Indian Partnership Act, 1932

Indian Partnership Act, 1932

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Meaning of Partnership (Section 4)

According to 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 “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

DIAGRAM

According to Section 5,

  • relation of partnership arises from contract and not from status;

Thus

  • the members of a Hindu Undivided Family carrying on a family business as such are not partners in such business,
  • a Burmese Buddhist Husband and wife carrying on business as such are not partners in such business.

Points to note:

  • Partnership can be done even for a single venture which may not be lengthy (like partnership for construction of single building)
  • Sharing of profit is an essential element of any partnership but it is not the only test or ultimate test. There may be cases where 2 or more persons share profit without creating partnership.
  • According to Section 4, ‘sharing of profit’ is an essential element but ‘sharing of loss’ is not an essential element. Thus, a partnership, where one person is partner in profit not in loss is absolutely valid.
  • It is open to the partners to agree to share the profits in any way they like. They may agree to share the profits either in specific proportions or in specific sums.

Sharing of Profit – Not a Conclusive Evidence
Although sharing of profits is a prima facie evidence of the existence of partnership, this is not the conclusive test of the same. A person may have a share in the partnership profits, but still may not be a partner.

Examples

  • Joint owners of a property sharing its return, or
  • Members of non-profit or non-trading associations, or
  • a servant or agent who receive a share in profits as his remuneration or
  • the seller of goodwill like franchisee

Another Example
Aallu, owed money to Kachallu. He agreed to pay Kachallu out of the profits of his business what he owned to him. It was held that the arrangement does not make Kachallu the partners with Aallu in the business.

Mutual Agency – Conclusive Evidence
Mutual Agency means agents of each other. Under Partnership Act, each partner is the agent as well as the principle of all other partners as well as partnership firm. Thus, for the act (within the scope of partnership) of any partner, all other partners are liable.

Distinguish Between

Co-Ownership

Partnership

Co-ownership may exist between any numbers of persons.

Partnership is between two persons.

Co-ownership is not always the result of an agreement

Partnership can be created only through an agreement

Co-owner is not the agent of the other co-owner(s)

Every partner is the agent of all other partners

Co-ownership does not necessarily involve sharing of profit.

In partnership sharing of profit is must.

A co-owner can transfer his rights and interests to strangers without the consent of the others.

A partner can’t transfer his rights and interests to strangers without the consent of all other partners

A co-owner can ask for division of property in specie.

No partner can ask for this. His only right is to have a share of the profits out of the properties.

A co-owner has no lien on the property

A partner has a lien on the firm property.

Hindu Undivided Family

Partnership

A Hindu Joint Family firm arises as a result of status (i.e. birth)

Partnership can be created only through an agreement

Death of a co-parcener does not dissolve the family firm

Death of a partner dissolves the partnership

In a joint family firm only the Karta or manager (who is the head of the family) has implied authority to borrow and bind HUF

In a partnership, act of each partner can bind other partners

In a joint family business only the Karta is personally liable.

Every partner is personally liable for the debts of the firm

A minor is a member of a joint family firm from the very day of his birth by virtue of his status, but he is not personally liable.

A minor cannot be a partner, although he may be admitted to the benefits of partnership.

A co-parcener cannot ask for accounts, his only remedy is to ask for partition of the assets of the family firm.

A partner can demand the accounts of the firm.

No registration of a family firm is necessary

A partnership firm must be registered before it can maintain suits against outsiders

The share of a coparcener is not fixed; it may be enlarged by death or reduced by a birth in the family

Each partner has a definite share in the business and this can be changed only by agreement

A Hindu joint family business is governed by Hindu Law

Indian Partnership Act, governs partnerships

Difference between Company and Partnership

 

Company

Partnership

Separate legal entity

Yes

No

Property in the name of

Company

Partners

Liability

Limited

Unlimited

Mutual Agency

Individual Member/individual director is not the agents of company

Every partner is an agent all other partners and partnership firm

Transferability of shares

Yes, subject to AOA

(Generally free in case of Public Companies)

No, a partner cannot transfer its share to some else without the consent of all other partners

Perpetual succession

Yes

No

Contract

A member can contract with his company

A partner cannot contract with his firm

Number of members

  • In case of private limited – Minimum 2, Maximum-200
  • In case of public limited – Minimum 7, Maximum-unlimited
  • In case of one person company – 1 person

Minimum – 2, Maximum-50
[Rule 10 of Companies (Miscellaneous) Rules, 2014]

Applicable laws

Companies Act, 2013
Companies Act, 1956

Partnership Act, 1932

Registration

Must

Optional

Dissolution

A company, being a creation of law, can only be dissolved as laid down by law

Can be dissolved at any time by agreement among the partners

Audit

A company is required to have its accounts audited annually by a chartered accountant.

The accounts of a firm are audited at the discretion of the partners or as per Tax Laws

Demutualization

Yes

No

Partnership Deed

The agreement of partnership may be oral but to avoid future disputes it is always advisable to have it in writing. The written document which contains the mutual rights and obligations of partners is known as partnership deed (also called as ‘Partnership Agreement’, ‘Constitution of Partnership’, ‘Articles of Partnership’ etc.).

Note:

  • The deed must be property drafted and stamped according to the provisions of the Indian Stamp Act.
  • The partnership deed is not a public document and therefore binds only third parties so far as they have notice of it.

Contents of Partnership Deed
Partners are free to decide the terms and conditions of Partnership. Generally a partnership deed contains the following covenants:

  1. The firm name and business to be carried on under that name.
  2. Names and addresses of partners.
  3. Nature and scope of business and address(s) of business place(s).
  4. Commencement and duration of partnership.
  5. The capital and the contribution made by each partner.
  6. Provision for further capital and loans by partners to the firm.
  7. Partner’s drawings.
  8. Interest on capital, loans, drawings and current account.
  9. Salaries, commission and remuneration to partners,
  10. Profit (or loss) sharing ratio of partners.
  11. The keeping of proper books of accounts, inspection and audit, Bank Accounts and their operation.
  12. The accounting period and the date on which that accounts are to be prepared.
  13. Rights, powers and duties of the partners.
  14. Whether and in what circumstances, notice of retirement or dissolution can be given by a partner.
  15. Provision that death or retirement of a partner will not bring about dissolution of partnership,
  16. Valuation of goodwill on retirement, death, dissolution etc.
  17. The method of valuation of assets (and liabilities) on retirement or death of any partner.
  18. Provision for expulsion of a partner.
  19. Provision regarding the allocation of business activities to be performed by individual partners
  20. The arbitration clause for the settlement of disputes.

Note:

  • The terms contained in the partnership deed may be varied with the consent of all the parties, and such consent may be express or implied by a course of dealing.

Classification of Partnership

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Dissolution of ‘Partnership at Will’
Section 43(1) provides that

  • where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
  • The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no such date is mentioned, as from the date of communication of the notice”.

 

Kind of Partners

Actual Partners

  • They are ordinary (normal) partners
  • They invest money and actively participate in the business
  • They share profit and loss in the agreed ratio, and if no ratio is agreed, in the equal ratio
  • They shall give public notice of their retirement from the firm in order to absolve (free) himself from liability for the acts of the other partners done after the retirement.

Sleeping Partners

  • Such partners invest money in the business but don’t participate in the day to day working of business
  • Although sleeping partners are not known to the outsiders but just like normal partners their liability is also unlimited towards outsiders.
  • There act is binding on the firm, every partner is liable for it.
  • Such partners can access the book of accounts of firm just like normal partners.
  • They can retire from the firm without giving any public notice of retirement.

Nominal Partners

  • Such partners neither invest money in the business nor they participate in the day to day working of business
  • They just give their name (goodwill) to the business and take their share of profit
  • Generally they don’t share loss
  • They are known to the outsiders as partners in the firm and are liable to third parties for all the acts of the firm
  • They shall give public notice at the time of being separate from the firm.

Partners in Profits Only

  • Such partners invest money in the business and share profit only
  • They don’t share risk or loss
  • They are liable to the third parties for all acts of the firm, just like other partners.

Sub-Partner

  • Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub-partner.
  • Sub-partner is not the partner of the firm
  • He is partner of a partner
  • As he is not directly associated with the firm,
    • he has no rights or duties towards the firm
    • he does not carry any liability for the debts of the firm
    • he can’t check the accounts of the firm
    • he can’t claim his share in the profit of the firm
    • he cannot bind the firm or other partners by his acts
  • But he has the right to share the profits in property of the firm at the time of winding-up

Partner by Estoppel or Holding Out

  • Holding Out means “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “Partners by Holding Out”. An active partner who fails to give public notice at the time of retirement is also liable as partner by holding out.
  • In case of “Partnership by Estoppel”, the representation is made by partners about a stranger within his knowledge and hearing and he does not contradict it. He is then held liable as a partner.

Effects of Holding out

  • The Holding Out partner becomes personally and individually liable for the acts of the firm.
  • But Holding Out partner does not become a partner in the firm and is not entitled to any rights or claim upon the firm.
  • An outsider, who has given credit to the firm thinking him to be a partner, can hold him liable as if he is a partner in that firm. As the liability of the partners is joint and several he can be held liable to pay the entire amount. But under the doctrine of subrogation as well as on the basis of quasi-contract, he can recover the amount so paid from the partners of the firm, if they are solvent.

Exceptions to Holding Out
The doctrine of Holding Out is not applicable in the following cases:

  1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable for the torts of another simply because that other person held himself to be his partner.
  2. It does not extend to bind the estate of a deceased partner, where after a partner’s death the business of the firm is continued in the old firm name.
  3. It also does not apply where the Holding Out partner has been adjudicated insolvent.

Change in Firm

Diagram

Note-

  • A partner can’t be expelled except with the authority of Court.
  • A change in the nature of the business can only be brought about by the consent of all the partners.
  • Where a partnership firm is formed for a particular undertaking or undertakings and it proceeds to carry on other undertaking or undertakings (with the consent of all other partners), in that event the mutual rights and duties of the partners in respect of the other adventures or undertakings remains the same as those in respect of the original adventures of undertakings.

 

Partnership Property

Partnership is not a legal entity in the eyes of law. Thus, any property can’t be purchased in the name of the firm. Property is always purchased in the name of the partners.

Now, whether a property is firm property or personal property of the partner, it may depends upon following:

  • Agreement between the partners
  • Whether that property is intended to be used for the partnership business?
  • Whether that property is brought into the common stock for the purposes of the partnership by individual partners?
  • Whether the property is acquired in the course of the business with money belonging to the firm

Note:

  • Goodwill of a firm is always the property of the firm; not the property of any individual partner
  • Partnership property can be used only for the purpose of partnership business. No partner can use the property for its personal purpose.
  • Every partner has the general lien over the property of partnership.

Rights/Liabilities of a Minor in Partnership Firm

General

  • As the minor can’t enter into the contracts, he can’t become a partner in any firm.
  • But a minor can be admitted to the benefits (profits) of a firm with the consent of all the partners.

 

Rights

  • If a minor is admitted to the profits of a firm, he is entitled to his agreed share and can inspect books of account of the firm.
  • But if he want to file suit against the firm for the books of accounts or for his share, he can do so only if he intends to sever his connections with the firm, but not otherwise.

Liabilities during minority

  • Only minor’s share is liable for the acts of the firm (if that is with firm). But a minor is not personally liable in any such act. Thus, he is neither personally liable nor is his private estate liable for the acts of the firm.
  • Where a minor on attaining majority, elects to become a partner, he becomes personally liable as other partners to the third parties for all the acts of the firm done since he was admitted to the benefits of partnership.

Election to become partner

  • After attaining the age of majority, minor partner has to determine whether he wants to continue with the firm (as a normal partner) or not.
  • He shall elect this at a date later of the following:
    • within 6 months of his attaining the age of majority or
    • within 6 months when he comes to know of his being so admitted
  • He may give public notice of his election to continue or repudiate, but if he fails to give any public notice within the period stated above, he will be deemed to have elected to become a partner in the firm.

 Liabilities after attaining the age of majority
If he becomes or elects to become a partner, his position will be as under:

  1. His rights and liabilities will be similar to those of a full-fledged partner.
  2. He will be personally liable for all the acts of the firm, done since he was first admitted to the benefits of the partnership.
  3. His share of profits and property remains the same as was before, unless altered by agreement.

If he elects not to become a partner, then:

  1. His rights and liabilities shall continue to be those of a minor upto the date of his giving public notice.
  2. His share shall not be liable for any acts of the firm done after the date of the public notice.
  3. He is entitled to sue the partners for his share of the property and profits in the firm.

Dissolution

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Settlement of Accounts on Dissolution

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Dissolution
Dissolution means the action of formally ending or dismissing an association or partnership or body.

Generally, dissolution is a 2nd step. Before, dissolution we have to windup the business. Thus even after taking the decision of dissolution, business of a partnership may be continued for the purpose of winding up. This may include:

  • Completion of work undertaken by firm before the decision of dissolution
  • Fulfilment of current obligations
  • Selling or disposing off the assets of business to realise cash (also known as realising the assets)

Indian Partnership Act, 1932 has made a distinction between

  • dissolution of partnership and
  • dissolution of firm

Dissolution of firm
According to Section 39 of Indian Partnership Act, 1932,

  • the dissolution of partnership between all the partners of a firm is called the dissolution of the Firm.

Thus where relation between all the partners come to an end, it is a dissolution of the firm.

Dissolution of partnership
Where relationship between some of the partners come to an end while the relationship between other partners continue, it is a dissolution of partnership not the dissolution of the firm.

So the dissolution of a partnership may or may not include the dissolution of the firm, but the dissolution of the firm necessarily means the dissolution of the partnership as well.

Circumstances where dissolution of partnership may takes place [Section 42]

  • By the expiry of the fixed term for which the partnership was formed. [Section 42(a)]
  • By the completion of the adventure. [Section 42(b)]
  • By the death of a partner. [Section 42(c)]
  • By the insolvency of a partner. [Section 42(d)]
  • By the retirement of a partner. [Section 42(e)]

In all the above cases, the remaining partners may continue the firm in pursuance of an agreement to that effect.
If they do not continue then the dissolution of the firm takes place automatically.

Circumstances where dissolution of firm takes place

  1. By mutual agreement [Section 40]
    A firm may be dissolved where all the partners agree that it shall be dissolved.
  2. By the insolvency of all the partners but one [Section 41(a)]
    An undischarged insolvent can create liabilities. Thus after insolvency, a person can’t continue in a firm as a partner. And where all partners but one becomes insolvent, the only remaining partner can’t continue the business as a partnership. Partnership requires atleast 2 partners.
  3. By business becoming illegal [Section 41(b)]
    If the business of the firm becomes illegal, firm can’t continue that business. It shall automatically or compulsorily dissolved by the operation of law.
  4. By notice of dissolution [Section 43]
    Where the partnership is at will, the firm may be dissolved at any time, by any partner giving notice in writing of his intention to dissolve the firm, to all the other partners. The dissolution will take place from the date mentioned in the notice or, if no such date is mentioned, as from the date of the communication of the notice.

Dissolution of the Firm through Court (in case of partnership for a fixed period) [Section 44]
As per Section 44, the Court may order dissolution of the firm in the following circumstances:

  • When a partner becomes of unsound mind
  • Permanent incapacity of a partner to perform his duties as a partner, e.g., he becomes blind, paralytic, etc.
  • Misconduct of a partner affecting the business prejudicially. For example
    • Gambling by a partner or
    • conviction of a partner for travelling without ticket
  • Persistent disregard of partnership agreement by a partner due to which other partners find it impossible to carry on the business
  • Transfer of his interest or share by a partner to a stranger without the consent of other partners
  • Where the interest of a partner has been attached under a decree or sold under a process of law, the other partners may sue for dissolution.
  • Business is working at a loss and Court is satisfied that the business of the firm cannot be carried on except at a loss.
  • Any other just and equitable ground like where there is a complete deadlock between the partners and destruction of confidence between the partners.

Effect of Dissolution

  1. Continuing Authority of Partners (Section 47)
    As discussed above, even after the decision of dissolution, the authority of partners to bind the firm continues so long as is necessary to wind up the business. The partners may complete unfinished transactions. But this authority is only for the winding up of the affairs of the firm and not for new transactions.
    But it should be noted that the firm is in no case bound by the acts of a partner who has been adjudged an insolvent except where firm shows that insolvent partner has the authority to bind the firm and on the basis of such representation of firm someone has acquired some liability (Principle of Holding Out)
  2. Equitable lien of partner over the firm’s assets (Section 46)
    Each partner has an equitable lien (right) over the firm’s assets. Every partner can apply the assets of firm for payment of the firm’s debts, and for payment of whatever is due to partner.
  3. Continuing Liability of Partners unless a public notice is given of the dissolution
    The partners continue to be liable to outsiders for any act done by any of them which would have been an act of the firm if done before the dissolution, unless a public notice is given of the dissolution.

Right to Return of Premium (Section 51)
Premium by New Partner to Old Partners

  • To buy entry into an existing firm, a new partner sometimes has to pay a premium to the existing partners in addition to any investment of capital. Premium is charge against the goodwill of the partnership firm created by the old partners.

Proportionate return of the premium if the partnership dissolved before term fixed for partnership
On dissolution, new partner (from whom premium was charged) is entitled to demand the return of a proportion of the premium if the partnership was for a fixed term and was dissolved before the expiry of that term

Cases where premium is refundable
Where dissolution was caused by

  • agreement, or
  • misconduct of the party seeking return of the premium, or
  • death of a partner

Settlement of Accounts on Dissolution [Section 48]
In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:

  • Losses, including deficiencies of capital shall be paid
    • first out of undistributed profits,
    • next out of capital, and
    • lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits
  • The assets of the firm shall be applied in the following manner and order:
    1. in paying outside creditors;
    2. in repaying advances made by partners (distinct from investment of capital);
    3. in repaying capital to partners; and
    4. the ultimate residue, if any, shall be divided among the partners in the proportions in which profits are divisible.

Where the assets are not sufficient, the partners have to bear the loss in profit sharing ratio. After they have contributed their share of the deficiency they will be paid rateably the amount due to them by way of their capital (The Rule followed in the case of Garner v. Murray, 1904 73 L.J. Ch. 66).

Loss due to insolvency of partners
In case a partner is insolvent and is not able to contribute towards the deficiency, the principle laid down in the case of Garner vs. Murray will be applicable.

It was held that:

  • The solvent partners will contribute only their share of deficiency in cash
  • The available assets should be distributed among the solvent partners in proportion to their capital.
  • Thus, the deficiency of capital of the insolvent partners will be distributed among the solvent partners in the ratio of their respective capitals.

Rights and Duties of Partners

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Rights of Partners as per Partnership Act (if partnership deed is silent)

  1. Right to take part in the business: Every partner has right to take part in the partnership business.
  2. Right of free access to all records: Every partner (active/dormant) has right of free access to all records/books/accounts.
  3. Equal Profit: Every partner is entitled to share in the profits equally (irrespective of capital/work)
  4. Interest on Advance Capital: If any partner has contributed capital (in excess of what is agreed by all) for the purpose of the partnership business, he shall be entitled to an interest at a rate of 6% p.a. on such excess capital.
    Note: It should be noted that no partner can claim interest on the capital. Interest is allowed only on Advance capital.
  5. Right to get Indemnified: Every partner is entitled to be indemnified by the firm for all expenses incurred by him in the course of the business, for all payments made by him in respect of partnership debts or liabilities and disbursements made in an emergency for protecting the firm from loss.
  6. Right to act in an emergency: Every partner has power to act in an emergency for protecting the firm from loss.
  7. No New Partner without Consent: Every partner is entitled to prevent the introduction of a new partner into the firm without his consent.
  8. Right to get retired by giving notice: Every partner has a right to retire by giving notice where the partnership is at will.
  9. Right against Expulsion: Every partner has a right to continue in the partnership and not to be expelled from it.
  10. Right to carry on a competitive business after leaving partnership.
  11. No contribution in the liability of firm before becoming partner.

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