ASSIGNMENT

ON
THE INDIAN PARTNERSHIP ACT, 1932

BY NEHA SACHDEVA
ROLL NO. – A3256119078
SUBMITTED TO: MR. ANNIRUDH
VASHISHTHA
 The Indian Partnership Act , 1932

INTRODUCTION
There are certain limitations of a sole trader. In a sole trading concern
only one man invests capital, undertakes the risk involves in the business
and controls the whole affairs of the business. But one man’s capital,
skill, controlling and risk taking capacity are generally limited.
Therefore, some person may combine and enter into an agreement to
form a partnership.
Partnership is a relation a mutual trust and faith. In order to maintain this
trust, it is necessary that the partnership accounts be maintained in an
honest, accurate and equitable manner. Partnership accounts should
present a true and fair picture of the partnership business. For the
purpose it is necessary to study the definition of partnership as given in
the Partnership Act and the relevant provisions of the Partnership Act
which affect the partnership accounts.

NATURE OF PARTNERSHIP FIRM

As per accounting viewpoint, partnership firm is treated as a separate
business entity distinct from its partners. However, as per the legal
viewpoint, a partnership firm is not a separate legal entity. In other
words, it has no existence separate from its partners. It mean that in case
of bankruptcy of the partnership firm, private estates of the partners
would be liable to meet the firm’s debts.
Definition of Partnership:
Section 4 of Indian Partnership Act, 1932, defines partnership as
follows:
“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.

RELATION OF PARTNERS WITHONE ANOTHER

All partners are free to form their own terms and conditions with respect
to functioning in their partnership deed. The Indian Partnership Act, 1932
has also prescribed provisions to govern their relationship inter
se (amongst them), and these provisions are applicable if no such deed
exists. Let us take a look at the duties and the rights of partners.

RIGHT TO DETERMINE RELATIONSHIP

Partners can determine their mutual rights and duties by a contract called

partnership deed, which determines aspects of general administration,
such as which partner will do what work, what will be their share
in profits, etc. It may be varied by express or implied consent of all the
partners.

Such deed can be expressly made or implied by a course of dealing. For

example, if one partner checks accounts of the firm daily and others do not
object, his conduct will be presumed to be a right of all partners in the
absence of a written partnership deed between them. So they can
themselves determine the rights of partners .

Agreement in Restraint of Trade is Valid

Section 27 of the Indian Contracts Act, 1872 declares contracts in restraint

of trade as void. All agreements restraining exercise of a lawful
profession, trade or business are invalid. Section 11 of Partnership Act,
however, states that partners can validly levy such a restraint on each
other, but such restraint must be provided for under the partnership deed.
Partners can use this agreement to prohibit each other from carrying on
any business other than that of the firm.

THE ACT COVERS MAINLY FOLLOWING :

 The Act gives guidance about relationship of patners as well as with

outsiders.

 Concept of partnerships and its essentials.

 ‘Principal - agent relationship’ among the partners.

 Points of difference between partnership and other various forms of

organization.

 It is very popular from of business organisation.

 Be familiar with the legal provisions regulating relation of partners’

interest as well as relations with

the third parties.

 The scope of implied authority of a partner to bind the partnership by

his acts.

 Various situations in which the constitution of a firm may change and

its effect on the rights and duties

of the partners.
 How the share in a partnership is transferred and what shall be the
rights and obligations of such

transferee.

 Mode of getting a firm registered with the authorities.

 The effect of registration of a firm upon the rights of partners’ inter-se

and the rights of the third

parties.

 Effect of nonregistration on rights of partners and the third parties.

 Various circumstances when a firm is dissolved.

 The consequences and the effects of the dissolution upon rights and
liabilities of various parties.

ELEMENTS OF PARTNERSHIP

1. ASSOCIATION OF TWO OR MORE PERSONS: Partnership is an

association of 2 or more persons. Again, only persons recognized by law
can enter into an agreement of partnership. Therefore, a firm, since it is
not a person recognized in the eyes of law cannot be a partner. Again, a
minor cannot be a partner in a firm, but with the consent of all the
partners, may be admiƩed to the benefits of partnership. The partnership
Act is silent about the maximum number of partners but section 464 of the
Companies Act, 2013 has now put a limit of 50 partners in any
associaƟon/partnership firm.
2. AGREEMENT: It may be observed that partnership must be the result
of an agreement between two ormore persons. There must be an
agreement entered into by all the persons concerned. This elementrelates
to voluntary contractual nature of partnership. Thus, the nature of the
partnership is voluntary and contractual.An agreement from which
relationship of Partnership arises may be express. It may also be
impliedfrom the act done by partners and from a consistent course of
conduct being followed, showing mutual understanding between them. It
may be oral or in writing.

3. BUSINESS: In this context, we will consider two propositions. First,

there must exist a business. For the purpose, the term ‘business’ includes
every trade, occupation and profession. The existence of business is
essential. Secondly, the motive of the business is the “acquisition of gains”
which leads to the formation of partnership.

4. AGREEMENT TO SHARE PROFITS: The sharing of profi ts is an

essenƟal feature of partnership. But an agreement to share losses is not an
essential element. It is open to one or more partners to agree to share all
the losses.

5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING

FOR ALL : The business must be carried on by all the partners or by
anyone or more of the partners acting for all. This is the cardinal principle
of the partnership Law. In other words, there should be a binding contract
of mutual agency between the partners. An act of one partner in the course
of the business of the firm is in fact an act of all partners. Each partner
carrying on the business is the principal as well as the agent for all the
other partners

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

1. Duty to act in good faith

2. Duty not to compete
3. Duty to be diligent
4. Duty to indemnify for fraud
5. Duty to render true accounts
6. Duty to properly use the property of the firm
7. Duty not to earn personal profits

1) Duty to act in good faith

Section 9 of the act provides that it is the duty of partners to act for the
greatest common advantage of the firm. Therefore, the partner should
work to secure maximum profits for the firm. A partner should not
secure secret profits at the expense of the firm. In Bentley v. Craven,
there was a partnership in a sugar refinery firm. One of the partners was
skilled in buying and selling sugar. Therefore, he was entrusted with the
task of buying and selling sugar. However, the partner sold the sugar
from his own stock and thus, gained profit. When the partners
discovered this fact, they brought an action to recover profits earned by
the partner. It was held by the court that the partner cannot make secret
profits and therefore, the firm was held entitled for profits earned by the
partner. The duty continues to exist even after the partnership has ceased
to exist. The partners owe the duty to legal representatives of the partner
as well as the former partner.

2) Duty not to compete

Section 16(b) of the act provides that if the partner makes a profit by
engaging in a business which is similar to or competing with the firm,
then the partner should account for such profits. In Pullin Bihari Roy v.
Mahendra Chandra Ghosal, there was a partnership for buying and
selling of the salt. One of the partners while buying the salt for the firm,
bought some quantity of salt for himself and then gained profit by
selling it on his personal account. He was held to be liable to account to
his co-partners for the profits earned. However, a partner can carry on
any business which is outside the scope of the business of the firm. The
duty can be altered by the partnership deed. The partners may enter into
an agreement which allows a partner to carry the business competing
with the business or can restrict the partner from carrying any business
other than that of the firm. Section 11 provides that such an agreement
will be valid and cannot be considered as a restraint in trade. If a person
breaches such agreement and carries on a personal business which not
competing to the business of the firm then such a partner will not be
liable to account for the profits, but his co-partners can apply for
dissolution of the partnership.

3) Duty to be Diligent

Section 12(b) provides that a partner is bound to diligently attend his

duties. Section 13(f) states that a person should indemnify the firm for
any loss caused to the firm because of his wilful neglect. A partner
cannot be made liable for mere errors of judgment or acts done in good
faith. In Cragg v. Ford, there was a partnership between the plaintiff and
the defendant. The defendant was the managing director of the firm and
therefore, the conduct of dissolution was left on him. Plaintiff advised
the defendant to dispose of certain bales of cotton. However, the
defendant said that the same would only be done after the dissolution.
Meanwhile, the prices of cotton fell and very less amount was realized
by selling the cotton as compared to which could have been otherwise
realized. An action for indemnity under this head can be brought only by
the firm or partners on behalf of the firm. A partner cannot bring an
action for indemnity in his personal capacity.

4) Duty to indemnify for fraud

Section 10 of the Indian Partnership Act, 1932, provides that if a loss is
caused to the business of the firm because of the act of the partner then
he shall indemnify his co-partners for such loss. The purpose of this
section is to induce partners to deal fairly and honestly with the
customers. Illustration: A, B, C, and D entered into a partnership for
the banking business. A committed fraud of ₹30,000 against one of the
customers. As a result, all the co-partners i.e. B, C, and D were held
liable. Here, A is bound to indemnify the firm for the loss caused to the
firm because of fraud committed by him. The liability to indemnify for
fraud cannot be excluded by entering into an agreement to the contrary.
Because entering into any such agreement is opposed to public policy.

5) Duty to render true accounts

Section 9 of the Act, provides that the partners are bound to disclose and
provide full information about the things that affect the firm to any
partner or his legal representatives. This means that a partner should not
conceal things from other co-partners in relation to the business of the
firm. Every partner has the right to access the accounts of the firm.
In Law v. Law, it was held by the court that if a partner is in possession
of some extra information then he is bound to deliver it to the co-
partners. If the partner enters into a contract with other co-partners
without furnishing them the material details which is known to him but
not his co-partners then such a contract is voidable.

6) Duty to properly use the property of the firm

Section 15 of the act, provides that property of the firm should be held
and used by the firm only for the business of the firm. A partner cannot
make use of the property for his personal purpose and if does so, then he
will be accountable to all the co-partners. He could be made liable for
the losses caused because of any such use. This duty can be avoided by
entering into an agreement to the contrary.
 7) Duty to account for personal profits

Section 16 of the Partnership Act, provides that: If a partner makes the
use of the property of the firm and earns profit out of it, then he should
account for the property. This duty arises because of the fiduciary
relationship between the partners. Illustration: A, B, and C were
partners in a firm. Goods were supplied to a person D. D paid some
extra commission to A, for using his influence to deliver the goods to D.
Here, A has the duty towards the co-partners to account for the
commission. If a partner enters into a business which is competing with
the business of the firm then the partner should account for the profit
earned from any such business. Illustration: A, B, and C were partners
in the business of sale of bottles. B started to carry on the same business
and started to influence the customers to buy the bottle from him rather
than the firm. Here, B has a duty to account for the profits earned from
the business. However, a competing business can be carried out after the
dissolution of the partnership. The firm has the right to put reasonable
restrictions on carrying the competing business by the ex-partners such
as, any reasonable time for which the ex-partners can’t carry the
competing business or the geographical limits where he can’t carry the
business. This is not a compulsory duty and thus, can be avoided by
entering into an agreement to the contrary

RIGHT OF PARTNERS

Mutual Rights of the partners generally depend upon the provisions of

the agreement. But subject to their agreement, the law confers following
rights on partners:

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

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

1) Right to take part in the conduct of the business

Section 12(a) of the act, provides that every partner has a right to take
part in the conduct to the business of the firm. This right can be curtailed
by the provisions of the agreement. Thus, allowing only a few partners
to actively participate in the functioning of the business. This right
should be used by the partners for promoting the business of the firm
and not for damaging the business. In Suresh Kumar Sanghi v. Amrit
Kumar Sanghi, a partner in order to undermine the position of the
managing partner wrote to the principals to not supply motor vehicles to
the firm and to the banker’s to not to honour the cheques of the firm.
The Delhi High Court provided an injunction against the partner saying
that the partner’s act was to damage the business of the firm.

2) Right to be consulted

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

course of business between the partners by the majority. It states that
every partner shall have the right to express an opinion before the matter
is decided. If for example, there is a difference in opinion among the
partners for introducing the son of one of the partners for the purpose of
learning business then the majority decision will prevail. However, if
the dispute is related to the Fundamental matter of the business i.e. the
nature of the business then the consent of every partner is required. For
Example: If a minor is to be included as a beneficiary in a partnership
then the consent of all the partners is required.

3) Right to access, inspect and copy books

Section 12(d) of the act, provides the right to partners to access, inspect
and copy account books. A partner can exercise this right by himself or
by his agent but none of them is authorized to use the gained information
against the interest of the firm. Example: If a dormant partner wants to
sell his shares to a co-partner and appoints an expert to inspect the
account and his share in the firm then, co-partners cannot object to same.
For raising an objection the co-partners should provide reasonable
grounds such as protection of trade.

4) Right to be Indemnified

Section 13(e) provides the right to be indemnified to the partners. This

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

5) Right to share profits

Section 13(b) of the Indian Partnership Act, provides that the partners
are entitled to share the profits and losses equally. Right to share profits
is not affected by the fact that the partners have contributed unequally in
the firm, possess different skills, have labored unequally in the firm.
In Mansha Ram v. Tej Bhan, where there was no satisfactory evidence
to show that in what proportion the partners were to divide the
remuneration. It was held by the Punjab and Haryana High Court that
the partners were entitled to share equal profits irrespective of the fact
that they had been paid separately and had done unequal work.
However, the right to share profits equally can be altered by the partners
by entering into an agreement to the contrary. Thus, the partners can fix
the share of profits or agree to be paid by way of salary rather than
profits.

6) Right to Interest

Interest on Capital: Section 13(c) provides that a partner is generally

not entitled to claim on the capital. But if there is an express agreement
between partners that allows interest on capital then, such an interest
will be paid only out of the profits of the firm. Interest is not provided to
the partner on capital except when there is an express agreement or a
usage to the effect, because a partner is deemed to be an adventurer
rather than the creditor. Interest on Advances: Section 13(d) states that a
partner is entitled to the interest of six percent per annum for the
advances made by him to the firm beyond the capital he had agreed to
subscribe. Illustration: A person X, invests ₹50,000 in a partnership
firm and provides ₹60,000 to the firm as advance. In this case, X will
receive interest from the profits of the firm for ₹50,000 which he had
invested in the firm and will get 6% interest on the advances made by
him to the firm. It must be noted that the interest in capital ceases after
the dissolution of the firm, but the interest on advances exist until it is
paid. Thus, the dissolution of a firm has no impact on the Interest on
Advances.

7) Right to remuneration

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

remuneration for taking part in the conduct of business. However, the
remuneration can be provided to certain partners along with the share in
profits if they have entered into an agreement to that effect or when such
remuneration is payable under the continued usage of the firm. For
Example, there is a firm consisting of Active and Dormant partners. In
such a case, the partners can form an agreement entitling the active
partners to receive a particular sum as remuneration.

Before going into rights and duties, we should first know how a change
may take place in the constitutionof the firm. It may occur in one of the
four ways, namely,

 Where a new partner or partners come in

 Where some partner or partners go out, i.e., by death or

retirement

 Where the partnership concerned carries on business

other than the business for which it was originally formed

 Where the partnership business is carried on after the

expiry of the term xed for the purpose