UNIT- IV

Indian Partnership Act- Definition- Nature, Mode of Determining the existence of

Partnership- Relation of Partner to one another- Rights and duties of partners- Relation of
Partners with Third Parties- Types of Partners- Admission of Partners - Retirements-
Expulsion- Dissolution of Firm- Registration of Firms.

INTRODUCTION:
One of the forms in which business can be carried on is Partnership, where two or
more persons join together to form the partnership and run the business. In order to govern
and guide partnership, the Indian Partnership Act, 1932, was enacted. Since, public at large
would be dealing with the partnership as customers, suppliers, creditors, lenders, employers
or in any other capacity, it is also very important for them to know the legal consequences of
their transactions and other actions in relation with the partnership where no one person is the
owner of the business and, therefore, exclusively responsible. The law relating to partnership
in India which is contained in Indian Partnership Act of 1932 is concerned partly with the
rights and duties of partners between partners and third persons, which flow or are incidental
to the formation of a partnership. Thus the Act not only determines the rights and duties of a
partner in relation to the partnership firm, in legal and contractual relationships arising out of
and in the course of business of the firm. It may be described as a branch of law relating to
principal and agent since every partner is in contemplation of law the general and accredited
agent of the partnership.

NATURE OF PARTNERSHIP:
A Partnership arises from a contract, and therefore, such contract is governed not only
by the provisions of the Partnership Act in that regard, but also by the general law of contract
in such matters, where the Partnership Act does not specifically make any provision. Thus,
the rules relating to offer and acceptance, consideration, free consent, legality of object, etc.
as contained in the Indian Contract Act are applicable to a contract of partnership also.
Partnership is a form of business organisation, where two or more persons join
together for jointly carrying on some business. It is an improvement over the ‘Sole-Trade
Business’, where on single individual with his own resources, skill and effort carries on his
own business. Due to the limitation of the resources of only a single person being involved in
the sole-trade business, a larger business requiring more investment and resources than
available to a sole-trader, cannot be thought of in such a form of business organisation. In a
partnership, on the other hand, a number of persons could pool their resources and efforts and
could start a much larger business, than could be afforded by any of these partners
individually. In case of loss also the burden gets divided amongst various in a partnership.
The law of Partnership is contained in the Indian Partnership Act, 1932, which came
into force on 1st October, 1932. Prior to the enactment of this Act, it was embodied in
Chapter XI of the Indian Contract Act, 1872. It was, however, found that the provisions

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relating to partnership, as contained in the Contract Act, were not exhaustive. Hence the
present Partnership Act, 1932 was enacted.
MEANING ANDDEFINITION OF PARTNERSHIP:
“When two or more persons (Subject to a maximum of 10 in Banking and 20 in Non-
Banking)carry on business to share profits and losses equally or in proportion of capitals, it is
called partnership business”.
Section 4 of the Indian Partnership Act, 1932 defines “Partnership”, “Partner”, “Firm
and Firm Name”.
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”.

ESSENTIALS OF PARTNERSHIP:
1. Association of Two or More Persons:
There should be at least two competent persons to form a Partnership. As regards
the maximum number of partners in a firm. The Companies Act, 2013 provides that
the maximum number of partners in a firm carrying on banking business should not
exceed ten and in any other business twenty. If the number of partners exceeds this
limit, the partnership becomes an illegal association. It ceases to be a partnership if
the number gets reduced to one by any reason.
2. Agreement or Deed: 
Partnership arises from an agreement between two or more persons for the
creation of this relation. Agreement here means a contract. This element indicates
voluntary contractual nature of partnership. The presence of an agreement has to be
there, though the same may be either express or implied. If the basis of the
relationship between certain persons is not an agreement, the association would not be
a partnership According to Section-5 of the Indian Partnership Act 1932, the
partnership relation is one of contractual nature. It arises from contract and not from
status, as agreement between the partners is the basis of this contract.
Thus, it is the element of agreement which distinguishes a partnership from
various other relationships like members of a Joint Hindu Family, Joint owners or
Joint heirs. The agreement may be express or implied. Implied agreement may be
inferred from the course of dealing or the conduct of the parties. The agreement may
be for a fixed period, or for the execution of a adventure, or it may give option to the
partners to withdraw from the partnership at any time. Partnership is thus created by
contract; it does not arise by operation of law or from the status or from the
inheritance. However a clause in Partnership Deed stating that heir or representatives
in interest of a dead partner shall be entitled to be partners in the firm, would not
make the heirs/legal representatives as partners of the firm.
Partnership agreement, like any other contract, must have all the essential
elements of a valid contract. It contains details relating to—
 name of the firm and the names of the partners,
  nature and place of business,
   the date of commencement and the duration of partnership,
  capital and banking account,
 sharing of profits and losses,

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   management,
 Accounts
 Arbitration etc.

Persons capable of becoming Partners:

The agreement to form partnership has to be between two or more persons. Since the
creation of partnership itself requires a contract between persons, such persons, therefore
must be competent to contract. A Minor or persons of unsound mind, who are not competent
to contract, cannot become partners. There is nothing which prevents a person incompetent to
contract from accepting any benefit and hence the business organisation permits a minor to be
admitted to the benefits of partnership. Such minor has a right to such share of property and
profits as may be agreed upon.

1. Hindu undivided family as a partner:

An H.U.F. cannot become a partner of a Partnership Firm. Section-4 of the
Partnership Act speaks of persons who enter into partnership with one another. It can
only be individuals and not a body of persons who can be a partner. If a Karta or any
other member of H.U.F. joins a partnership, he can do so only as an individual. His
rights and obligations will be same as other partners and are determined by
Partnership Act and not by Hindu Law.
2. Partnership as a partner:
Partnership can arise between ‘persons’. A partnership firm is not a legal
person and therefore a firm as such is not capable of entering into partnership with
another firm or individuals. The partners of a firm can however, enter into partnership
in their individual capacity with another individual.
3. Company as a partner:
The Partnership Act permits partnership between any two or more persons.
Such persons may be either natural or artificial. Thus, a partnership could be formed
between a numbers of companies. Though formations of a partnership with a
Company being a partner is a possibility under the Partnership Act, but there would
be practice difficulties in the working of such partnership from the point of view of
the provisions of Companies Act.
4. Insolvent as a partner:
The Partnership Act does not directly mentioned that only a solvent person can
become a partner. But section 34 states that when a partner is adjudicated as insolvent,
he ceases to be a partner. In view of this provision, only such person who is not
insolvent can become a partner. The reason for such a provision is that the interests of
the third parties do not suffer when they want to enforce their rights various partners.
Hence, a person who has been adjudicated insolvent cannot become a partner, and if
he is solvent when he becomes a partner, he ceases to be a partner, if and when he is
adjudicated insolvent.
4. Business: 
A partnership can be formed only for the purpose of carrying on some business,
‘Business’ includes every trade, occupation and profession. The object of the

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 partnership is to carry on any business, profession, vocation, trading or calling. Such
business must be lawful. Mere holding of property in common is not partnership, e.g.
co-ownership.
5. Profit Sharing:
 Sharing of profits is essential though it does not mean that all those who
participate in profits are necessarily partners. The object of partnership must be to
make profit. Profit means net profit. Profit must be distributed among the partners in
an agreed ratio. If any person claiming to be a partner is deprived of his right to share
in the profit of the business, he is not a partner as his carrying on the business is not
for profit. The sharing of profit also includes sharing of loss which in fact is negative
profit. But as between the partners, it may be agreed that one or more of the partners
shall not be liable for losses.
6. Mutual Agency:
 Each partner acts as an agent as well as a principal. Each one can act in the
course of business and bind the other partners by his acts. As such, he can be called an
agent. Since he is also bound by the acts of the other partners, he can be called the
principal. Thus, the law of partnership is a branch of the general law of agency as
every partner has implied power to bind other partners for the acts of the firm, done in
the course of conduct of the business.

MODE OF DETERMINING THE EXISTENCE OF PARTNERSHIP OR TEST OF

PARTNERSHIP:
In order to determine the existence of partnership between a group of persons, the
definition in Section-4 is used as a test, i.e., one must look to the agreement between them. If
the agreement is to share the profits of a business, and the business is carried on by all or any
of them acting for all, there is partnership, otherwise not. The difficulty arises when there is
no specific agreement constituting partnership among the partners, or the agreement is such
as does not specifically speak of partnership.
In determining whether a partnership exists or not or whether a person is a partner or
not the real relation between the parties as shown by all relevant facts, must be taken into
consideration.
The joint use of property in common in business for sharing of profits is evidence that
a partnership exists. But this is not conclusive evidence to show that a partnership exists.
Likewise, an active participation in the conduct of business is evidenced that a partnership
exists. But again, it is no conclusive evidence to establish the fact of existence of partnership.
For example, a servant may manage the affairs of a firm. Yet he is not a partner.
In the same way, a joint venture having no object of profit sharing is not a
partnership, while sharing of profits is evidence, though no conclusive, that a partnership
exists. So, Section 6 lays down that the receipt of a share of profit, or a payment contingent or
varying with the profits does not of itself, make the recipient a partner. Therefore, the true
test of partnership is no sharing of the profit, but whether the relationship of agency exists or
not.
Section 6 of the Partnership Act, 1932 determines the test of partnership
1. Real relation is the Basis:
The general principle which serves as a guide to determine whether a group of
persons does or does not constitute partnership as laid down in section is as follows:
“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, regard shall be had to the real relation between
the parties, as shown by all relevant facts taken together”.
2. Determination of Real Relation:

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 The real relation between the parties is to be determined from all the facts,i.e.,
written or verbal agreement, surrounding circumstances at the time when the contract
was entered into, conduct of the parties and other relevant facts, e.g., books of
account, correspondence, evidence of employees, etc. These facts are not considered
individually to ascertain the existence of partnership, but are taken collectively and
their cumulative effect is taken into consideration. In effect it is the substance of the
thing, and not the form, that has to be looked to. The parties may expressly state in a
document that they are not partners but they may turn out to be partners in the eyes of
the law, when all the other facts are taken into account. Again, a statement by the
parties in a document that they are partners may not necessarily constitute them
partners in law.
3. Mixed Question of Law and Fact:
Whether a genuine partnership exists or not is a mixed question of law and
fact. The fact that a partner was entitled to a fixed percentage of profits of the
firm only and not to share its losses and he was excluded from operating bank
accounts of the firm, were inconsequential to determination of the question.
 Cases where no Partnership relation:
Section- 6 enumerates, in its two explanations, cases where the Partnership
relation does not exist. These cases are:
1. Joint Owners sharing Gross returns: Joint owners of property sharing profits or gross
returns arising from the property do not become partners. For example: A and B
jointly purchased a tea shop, each of them have contributed a half of the expense
incurred for the purchase of pottery and utensils. They leased out the shop and shared
the rent equally. Held, they were co-owners and not partners.(Govind Nair v/s Maga
AIR, 1933).
2. Sharing Profits: the sharing of profits is prima facie a strong evidence of partnership
but the fact that there is sharing of profits between some persons will not
automatically make them partners. Therefore, receipt by a person of a share of the
profits of a payment contingent upon the earning of profits or varying with the profits
earned by the business, does not of itself make him a partner with the persons carrying
on the business, in particular, there is no partnership:-
1. Where a person has lent money to persons engaged or about to engage in
business, and receives a rate of interest varying with the profit.
For example: A advanced money to two merchants who agreed to carry on the
business subject to the control of A in several respects, A was to receive a
commission of 20 percent on all profits. Held, there was no partnership.
2. Where a person has lent money to persons engaged or about to engage in
business, and receives a rate of interest varying with the profit.
For example: A, a contractor for loading and unloading railway wagons,
appointed a servant to manage it. The servant was to receive 75 percent of the
profits and was to bear all losses, if any. It was held that the servant was the
agent of A and not his Partner
3. Where the widow or child of a deceased partner receives a portion of the
profits.
4. Where a person has sold his business along with its goodwill and receives a
portion of the profits in consideration of the sale
Although the sharing of profits of a business is a strong test of partnership. Yet
whether the relation of partnership does or does not exist must depend upon the
real intention and conduct of the parties.

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  Conclusion:
To conclude, one may say that the true test of partnership is not the sharing of
profits by a person or the contribution of capital or the holding of a particular property
jointly, but whether the business is carried on by him or by another on his account so
that there is mutual agency between them. If relation of principal and the agent exists
between the parties constituting a group, formed with a view to earn profits of a
business, we can say that there is partnership.

DURATION OF PARTNERSHIP:
Duration of the Partnership firm can be analysed under the following heads:
1. Partnership at will: 
Where the partners have not provided in their deed, for the duration of
partnership or for the termination of partnership, the partnership is called “partnership
at will”. A partner may retire to dissolve the partnership at his will, by giving a notice
to other partners, of his intention to do so.
According to Section 7- “Where no provisions are made by contract between
the partners for the duration of their partnership or for the determination of their
partnership, the partnership is ‘Partnership at Will’”. It may be dissolved by any
partner by giving a notice in writing to all other partners of his intention to dissolve
the firm. When such a notice is given, the firm is dissolved as from the date
mentioned in the notice as the date of dissolution or, if so mentioned as from the date
of communication of the notice. The notice should be an unambiguous intimation of a
final intention to dissolve the partnership, and should be served on all the other
partners; Notice once given cannot be withdrawn unless all the other partners agreed
to it.
In M.O.H. Uduman v/s M.O.H. Aslum (AIR 1991 SC 1020): The
partnership deed contained a clause to the effect that “the partnership shall continue
between the remaining partners unless all the partners mutually agree to determine the
relationship”. Considering this clause, the Court held that the partnership was not ‘At
Will’ and that it could not be dissolved by a partner by giving notice to the remaining
partners.
2. Particular partnership: 
According to Section-8 “a person may become a partner with another person
in particular adventures or undertakings, such a partnership is known as Particular
Partnership”. Thus, persons can be partners in the working out of a coal-mine or the
production of a film because although that may be a single adventure but the same
requires a series of transactions and continuous relationship. It comes to an end as
soon as that adventure is completed. If it is continued after the completion of that
adventure for which it was entered into, it becomes partnership-at-will. In such a case,
rights and liabilities of the partners in respect of the other adventures are the same as
those in respect of the original adventure or undertaking.
In K. Jaggaiah v/s Kokumanu: The plaintiff and the two defendants joined
together and obtained a contract for the maintenance of a road. There was held to be
partnership in the road building activity. Such activity though arising out of a single
contract was spread over a particular period and the firm had to employ certain
workers, supervise the work, prepare the bills and finalise the work and get the
approval from the Government and finally receive the bills, and all that meant
carrying on of business.
3. Partnership for a fixed term: 

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 Where the partners fix the definite period or duration of partnership, it is
called a partnership for a fixed term. Partners are free to decide as to how long
partnership between them shall continue. It may be a partnership for a fixed term,
say 2 years or 5 years, or it may be until the completion of certain adventure or
undertakings, for example, until the production of a firm. Sometimes the
agreement may stipulate about the determination (end) of the partnership on the
happening of certain event e.g., if the business runs into loss for consecutively five
years. When the partners have not decided about the duration of partnership, such
a partnership is known as partnership at will.

KINDS OF PARTNERS
            An outsider dealing with a firm have to ascertain in certain cases and particularly
when there is a default by the firm, as to what the partners are, and to what extent they are
liable. Thus following are different kinds of partners
1. Active Partner: 
An active partner is also called as actual partner. Active partner is one, who
takes active part in the conduct of the business. He becomes partner by an agreement
and his acts are binding on the firm. A person who becomes a partner by an
agreement and is actively engaged in the conduct of the business of the partnership is
known as an actual partner. He is the agent of the other partners in the ordinary course
of business of the firm. He binds himself and the other partners, so far as third parties
are concerned, for all the acts which he does in the ordinary course of the business
and in the name of the firm.
2. Dormant or Sleeping Partner: 
A sleeping partner is one, who invests capital and share profits or losses along
with other partners, but does not take any active part in the conduct of the business in
the firm. He is a partner who is not known to third parties as such. He does not take
active part in the conduct of business. He occupies the position of an undisclosed
principal. Hence, third parties can sue him on discovering that he is a partner. While
he has access to accounts and examines and verifies them, he has not duties to
perform. Hence no notice of his retirement to the public is necessary nor is the firm
dissolved when he becomes insane.
3. Nominal Partner:
A nominal partner is one, who allows the firm to use is name to gain benefit.
He neither invests capital nor claims share in the profits or takes part in the business.
He is not a partner in reality. However, he is liable or answerable for all acts of the
firms as if he were a partner. A nominal partner must be distinguished from a sleeping
partner.
4. Partner by Estoppel: 
Sometimes a person who is not a partner in a firm may, under certain
circumstances, be liable for its debts as if he were a partner. Such a partner is called a
partner by estoppel. Where a person causes, by his conduct, another to believe him to
be a partner and on that belief such other person gives credit to the firm, he is
estopped from denying that he is a partner.
Example: X, Y and Z are partners of a firm. X, in the presence and within the hearing
of A, represents to D that A is a partner of their firm. A does not contradict this
representation. A, on faith of that representation, lent Rs. 5000 to the firm, A, is liable
as a partner.
A retired businessman of some repute assumed the honorary presidentship of
the business of certain persons who requested him for the same. Held he was liable for

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 the debts of the firm to those who gave credit to the firm in the bona fide belief that he
was a partner.
5. Partner by Holding Out: 
 Where a person represents himself or allows others to represent him as a
partner of a particular firm, he becomes liable to all those who act and lend money to
the firm, on the faith of such representation. Example: A, represents himself as a
partner of a particular firm. D on the faith of the representation lends credit to the
firm. A becomes liable.
6. Minor Partners:
According to Section-11 of the Indian Contract Act 1872, an agreement by or
with a minor is void. As such, he is incapable of entering into a contract of
partnership. But according to Section 30 of the Partnership Act, with the consent of all
the partners for the time being, a minor may be admitted to the benefits of partnership.
This provision is based on the rule that a minor cannot be a promisor, but he can be a
promise or a beneficiary. It should, however, be noted that a new partnership cannot
be formed with a minor partner. Also, there cannot be partnership of minors among
themselves as they are incapable of entering into a contract.
The position of a minor partner may be studied under the following two heads:
1. Position before Attaining Majority:
A minor before attaining the age of majority he has some rights and liabilities.
 Rights of Minor: A minor before attaining the age of majority is entitled to certain
rights
(a) He has a right to such share of the property and of profits of the firm as may have
been agreed upon.
(b) He has a right to have access to and inspect and copy of any of the accounts of the
firm
(c) When he is not given his due share of profit, he has a right to file a suit for his
share of the property of the firm. But he can do so only if he wants to sever his
connection with the firm.
 Liabilities of Minor: A minor before attaining majority is not only entitled to rights
but also liable under the following circumstances
(a) The liability of the minor partner is confined only to the extent of his share in the
profits and property of the firm. Over and above this, he is neither personally
liable nor is his private estate liable.
(b) He cannot be declared insolvent, but if the firm is declared insolvent his share in
the firm vests in the Official Receiver or Official Assignee.

2. Position on Attaining Majority:

On attaining majority the minor partner has to decide within six months
whether he shall continue in the firm or leave it. These six months run from the
date of his attaining majority or from the date when he first comes to know that he
had been admitted to the benefits of partnership whichever date is later. Within
this period he should give a public notice of his choice:-
1. To become, or
2. Not to become, a partner in the firm.
If he fails to give the public notice, he is deemed to have become a partner in the
firm on the expiry of the said six months. The burden of proof that he had no
knowledge of his admission until a particular date after the expiry of six months of his
attaining lies on the person asserting that fact.
(1) When he Elects to Become a Partner:

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 (a) He becomes personally liable to third persons for all acts of the firm done
since he was admitted to the benefits of partnership.
(b) His share in the property and profits of the firm is the share to which he was
entitled as a minor partner.
(2) When he Elects not Become a Partner:
(a) His rights and liabilities continue to be those of a minor up to the date of the
notice.
(b) His share is not liable for any acts of the firm done after the date of the public
notice.
(c) He is entitled to sue the partners for his share of the property and profits in the
firm.

DIFFERENCE BETWEEN PARTNERSHIP AND OTHER ASSOCIATIONS

PARTNERSHIP AND HINDU JOINT FAMILY

A business in Hindu Law is a heritable asset, if an ancestral business descends on
the members of a joint family, or if they start a common business out of the joint finds
at any time after the death of the ancestors such a business is called a joint family
business. The members of a Hindu joint family business as such are not partners in
such business. The points of distinction between the two are as follows:
1. Mode of Creation: Partnership is essentially the result of an agreement. A Joint
Hindu family arises from status and is not the result of an agreement. It arises by
operation of law.
2. Interest in the Business: in Partnership a person does not acquire interest in
partnership business by birth. It is the result of an agreement. In a Joint Hindu
family business, the male members acquire interest by birth.
3. Admission of New Members: in Partnership, a new partner can be admitted only
with the consent of all the partners. In a Joint Hindu family business, a male
becomes a member merely by birth.
4. Authority of Members: In Partnership each partner has implied authority to bind
the firm by acts done in the ordinary course of the business of the firm. In a Joint
Hindu family business, only the Karta has implied authority to contract debts and
pledge the credit and the property of the family for the ordinary purposes of the
family business.
5. Liability of Members: In Partnership, the liability of the partners is unlimited.
The share of each partner in the partnership property along with his private
property is liable for the discharge of partnership liabilities. In a Joint Hindu
family business, the Karta is personally liable for the debts of the family whereas
other members are liable only to the extent of their interest in the joint Hindu
family business. The other members are personally liable if they are also
contracting parties.
6. Right of Members to Demand Account: In Partnership, every partner has a right to
have access to and inspect and copy of the books of the firm and ask for the
accounts of profits and losses. The members of a Joint Hindu family business
cannot ask the Kart of the family for the accounts of his past dealings concerning
the family business; similarly, they cannot ask the Karta for accounts of profits
and losses.
7. Registration: In case of a partnership, it is not compulsory that it should be
registered. But, indirectly, law has made registration compulsory because an

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 unregistered firm suffers from certain disabilities. A Hindu joint family business
does not require any such registration.

PARTNERSHIP AND CO-OWNERSHIP:

Co-ownership means joint ownership of some property which does not necessarily
result in partnership. In partnership the partners are necessarily co-owners of the property of
the firm, but in co-ownership the co-owners are not necessarily partners. The followings are
the points of differences between the two:
1. Mode of Creation: Partnership is necessarily the result of an agreement. Co-ownership
may or may not arise from agreement, it may also arise by status.
2. Business: Business is necessary for the existence of partnership. Co-ownership can
exist without it.
3. Nature of Interest: Partnership involves community of interest whereas co-ownership
may not necessarily involve any such interest.
4. Transfer of Interest: A partner cannot transfer his share to a stranger without the
consent of the other partners. A co-owner can. When a co-owner transfers his share,
the transferee becomes vis-a-vis the other co-owner who transfer his share.
5. Number of Members: In partnership, the number of members cannot exceed the
statutory limit. In co-ownership there is no limit on maximum number of members.
6. Authority of Members: A partner is the agent of his co-partners. A co-owner is not the
agent of the other co-owners.
7. Partition of Property: A partner cannot sue for the partition of partnership property but
he can sue his co-partners for the dissolution of the firm and accounts. A co-owner
can sue for the partition of the property.
8. Lien for Expenses: A partner has a lien on the partnership property for expenses
incurred by him on such property on behalf of the firm. A co-owner has no such lien.

PARTNERSHIP AND COMPANY:

1. Separate Legal Entity: In a Partnership the persons who have entered into partnership
are individually called partners and collectively a firm. A Partnership firm, therefore,
is merely a collective name of the partners. A partnership firm does not have a
separate legal personality. A Company is a legal entity different from its members.
2. Perpetual Succession: A partnership firm means all the partners put together, if all the
partners ceases to be partners, e.g., all of them die or become insolvent, the
partnership firm gets dissolved. A company being a person different from the
members of the company, the members may come and members may go but the
company goes on forever, its life cannot be affected thereby.
3. Transfer of Shares: The shareholders of a company can transfer his share to anybody
he likes but a partner cannot substitute another person in his place unless all the
partners agree to the same. Similarly, on the death of the member of a company his
legal representatives will step into his shoes for the purpose of the rights in the
company, but on the death of a partner his legal representatives do not get substituted
in his place in partnership.
4. Number of Members: The minimum number of members in a partnership is two and
maximum in case of partnership carrying on banking business is 10 and in case of any
other business is 20. In the case of a Private Company minimum number of member is
2 maximum is 200 whereas in the case of a Public Company the minimum number of
members is 7 maximum is unlimited.
5. Liability: The liability of the members of a company is limited but the liability of the
partnership is unlimited.

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RELATION OF PARTNER TO ONE ANOTHER

Chapter III (Sections 9 to 17) of the Partnership Act, 1932, contains provisions
concerning ‘Relations of Partners to One Another’, i.e., the rights and duties of the partners
as between themselves.

Section 11 of the Act contains the general rule that the mutual rights and duties of the
partners and the relations of the partners of a firm to one another are usually governed by the
agreement among them. Such agreement may be express or implied from the course of
dealings among them. It may be varied by consent of all of them, and such consent may be
expressed or may be implied by a course of dealings. Where there is no specific agreement or
where the agreement is silent on a certain point, the relations of partners to one another as
regards their rights and duties are governed by Partnership Act.

As it has been noted above, this Section incorporates the general principle that the
mutual rights and duties of the partners may be determined by a contract between themselves.
They may themselves decide that how much investment or labour is to be put by whom, or
whether a partner will be entitled to any remuneration, apart from sharing the profits or what
will be the profit sharing ratio, etc., etc. such contract may be express or implied by a course
of dealing.

In Pabitra Construction Co. v/s UCO Bank (AIR 2008 Cal 103), three partners
opened a joint account with the respondent Bank with special instruction that any of the two
partners would be entitled to operate the bank account. In the course of the business
transaction, dispute arose between them and one of them gave written instruction to the
respondent bank, not to clear any cheque unless all the partners jointly operate the account in
deviation from the earlier instruction. The Bank, in view of such instruction, refused to clear
two cheques issued by two of the partners. The action taken by the Bank was held as quite
justified by the Calcutta High Court.

The Court explained that in a partner-business, all the partners were equally interested
in case of profit and loss arising out of business and if all the three partners jointly opened an
account and even give instruction to stop further transaction unless the dispute among them
was resolved. The Court held that if one of the joint account-holders decided to change the
mode of operating the account, which was initially agreed to by the parties, the Bank should
not continue with the account based on the instruction initially given to it so long the dispute
was not settled by the parties.

The right of the partners to make any contract to regulate their mutual rights and
duties is subject to the provisions of the Partnership Act.

RIGHTS OF A PARTNER
It has been noted above that various rights and duties of the partners contained in
Sections 9 to 17 are ‘Subject to Contract between the Partners’. Therefore, unless it has been
agreed otherwise, the following rights as contained in the above mentioned provisions are
there:

11
1. Right to take part in Business
The partnership agreement usually provides the mode of the conduct of the
business. Subject to pay such agreement between the partners, every partner has a
right to take part in the conduct of business [Sec. 12(a)]. This is based on the general
principal that partnership business is the common business of all the partners. The
partners are free to provide in their agreement that only some of them will take part in
the conduct of the business and certain other partners will not. If such a right is
wrongly denied to a partner, he can seek the enforcement of the right through a court
of law. If the right to manage the business has been conferred on only some of the
partners, they alone will be entitled to this right. But where a partner neglects or
refuse to perform his duties, and the burden of performing such duties for the conduct
of the business falls on other partners, the other partners have a right to compensation.
2. Right to be Consulted
Every partner has an inherent right to be consulted in all matters affecting the
business of the partnership and express his views before any decision is taken by the
partners. Where there is any differences of opinion among the partners as to ordinary
matters connected with the business, it may be settled, subject to contract between the
parties, by a majority of the partners. The majority of the partners in exercising their
power must act in good faith, and before the matter is decided every partner must
have expressed his opinion. If the partners are equally divided those who forbid the
change must have their way. But as to important matters concerning the nature of
business, no change may be effected without the consent of all the partners.
3. Right of Access to Accounts
Subject to contract between the partners, every partner has a right to have access
to and inspect and copy any of the books of the firm. This right is available to both
active partner and dormant partners. This right is not only in respect of books of
accounts but in respect of any books of the firm. A partner could exercise this right
either personally or by engaging an agent for the purpose. A minor partner may have
access to and inspect any of the accounts of the firm but not books.
4. Right to Share in Profit
In the absence of any agreement, the partners are entitled to share equally in the
profits earned and are liable to contribute equally to the losses sustained by the firm.
Every partner has a right to share the profits. Generally, the partners provide in their
agreement as to what will be the proportion in which they will share the profits.
For example: In a firm of three partners, it may be agreed that the profit sharing
proportion will be 2/4: 1/4: 1/4. According to Section 13(b), in the absence of any
such agreement, the partners are to share the profits equally and also to contribute
equally to the losses sustained by the firm and not in the proportion in which various
partners contribute capital. If any partner alleges that their shares are unequal, he has
to prove an agreement to that effect.
5. Right to Interest on Capital
The partnership agreement may contain a clause as to the right of the partners to
claim interest on capital at a certain rate. Such interest, subject to contract between the
partners, is payable only out of profits, if any, earned by the firm.
6. Right to Interest on Advances
Generally, no interest on capital subscribed by the partners is to be given because
the partners share the profits of the business of the firm. In case the partners agree that
interest on capital is to be given, according to section 13(c), such interest shall be
payable only out of profits. Where a partner makes, for the purposes of the business
of the firm, any advance beyond the amount of capital, he is entitled to interest on

12
 such advance at the rate of six per cent annum. Such interest is not only payable out of
the profits of the business but also out of the assets of the firm.
7. Right to be Indemnified
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. Such acts of the partner bind the
firm. If as a consequence of any such act, the partner incurs any liability or makes any
payment, he has a right to be indemnified.
8. Right to the Use of Partnership Property
Subject to contract between the partners, the property of the firm must be held and
used by the partners exclusively for the purposes of the business of the firm. No
partner has a right to treat it as his individual property. If a partner uses the property
of the firm directly or indirectly for his private purpose, he must account to the firm
for the profits which he may have earned by the use of that property.
9. Right of Partner as Agent of the Firm
Every partner for the purposes of the business of the firm is the agent of the
firm. And subject to the provisions of the Indian Partnership Act 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.
10. No New Partner to be Introduced
Every partner has a right to prevent the introduction of a new partner unless he
consents to that or unless there is an express term in the contract permitting such
introduction. This is because partnership is founded on mutual trust and confidence.
11. No Liability before Joining
A person who is introduced as a partner into a firm is not liable for any act of the
firm done before he became a partner.
12. Right to Retire
A partner has a right to retire (a) with the consent of all other partners, or (b) in
accordance with an express agreement between the partners, or (c) where the
partnership is at will, by giving notice to all the other partners of his intention to
retire.
13. Right of Outgoing Partner to Share in the Subsequent Profits
Where a partner has died, or has ceased to be a partner by retirement,
expulsion, insolvency, or any other cause, the surviving or continuing partners may
carry on the business with the property of the firm without any final settlement of
accounts as between them and the outgoing partner or his estate. In such a case, legal
representative of the deceased partner or the outgoing partner is entitled to such share
of the profits as is proportionate to his share in the property of the firm or interest at
the rate of 6 % per annum on the amount of his share in the property of the firm.
14. Right not to be Expelled
A partner has a right to not to be expelled from the firm by any majority of the
partners, save in the exercise in good faith of powers conferred by the contract
between the partners.

DUTIES OF A PARTNER
Partnership is a contract of uberrimae fide. The partners must act with utmost good
faith as the very basis of partnership is mutual trust and confidence. According to Sec. 9,
which deals with the general duties of partners, partners are bound –
(a)  To carry on the business of the firm to the greatest common advantage,
(b)  To be just and faithful to each other, and

13
(c)  to render true accounts and full information of all things affecting the firm to any partner
or his legal representative.
The other duties are spread over the Partnership Act. These duties are summed as
under:
1. To carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest common
advantage. He is bound, in all transactions affecting the partnership, to do his best in
the common interest of the firm. He must share with other partners any benefit which
he may have been able to obtain from other people and in which the firm is in honour
and conscience entitled to participate.
In Bentley v/s Craven: B and C were partners in a business as sugar refiners. C
was authorised to buy sugar for the firm. He, without B’s knowledge, supplied to the
firm his own sugar at the market price. He had bought the sugar at a lower price and
thus made a considerable profit. Held, he must account to the firm, for the profit
made.
2. To be Just and observe faithful to each other
Partnership is a fiduciary relation. Every partner must be just and faithful and
observe utmost good faith towards every other partner of the firm. Good faith requires
that he shall not obtain a private advantage at the expenses of the firm. He is bound, in
all transactions affecting the partnership, to do his best in the common interest of the
firm.
3. To indemnify for fraud
Every partner is bound to indemnify the firm for any loss caused to it by his fraud
in the conduct of the business of the firm. This is an absolute duty of a partner and no
partner can contract himself out of it. The innocent partners of the firm are, however,
liable to third parties for the fraud of any partners. But they can proceed to claim
damages against the partner who has committed the fraud.
4. To attend diligently
It is the duty of every partner to attend diligently to his duties in the conduct of the
business of the firm [Sec. 12b], and to use his knowledge and skill to the common
advantage of all the partners.
5. Not to claim remuneration
A Partner is not entitled to receive any remuneration in any form for taking part in
the conduct of the business of the firm. It is however, usual to allow some
remuneration to the working partners provided there is a specific agreement to that
effect.
Where a pardanashin lady was a partner, it was held that it was just and reasonable
that some allowances must be made to the other partners for the trouble they took in
running the business of the firm. Similarly, where undue labour and extra trouble is
imposed on one partner by another partners wilful neglect of the business to which he
ought to attend, he is entitled to compensation.
6. To share losses
It is the duty of every partner to contribute to the losses of the firm. In the absence
of an agreement to the contrary, the partners are bound to contribute equally to the
losses sustained by the firm. An agreement to share profits implies an agreement to
share losses also.
7. To indemnify for wilful neglect
Every partner is bound to indemnify the firm for any loss caused to it by his wilful
neglect in the conduct of the business of the firm. The firm is however, liable to the
third persons for the wilful neglect or fraud of any of the partners.

14
 8. To hold and use property of the firm exclusively for the firm
It is the duty of every partner of the firm to hold and use the property of the firm
exclusively for the purposes of the business of the firm. The partners may agree
differently but, in such a case, there should be a specific agreement to that effect.
9. To account for personal profits
If a partner derives any benefit, without the consent of the other partners, from
partnership transactions, he must account for it and pay it to the firm. This is because
the relationship between partners is a fiduciary relationship and no partner is entitled
to make any personal profit.
For Examples (a) A,B and C carry on business of partnership as merchants. D, to
whom they send goods for sale on commission, secretly allows C a share in the
commission which he receives in consideration of C using his influence to send
consignments to him, A and B come to know of the secret share of C. They can be
compel C to render account to the firm for the money so received by him.
10. To account for profit in competing business
A partner must not carry on any business of the same nature as competing with
that of the firm. If he does that he is bound to account for and pay to the firm all
profits made by him in that business. This is, however, subject to contract between the
partners.
For Example: A and B are partners in business which consists of supplying meat
to the government. Subsequently, it is found that A is engaged with C in the supplying
of meat to the same Government. A is bound to account to the firm for the profits so
made by him.
11. To act within authority
Every partner is bound to act within the scope of his actual or implied authority.
Where he exceeds the authority conferred on him and the firm suffers a loss, he shall
have to compensate the firm for any such loss.
12. To be liable jointly and severally
Every partner is liable, jointly with all the other partners and also severally, for all
the acts of the firm done while he is a partner. 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. Any other act or omission is not covered by
the term act of the firm.
13. Not to assign his rights
A partner cannot assign his rights and interest in the firm to an outsider so as
to make him the partner of the firm. He can, however, assign his share of the profit
and his share in the assets of the firm.

RELATION OF PARTNERS TO THIRD PARTIES

The relation between partners on the one hand and the third parties on the other is
founded on the principle contained in section 18. Every partner is the agent of the firm for the
purposes of the business of the firm. He can act on behalf of the firm and bind the firm
provided (a) he does the act for carrying on, in the usual way, business of the kind carried on
by the firm, and (b) the act is done in the name of the firm.

Implied Authority of a Partner

The authority of a partner means the capacity of a partner to bind the firm by his act.
This authority may be express or implied. Where the authority to a partner to act is expressly
conferred by an agreement, it is called express authority. But, where there is no partnership
agreement or where the agreement is silent. “the act of a partner which is done to carry on, in

15
the usual way, business of the kind carried on by the firm, binds the firm”. This authority of a
partner to bind the firm is called his implied authority. It flows from the legal relations of the
partners and is founded on the principle of agency.
Implied Authority and Third Parties
1. Extension and Restriction of a Partner’s Implied Authority
The partners in a firm may, by contract between them, extend or restrict the
implied authority of any partner. So far as a third party is concerned, the firm continue
to be liable to him for any such act which falls within the scope of the implied
authority of a partner unless the person with whom the partner is dealing either knows
that the partner has limited or no authority or does not know or believe that partner to
be a partner. The third party is also affected by a secret restriction of the implied
authority of a partner unless he has notice of it.
2. Effect of Admissions by a Partner
Where a partner makes any admission or representation concerning the affairs
of the firm, it is sufficient evidence against the firm provided the admission or
representation is made in the ordinary course of business. This follows from the
general rule that the partners are agents of each other for the purpose of carrying on
the business of the firm.
3. Effect of Notice to an Acting Partner
Notice to a Partner, who habitually acts in the course of a business of the firm,
of any matter relating to the affairs of the firm operates as notice to the firm except in
the case of a fraud on the firm committed by, or with the consent of, that partner. This
follows from the general rule that a notice to an agent of matters relating to his agency
is notice to the principal.
4. Liability of a Partner for Acts of the Firm
Every partner is liable, jointly with all the other partners and also severally, for
all acts of the firm done while he is a partner. The significance of joint and several
liabilities is that for every act of the firm a partner can be sued individually and also
jointly with other partners.
5. Liability of the Firm for Wrongful acts of a Partner
Where, by the wrongful act or omission of a partner acting in the ordinary
course of the business of the firm, or with the authority of his partners, loss or injury
is caused to any third party, or any penalty is incurred, the firm is liable therefore to
the same extent as the partner.
6. Liability of Firm for Misapplication
A firm is liable to make good the loss where—
(a) a partner acting within the scope of his apparent authority receives money
or property from a third party and misapplies it; or
(b) the firm in the course of its business receives money or property from a
third party, and the same is misapplied by any of the partners while it is in
the custody of the firm.

16
REGISTRATION OF FIRMS
Chapter VII (Sections 56 to 71) deals with the registration of Partnership Firms. The
Partnership Act does not provide for the compulsory registration of firms. And it does not
impose any penalties for non-registration. It has left it to the option of the firms to get
themselves registered. But indirectly, by creating certain disabilities from which an
unregistered from suffers, it has made the registration of firms compulsory. These disabilities
are such that, sooner or later, every firm has to get itself registered. However, registration
does not create partnership; it is only a reliable evidence of the existence of partnership. It
also affords protection to outsiders dealing with the firm
PROCEDURE FOR REGISTRATION (Sections-58 and 59)
The registration of a firm may be affected at any time by filling an application in the
form of a statement, giving the necessary information, with the Registrar of Firms of the area.
Section 57 empowers a State Government to appoint Registrars of Firms for the purposes of
the Partnership Act and define the areas within which they shall exercise their powers and
perform their duties.
The application for registration of a firm shall be accompanied by the prescribed fee.
It shall state:
(a)  the name of the firm
(b)  the place or principal place of business of the firm
(c)  the names of other places where the firm carries on business
(d)  the date when each partner joined the firm
(e)  the names in full and permanent address of the partners
(f)   the duration of the firm.

 The statement shall be signed by all the partners or by their agents specially
authorized in this behalf. Each partner signing the statement shall also verify it in the
manner prescribed. It shall also be verified by them in the prescribed manner [Sec.
58(2)].
 When the Registrar is satisfied that the above provisions have been duly compiled
with, he shall record an entry of the statement in the Registrar of Firms  (maintained
by Registrar of Firms in respect of each registered firm for recording the necessary
information relating to that firm) and file the statement (Sec. 59).
 He shall then issue under his hand a certificate of registration. Registration is effective
from the date when the Registrar files the statement and makes entries in the Register
of Firms.
 Name of the firm should not contain any words which may express or imply the
approval or patronage of the government except where the government has given its
written consent for the use of such words as part of the firm name.
  Under Section 59 of the Act, when the Registrar of Firms is satisfied that the
provisions of section 58 have been duly complied with, he shall record an entry of the
statement in the Register of Firms and issue a Certificate of Registration.

Time of Registration:
A firm may get registered at any time after the creation of partnership. It is not
necessary that it should be registered at the time of its formation, moreover, the Act does
not lay down any time limit within which the firm should be registered. Therefore, there
is no period of limitation either for the original registration, or recording of subsequent
changes as contemplated in Section 63 of the Act. Thus, the concept of any limitation
period or that of reasonable time cannot be introduced either for original registration or

17
 for subsequent changes in a firm. Hence, any legislation by the State Government laying
down any time limit either for original registration or for recording of subsequent changes
will be ultra virus the Partnership Act and therefore, bad in law. The Registrar of Firms
cannot reject an application for recording changes in the constitution of the firm on the
ground of inordinate delay in submitting the application.
Penalty for furnishing false particulars (Section 70)
Any person who signs any statement, amending statement, notice or intimation under
this Chapter containing any particular which he knows to be false or does not believe to be
true or containing particulars which he knows to be incomplete or does not believe to be
complete, shall be punishable with imprisonment which may extend to three months, or with
a fine or with both.
Any alterations, subsequent to Registration shall be notified to the registrar
 Change in firm name and principal place of business (Section 60) shall require
sending of a new application form along with the prescribed fee, duly signed and
verified by all the partners.
  Change relating to opening and closing of branches. (Section 61)
 When a registered firm discontinues business at any place or begins to carry on
business at any place, such place not being its principal place of business, any partner
or agent of the firm may send intimation thereof to the Registrar.
  Change in the name and permanent address of any partner (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
 Change in the constitution of the firm and its dissolution [Section 63(1)]
 When change occurs in the constitution of the firm, any of the new, continuing or the
outgoing partner, while when a registered firm is dissolved , any person who was a
partner immediately before the dissolution or the agent of any such partner or person
specially authorized on his behalf, may give notice of such a change to the Registrar,
specifying the date thereof.
 Under Section 63(2), when a minor who has been admitted to the benefits of
partnership in a firm attains majority and elects to become or not to become a partner,
he or his agent specially authorized in this behalf, may give notice to the Registrar
that he has or has not become a partner.

EFFECTS OF NON-REGISTRATION (SEC. 69)

It may be noted that the Partnership Act neither makes the registration of firm
compulsory nor does it impose any penalties for non-registration. However, it provides
certain disabilities for an unregistered firm and the partners of such a firm or the partners
whose names have not been shown as registered partners even though the firm is registered.
Section 69(1) provides that no suit can be instituted to enforce rights arising from a
contract or conferred by the Partnership Act by any partner against co-partners or against the
firm. Similarly, according to Section 69(2), no suit can be instituted to enforce any right
arising from a contract by an unregistered firm against any third party.
The idea behind making these provisions is that in their own interest, the partners may get
the firm registered and thereby the interest of the third parties with whom the firm may be
dealing may be protected. The procedure for registration is very simple and disabilities being
too compelling that generally the partners would like to get the firm registered at one time or
the other. The disabilities on non-registration of a partnership firm and the exceptions thereto
may be noted.
18
 1. Suits between partners and firm: A person suiting as a partner of an unregistered
firm cannot sue the firm or any partners of the firm to enforce a right from a contract
or conferred by the Partnership Act. He can do so if-
(i) The firm is registered, and
(ii) The person suing is or has been shown in the Register of Firms as a partner
in the firm.
Thus, there should be registration of a firm, and the person suing is or has been shown in
the Register of Firms as partners in the firms. The firm is registered when the entry of the
statement is recorded in the Register of Firm and the statement is filed by the Registrar as
provided by Section 59.
This provision bars a suit between partners or between partners and the firm if the firm is
unregistered. Even if the firm is registered only such partners can sue whose names appear in
the Register of Firms. Therefore, if some partners joins after the firm with certain other
partner has already been registered, unless the newly introduced partners are also shown in
the Register of Firms, they suffer from the disability because only the registered partners can
get benefit of decree.
In Oriental Fire & General Insurance Co. Ltd v/s Union of India: It has been held that
when a firm takes an insurance policy on a motor vehicle belonging to the firm, the claim
under that policy arises out of a contract of Insurance, rather than out of status, i.e., the
Insurance Act, and therefore, the same cannot be enforced by filing a suit if the firm is
unregistered.
In Sapna Ganglani v/s R.S. Enterprise, in a suit seeking enforcement of contract by the
partnership firm, the plaint filed by authorised signatory of firm who was not a partner but the
authorisation was given to him by the partners of the said firm, it was held to have valid
authority even if signed by only one of the partners of the firm.
2. Suits between firm and third parties: An unregistered firm cannot sue a third party
to enforce a right arising from a contract until –
(i)  the firm is registered, and
(ii)   the names of the persons suing appear as partners in the Register of Firms
[Sec. 69(2)]
To enforce the rights against third parties, it is not enough that the firm is registered; it
is further necessary that “the person suing is or has been shown in the Register of Firms
as a partner in the firm”.
In Muthu Kumaraswami v/s Kumar Textile, it has been held that the provision
contained in Sec 69(2) is mandatory, and registration of the firm is a condition precedent
to its right to institute a suit. Even if the defendant does not arise an objection, the
provision contained in Section 69 cannot be flouted. The trial Court is to find if the
plaintiff firm is registered and for that purpose the court should enable the parties to
adduce evidence to that effect.
In Gandhi & Co. v/s Krishna Glass Pvt. Ltd, it was held that if the name of the
partners had not been shown in the Register of Firms, the suit filed by the Partnership
Firm must fail.
3. Claim of set-off: An unregistered firm or any partner thereof cannot claim a set-off in
a proceeding instituted against the firm by a third party to enforce a right arising from
a contract, until the registration of the firm is effected [Sec. 69(3)]. This right of set-
off, however is not affected if the claim of set-off does not exceed Rs. 100 in value.
Non- registration, however, does not affect-
1. The right of a firm or partners of a firm having no place of business in India.

19
 2. The right to any suit or claim of set-off not exceeding Rs. 100 in value.
3. The right of a partner to sue for the dissolution of the firm, or for the accounts of
the dissolved firm, or for share of the property of the dissolved firm
4. The powers of an Official Assignee, Receiver or Court to realise the property of
an insolvent partner of an unregistered firm.
5. The right of a third party to proceed against an unregistered firm or any of its
partners.
6. The right of an unregistered firm to enforce a right arising otherwise than out of a
contract.

RECONSTITUTION OF A FIRM
Chapter V (Sections 31 to 38) of the Partnership Act contains provisions with regard
to reconstitution of a firm. A partnership firm is said to be reconstituted when any of the
following changes occurs and the firm continues:
1. Introduction of a Partner/ Incoming Partners (Section-31) : Subject to Sec-30, a
person may be admitted as a new partner by following ways :-
(a) With the consent of all the existing partners, or
(b) In accordance with a contract already entered into between the existing partners
for the admission of a new partner.
 Introduction with the Consent of a Partner:
The relationship between the partners is based upon mutual confidence and
trust. For the harmonious working of a partnership, it becomes necessary that a new
partner should not be introduced without the consent of all the partners. This Section
therefore, provides the general rule that no person shall be introduced as a partner into
the firm without the consent of all the existing partners.
 Introduction in Accordance with a Contract between the Partners:
The rule stated above is subject to contract between the partners. If a contract
between the partners permits the introduction of a new partner even without the
consent of all the existing partners that can possibly be done.
 Liability of incoming Partners:
An incoming partner does not become liable for any act of the firm done prior to
his admission as a partner. This is because the old partners were not the agents of the
new partner at the time when they acted. But by mutual agreement, the new partner
may agree with the old partners to be liable for the past liabilities of the firm. This
does not, however, give a right to the creditors of the firm to proceed against the new
partner for the recovery of their past debts. This is because he was not in existence, as
principal, at the time when the acts were done. He is liable for the acts of the old firm
only if:-
(i) The new firm assumes the liabilities of the old firm and,
(ii) The creditors accept the new firms as their debtor and discharge the old
firm its liability.

2. Outgoing Partner (sec-32 to 38)

Sections 32 to 38 deals with different ways in which a partner may cease to be
a partner and his rights and liabilities thereafter. These provisions pertain to situations
when the outgoing partners cease to be a partner, but the firm is not dissolved and it
continues with the remaining partners. A partner may cease to be a partner in the
following ways:-

20
 1. By Retirement,
2. By Expulsion,
3. By Insolvency, and
4. By Death.
1. By Retirement (Section-32):
Retirement here means voluntary withdrawal of a partner from thr firm, as
opposed to expulsion, when a partner is made to quit. It covers such cases where on
the withdrawal of a partner from the firm, the firm is not dissolved but the business of
the firm is continued with the remaining partners.
A partner may retire from a firm—
(i) With the consent of all the other partners
(ii) In accordance with an express agreement by the partners, or
(iii) Where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.
In Usha Gopirathnam v/s Shri P.S. Ranganathan, a partner gave notice, by
letter, written to another partner who habitually was acting in business of the firm,
expressly stating that he was desirous of retiring from the firm and that his accounts
also be settled by assessing assets and liabilities of the firm. It was held to be clear
expression of his intention to retire.
 Liability for acts done before Retirement [Section 32(2)]
Every partner is liable for all acts of the firm done while he is a partner. If
liability has arisen during the period while a person was a partner, such liability does
not come to an end by his retirement. According to section 32 (2), however, this is a
possibility of discharge of the outgoing partner from liability for the past acts.
 Liability for acts done after Retirement[Section 32(3)]
By retirement of a person ceases to be a partner. The third parties can still
presume mutual agency between the outgoing partner and the continuing partners
until a public notice of retirement is given. Therefore, provides that in the absence of
a public notice, the outgoing partners and the continuing partners continue to be liable
for the act of each other towards third parties.

2. Expulsion of a Partner(Section-33)
It has been expressly provided in Section 33 that ‘a partner may not be
expelled from a firm by any majority of the partners, save in the exercise in good faith
of powers conferred by contract between the partners”. A partner may be expelled
from partnership subject to the following three conditions:
 The power of expulsion of a partner should be conferred by the contract
between the partners.
 The power should be exercised by a majority of the partners.
 The power should be exercised in good faith.
No expulsion is possible unless a power to that effect has been conferred by a
contract. This power must be exercised in good faith for the general interest of the
whole firm. If the power to expel has been exercised bona fide the same cannot be
challenged in a court of law.
 Liability of an Expelled Partner:

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 As regards liability towards third parties for act of the firm done either before
or after expulsion, the position, of the expelled partner is exactly the same as that of a
retired partner. It means that:
(i) He continues to be liable for the acts of the firm done before his
expulsion, unless he is discharged from liability by following the
procedures mentioned in section 32(2); and
(ii) He can be made liable towards third parties for the acts of the firm
done after expulsion unless a public notice of the expulsion has been
given.

3. Insolvency of a Partner(Section-34)
Where a partner in a firm is adjudicated insolvent, he ceases to be partner on
the date on which the order of adjudication is made, whether or not the firm is thereby
dissolved. The other effects resulting from the insolvency of a partner are as follows:
 The firm is dissolved on the date of the order of adjudication but the partners may
specifically provide that on such a contingency the firm shall not be dissolved.
 The estate of the insolvent partner is not liable for the acts of the firm done after the
date of the order of adjudication. A public notice to the effect that a partner has been
adjudicated insolvent is not required.
 The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication.
4. Death of a Partner(Section-35)
Subject to contract between the partners, a firm is dissolved by the death of a
partner where under a contract between the firm is not dissolved by the death of a
partner, the estate of the deceased partner is not liable for any act of the firm done
after his death. No public notice is required of the death of a partner. Whether the
dissolution of the firm takes place or not, the estate of the deceased partner is not
liable for the acts of the firm done after his death. As regards the liability of his estate
for the acts of the firm done after his death, the position is the same as in the case of
an insolvent partner. If the firm is not dissolved on the death of a partner, the estate of
the deceased partner is not liable for acts of the firm done after his death. No public
notice is required to be given on the death of a partner.

DISSOLUTION OF FIRMS
The partnership may be voluntarily dissolved at any time with the mutual consent of
the partners. In such an eventuality, the withdrawing partner should move reasonably swiftly
to facilitate the liquidation. In case a partner was to die, the remaining partners will have the
option to either liquidate the partnership or to buy out the share of the deceased partner.
Dissolution of a firm implies dissolution of the partnership between all partners of a firm. It
may be by agreement, compulsory, due to contingency, by will and by the court.
Section 39 of the Indian Partnership Act lays down that the dissolution of partnership
between all the partners of a firm is called the “dissolution of the firm”.  This is different
from the dissolution of partnership. A partnership may be dissolved without dissolution the
firm. But dissolution of firm involves dissolution of partnership. In the firm of A, B and C, if
C dies or retires the firm will be dissolved. But A and B may take in D and continue doing
the business. This new firm of A, B and D is called the new or reconstituted firm.
Dissolution of partnership means coming to an end of the relation known as
partnership, between various partners. When one or more partners cease to be partners but

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others continue the business in partnership, there is dissolution of partnership between the
outgoing partners on the one hand and remaining partners on the other.

Dissolution of Firm: It means complete breakdown or extinction of the relationship of

partnership between all the partners of a firm. If this breakdown or severance of partnership
relation is between a few and not all the partners, this amounts to dissolution of partnership
and not the firm.

Dissolution of Partnership: It involves only a change in the relation of the partners. For
example, if there is a partnership between A, B, and C and C, retires. The partnership
between A and C comes to an end and partnership between A and B comes into being. The
new firm with A and B as its partners is called reconstituted firm. Thus retirement of a
partner from firm does not dissolve the firm. It merely serves the partnership relation between
the retiring partner and the continuing partners. It leaves the partnership amongst the
continuing partners unaffected and the firm continues with the changed constitution.

Modes of Dissolution of Firm(Section 40 to 44)

Dissolution without the Order of Court Dissolution by the Order of Court

1. By Agreement 1. Unsoundness of Mind

2. Compulsory Dissolution 2. Permanent Incapacity to Perform Duties
3. On the Happening of certain 3.Misconduct of the Partners
Contingence
4. Persistent Breach of Partnership
Agreement.
4. By Notice 5. Transfer of Interest
6. Business Working at Loss
7. When Dissolution is Just and Equitable

DISSOLUTION WITHOUT THE ORDER OF COURT:

It may takes place in one of the following ways:

1. BY AGREEMENT (Section40) :
A firm may be dissolved either:-
(i) With the consent of all the partners, or
(ii) In accordance with a contract between the partners.
As partners can create partnership by making a contract as between them, they
are also similarly free to end this relationship and thereby dissolve the firm by their
mutual consent. When all the partners so agree, they may dissolve the firm at any time
they like. Sometimes there may have been a contract between the partners indicating
as to when and how a firm may be dissolved, a firm can be dissolved, in accordance
with such a contract. For example, if the contract between the partners provides that
on a 6 months’ notice by a partner the firm may be dissolved, then in accordance with
this contract, a partner could give 6 months notice and get the firm dissolved.

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2. BY COMPULSORY DISSOLUTION (Section 41):
A firm is compulsorily dissolved:-
(a) By the adjudication of all partners or all the partners but one as insolvent. The
reason for this is simple. A partner on, being adjudicated insolvent ceases to be a
partner on the date on which the order of adjudication is made. If therefore, all or all
the partners but one are adjudicated insolvent, the firm can no longer exist, for there
must be at least two partners to constitute a firm.
(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.
Example. A, a resident in India, and B, a resident in Pakistan, are partners.
War breaks out between India and Pakistan. The partnership becomes un lawful and is
dissolved automatically on the outbreak of war.
If the business of a partnership is unlawful from its very inception such
partnership is void and no question of its dissolution arises. If some out of the several
businesses or adventures of a partnership become unlawful, the illegality of one or
more of the businesses or adventures will not of itself cause the dissolution of the firm
in respect of its lawful businesses or adventures.

3. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES:

Section 42 mentions certain contingencies on the happening of which the firm
is dissolved, unless there is a contract to the contrary. Unlike the dissolution under
Section 41, which is compulsory, the dissolution contemplated under Section 42 is not
compulsory. Even on the happening of the contingencies mentioned in Section 42,
partners may agree that the firm will not be dissolved, but the business of the firm will
be continued as before. The contingencies mentioned in the Section are:
1. Expiration of the Partnership Term: -
When the partnership had been constituted for a fixed term, it
continues obviously for the contemplated term and would be dissolved on
the expiry of such term. If the partners so like they may agree to the
contrary and continue the business even beyond that time. Such an
agreement may be express or implied. If a fresh term is not stipulated, then
it will be considered to be a partnership at will.
2. Completion of the Adventure:-
Partnership created for some specific adventures or undertakings
comes to an end on the completion of such adventures or undertakings.
Thus, when the partnership was created specifically for carrying out
contract of construction of a road and the road was completed on 24.7.63
and final bill prepared on 18.2.65, the partnership stood dissolved on
18.2.65. The suit for dissolution filed within 3 years of 18.2.65.Was held
to be within time.
There can, however, be an agreement by which the partnership may
not be dissolved and the business may be continued for some other
adventures or undertakings after the completion of the earlier ones. Unless
otherwise agreed, the same mutual rights and duties between the partners
continue in respect of their relationship for the new adventures and
undertakings also.
3. Death of a Partner:-
Death of a partner results in the dissolution of the firm unless the
remaining partners agree to the contrary. Section 42 of the Partnership Act,
1932 provides that a firm stands dissolved on the death of a partner.

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 However, the firm would not stand dissolved if there is a contract to the
contrary between the partners. It is not necessary that such a contract must
be express. The contract may be implied and can also be spelt out from the
conduct of the partner subsequent to the death of a partner.
4. Insolvency of Partners:-
When a partner is adjudicated insolvent, he ceases to be a partner. The
firm is also dissolved unless there is an agreement between the remaining
partners to the contrary. This provision has to be read along with. When all
or all except one partner become insolvent, there is compulsory dissolution
of the firm. If, therefore, there are only two partners and one of them is
adjudicated insolvent, there is compulsory dissolution under section 41 and
there is no question of there being a contract to the contrary making the
firm to continue.

4. DISSOLUTION BY NOTICE (Section-43):-

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, in
such a case, 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. The notice
should be an unambiguous intimation of a final intention to dissolve the partnership, and
should be served on all the other partners. Notice once given cannot be withdrawn unless all
the other partners agree to it.

 DISSOLUTION BY THE ORDER OF COURT (Section-44):-

Section-44 mentions certain grounds on which a suit can be filed for the
dissolution of a firm. A sit for the dissolution for the firm, may be filed, by the
innocent partners and not by the partner whose conduct, is the subject-matter for the
suit.
The need for dissolution by the Court arises when all the partners do not want
the dissolution. The partner or partners who want dissolution can file a suit and the
other partners may contest the same. It may be noted that Section 44 which permits a
partner to invoke the jurisdiction of the court for the dissolution of the firm, is not
subject contract between the partners permitted under Section 11. Therefore, a partner
can always file a suit for the dissolution of the firm if his case is covered under
Section 44.
A suit for dissolution can be filed only when one or the other ground
mentioned in section 44 is there. Even when there is a valid ground for filing the suit
for dissolution and a partner accordingly files the suit, the Court is not bound to
decree dissolution as this section clearly provides that “At the suit of a Partner,the
Court may dissolve the firm.”
The grounds which justify the filing of suit by a partner for the dissolution of
the firm as mentioned in Section 44 are as under:
1. Unsoundness of Mind:-
When a partner becomes of unsound mind, a suit for the dissolution of
the firm can be filed. Such a suit may be filed either on behalf of the partner
who has become of unsound mind, or by any other partner.
2. Permanent Incapacity to Perform Duties:-
When a partner becomes permanently incapable of performing his
duties as a partner that is a good ground for applying to the court for the

25
dissolution of the firm. When the incapacity is not permanent, the court would
not grant relief. In Whitwell v/s Arthur, one partner filed a suit for the
dissolution of the firm when the other suffered from the paralytic attack and
was thereby incapacitated from performing his duties as a partner. It was
found from medical evidence that the incapacity was not likely to be
permanent as the defendants health was improving. The court did not grant the
dissolution of the firm.
3. Misconduct of the Partners:-
When a partner is guilty of conduct which is likely to effect the
carrying on the business of the firm, the court may dissolve the firm on that
ground. Misconduct need not be with regard to the partnership business, but
the conduct should be such as should prejudicially affect the partnership
business. The acts of adultery by a partner in a firm of banker’s partnership
business. The acts of adultery by a partner in a firm of banker’s ha s been
considered to be no ground for seeking dissolution by the other partners but
that may be so if it is a firm of medical practitioners. Conviction for a breach
of trust or the adultery by one partner, with another partner’s wife are grounds
for dissolution of the firm.
4. Persistent Breach of Partnership Agreement:-
Where a Partner other than the partner suing, wilfully or persistently
commits breach of the Partnership agreement relating to the management of
the affairs of the firm or the conduct of its business, or otherwise so conducts
himself that it is not reasonably practicable for the other partners to carry on
the business of the firm with him, the Court may, at the instance of any of the
other partners, dissolve the firm. Thus if one of the partners keeps erroneous
accounts and omits to enter receipts or if there is continued quarrelling
between the partners or there is such a state of animosity that all mutual
confidence is destroyed, the Court may order for the dissolution of the firm.
5. Transfer of Interest:-
Where a partner has in any way transferred the whole of his interest in
the firm to a third party or where his share has been attached under a decree,
or sold in the recovery of arrears of land revenue, the court may dissolve the
firm at the instance of any other partner.
6. Business Working at Loss:-
Where the business of the firm cannot be carried on except at a loss,
the Court may dissolve the firm at the suit of a partner. This clause gives
discretion to the Court to dissolve a firm for a fixed term even though the term
has not expired, if the business thereof cannot be carried on except at a loss. A
partnership is formed essentially to earn and share profits of the partnership. If
the business can be carried on only at a loss, the attainment of the common
end, with a view to which the partnership was formed, becomes impossible. In
such a case, the Court may dissolve the firm.
7. When Dissolution is Just and Equitable:-
The Court has been given wide power of dissolution. Apart from
ordering the dissolution of the firm on the grounds stated above, the court has
been vested with the power of dissolving the firms on any other ground which
renders it just and equitable that the firm should be dissolved.

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