in the act performed or
transactions entered into by the Karta.
he liability of a partner is
unlimited
Minor’s Capacity. A minor becomes a member of the
ancestral business by the incidence of
birth. He does not have to wait for
A minor cannot be a partner,
though he can acquire benefits of
partnership, only with the

• COMPANY: A company is a juristic person and therefore can become a
partner in a partnership firm, if it is authorised to do so by its objects.

• TRUSTEES: Trustees of private religious trust, family trust and trustees of
Hindu mutts or other religious endowments are juristic persons and can
therefore enter into partnership, unless their constitution or objects forbid

• NUMBER OF PARTNERS
• The number of partners in a firm shall not exceed 20 and a partnership
having more than 20 persons is illegal.
• If the partnership is between the karta or member of Hindu undivided
family the members of the joint Hindu family will not be taken into
account.

ESSENTIALS OF A
PARTNERSHIP
• AGREEMENT - The relationship between partners arises
from contract and not status. If after the death of sole
proprietor of a firm, his heirs inherit firm they do not
become partners, as there is no agreement between them

• SHARING OF PROFITS – The partners may agree to share profits out
of partnership business, but not share the losses. Sharing of losses is not
necessary to constitute the partnership. The partners may agree to share
the profits of the business in any way they like.

• BUSINESS – Business includes every trade, occupation, or profession.
There must be course of dealings either actually continued or
contemplated to be continued with a profit motive and not for sport or
pleasure.

• RELATION BETWEEN PARTNERS– The partner while carrying on
the business of the partnership acts a principle and an agent. He is a
principal because he acts for himself, and he is an agent as he
simultaneously acts for the rest of the partners.

Kinds of Partnership
With Regard to the Duration of the
partnership –
either Partnership at Will or
Partnership for Fixed Duration
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.
•No provision with regards to the determination of a
partnership
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.

3] Particular Partnership
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.
4] 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.

Partnership Deed
Partnership deed is a partnership agreement between the partners of the
firm which outlines the terms and conditions of the partnership between
the partners. The purpose of a partnership deed is to provide clear
understanding of the roles of each partner, which ensures smooth running
of the operations of the firm.
A few essential characteristics of a partnership deed are:
•The name of the firm.
•Name and addresses of the partners.
•Nature of the business.
•The term or duration of the partnership.
•The amount of capital to be contributed by each partner.
•The drawings that can be made by each partner.
•The interest to be allowed on capital and charged on drawings.
•Rights of partners.
•Duties of partners.
•Remuneration to partners.
•The method used for calculating goodwill.
•Profit and loss sharing ratio

Types Of Partners
1. Active or managing partner
An active partner participates in a company's management. Referred to as
material participants, active partners invest in the partnership and
participate in its day-to-day activities to maximise their returns. They
typically hold some of the most important positions and can serve in
various roles, including those of a manager, advisor, organiser and
controller of the company's operations. The active partner may withdraw
compensation from the business, subject to the partnership deed's terms
and conditions. Additionally, they are completely liable for any debts.
2. Inactive or sleeping partner
An inactive partner is not involved in the day-to-day operations of the
partnership firm. But other partners might consult with them when
making important decisions for the company. Similar to other partners, a
sleeping partner contributes a fair portion of capital to the business and
shares its gains and losses. Outsiders may not be aware of this partner's
relationship, but they invest in the company and are responsible for paying
off any debts on the company's behalf.

3. Nominal partner
A nominal partner has no substantial stake in a partnership firm. They
do not participate in the operation of the company and merely lend
their name to it. They make no capital investments in the company and
hence do not share in its profits. But the nominal partner is still
responsible for the actions of any other partners when dealing with
third parties and outsiders. They are also responsible for paying the
firm's debts back to its creditors
4. Partner by estoppel or holding out
A partner who indicates through their words, deeds or conduct that they
are a partner in the firm is a partner by estoppel. Even if they are not
actually a partner in the company, they may have presented themselves
in a way that legally binds them to become a partner by estoppel
5. Partner in profits only
A partner who enters the partnership firm as a 'partner in profits only'
partakes in profits but is not responsible for any losses. Even when
engaging with third parties, they are only accountable for their profit-
making activities and do not share any other liabilities

6. Minor as a partner
A minor, or someone under the age of 18, cannot be a formal
partner in any partnership firm as per the Contract Act. But,
if other business partners agree, they may still be eligible for
a partnership. A minor may partake in a company's profits,
but they are only liable for their capital contribution if the
company suffers a loss. After reaching maturity or turning
18, a minor partner has six months to determine whether
they want to stay on as a partner or leave the firm. They
declare this by a public notice in both situations.
7. Secret partner
A secret partner is a partner whose affiliation with the
company is unknown to the broader public. The secret
partner occupies the space between the active and sleeping
partners. They invest capital, enjoy profits, share losses,
take part in business management and are subject to
unlimited liability. But they keep their membership a secret
from outsiders and other parties.

8. Sub-partner
A third party who shares a stake in a company with an
existing partner is a sub-partner. This occurs when a partner
consents to divide the company's profits with another party.
The relationship is between them and the partner and not
between the sub-partner and the partnership firm. A sub-
partner is not an entity of the firm and has no obligations to
the firm as a result.

Duties and Rights
of the Partners

GENERAL DUTIES OF A
PARTNER
• Subject to a contract to the contrary between the
partners the following are the duties of a partner.
To carry on the business of the firm to the greatest
common advantage. Good faith requires that a
partner shall not obtain a private advantage at the
expense of the firm.
•

• Where a partner carries on a rival business in competition with the partnership,
the other partners are entitled to restrain him.

• To be just and faithful. Partnership as a rule is presumed to be based on
mutual trust and confidence of each partner, not only in the skill and
knowledge, but also in the integrity, of each other partner

• To render true accounts and full information of all things done by
them to their co-partners.
• To indemnify for loss caused by fraud. Every partner shall indemnify
the firm for loss caused to it by his fraud in the conduct of the business of
the firm.

• Not to carry on business competing with the firm. 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.

• To indemnify the firm for willful neglect of a partner. A partner shall
indemnify the firm for any loss caused to it by his willful neglect in the
conduct of the business of the firm.

• To carry out the duties created by the contract. The partners are bound
to perform all the duties created by the agreement between the partners.

RIGHTS OFTHE PARTNERS
• To take part in the conduct and management of the
business
• To express opinion in matters connected with the
business. He has a right to be consulted and heard in all
matters affecting the business of the firm

• To have free access to all the records, books of account of the firm
and take copy from them.
• To share in the profits of the business. Every partner is entitled to
share in the profits in proportion agreed to between the parties.

• To get interest on the payment of advance.
Where a partner makes for the purpose of the
business, any payment or advance beyond the amount
of capital he has agreed to subscribe, he is entitled to
interest thereon at the rate of 6% per annum.
• To be indemnified by the firm against losses or
expenses incurred by him for the benefit of the firm.

• RESTRICTIONS ON AUTHORITY OF A PARTNER -Restrictions are
governed by Contract and by the Partnership Act .
• The partners may by contract extend or restrict the implied authority of any
partner.

• Under the Partnership Act in the absence of any usage of trade to the
contrary, the implied authority of a partner does not empower
him to do the following acts:
• Submit a dispute relating to the business of a firm to arbitration
• Open a bank account in his own name

• Compromise or relinquish any claim of the firm
• Withdraw a suit or proceeding on behalf of the firm
• Admit any liability in a suit or proceeding against the firm

• Acquire immovable property on behalf of the firm
• Transfer immovable property belonging to the firm, or
• Enter into partnership on behalf of the firm.

RIGHTS OF A MINOR
• A person who is a minor according to the law to which
he is subject may not be a partner in a firm, but, with
the consent of all the partners for the time being, he
may be admitted to the benefits of partnership.

• Such minor has a right to such share of the property and of the
profits of the firm as may be agreed upon, and he may have access to
and inspect and of the accounts of the firm

• Such minor’s share is liable for the acts of the firm, but the minor is not
personally liable for any such act.
• Such minor may not sue the partners for an account or payment of his
share of the property or profits of the firm

• 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
not to become a partner in the firm, and such
notice shall determine his position as regards the
firm, provided that, if he fails to give such notice, he
shall become a partner in the firm on the expiry of
the said six months.

• Where any person has been admitted as a minor to the benefits of
partnership in a firm, the burden of proving the fact that such person had
no knowledge of such admission until a particular date after the expiry of
six months of his attaining majority shall lie on the person asserting that
fact

• Where such person becomes a partner-
• his rights and liabilities as a minor continue upto the date on which he
becomes a partner, but he also becomes personally liable to third parties
for all acts of the firm done since he was admitted to the benefits of the
partnership, and

• his share in the property and profits of the firm shall be the share to which
he was entitled as a minor

• Where such person elects not to become a partner-
• his rights and liabilities shall continue to be those of a minor upto the date
on which he gives public notice,
• his share shall not be liable for any acts of the firm done after the date of
the notice, and
• he shall be entitled to sue the partners for his share of the property and
profits.

DISSOLUTION OF A FIRM
• A firm may be dissolved in the following manner
• Dissolution by Court
• Dissolution by agreement
• Dissolution by operation of law
• Dissolution on the happening of certain contingencies
• Dissolution by notice

DISSOLUTION BY COURT
•The court may dissolve a firm at the suit of any partners on
any of the following grounds namely :
•INSANITY OF A PARTNER: that a partner has become
of unsound mind. The insanity of a partner does not ipso
facto dissolve the firm and the next friend or continuing
partners has to file suit foe dissolution.

• PERMANENT INCAPACITY OF A PARTNER: that a
partner has become permanently incapable of performing his
duties as partner.
(Whitwell v. Arthur, Incapable to perform duties due to attack)
• CONDUCT AFFECTING PREJUDICIALLY THE
BUSINESS : that a partner is guilty of conduct, which is likely
to affect prejudicially the carrying on the business of the firm.
• (Carmichael v. Evans. Travelled in railway without ticket)

• BREACH OF PARTNERSHIP AGREEMENT that a
partner willfully or persistently commits breach of
agreements relating to the management of the affairs of
the firm or the conduct of it’s business or otherwise
conducts himself in matters relating to the business, that it
is not reasonably practical for the other partners to carry
on the business with him.

• TRANSFER OF INTEREST OF A PARTNER : that a
partner has in any way transferred the whole of his interest in
the firm to a third party.
• LOSS: that the business of the firm cannot be carried on save
at a loss ( No hope for profits from last few years)
• JUST AND EQUITABLE : on any other ground that
renders it just an equitable that the firm should be dissolved

Dissolution without intervention
of court
1.DISSOLUTION BY AGREEMENT
•A firm may be dissolved with the consent of all the partners or in accordance with
the contract between the partners. The partnership agreement may contain a
proviso that the firm will be dissolved on the happening of certain contingency

2.DISSOLUTION BY OPERATION OF LAW
A firm is compulsorily dissolved on the following grounds
•Insolvency of partners
•By the happening of any event which makes it unlawful for the business of the firm
to e carried on.(subsequently become illegal)

3.DISSOLUTION ON THE HAPPENING OF
CERTAIN CONTINGENCIES
Subject to contract between the partners a firm is dissolved on the happening of the
following contingencies.
1.If constituted for a fixed term, by the expiry of that term

2.If constituted to carry out one or more adventures or undertakings, by its
completion.
3.By the death of a partner
4.On insolvency of a partner

4.DISSOLUTION BY NOTICE
•If the partnership is at will, the same may be dissolved by service of a notice
by one partner to dissolve the firm.

Rights of Partner after Dissolution
1.Right of partners to have business wound up after
dissolution
2.Right to have firms debt settled out of firm’s property
3.Right to personal profits earned after dissolution
4.Right to return of premium on dissolution
5.Right where partnership contract is rescind for fraud or
misrepresentation
6.Right to restrain from firms property
Mode of settlement of Accounts
1.Paying of debts to the third Party
2.Paying to partners for their advances to firm
3.Paying to them account of capital
4.Surplus shall be devided in profit sharing ratio

REGISTRATION
• It is not compulsory to register the firm. However there
are serious effects of non-registration.

• No suit to enforce a right arising from a contract or conferred by
the Indian Partnership Act shall be instituted in any court by or on behalf of
any person suing as partner in a firm against the firm or any person alleged
to be or to have been a partner in the firm, unless the firm is registered
and the person suing is or has been shown on the Register of firms as a
partner in the firm

• Similarly, no suit to enforce a right rising from a contract shall be instituted
in any court by or on behalf of a firm against any third party unless the
firm is registered.

• PROCEDURE FOR REGISTRATION The
registration of a firm may be effected at any time by
sending by post or delivering to the Registrar of Firms
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 :
• the firm name

• the place or principal place of business of the firm;
• the names of any other places where the firm carries on business;
• the date when each partner joined the firm;

• the names in full and permanent addresses of the partners; and
• the duration of the firm.

• The statement shall be signed by all the partners or by their agents specially
authorised in this behalf. Each person signing the statement shall also verify
in the manner prescribed.

• A firm name shall not contain any of the following words viz. "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.

• All the States have framed rules prescribing the forms, fee for registration
and verification of the statement. The application for registration has to be
made to the Registrar of Firms in the prescribed form

• When the Registrar is satisfied that the provisions have been complied
with, he shall record and entry of the statement in a register called the
Register of Firms and shall file the statement. The Registrar is the
competent authority and if he acts bona fide and follows the procedure, his
satisfaction cannot be challenged.

• CHECKLIST FOR DRAFTING A PARTNERSHIP DEED
• A partnership deed should contain the following clauses
• Name of the parties
• Nature of business

• Duration of partnership
• Name of the firm
• Capital
• Share of partners in profits and losses
• Banking, Account firm
• Books of account

• Powers of partners
• Retirement and expulsion of partners
• Death of partner
• Dissolution of firm
• Settlement of disputes

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