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THE INDIAN PARTNERSHIP ACT, 1932

Nature and Concepts


INTRODUCTION
The Indian Partnership Act, 1932 is an act enacted by the Parliament of India to
regulate partnership firms in India. It received the assent of the Governor-General on
8th April, 1932 and came into force on 1st October 1932. Before the enactment of this
act, partnerships were governed by the provisions of the Indian Contract Act. The act is
administered through the Ministry of Corporate Affairs. The act is not applicable to
Limited Liability Partnerships, since they are governed by the Limited Liability
Partnership Act, 2008.
The Indian Partnership Act,1932 is based on the English law of Partnership Act,1890.
Section 69 of the Act which relates to effect of non-registration of firm came into force
with effect from 1st October, 1932. Section 3 of the Act provides that it is branch of
general law of contract and the provisions of the Indian Contract Act, 1872 shall
continue to apply to partnership, except so far as they are not consistent with the
provision of Indian Partnership Act, 1932. This Act contains 74 sections spread over 8
chapters.
The Act extends to whole of India except the State of Jammu and Kashmir.
Section 2 of the act defines,
(a) an act of a firm means any act or omission by all the partners, or by any partner or
agent of the firm which gives rise to a right enforceable by or against the firm;
(b) business includes every trade, occupation and profession;
(c) prescribed means prescribed by rules made under this Act;
(c-1) Registrar means the Registrar of Firms appointed under sub-section (1) of
Section 57 and includes the Deputy Registrar of Firms and Assistant Registrar of
Firms appointed under sub-section (2) of that section;
(d) third party used in relation to a firm or to a partner therein means any person who
is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the Indian Contract Act,
1872, shall have the meanings assigned to them in that Act.

Definitionof Partnership
Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. (Sec 4, para 1)
Persons who have entered into partnership with one another are called individually,
partners and collectively a firm, and the name under which their business is carried
on is called the firm-name. (Sec 4, para 2)
It may be noted that partnership firm is not a legal entity like a company, it is a group of
individual partners, Comptroller & Auditor General vs. Kamlesh Vadilal Mehta(2003) 2
SCC 349.
Similarly in the case of Malabar Fisheries co vs. IT Commissioner, Kerla AIR 1980 SC
176, a partnership firm is not a distinct legal entity and the partnership property belongs
to all partners constituting the firm.

Essential Characteristics of Partnership


After having understood the meaning of the term partnership as defined in section 4 of
the Act, let us discuss the essential characteristic of a partnership, which are discussed
as under;

A. Association of two or more persons:


There must be at least two persons to form a partnership. A person cannot enter into
partnership with himself. The maximum number of persons in a partnership should not
exceed 10 in case of banking business and 20 in other types of business.
If the number of partners exceeds the prescribed maximum, it would become an illegal
association of persons. A firm cannot become a partner of another firm though its
partners can join any other firm as partners.
It may, further be noted that the statutory limit on the maximum number of partners does
not apply to a Hindu Undivided Family. However, if two or more HUF amalgamate the
statutory limit mentioned above will apply.

B. Agreement:
Partnership is the outcome of an agreement between persons. The relation of
partnership arises from the formation of a contract and not from status or birth.
If a proprietor gives a share in profits to his employee it will not be called a partnership
unless there is an agreement of partnership between the two. The agreement may be
oral or in writing but it must satisfy all the essentials of a valid contract.
Section 5 provides that the relation of partnership arises from contract and not from
status. That is why, a Hindu Undivided Family carrying on a family business is not
considered a partnership, The reason is that the coparceners of a Hindu Undivided
Family acquire interest in the business because of their status (i.e. birth) in the family
and not because of any agreement between them. Thus, partnership is voluntary and
contractual in nature.
It may be noted that as per Section 5 the relation of partnership arises from contract and
not from status. In particular the members of a HUF carrying on a family business as
such are not partners in partnership firm. This will be discussed subsequently also.

C. Lawful business:
A partnership can be formed only for the purpose of carrying on a business. An
association of persons who jointly own a house without carrying on a business is not
partnership.
Moreover, the business carried on by the partners must be lawful. Illegal acts such as
theft, dacoity, smuggling, etc., cannot be called partnership.
An association created for charitable. religious or social purpose cannot be regarded as
partnership because there does not exist any business. It may also be noted that an
agreement to carry on business at a future time does not result in partnership unless
that time arrives and the business is started. [ R R Same, vs. Heuberr]
Another point which is worth noting is whether business should be temporary or
permanent. So long there is a valid agreement to carry on legal business there exist a
partnership.
An agreement for Partnership can be for a specified period, specified project or for an
undefined period or purpose. This we will discuss subsequently in sub-section duration
of partnership.

Example: Two brothers were living together with their father. The father who was a
proprietor of a business dies. The sons inherited the business but does not become
partners automatically after death of their father unless there is an agreement between
them expressed or implied to carry on the business as partners.

D. Sharing of profits:

The agreement between the partners must be to share the profits of business. There
can be no partnership without the intention of mutual gain. The profits must be
distributed among the partners in an agreed ratio.

The section does not insist upon loss sharing. Thus a, provision for loss sharing is not
essential [Walker West Development vs. FJ Emmett(1978)252EG1171]

However, sharing of profits is not a conclusive proof of partnership. For example, a


manager may be given a share in profits of the firm.

Example:-
Two persons agreed to produce a film and share the profits of hiring it out, it was held to
be sufficient to constitute a partnership [Minck vs. Roshal lal Shorey, AIR 1931 lah390]

An agreement to carry on business at future time does not result in partnership unless
that time arrives and business is commended, as an agreement to agree in future is not
an agreement.

E. Mutual agency:

Partnership business can be carried on by all the partners or by any of them acting on
behalf of the others. In other words, every partner is an implied agent of the other
partners and of the firm. Each partner is liable for acts performed by other partners on
behalf of the firm.

The use of the words carried on by all or any of them acting for all in Sec 4 clearly
emphasizes the agency relationship.

The partners are agent for each other and principals for themselves. Their relationship
is governed by the law of agency. The partners are largely regulated by the law of
Principal and agent.

The above mentioned features are the real tests of partnership. In addition, partnership
has the following characteristics:

F. Utmost good faith:

The relations between partners are based upon mutual trust and confidence. Every
partner is expected to act in the best interests of other partners and of the firm as a
whole.

He must observe utmost good faith in all the dealings with his co-partners. He must
render true accounts and make no secret profits from the business.

The concept of utmost good faith is stressed in section 9 of the Partnership Act which
lays down general duties of a partner. Section 9 lays down that partners are bound to
carry on the business of the firm to the greatest common advantage to be just and
faithful to each other and to render true accounts and full information of all things
affecting the firm to any partner or his legal representatives. This we will be discussing
in subsequent section dealing with right and duties of partners.

G. Unlimited liability:

Every partner is jointly and severally liable to an unlimited extent for the debts of the
partnership firm. In case the assets of the firm are insufficient to pay the debts in full, the
personal property of each partner can be attached to pay the creditors of the firm.
H. Restriction on transfer of interest:

No partner can transfer his share in the partnership without the prior consent of all other
partners. As per section 29 a partner cannot assign his rights and interest in the firm to
an outsiders so as to make him the partners of the firm. He can however, assign his
share in the profits and share in the assets of the firm. But the transferee will not be
entitled to take part in the business of the firm, but in the share of profit only.

4.1.2.1 Test of Partnership:

The question whether association of two or more persons constitutes a partnership


under the Indian Partnership Act, 1932 or not is a difficult question to find readymade
answer. In order to decide whether such association of persons constitutes a
partnership first we must look at the existence of the essential characteristic of a
partnership as discussed in para A to H. An association of two or more persons entering
into an agreement to share profits may not necessarily determine partnership, because
such an agreement many not carry on business and may be formed for some charitable
purpose only or social objects. Similarly the business may be carried on for profits, but
the agreement does not provide for sharing of profits, in such case also there is no
partnership at all. The mode of determining existence of partnership is provided in
section 6 of the act which read as under;

As per Section 6, in determining whether a group of persons is or is not a firm, or


whether a person is or is not a partner in a firm, shall be verified in real relation as is
prevailing between the parties, as shown by all relevant facts taken together. Sec 6 is
based on case of Cox v. Hickman, (1860) H.L.C. 268. Thus test of partnership can be
analyzed as under:

(i) The partnership is determined by real relation among partners and relation must
show existence of mutual agency.

(ii) The sharing of profit is prima facie evidence but not conclusive evidence of
Partnership.

Cases where no partnership relation exits:

Sec 6 enumerates in its two Explanations where partnership relation does not exist.
These cases are:

(a) Joint owners of property sharing profits or gross returns arising from the property do
not become partners (Ex 1 to Section 6)

Example:
A and B jointly purchased a tea shop, each contributing half of the expenses for
purchase of pottery and utensils. They then leased out the shop and shared the rent
equally. Held they were co-owners and not partners [Govind Nair v Moga
AIR(1933)Rang120]. The decision could have been different had they started the
business and shared the profit.

(b) Where a person has lent money to persons engaged or about to engage in business
and receive a rate of interest varying with profits.

Example:

A advanced money to two merchants engaged in business subject to control of A in


several respects. A was to receive 20% commission on all profits. This was held not to
be a partnership because there is no sharing of profit. [Mollow March & co. vs The court
of wards,1872LR2CP419]

(c) Where a servant or agent is engaged in a business and receives his remuneration
as a share of profits.

Example:

A a contractor for loading and unloading railway wagons appointed B his servant to
manage it. B was to receive 75% of profits and share all the losses if any.Held not to be
a partnership as B (servant) was an agent of A and not a partner. No valid partnership is
created by simply by the facts servant/agent share the profits. [Munshi Abdul Latif vs.
Gopeshwar AIR(1933)Cal 204].

(d) A widow or child of a deceased partner receives a portion of profits.

(e) Where a person has sold his business along with goodwill and receive a portion of
profits in consideration of sale (Explanation 2 to Section 6)

From above discussion and exceptions provided in explanations to Section 6 of the act
we can say that the real test of existence of partnership is existence of mutual agency
relationship rather than sharing profits. This was also laid down in a famous case of Cox
vs. Hickman.

Who are not partners? (Sec 5, para 2)

In addition to cases already discussed, the following entities are not partners:

i) The members of a Hindu undivided family carrying on a family business as such,

ii) A Burmese Buddhist husband and wife carrying on business as such are not partners
in such business.
Who cannot enter into partnership contract?

The answer is who is not competent to enter into a contract under Section 11 of the
Indian Contract Act. The following persons for want of capacity can not enter into
contract and accordingly cannot be a partner in a firm.

(a) Minor: A minor cannot become a partner in a firm, but with the consent of all the
partners, a minor can be admitted to the benefits of partnership.

(b) Alien Enemy: An Alien enemy can not enter into a partnership with an Indian
subject. However, a native of Alien friend country can enter into a partnership with
Indian citizen.

(c) Person of unsound mind: A person of unsound mind is not competent to enter into
a contract of partnership.

(d) Corporation: A Registered company can enter into a contract of partnership as a


single individual but not as a group of Individuals comprising it [Shri Murugan Oil
Industries (Pvt.) Ltd vs. AU Suryanarayana Chettiar(1963)33 Comp.Cas 833(Mad)]. It
may be noted that a company can be a partner in a firm only if so authorized by its
Memorandum of Associations. You may like to know how a company be a partner in a
firm. Answer is very simple. Company is a legal entity, separate from its members, it
can enter into any contract subject to the provisions of its Memorandum of Association.

Can two partnership firms enter into a partnership with each other ? No, a firm is not a
legal person except for income tax, sales tax purpose. A firm is not a person. At best, it
is only a collective name of those individuals who constitute the firm. [Dulichand
Laxminarayan vs. CIT(1956)29ITR-535AIR1956SC354]. Similarly a partnership firm
cannot be partners in another firm.

Duration of partnership

At the time of entering into a partnership agreement the partners may fix the duration,
venture for which partnership formed or may be silent about the duration or venture.
The former where the duration of the partnership is fixed in the agreement is called
partnership for a fixed term, the second type of partnership is called particular
partnership and third type of partnership is called partnership at will.

Example:

ABC entered into a partnership to carry on the business of real estate consultancy for
five years. Here in the partnership deed or agreement the duration of the partnership is
fixed as five years. So this type of partnership is called Partnership for a fixed duration.
On the other hand if the partnership deed or agreement is silent, it will be treated as
partnership at will.

Particular partnership: A person may become a partner with another person in


particular adventures or undertakings. Such partnership is known as particular
partnership (Sec 8) If the partnership is for a particular venture like Construction of
Stadium for Olympic games, this partnership will be called Particular Partnership.

Formation of A Partnership firm (Registration and effects of non-registration)

As we have discussed earlier that partnership form of business organization is the


simplest form of business organization requiring the least formalities. Any two or more
person after making an agreement can start the business even without getting the
partnership deed registered with the Registrar of firms. Prior to enactment of
Partnership Act in India there was no provision for registration of partnership in India.
Even after enactment of the Act, Section 69 dealing with effect of non registration of
partnership was made effective only after one year i.e. with effect from 1st October,
1933. Even today registration of partnership firm is not mandatory. However a non
registered firm is subject to some disadvantages as provided in Section 69 which we
shall discuss subsequently as a result of which most of the firms go for registration of
partnership firm. No duration or time limit for registration of firm is provided in the Act. A
firm may register itself any time during the life time of the partnership firm. Registration
is simply a formality of getting the details of the firms like its name, address, name and
address of the partners, nature of business etc. to be recorded in the Register of firms
kept in the office or Registrar of firms. A Partnership Deed which contains the
agreement between the partners setting out their mutual relations, duties and rights etc
is necessary under Section 58(1) at the time of registration of any firm. Though, there is
no requirement of having any instrument in writing at the time of admission and/or
retirement or dissolution of firm, under Rule 16 of Indian Partnership Rules, 1989, the
Registrar of Firms (who is a registering authority to register the firm) is empowered to
take on record the evidence in support of registering any partnership. Therefore, the
Deed is necessary to be executed to place on record the relationship of partners at the
time of registration and at subsequent changes to register such changes.

Various forms are required to be filled up and filed with the Registrar as he needs
certain information. Therefore, it is necessary to have that information incorporated in
the deed which Registrar can verify while scrutinizing the forms and ultimately register
the firm. Names and Addresses of Partners are to be mentioned in the beginning paras.
Partnership Deed should, therefore, contain following clauses.

(i) Name of the firm.


(ii) Date of commencement of Business of the firm.

(iii) Address including address of the additional place/s of Business of the firm.

(iv) Nature of Business.

(v) Duration.

(vi) Sharing of Profit & Loss between Partners.

(vii) Capital of the firm.

The above clauses are necessary in all deeds, since the entry on record which is
furnished by the Registrar to the Firm gives the above information as recorded in the
Register. If for any reason, any of the above clauses are missing from the deed, the
registration procedure cannot be completed. As regards Point No. (vii) above, it should
be noted that to be a valid document, partnership deed should necessarily be on a
stamp paper of requisite value and this value is determined by the amount of capital.

As per Section 58 the registration of a firm may be effected at any time by sending by
post or delivering to the Registrar of the area in which any place of business of the firm
is situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating-

(a) the firm name,

(b) the place or principal place of business of the firm,

(c) the names of any other places where, the firm carries on business,

(d) the date when each partner joined the firm,

(e) the names in full and permanent addresses of the partners, and

(f) the duration of the firm. The statement shall be signed by all the partners, or by their
agents specially authorized in this behalf.

Every person signing the statement is required to verify it in the manner prescribed.
While deciding the firms name care should be taken to ensure that the firms name does
not contain any of the following words, namely:- Crown, Emperor, Empress,
Empire, Imperial, King, Queen, Royal, or words expressing or implying the
sanction, approval or patronage of Government.

As per Section 59 when the Registrar is satisfied that the provisions of Section 58 have
been duly complied with, he is required to record an entry of the statement in a register
called the Register of Firms, and shall file the statement. The Registrar of firms is a
appointed by the State Government who is deemed to be a public servant with the
meaning of Section 51 of the Indian Penal code. Any alternation in the firms name and
its principal place of business is also required to be intimated to the Registrar of firms
who is required to amend the entry relating to the firm in the Register of firms in
accordance with the statement, and shall file it along with the statement relating to the
firm filed under Section 59.

Further more as per Section 61 when a registered firm discontinues business at any
place or begins to carry on business at any other place, such place not being its
principal place of business, any partner or agent of the firm may send intimation thereof
to the Registrar, who shall make a note of such intimation in the entry relating to the firm
in the Register of Firms, and shall file the intimation along with the statement relating to
the firm filed under Section 59.

As per Section 62 when any partner in a registered firm alters his name or permanent
address, an intimation of the alteration may be sent by any partner or agent of the firm
to the Registrar, who shall deal with it in the manner provided in Section 61. Various
other facts like change in the constitution of the firm due to admission, retirement,
dissolution, minor electing to becoming or not becoming partner after attaining the age
of majority etc are also required to be intimated to the Registrar of firms.

As per Section 66 the register of firms is open to inspection by any person on payment
of such fee as may be prescribed. All statements, notices and intimations filed are also
open to inspection, subject to such conditions and on payment of such fee as may be
prescribed. Any person can get a certified copy of any entry of portion thereof in the
Register of firms on payment of prescribed fee.

Any statement, intimation or notice recorded or noted in the Register of Firms shall, as
against any person by whom or on whose behalf such statement, intimation or notice
was signed, has evidential value and is a conclusive proof of any fact therein stated.

4.1.7 Effect of non-registration

As stated earlier in this section registration of partnership firm is not mandatory in India
but Section 69 of the Act place an unregistered firm under some disadvantages as a
result of which firms go for compulsory registration. The consequences of non
registration of a firm are as under;

(1) No suit to enforce a right arising from a contract or conferred by this Act shall be
instituted in any Court by or on behalf of any person suing as a 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 in the Register of Firms as a
partner in the firm.
(2) No suit to enforce a right arising from a contract shall be instituted in any Court by or
on behalf of a firm against any third party unless the firm is registered and the persons
suing are or have been shown in the Register of Firms as partners in the firm.

(3) The provisions of sub-sections (1) and (2) shall apply also to claim of set- off or other
proceeding to enforce a right arising from contract, but shall not affect-

(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a
dissolved firm, or any right or power to realise the property of a dissolved firm, or

(b) the powers of an official assignee, receiver or Court under the Presidency- towns
Insolvency Act, 1909 or the Provincial Insolvency Act, 1920. to realise the property of an
insolvent partner.

However, non-registration does not affect the following:-

(a) firms or partners in firms which have no place of business in the territories to which
this Act extends, or whose places of business in the said territories are situated in areas
to which, by notification under section 56 the Chapter 7 does not apply, or

(b) any suit or claim of set- off not exceeding one hundred rupees in value which, in the
Presidency- towns, is not of a kind specified in Section 19 of the Presidency Small
Cause Courts Act, 1882 or, outside the Presidency- towns, is not of a kind specified in
the Second Schedule to the Provincial Small Cause Courts Act, 1887 or to any
proceeding in execution or other proceeding incidental to or arising from any such suit
or claim.

IMPLIED AUTHORITY OF A PARTNER

In order to discharge the duty of both an agent as well as principal a partner has some
implied authority cast upon him by the Act. The kind of implied authority may be derived
either from usage, customs of trade, conduct of the partners or from the statute. It can
be inferred from the circumstances of the case. Section 19 of the Partnership Act deals
with the implied authority of a partner that reads as under.

Implied authority of partner as agent of the firm. (Sec 19)

(1) Subject to the provisions of section 22, the act of a partner which is done to carry on,
in the usual way, business of the kind carried on by the firm, binds the firm. The
authority of a partner to bind the firm conferred by this section is called his implied
authority.
Under the implied authority of a partner the firm will be liable only if the following
conditions are satisfied;-

(a) The act done by the partner relates to the normal business of the firm;

(b) The act must be as is done within the scope of the business of the firm in the usual
way;

(c) Act done must be in name of the firm or in any manner expressing or implying an
intention to bind the firm;

(d) The act done must state that it has been done in the capacity of an agent of other
partners.

The following acts of a partner can be treated as covered under the implied authority of
a partner.

(a) To purchase goods of the kind that are used in the business of the firm;

(b) To sell goods on behalf of the firm;

(c) To engage servants to perform the business of the firm;

(d) To receive payment of the debt due to the firm and give receipt thereof;

(e) To settle account with the person dealing with the firm;

(f) To draw, accept, endorse bill of exchange or any other negotiable instrument.

(g) To pledge the firms property as security for loans etc.

Certain restrictions are imposed on the implied authority of a partner Section 19(2) lays
down certain statutory and Partnership deed imposed restrictions on the implied
authority of a partner which are reproduced as under:

(2) In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to

(a) submit a dispute relating to the business of the firm to arbitration,

(b) open a banking account on behalf of the firm in his own name,

(c) compromise or relinquish any claim or portion of a claim by the firm,

(d) withdraw a suit or proceeding filed on behalf of the firm,

(e) admit any liability in a suit or proceeding against the firm,


(f) acquire immovable property on behalf of the firm,

(g) transfer immovable property belonging to the firm, or

(h) enter into partnership on behalf of the firm.

Extension and restriction of partners implied authority(Sec 20) The partners in a


firm may, by contract between the partners, extend or restrict the implied authority of
any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm
which falls within his implied authority binds the firm, unless the person with whom he is
dealing knows of the restriction or does not know or believe that partner to be a partner.

Partners authority in emergency(Sec 21)

A partner has authority in an emergency to do all such acts for the purpose of protecting
the firm from loss as would be done by a person of ordinary prudence in his own case,
acting under similar circumstances and such acts bind the firm.

As per Section 22 of the Act an admission or representation made by a partner


concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary
course of business. Similarly a notice given to a partner who habitually acts in the
business of the firm in any manner relating to the affairs of the firm operates as a notice
to the firm except in the case of fraud on the firm committed by or with the consent of
that partner. In other words a notice to an active partner of the firm is the sufficient
notice to the firm. Once a notice is served upon the active partner of the firm other
partners can not ignore the same.

DISSOLUTION OF FIRM [SECTIONS 39 TO 47]

The dissolution of a partnership between all the partners of a firm is called the
dissolution of the firm. There is a difference between dissolution of partnership and
dissolution of firm.

Dissolution of Partnership: Dissolution of partnership refers to the change in the


existing relations of the partners. The firm continues its business after being
reconstituted. This may happen on admission, retirement or death of a partner or
change in profit sharing ratio in the firm:

Example 1:
X,Y and Z are three partners in a firm. X retires. The partnership between X Y Z comes
to an end and new partnership between Y and Z comes into existence. This new
partnership between Y and Z shall be known as `reconstituted firm. Thus, on retirement
of partner, the old partnership stands dissolved but the firm continues its business with
remaining partners YZ. This is a case of dissolution of partnership.

Example 2:

X,Y are two partners in a firm. Z is admitted in the firm with 1/3 rd share of profit. The
partnership between X Y comes to an end and new partnership between X,Y and Z
comes into existence. This new partnership between X,Y and Z shall be known as
`reconstituted firm. Thus, on admission of new partner, the old partnership stands
dissolved but the firm continues its business with new partners XYZ This is also a case
of dissolution of partnership.

Dissolution of Firm :Dissolution of a firm means the dissolution of partnership between


all the partners of a firm. In such a situation, the business of the firm is discontinued, its
assets are realised, the liabilities are paid off and the surplus (if any) is distributed
among the partners according to their rights.

Difference between Dissolution of Partnership and Dissolution of Firm:

Dissolution of partnership and Dissolution of firm are two different terms. Dissolution of
partnership means termination of existing partnership agreement and the formation of a
new aggreement which can be due to any reason like admission of a new partner or
death or retirement of an old partner. In the case of dissolution of partnership the
remaining partners may agree to carry on the business under a new agreement.

Whereas Dissolution of Partnership firm means that the firm is closing down its
business. In the case of dissolution of firm the Assets of the business are sold,
Liabilities are paid off and the accounts of the partners are settled out of the remaining
amount.

Dissolution of partnership

Partnership may be dissolved in the following circumstances:

a) At the time of admission of a new partner;

b) On the retirement/death of an old partner;

c) At the time of change in profit sharing ratio among existing partners;


d) If any partner is declared insolvent;

e) On the expulsion of any partner;

f) On the expiry of the pariod of partnership.

Thus this is clear from the above discussion that in the case of dissolution of the
partnership the firm may continue under a new agreement whereas in the case of
dissolution of partnership firm the business of the firm comes to an end.

Modes of Dissolution of Firm

A partnership firm can be dissolved in any of the two ways: A) By the order of the court;
B) without the intervention of the court.

Dissolution of FirmWithout the Courts Order (Sec 40 to 43)By Mutual Agreement (Sec
40)Compulsory Dissolution (Sec 41)On happening of certain contingencies (Sec 42)By
Notices (Sec 42)By the Courts Order (Sec 44)

A) By the order of the court:

A partner may apply to the court for getting the firm dissolved. On getting such
application by any of the partner the court may proceed to order the dissolution of the
firm in the following circumstances: (Sec 44)

i) If any of the partner becomes of unsound mind.[Sec 44(a)]

ii) If a partner, other than the partner filing the suit has become disabled to perform his
duties as a partner. [Sec 44(b)]

iii) If a partner, other than the partner filing the suit is guilty of misconduct. [Sec 44(c)]

iv) If a partner, other than the partner filing the suit is guilty of intentionally and
persistently committing a breach of the partnership agreement. [Sec 44(d)]

v) If a partner, other than the partner filing the suit has transferred whole of his interest
in the firm to a third party without the consent of the other partners.[Sec 44(e)]

vi) If the court is satisfied that the business of the firm cannot be carried on except with
a loss. [Sec 44(e)]

vii) If the court considers it just and equitable to dissolve the firm due to some other
reasons. [Sec 44(f)]

B) Without the intervention of the court.

i) Dissolution by agreement:
A firm may be dissolved with the consent of all the partners or in accordance with a
contract between the partners.

ii) Compulsory dissolution: (Sec 41)

A firm is dissolved :

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to
be carried on or for the partners to carry it on in partnership:

Provided that, where more than one separate adventure or undertaking is carried on by
the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in
respect of its lawful adventures and undertakings

C) Dissolution on the happening of certain contingencies. (Sec 42)

Subject to contract between the partners a firm is dissolved:

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertakings, by the completion
thereof;

(c) by the death of a partner; and

(d) by the adjudication of a partner as an insolvent.

D) Dissolution by notice of partnership at will. (Sec 43)

(1) Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication of the
notice.

RIGHTS AND DUTIES OF PARTNERS

The Partnership Deed contains the mutual rights, duties and obligations of the partners,
in certain cases, the Partnership Act also makes a mandatory provision as regards to
the rights and obligations of partners.
When there is no Deed or the Deed is silent on any point, the rights and obligations are
governed by Sections 9 to 17 of Partnership Act .

A) Rights of a Partner:

i. A partner has right to take part in the day-to-day management of the firm.[Sec 12(a)]

ii. A partner has right to be consulted and heard while taking any decision regarding the
business.[Sec 12(c)]

iii. A partner has right of access to books of accounts and call for the copy of the
same.[Sec 12(d)]

iv. A partner has right to share the profits equally or as agreed upon by the
partners.[Sec 13(b]

v. A partner has right to get interest on capital contributed by the partners to the
firm.[Sec 13(c)]

vi. A partner has right to avail interest on advances paid by the partners for business
purpose.[Sec 13(d)]

vii. A partner has right to be indemnified in respect of payment made or liabilities


incurred or for protecting the firm from losses.[Sec 13(e)]

viii. A partner has right to the use of partnership property exclusively for partnership
business only not himself.[Sec 15]

ix. A partner has right as agent of the firm and implied authority to bind the firm for any
act done in carrying the business.[Sec 18]

x. A partner has right to prevent admission of new partners/expulsion of existing


partners.[Sec 31(1)]

xi A partner has right to continue unless and otherwise he himself cease to become a
partner.[Sec 33(1)]

xii. A partner has right to retire with the consent of other partners and according to the
terms and conditions of deed. [Sec 32(1)]

xiii. A partner has right of outgoing partner/legal heirs of deceased partner.[Sec 37]

B) Duties of a Partner:

i. To carry on the business to the greatest common advantage. Every partner is bound
to carry on the business of the firm to the greatest common advantage. In other words,
the partner must use his knowledge and skill in the conduct of business to secure
maximum benefits for the firm.

ii. To be just and faithful to each other. Partnership is a fiduciary relation. Every partner
must be just and faithful to other partners of the firm. Every partner must observe
utmost good faith and fairness towards other partners in business activity.

iii. To render true accounts. Every partner must render true and proper accounts to his
co-partners. Each and every entry in the books must be supported by vouchers and
give explanations if demanded by other partners.

iv. To provide full information. Every partner must provide full information of all activities
affecting the firm to the other co-partners. No information should be concealed, kept
secret.

v. To attend diligently to his duties. Every partner is bound to attend diligently to duties
in the conduct of the business of the firm.[Sec 12(b)]

vi. To work without remuneration. A partner is not entitled to receive any kind
remuneration for taking part in the conduct of the business. But in practice, the working
partners are generally paid remuneration as per agreement, so also commission in
some case.[Sec 13(a)]

vii. To indemnify for loss caused by fraud or willful neglect.If any loss is caused to the
firm because of a partners willful neglect in the conduct of the business or fraud commit
by him against a third party then such partner must indemnify the firm for the loss.[Sec
10]

viii. To hold and use partnership property exclusively for the firm.The partners must hold
and use the partnership property exclusively for the purpose of business of the firm not
for their personal benefit.

ix. To account for personal profits. If a partner derives any personal profit from
partnership transactions or from the use of the property of the firm or business
connection with the firm or the firms name, he must account for such profit and pay it to
the firm.

x. Not to carry on any competing business.A partner must not carry on competing
business to that of the firm. If he carries on and earns any profit then he must account
for the profit made and pay it to the firm.

xi. To share losses.[Sec 13(b)]. It is the duty of the partners to bear the losses of the
firm. Partners share the losses equally when there is no agreement or as per their profit
share ratio.
xii. To act within authority.[Sec 19(1)]. Every partner is bound to act within the scope of
authority. If he exceeds his authority and the firm suffers from any loss, he shall have
compensate the firm for such loss.

xiii. Duty to be liable jointly and severally[Sec 25]. Every partner is jointly and
individually liable to the third parties for all acts of the firm done while he is a partner.

xiv. Duty not to assign his interest[Sec 29]. A partner cannot assign or transfer his
partner interest to an outsider so as to make him the partner of the firm without the
consent of other partners. However, he can assign his share of the profit and his share
in the assets of the firm where the assignee shall not be entitled to interfere in the
conduct of the business

C) Liabilities of a Partner to Third Parties:

i. Liability of a partner for acts of the firm:

Every partner is jointly and severally liable for all acts of the firm done while he is a
partner. Because of this liability, the creditor of the firm can sue all the partners jointly or
individually.

ii. Liability of the firm for wrongful act of a partner:

If any loss or injury is caused to any third party or any penalty is imposed because of
wrongful act or omission of a partner, the firm is liable to the same extent as the partner.
However, the partner must act in the ordinary course of business of the firm or with
authority of his partners.

iii. Liability of the firm for misutilisation by partners:

Where a partner acting within his apparent authority receives money or property from a
third party and misutilises it or a firm receives money or property from a third party in the
course of its business and any of the partners misutilises such money or property, then
the firm is liable to make good the loss.

iv. Liability of an incoming partner:

An incoming partner is liable for the debts and acts of the firm from the date of his
admission into the firm. However, the incoming partner may agree to be liable for debts
prior to his admission. Such agreeing will not empower the prior creditor to sue the
incoming partner. He will be liable only to the other co-partners.

v. Liability of a retiring partner:


A retiring partner is liable for the acts of the firm done before his retirement. But a
retiring partner may not be liable for the debts incurred before his retirement if an
agreement is reached between the third parties and the remaining partners of the firm
discharging the retiring partner from all liabilities. After retirement the retiring partner
shall be liable unless a public notice of his retirement is given. No such notice is
required in case of retirement of a sleeping or dormant partner.