Introduction

Partnership results from a contract and is governed by the Partnership Act 1932. The
partnership is additionally governed by the final provision of the Indian Contract Act on such
matters where the Partnership Act is silent. It’s expressly mentioned that the provision of the
India Contract Act which isn’t repealed will be applicable on Partnership until and unless
such provision is contrary to any provision of Partnership Act, 1932. The rules of contract
regarding the capacity to contract, offer, acceptance, etc will also apply to the partnership.
But the rules regarding the status of minors will be governed by the Partnership Act, 1932
since Section 30 of the Act talks about the position of the minor.[1]

Section 3: Application of Provisions Of the Indian

Partnership Act
The unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are
inconsistent with the express provisions of this Act, shall continue to apply to firms.[2]

Section 4: Definition Of “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 a
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”.[3]

In other words, The Indian Partnership Act, 1932 defines a partnership as a relationship
between two or more individuals who comply with share the profits of a business run by them
all or by one or more individuals acting for all. Individuals who have entered into a
partnership with each other are called “partners” and collectively a “company,” and also the
name under which their business is carried on is termed as the “company name.”

Illustrations

 X and Y purchase 100 bales of cotton that they agree to sell on their shared account. For the
sale of such cotton, X and Y are partners. X and Y purchase 100 bales of cotton and agree to
share. X and Y are not partners.
 X agrees with Y, a goldsmith, to purchase and furnish gold to Y, to be processed, sold, and to
share the profit or losses that result. X and Y are partners.[4]

Section 5: Partnership under the Indian Partnership

Act Not Created By Status
The relation of partnership arises from contract and not from status; and, in particular, the
members of a Hindu undivided family carrying on a family business as such, or a Burmese
Buddhist husband and wife carrying on business as such are not partners in such business.
[5]

State Amendment Goa, Daman, and Diu. In section 5, for the words “Burmese Buddhist
husband and wife carrying on business as such”, substitute the words “a husband and wife
under the regime of the communion of property-carrying on business as such”. [Vide Goa,
Daman and Diu Act 6 of 1966, sec. 2 (w.e.f. 22-8-1966)].[6]

Section 6: Mode of Determining Existence of

Partnership under the Indian Partnership Act
 In determining whether a gaggle of persons is or isn’t a firm, or whether an individual is or
isn’t a partner in an exceedingly firm, regard shall be had to the important relation between
the parties, as shown by all relevant facts taken together.

Explanation I: The sharing of profits or of gross returns arising from property by persons
holding a joint or common interest in this property doesn’t of itself make such person
partners.

Explanation II: The receipt by an individual of a share of the profits of a business, or of a

payment contingent upon the earning of profits or varying with the profits earned by a
business, doesn’t itself make him a partner with the persons carrying on the business; and,
particularly, the receipt of such share or payment –

(a) by a lender of cash to persons engaged or near to engage in any business

(b) by a servant or agent as remuneration,

(c) by the widow or child of a deceased partner, as an annuity, or

(d) by a previous owner or part-owner of the business, as consideration for the sale of the
goodwill or share thereof, doesn’t of itself make the receiver a partner with the persons
carrying on the business.[7]

Section-7: Partnership-At-Will
Where no provision is 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”.[8]

In other words, if there is no clause to establish a partnership at the expiry of such a

partnership, it is referred to as a partnership at will. Under Section 7 of The Indian
Partnership Act, 1932, two conditions have to be met for a partnership to be a partnership at
will and they are:

 There is no agreement on a fixed period for the existence of a partnership.

 No provision is made for establishing a partnership.
If a partnership has been established and continues to operate beyond the fixed period, the
partnership will become a partnership at will after the end of that term.[9]

Section-8: Particular Partnership under the Indian

Partnership Act
A person may become a partner with another person in particular adventures or
undertakings.[10]

In other words, A partnership may be formed for ongoing business or a specific purpose. If the
partnership is merely formed to hold out one company or complete one undertaking, it’s
referred to as a specific partnership.

The partnership is going to be dissolved after the completion of the said venture or activity.
The partners may, however, conform to continue the said partnership. But within the absence
of this, when the task is complete, the partnership ends.

Duties of Partners under the Indian Partnership Act

General duties of partners(Section 9)

There are three sub-sections of section 9 which provides three different duties of the partners
under the Indian Partnership Act.
Sub-section 1 of section 9 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.

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 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[1].

Sub-section 2 of section 9 provides that it is the duty of the partners to be just and faithful
to each other.

Sub-section 3 of section 9 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.

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.[2]

Duty to indemnify for loss caused by fraud (Section 10)

Every partner shall indemnify the firm for ant loss caused to it by his fraud in the conduct of
the business of the firm. 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.

Duty to be diligent (Section 12(b))

Every partner is bound to act diligently.

And section 13(f) states that a person should indemnify the firm for any loss caused to the
firm because of his wilful neglect in the conduct of the business of the firm. Although a
partner cannot be made liable for mere errors of judgment or acts done in good faith.

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 realised by selling the cotton as compared to which could have
been otherwise realised.[3]

NOTE: 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.

Determination of duties and rights of partners by contract between the

partners (Section 11)

All partners are free to form their own terms and conditions with respect to functioning in
their partnership deed. These are governed by the existing contract between them which may
be expressed or implied by the course of dealing.

Sub-section (1) of section 11 provides that, subject to the provisions of the Act, the mutual
rights and duties of partners of a firm may be determined by the contract between the
partners, and such contract may be expressed or may be implied by a course of dealing. It
further provides that the mutual duties and rights of partners which may have been agreed
upon between the partners may be subsequently varied by the consent of all the partners and
such consent may be expressed or may be implied by a course of dealing. 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 how much investment or labour is to be put in by whom,
whether a partner will be entitled to any remuneration, apart from sharing the profits, or what
will be the profit-sharing ratio, etc.

Sub-section (2) of section 11 clearly provides that, notwithstanding anything contained in

section 27 of the Indian Contract Act, the contract between the partners may provide that a
partner shall not carry on any business other than that of a firm while he is a partner.

Although according to section 27 of the Indian Contract Act, an agreement in restraint of

trade is void, but such an agreement entered into between the partners as stated above will
be valid.

Duty to share losses [Section 13(B)]

All partners are liable to contribute equally to the losses sustained by the firm.

Duty to use the property of the firm properly (Section 15)

This section provides that the 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 he 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. Although this duty can be avoided by entering into an agreement to
the contrary.

Duty to account for the profit (Section 16)

Basically, Section 16 runs in two parts. If a partner derives any profits for himself from any
transaction of the firm or derives any profit from the use of property or business connection of
the firm or the firm name then he shall account for that profit and pay it to the firm. [4] If a
partner carries on any business of the same nature as of the firm and competes with that of
the firm then he shall account for and pay to the firm all profits made by him in that
business.[5]

NOTE: This duty arises because of the fiduciary relationship between the partners.

Rights of Partners under Indian Partnership Act

Now let’s discuss the rights of partners under the Indian Partnership Act. The mutual Rights
of the partners generally depend upon the provisions of the agreement. But subject to their
agreement, the law confers the following rights on partners:

Right to take part in the conduct of the business [Section 12(A)]

Every partner has the right to take part in the business of the firm. This is because a
partnership business is a business of the partners and their management powers are
generally coextensive.

NOTE The above-mentioned provisions of the law will be applicable only if there is no contract
to contract between the partners.

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 bankers to not 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.[6]

Right to be consulted [Section 12(C)]

This Section 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.

NOTE The aforesaid majority rule will not apply where there is a change in the nature of the
firm. In such a case, the unanimous consent of the partners is needed.

Right to access to books [Section 12(d)]

Every partner whether active or sleeping is entitled to have access to any of the books of the
firm and to inspect and take out of copy thereof.

NOTE None of them (any partner) is authorised to use the gained information against the
interest of the firm.

Right to remuneration [Section 13(a)]

This Section 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.

Where the assessee firm is engaged in the business of trading in cotton and food grains. In
respect of the previous year relevant to the assessment year 1997-98, the firm
paid remuneration of Rs. 2,53,000 to Sri Ch. Ekambaram who served as a
working partner representing his HUF. Remuneration paid to work partners authorized by
the partnership deed is allowable whereas in the instant case, Ch. Ekambaram is not
a partner in his individual capacity and hence he cannot be treated as a working partner. The
audit party was of the opinion that remuneration paid to the working partner is not allowable
as a deduction.[7]

Right to share profits [Section 13(b)]

The partners are entitled to share the profits and losses equally. The right to share profits is
not affected by the fact that the partners have contributed unequally to the firm, possess
different skills, and have laboured unequally in the firm.

Where there was no satisfactory evidence to show 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.[8]

Right to interest on capital [Section 13(c)]

A partner is generally not entitled to claim 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.

Right to interest on advances [Section 13(d)]

Taking the earlier provision, a little forward Section 13(d) provides that a partner is entitled
to get the interest of six per cent per annum for the advances made by him to the firm beyond
the capital he had agreed to subscribe.
 Right to be indemnified [Section 13(e)]

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.
 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.
NOTE The right to be Indemnified is not lost with the dissolution of the firm.

Right to stop admission of a new partner (Section 30)

Every partner has the right to prevent the introduction of a new partner in the firm without
the consent of all the existing partners.

Right to retire [Section 32 (1)]

Every partner has the right to retire with the consent of all the other partners and in the case
of a partnership being at will, by giving notice to that effect to all the other partners.

Right not to be expelled (Section 33)

Every partner has a right to continue in the partnership. He cannot be expelled from the firm
by ant majority of the partners unless conferred by a partnership agreement and exercised in
good faith and for the benefit of the firm.

Right to dissolve the firm (Section 40)

A partner has a right to dissolve the partnership with the consent of all partners.

For Rights and Duties of Incoming and Outgoing Partners under Indian Partnership Act, click
here.

Partnership Property
It becomes important to determine the property of the firm as opposed to the personal
property of partners. For example, when the partnership is dissolved then the debts are first
paid out of the property of the firm. So, for this and several other purposes, it is important to
clarify which property is partnership property.

Section 14 provides what shall constitute the partnership property. The partners can
explicitly mention in the contract what will be the partnership property. Hence, Section 14
will apply only in the cases when there was no agreement between the partners stating what
would be the partnership property.

Partnership property is nothing but the joint property of all the partners, however, none of the
partners can personally claim the property.

PROPERTY BROUGHT IN ORIGINALLY: The property of the firm includes all property,
rights, and interests which were originally brought into the stock of the firm by the partners
at the commencement of the business.

NOTE: When one of the partners brings his personal property for the purpose of the
partnership, he loses his personal rights over it. He will only get the share of profits which
may be agreed upon by the partners.

Since a firm has no legal existence, the partnership property will vest in all the partners and
in that sense every partner has an interest in the property of the partnership. During the
subsistence of the partnership, however, no partner can deal with any portion of the property
as his own nor can he assign his interest in a specific item of property to any one.[9]
 GOODWILL: The goodwill of the firm is treated as the property of the firm. Goodwill is nothing
but the reputation of the firm. When a partner buys the firm, he is entitled to the goodwill as
well.

PROPERTY BROUGHT SUBSEQUENTLY: When a property is subsequently brought for the

purposes of the firm or in the ordinary course of the business, then it would constitute the
property of the firm. Any property bought by the firm’s money will be the property of the firm.

Application of the property of the firm (Section 15)

Subject to the contract between the partners, the property of the firm shall be held and used
by the partners exclusively for the purpose of the business.

Rights and duties of partners after a change in the

constitution of the firm (Section 17)
Before going into the rights and duties of partners, we should first know how a change may
take place in the constitution of the firm. It may occur in one of four ways; Where,

 A new partner/partners come in,

 Some partner/partners go out,
 The partnership concerned carries on business other than the business for which it was
originally formed,
 The partnership business is carried on after the expiry of the term fixed for the purpose.
Section 17 lays down the rule, Where-

1. Change occurs in the constitution of a firm- The mutual rights and duties of partners
remain the same as they were immediately before the change.
2. Firm constituted for a fixed term but continues to carry on business- The mutual rights
and duties of partners remain the same as the were before the expiry of the term.
3. Firm constituted to carry out certain adventures but carries out other adventures- The
mutual rights and duties of the partners in respect of the other adventures are the same as
those in respect of the original adventures.

Section 18- Partner to be agent of the firm:

Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the
business of the firm. For the purposes of the business of the firm, a partner is an agent of the
firm. It means that a firm, i.e., all the partners of the firm are bound by the act of a partner as
any principal would be bound by the act of his agent. Mutual agency between the partners is
one of the essentials to create partnership. Every partner having the capacity to act as firm’s
agent, the act done by any partner renders the whole firm liable towards a third party. Law of
partnership is generally stated as a branch of the law of principal and agent.

Relations of partners to third parties are thus founded on the principle of mutual agency
between the partners. According to Mr. Justice Story[1], “Every partner is an agent of the
partnership, and his rights, powers, duties and obligations are in many respects governed by
the same rules and principles as those of an agent; a partner virtually embraces the character
of both a principal and agent.”

It has been observed by Lord Wensleydale[2] : “A man who allows another to carryon trade,
whether in his own name or not, to buy and sell, and to pay over all the profits to him, is
undoubtedly the principal, and the person so employed is the agent, and the principal is
liable for the agents contracts in the course of his employment. So if two or more persons
agree that they should carry on a trade and share the profits of it, each is a principal, and
each is an agent for the other, and each is bound by the other contract in carrying on the
trade, as much as a single principal would be by the act of an agent, who was to give the
whole of the profits to his employer.”
 A partner is an agent of the firm. This agency is only for the purposes of the business of the
firm. He can enter into contracts, purchase and sell goods, borrow money and do similar acts
in so far as they are necessary for the carrying on of the business of the firm and the firm will
be bound by every such act. If he, on the other hand, does an act unconnected with the
business of the firm, e.g., purchases materials for the construction of his own building or
borrows money for his daughter’s marriage, the firm will not be bound by that a she is not
firm’s agent for that purpose.

Sections 18 to 30 of the Indian Partnership Act contain provisions concerning the relations of
partners to third parties. These provisions have been classified and discussed under the
following subheads:

1. Nature and extent of liability of the Firm for the acts of a partner (Ss 18-27);
2. Doctrine of Holding Out, creating the liability of a Non-partner. (S 28);
3. Rights of transferee of a partner’s interest (S 29); and
4. Position of a ‘Minor’ admitted to the benefits of partnership (S 30).

Contents hide

1. I. NATURE AND EXTENT OF LIABILITY OF THE FIRM FOR THE ACTS OF A PARTNER (Ss 18-27)

1.1. A. Nature of liability of the partners towards third parties (S 25)

1.2. B. The kind of acts for which the partners are liable

2. II. THE DOCTRINE OF HOLDING OUT (S 28):

3. III.RIGHTS OF TRANSFEREE OF PARTNER’S INTEREST (S 29)

I. NATURE AND EXTENT OF LIABILITY OF THE FIRM FOR

THE ACTS OF A PARTNER (Ss 18-27)
The question of liability of the firm for the acts of a partner is being discussed under the
following sub-heads: A. Nature of liability of the partners towards third parties, and

B. The kind of acts for which the partners are liable which are as follows:

i. Liability for the acts done within the authority of a partner (Ss 18, 19, 20 and 22). Such
authority may be either express or implied authority.

ii. Liability when a partner acts in emergency (S 21).

iii. Liability on ratification of a partner’s act.

iv. Liability for admission made by a partner (S 23).

v. Liability on notice to an acting power (S 24).

vi. Liability for torts and wrongful acts (S 26).

vii. Liability for misapplication of money or property (S 27).

A. Nature of liability of the partners towards third parties (S 25)

 S 25 contains the following provision to explain the nature of liability of the partners of a firm:
25. 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. A principal is
liable for the act of his agent done by him on his behalf. According to s 18, it has been noted
above, a partner is an agent of the firm for the purpose of the business of the firm. Obviously,
therefore, the whole of the firm, which means all the partners of the firm become liable for an
act of the firm done by any partner. As regards the nature of liability of the partners, S 25
states that every partner is jointly and severally liable for all acts of the firm done while he is a
partner.

In M/s Glorious Plastics Ltd v Laghate Enterprises[3], it was held that if a partner retires
on 1st April 1982 and the act of the firm is done on 1st March 1985, s 25 cannot be applied
to make such retiring partner liable for an act done after he has retired. The liability of all the
partners is joint and several even though the act of the firm may have been done by one of
them. Thus a third party, if he so likes, can bring an action against any one of them severally
or against any two or more of them jointly.

B. The kind of acts for which the partners are liable

1) Acts done within the authority of a partner (Ss 18, 19, 20 and 22): A partner being an
agent of the firm, his acts bind the firm provided that the partner is acting within the
authority vested in him. As in the contract of agency, the authority of the partner may also be
either express or implied.

Express Authority: An authority is said to be express when it is given by words spoken or

written.

Implied Authority: An authority is said to be implied when it is to be inferred from the

circumstances of the case; and things spoken or written, or the ordinary course of dealing,
may be accounted circumstances of the case. For instance, A is authorised to recover Rs.
5,000 from B. In this case A has the implied authority to file a suit for the recovery of the
amount.

Mode of exercising authority (S 22) S 19 (1) which defines implied authority, is subject to the
provisions of s 22. In order to bind the firm, the act of a partner must be done in a manner
mentioned in s 22. The provision is as follows:

Section 22: Mode of doing act to bind the firm

In order to bind a firm, an act or instrument done or executed by a partner or other person on
behalf of the firm shall be done or executed in the firm name, or in any other manner
expressing or implying an intention to bind the firm.

According to the provision contained in s 22, for an act falling within the implied authority of
a partner, the firm will be bound if the act or instrument done or executed by a partner has
been done or executed

1. in the name of the firm; or ii. in a manner expressing or implying an intention to bind the
firm.
2) Partner’s authority in an emergency (S 21) Sometimes even if a partner does not have
either express or implied authority to act on behalf of the firm, his act can bind the firm if the
same has been done in a situation of emergency as described in s 21.

The section reads as under:

Section 21- Partner’s authority in an emergency
A partner has authority in an emergency to do all such acts for the purpose of protecting the
firm from loss as would be done by a person of ordinary prudence, in his own case, acting
under similar circumstances, and such acts bind the firm.
3) Ratification of a partner’s act: When an agent does an act on behalf of a principal but
without the principal’s prior authority, the principal may grant subsequent approval to such
an act i.e., ratify the same. If the principal ratifies the act, the same effects follow as if the act
had been performed with his prior authority.

4) Admission made by a partner (S 23): According to s 23, an admission or representation

made by a partner concerning the affairs of the firm is an evidence against the firm, if it is
made in the ordinary course of business. This is so because every partner is the agent of the
firm for the firm’s business.
For example, admission by one partner regarding making of a contract, execution of a
document, payment of money, supply of goods or financial condition of the firm, will be
evidence against all the other partners.
It is, of course, necessary that such admission or representation must have been made in the
ordinary course of business.

Similarly, representations made by a partner also have the same effect. However, evidence can
be given to disprove such admissions or representations made by a partner as they do not
constitute conclusive proof of the matters admitted or represented.

5) Effect of notice to an acting partner (S 24): “Notice to a partner who habitually acts in
the business of the firm of any matters 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 the
partner.”

6) Liability for torts and wrongful acts (S 26) :A principal is vicariously liable for the torts
and other wrongful acts committed by his agent in the course of the business of agency.25
Every partner being an agent of the firm for the business of the firm, the same principle has
been recognised by the Indian Partnership Act also. S 26 contains the following provision in
this regard: 26. 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 a 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 there for to the same extent as the partner.

In Hurruck Chand v Gobind Lal,[4] one of the partners, who was an active partner in a firm,
knowing that the goods were stolen ones, purchased and sold them without the knowledge of
the other partner who was a sleeping partner. It was held that both the partners were liable
for the tort of conversion to the owner of the goods.

7) Liability of the firm for misapplication by partners (Sec: 27)- Where-

(a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it; or
(b) a firm in the course of its business receives money or property is misapplied by any of the
partners while it is in the custody of the firm, the firm is liable to make good the loss.

II. THE DOCTRINE OF HOLDING OUT (S 28):

Every partner is liable for all acts of the firm done while he is a partner. Therefore, generally a
person who is not a partner in the firm cannot be made liable for an act of the firm. In certain
cases, however, a person who is not a partner in the firm may be deemed to be a partner for
the purpose of his liability towards a third party. The basis of liability of such a person is not
that he was himself a partner or was sharing the profits or was taking part in the
management of the business, but the basis is the application of the law of estoppel because of
which he is held out to be a partner or is deemed to be a partner by holding out.

III.RIGHTS OF TRANSFEREE OF PARTNER’S INTEREST (S

29)
The relation of partners is based upon mutual confidence and trust and obviously, therefore,
no person may be introduced as a partner in the firm without the consent of all the existing
partners.[5] It follows that no partner can assign his share in a way which may substitute an

outsider in his place. If any partner transfers the whole of his interest in the firm to a third
party, the other partners may apply to the court for the dissolution of the firm.[6] It is,
however, possible that a partner may transfer his interest in the business in favour of a third
person. S 29 contains the following provision with regard to the rights of the transferee of a
partner’s interest:

Section 29: Rights of transferee of a partner’s interest

(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the
creation of him of a charge on such interest, does not entitle the transferee, during the
continuance of the firm, to interfere in the conduct of the business, or to require accounts, or
to inspect the books of the firm, but entitles the transferee only to receive the share of profits
of the transferring partner, and the transferee shall accept the accounts of profits agreed to by
the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee
is entitled as against the remaining partners to receive the share of the assets of the firm to
which the transferring partner is entitled, and, for the purpose of ascertaining that share, to
an account as from the date of dissolution. S 29 (1) deals with the position during the
continuance of the firm whereas the position of the dissolution of the firm or the transferring
partner ceasing to be a partner is contained in s 29 (2).

During the continuance of the firm, the transferee of a partner’s interest does not become
entitled to interfere in the conduct of the business of the firm. Nor can such a transferee
require accounts, nor can he inspect the books of the firm. He is bound to accept the account
of profits agreed to by the partners. His only right is to receive the share of profits of the
transferring partner. The reason why the transferee is not entitled to interfere in the conduct
of the business is that partnership being based on mutual confidence and trust between the
partners, there should be no interference by any outsider.

Incoming Partners under Indian Partnership Act

An incoming partner is a partner who is joining the partnership firm by contract or is added
to the firm. They are the new partners who get admitted to the firm. Such admission is
subject to any procedure/method that the firm at its will and understanding adopts to
include new members. It is significant to note that a new partner can be admitted into a firm
with the consent of all the partners.

Pullock And Mulla:

“Where a person nominated is not acceptable to the other partners, the court cannot force
them into to enter into partnership with him because the foundation of partnership is mutual
confidence, which the court cannot supply where it doesn’t exist”

Therefore, we can say that the legal liability of any member begins only after he is admitted to
the firm and not before that.

Liability of Incoming Partner

A person who is admitted as a partner into an existing firm does not thereby become liable to
the creditors of the firm for anything done or omitted before he became a partner.

A new partner becomes liable for the debts and acts of the firm only from the date he is
admitted as a partner, he cannot be held liable for the acts of the old firm.

He will be liable to other co-partners only.

 Rights and Duties of Partners under the Indian Partnership Act, click here.

Outgoing Partner under Indian Partnership Act

A partner who is going to leave a particular firm purposely or to he/she might be died or be
expelled by a firm. Then it is the process of the outgoing partner. Sec 32 to 38 of the Indian
Partnership Act deals with different ways in which a partner may become an outgoing partner
with their rights and liabilities.

They are as follows-

1. Retirement of a partner- sec 32 deals with retirement, it says they may retire under the
following circumstances:
2. With the consent of all other partners.
3. With the express agreement of the partners.
4. If it is a partnership by will, then by giving notice of retirement to all other partners
 Outgoing partner by notice- In case of partnership at will, a partner may retire from the
partnership by giving notice of his intention to retire to all the other partners. The need of
such a notice is required when all the other partners either do not agree to the retirement of a
partner or they are not available to give their consent for the retirement of a partner.
 Expulsion of partner- sec 33 of the Indian Partnership Act deals with the removal of the
partner, it says that a partner can be removed when certain conditions are fulfilled-
 Notice is give to remove the partner
 If removal is necessary for the interest of the partnership
 An opportunity of listening to the expelled partner
 Insolvency of the partner- An insolvent is not allowed to continue as a partner. Therefore a
person who is adjudicated insolvent ceases to be a partner on the date on which order of
adjudication is made. Whether on the adjudication of partner as insolvent, the firm is also
dissolved or not depends on a contract between the partners.
 Death of a partner- A firm is dissolved, but if other partners so agree, the firm may not be
dissolved, and the business of the firm may be continued with the remaining partners.

Rights of Outgoing Partners

 Right to carry on a competing business- sec 36(1) of the Indian Partnership Act deals with it.
It imposes certain restrictions
 Cannot use the firm name
 Cannot represent himself as a member of the partner
 Right of outgoing partner in certain cases to share future profits- sec 37 deals with the rights
of an outgoing partner in certain cases to share subsequent profits. It says that if any member
of the firm dies or ceases to be the partner of the firm and the other partner carries on the
business without any final settlement of account between them; then the outgoing partner is
entitled to share his profits made by the firm since he ceased to be a partner.

Liabilities of Outgoing Partner

A retired partner continues to be liable to a third party for acts of the firm till such time that
he or other members of the firm give a public notice of his retirement.

If the partnership is at will, then it can relieve a partner without giving public notice.

Meaning of Outgoing Partners

When a partner decides to leave a partnership, they are referred to as an outgoing partner.
Outgoing partners can leave for various reasons, such as retirement, personal reasons, or
disputes with other partners. When a partner leaves, it can have significant implications for
the partnership’s operations, particularly in terms of ownership, management, and decision-
making.
 It is important for outgoing partners to understand their rights and obligations under Indian
law. The Indian Partnership Act, 1932 governs partnerships in India and sets out the rights
and obligations of partners, including outgoing partners.

Definition of Outgoing Partners

Under the Indian Partnership Act, 1932, an outgoing partner is defined as a partner who
ceases to be a partner of the firm. This can occur in several ways, including:

 Dissociation: The partner voluntarily gives notice to the other partners of their intention to
dissociate from the partnership.
 Expulsion: The other partners expel the partner from the partnership, in accordance with the
partnership agreement or the provisions of the Partnership Act.
 Retirement: The partner retires from the partnership in accordance with the partnership
agreement or the provisions of the Partnership Act.
Regardless of the manner in which the partner leaves the partnership, once they have ceased
to be a partner, they are considered an outgoing partner. This means that they are no longer
entitled to participate in the management of the partnership or share in its profits and losses.

The Partnership Act also specifies certain rights and obligations that outgoing partners have.
For example, outgoing partners have the right to receive their share of the partnership’s
profits up until the date of their dissociation, and they have the obligation to account to the
partnership for any profits made from transactions after their dissociation but before public
notice of their dissociation is given.

Rights of Outgoing Partners

Outgoing partners have certain rights that they are entitled to under Indian law. These rights
are designed to protect the interests of the outgoing partner and ensure that they receive their
fair share of the partnership’s assets and profits. Some of the key rights of outgoing partners
are:

 Right to Dissociate: Outgoing partners can dissociate from the partnership at any time by
giving notice to the other partners. This means that they can leave the partnership without
the consent of the other partners.
 Right to Share of Profits: Outgoing partners is entitled to receive their share of the
partnership’s profits up until the date of their dissociation. This means that they are entitled
to a portion of the partnership’s earnings during their time as a partner.
 Right to Inspect Books: Outgoing partners have the right to inspect the partnership’s books
and records to ensure that their share of profits is accurately calculated. This includes the
right to examine financial statements, receipts, and other records.
 Right to Claim for Breach of Partnership Agreement: Outgoing partners have the right to
claim for breach of the partnership agreement if the other partners fail to fulfil their
obligations under the agreement. This can include failure to pay the outgoing partner their
share of profits or failure to provide notice of a change in the partnership’s business.
 Right to a Fair Valuation of Partnership Interest: Outgoing partners gets the right to a fair
valuation of their partnership interest if they wish to sell their share of the partnership. This
means that they are entitled to a fair price for their share of the partnership’s assets and
profits.
Let us consider a scenario where a partner decides to dissociate from a partnership. In this
scenario, the outgoing partner is entitled to their share of profits up until the date of their
dissociation.

For example, if a partnership has earned a profit of Rs. 1,00,000 in a financial year, and the
partnership has four partners, each partner is entitled to Rs. 25,000. If one of the partners
dissociates from the partnership on 31st March, their share of profits would be calculated
based on the profits earned up until that date.

These rights are essential for protecting the interests of outgoing partners and ensuring that
they receive their fair share of the partnership’s assets and profits. Failure to recognize these
 rights can lead to legal action being taken against the partnership or the other partners. For
example, if the other partners refuse to provide the outgoing partner with their share of
profits, the outgoing partner may sue the partnership for breach of contract.

In addition to these rights, outgoing partners may also have additional rights under the
partnership agreement.

For example, the partnership agreement may include a right of first refusal clause, which
gives the outgoing partner the right to offer their share of the partnership to the other
partners before selling to a third party.

Obligations of Outgoing Partners

Outgoing partners have certain obligations that they must fulfill under Indian law. These
obligations are designed to ensure that the partnership’s affairs are properly settled and that
the interests of all partners are protected. Some of the key obligations of outgoing partners
are:

 Duty of Loyalty: Outgoing partners have a duty to act in good faith and in the best interests
of the partnership until the date of their dissociation. This means that they cannot take
actions that harm the partnership, such as disclosing confidential information or competing
with the partnership.
 Duty to Account: Outgoing partners have a duty to account for their actions and provide a
full and accurate statement of their financial dealings with the partnership. This includes
providing details of any expenses they have incurred on behalf of the partnership, any profits
they have earned, and any liabilities they have incurred.
 Duty to Pay Liabilities: Outgoing partners are responsible for paying their share of the
partnership’s liabilities up until the date of their dissociation. This means that they must pay
any debts or obligations that the partnership has incurred during their time as a partner.
 Duty to Return Partnership Property: Outgoing partners must return any partnership
property in their possession or control to the partnership. This includes any assets, such as
equipment or inventory, that they may have used during their time as a partner.
 Duty to Give Notice: Outgoing partners must give notice of their dissociation to the other
partners in writing. The notice must include the date of dissociation and the reasons for the
dissociation, if applicable.
In another scenario, if the outgoing partner has breached the partnership agreement, the
other partners may claim damages from them. For instance, if an outgoing partner has
violated a non-compete clause in the partnership agreement by starting a competing
business, the other partners may seek damages for the harm caused to the partnership’s
business.

In some cases, partnerships may have a buyout clause in the partnership agreement. This
clause allows partners to buy out the share of an outgoing partner in the partnership. The
buyout price is usually determined by an independent valuation of the partnership’s assets
and liabilities.

These obligations are essential for ensuring that the partnership’s affairs are properly settled
and that the interests of all partners are protected. Failure to fulfil these obligations can lead
to legal action being taken against the outgoing partner.

For example, if an outgoing partner fails to pay their share of the partnership’s liabilities, the
other partners may sue them for the amount owed. Similarly, if an outgoing partner fails to
return partnership property, the partnership may seek legal action to recover the property.

In addition to these obligations, outgoing partners may also have additional obligations under
the partnership agreement. For example, the partnership agreement may include a non-
compete clause, which prohibits outgoing partners from starting a competing business for a
certain period of time.

Conclusion
 When a partner decides to leave a partnership, they are referred to as an outgoing partner.
Outgoing partners have several rights and obligations under Indian law, including the right to
dissociate, the right to share profits, the right to inspect books, and the right to claim for
breach of the partnership agreement.

Outgoing partners also have several obligations, including the duty of loyalty, the duty to
account, the duty to pay liabilities, the duty to return partnership property, and the duty to
give notice.

Generally, it is understood that there is no difference between dissolution of partnership and

dissolution of firm, and both are synonymous. But this is not correct, because both of them
are different concepts. The dissolution of partnership means disconnection of some partners
from partnership and the dissolution of firm means disconnection of all partners from each
other. The latter ends in an end of business.

Dissolution of a partnership firm means a process in which relationship between partners of

firm is dissolved / terminated or it can be said that it means discontinuing the business
under the name of said partnership firm.

According to Section 39 of the Partnership Act, 1932 the dissolution of a partnership

firm between all the partners of the firm is called the “Dissolution of the Firm”. The business
of the firm essentially comes to and upon the dissolution of the firm. When a firm is dissolved,
the assets of the firm are sold out and liabilities of the firm are satisfied.

After Dissolution of the partnership firm, the firm cannot do any activity with anybody after
the dissolution of the firm.

However, the partnership firm is dissolved under certain circumstances, they are as follows-

1. Change or shift in its existing profit-sharing ratio.

2. A new partner’s entry
3. Retirement of one or more existing partners of the firm
4. Demise of one of the partners
5. Completion of a specific partnership venture
6. Expiry of partnership period of agreement
7. A partner’s insolvency due to incompetence to contract[1]
After Dissolution, a partnership firm can only sell the assets to realise the amount, pay the
liabilities of the firm and discharge the claim of the partners. The dissolution may be done
with or without the intervention of the court.

Ways of Dissolution of a Partnership Firm

There are various ways through which the partnership firm may be dissolved, they are as
follows:

 Dissolution by Agreement (sec 40)

 Dissolution by Notice
 Contingent Dissolution
 Compulsory Dissolution (sec 41)
 Dissolution by Court
Dissolution by agreement- A firm can be dissolved with an agreement among its existing
partners in accordance with the terms of the agreement.
 Dissolution by notice- When a partnership is formed at will, the dissolution of the firm may
take place if any of the partners gives a notice in writing to the other partners indicating his
intention to dissolve the firm.

Compulsory Dissolution- Circumstances under which a firm is dissolved compulsorily are as

follows:

 When one or more partners of a firm become solvent, making them incompetent to enter any
contract or agreement
 If it becomes unlawful for a specific partnership firm to continue its business and revenue
generation.
Contingent dissolution- Upon happening of certain events, a firm may be required to get
dissolved:

 Expiry of fixed-term- Partnership formed for a fixed term will get dissolved once the term
gets over.
 Completion of task- Sometimes, a partnership is formed for a certain task or objective. Once
the task is completed, the partnership will automatically get dissolved.
Death of partner- If there are only two partners, and one of the partner dies, the partnership
firm will automatically dissolve.

Dissolution by the court- When of the partners of a firm files a legal suit; a court of law can
direct the dissolution of a firm. That can be done on any of these following grounds described
below.

 Insanity- If a partner loses mental stability

 Permanent incapacity- If one partners become incapable of fulfilling his/her duties
 Misconduct- When a partner is found guilty of any misconduct that goes on to affect his
firm’s business adversely when a lawful court deems its dissolution
 Transfer of interest- If one or more partners turn their whole interest in the partnership to a
third party.
 Business at loss- Where the business of a firm cannot be carried on except at a loss, the
court may dissolve the firm at the suit of partner. A partnership is essentially formed to earn
and share the profits, and if it is carried on only at loss, it comes to an end, i.e the court may
dissolve the firm.

Consequences of Dissolution of a Firm

Rights of A Partner on Dissolution of a Firm
On Dissolution of firm, a partner has following rights:

 Right to have business wound up- on dissolution of a firm, each partner is entitled to have
the property of the firm applied in payment outside debts and liabilities of the firm, and to
have the surplus distributed among the partners in accordance with their rights. This right of
a partner is called “partner’s lien”.
 Right to personal profits earned after Dissolution- Where any partner has bought the
goodwill of the firm on its dissolution, he has the right to use the firm’s name and earn profit
by its use.
 Right to return of premium on premature dissolution- Where a partner has paid a
premium on entering into partnership for a fixed term and the firm is dissolved before the
expiration of the term, he is entitled to repayment of the whole or part of the premium, regard
being had to:
o (a)- the terms upon which he becomes partner.
o (b)- the length of the time during which he was a partner.
 Right where partnership contract is rescinded for fraud or misrepresentation- Where
partnership is rescinded on the ground of fraud or misrepresentation of one partners, the
partner entitled to rescind has the following rights:
o Right in lieu of surplus assets
o Right of subrogation
o Right to be indemnified
 Right to restrain partners from the use of firm name or firm property- After a firm has been
dissolved, every partner or his representative may restrain any other partner or his
representatives from carrying on a similar business in the firm name or from using any
property of the firm for his own benefit, until the affairs of the firm have completely wound
up.

Liabilities of A Partner On Dissolution Of Firm

After the dissolution of firm has taken place, the following liabilities have been casted upon
the partners.

1. Issuing of public notice- Public notice must be given of the dissolution in order to absolve
partners of the liability for any act done after the dissolution of the firm. If it is not done, the
partners continue to be liable as such to third parties for any act done by any of them after
the dissolution, and in such case, the act of partner done after dissolution is deemed to be an
act done before the dissolution.
2. partner to make use of the assets of the firm for the payment of loans and settlement of
other liabilities on behalf of the firm. Whatever is left after the payment of loans and
settlement of other dues, the same is distributed among the partners of the firm.
3. Continuing rights and liabilities of partners- After the dissolution of a firm, the authority of
each partner to wind-up the firm and for the other mutual rights and obligations of the
partners continue, so far as may be necessary:
4. To wind up the affairs of the firm
5. To complete transactions begum but unfurnished , at the time of the dissolution
The firm is not liable for the act of an insolvent partner in above two cases.

Settlement of Accounts After Dissolution of a Firm

Final settlement of account after dissolution, if there is no other agreement among the
partners in that regard, is made as follows:

1. Loss of business- Losses, including deficiencies of capital, shall be paid first out of profits,
then out of capital and lastly by partners individually in the proportions in which they were
entitled to share profits.
2. Use of Assets of Business- The assets of the firm, including any sums contributed by the
partners to make deficiencies of capital, shall be applied –
3. In paying the debts of the firm .
4. In paying each partner rateably what is due to him from the firm for advances as
distinguished from capital .
5. In paying each partner what is due to him from the firm for advances as distinguished from
capital .
6. Payment of Business loans and the loans of partners- If the firm has to pay business or
commercial loans like bank overdraft and has also to pay back the loans taken from the
partners, then at the time of dissolution of the firm, first business or commercial loans are
paid and , thereafter , loans taken from partners are paid.
7. Profits acquired after Dissolution of the Firm – A partnership firm may come to an end due
to the death of a partner. It may happen that the surviving partner has earned some profits
after the death of the partner, but before the dissolution of the firm has in fact taken place.
Under the circumstances, it becomes the duty of the surviving partner to give the share of
profit of the dead partner to his legal representatives.

Registration means to get the partnership firm registered with the registrar of the firms.
Before the registration of the partnership firm in India. Now the registration of partnership
firms is governed by the Indian Partnership Act, 1932. This present Act made the registration
of a partnership firm optional entirely at the discretion of the partners.

Types of Partnership Firms

 Under the Partnership Act it is not necessary for every partnership firm to get itself registered.
The partnership business is regulated under Indian Partnership Act, 1932 which prescribes
two types of partnership firms:

 Unregistered firms, and

 Registered firms.
An Unregistered firm is formed by entering into an agreement between two competent
persons, known as partners, where the firm is not registered with the registrar of the firms.

Whereas the firms which subsequently get registered with the registrar of the firms by
submitting the copy of partnership deed is known as Registered Partnership Firm.

Chapter VII (Section 56-71) of the Indian Partnership Act, 1932 deals with Registration of
partnership firms.

Laws governing registered Partnership Firms

An overview of the sections 56-71 is as follows:

 Sec. 56: Power to exempt from application of this Chapter.

 Sec. 57: Appointment of Registrars.
 Sec. 58: Application of Registration.
 Sec. 59: Registration.
 Sec. 60: Recording alterations in firm name or principal place of business.
 Sec. 61: Noting of closing and opening of branches.
 Sec. 62: Noting of changes in names and addresses of partners.
 Sec. 63: Recording of changes in and dissolution of the firm & Recording of withdrawal of a
minor.
 Sec. 64: Rectification of mistakes.
 Sec. 65: Amendment of Register by order of Court.
 Sec. 66: Inspection of Register and filed documents.
 Sec. 67: Grant of Copies.
 Sec. 68: Rules of evidence.
 Sec. 69: Effect of non-registration.
 Sec. 70: Penalty for furnishing false particulars.
 Sec. 71: Power to make rules.
Now for the better understanding of the sections we are going to elaborate these sections.

Section 56 talks about the power of the State Government to exempt the application of
chapter VII in that particular state or to any part of it.

NOTE: State can do so by notification in the official gazette.

Section 57 talks about the appointment of the registrar that the State Government may
appoint Registrars of Firms for the purpose of this Act. And may define areas within which
they shall exercise their powers and perform their duties.

Also, it states that every registrar shall be deemed to be a public servant within the meaning
of section 21 of the Indian Penal Code.

Application for Registration of a Partnership Firm (Section

58)
Section 58 and 59 deal with the procedure of registration of partnership firms. The form along
with registration fees needs to submitted to Registrar of Firms who has been appointed in
consonance with Sec. 57 by the State government.
 The registration of firm may be affected at any time by sending or by post or by delivering to
the registrar of the area. It is not essential that the firm should be registered from the very
beginning.

When the partners decide to get the firm registered, as per the provisions of the section 58 of
the Indian Partnership Act,1932 they have to file the statement in the prescribed form. The
statement must be accompanied by the prescribed fee stating-

 The firm’s name,

 The principal place of business,
 The names of its other places of business,
 Date of joining of each partner,
 Names in full and permanent addresses of the partners, and
 Duration of the firm.
The aforesaid statement is to be signed by all the partners or by their agents specially
authorizes in this behalf.

When the registrar is satisfied that the above-mentioned provisions have been complied, he
shall record an entry of this statement in the register and shall file the statement[1].

Recording of Alteration in Firm Name and Principal Place

of Business (Section 60)
When an alteration is made-

 In the firm name or

 In the location of the principal place of business of a registered firm.
A statement may be sent to the registrar specifying the alteration and signed and verified in
the manner required under section 58 accompanied by the prescribed fee.[2]

When the registrar is satisfied that the provisions of sub-section (1) have been duly complied
with, he shall amend the entry relating to the firm in the register of firms.[3]

NOTE: Subsequent alteration as alteration in the name, place, constitution, etc., of the firm
that may occur during its continuance should also be registered.

Noting of Closing and Opening of Branches (Section 61)

When a registered firm discontinues business at any place or begins to carry on business at
any place-

Any partner or agent of the firm may send intimation thereof to the registrar, who shall make
a note of such intimation in the entry relating to the firm in the Register of Firms and shall
file the intimation along with the statement relating to the firm filed under section 59.

How the Change in The Name and Address of Partners is

Made? (Section 62)
When any partner in a registered firm alters his name or permanent address-

An intimation of the alteration may be sent by any partner or agent of the firm to the
registrar, who shall deal with it in the manner provided in the manner provided in section 61.

Rectification of Mistakes (Section 64)

The registrar shall have power at all times to rectify any mistake in order to bring the entry in
the register of firms relating to any firm into conformity with the documents relating to that
firm filed under this chapter.
 On application made by all the parties who have signed any document relating to a firm filed
under this chapter, the registrar may rectify any mistake in such document or in the record
or note thereof made in the register of firm.

Register and Filed Documents Can Be Inspected

Section 66 gives power that-

The Register of Firms shall be open to inspection by any person.[4]

All statements, notices and intimations filed under this chapter shall be open to inspection.[5]

NOTE: The information is subject to be provided on such conditions and on the payment of
such fee as may be prescribed.

Effect of Non-Registration of Partnership Firm

Under the English law, the registration of firms is compulsory. Therefore, there is penalty for
non-registration of firms. But the Indian Partnership Act does not make the registration of the
firms compulsory nor does it impose any penalty for non-registration.

However, under section 69, the consequences of non-registration of partnership firm

includes a number of disabilities which are as follows:

1. No suit to enforce rights arising from a contract under this Act- A firm which has not
undergone the process of incorporation cannot file a suit against any other firm or third party.
A non-registered firm does not have the privilege to file a suit like all other registered firms.
Another important essential about this sub-point is that the person or the third party suing
the non-registered firm shall be already registered in the register as a firm.
2. No proper relief- If the firm is not registered, the claim exceeding ₹100 cannot be set off by a
third party, so there is no relief in this regard to the party. Such a right can be only enjoyed
by the registered firm.
3. Partners cannot bring legal action against each other– An aggrieved partner of an
unregistered firm cannot bring legal action towards each other as they are in no position to
file a suit in the court or have the power to enforce any right.
The high court dismissed the petition on the grounds of sec 69(2) as the plaintiff was not a
registered firm thus the suit was not maintainable. [6]

Hence, it is strongly recommended to register the partnership firm with the registrar of firms
(ROF). An unregistered firm can be registered at any time. Every state government has
established the office of the registrar of firms, which is vested with the powers to register the
firm and issue the Certificate of Registration of the Firm and a copy of the extracts of the
register of firms where the partnership name has been entered.

Rights Not Affected By Non-Registration of Partnership

Firm
Non-registration of the partnership firm does not affect the following rights:

1. The right of the partner to sue for dissolution of the firm or for accounts of and his share,
the dissolved firm.

2. The rights of the firm or its partners having no place of business in India.

3. Suits not exceeding ₹100.

4. The power of an official assignee to realise the property of an insolvent partner.

5. Suits arising otherwise than under a contract, for example, a suit against the third party
for infringement of trademarks of the firm.

What Is the Penalty for Furnishing False Particulars?

Section 70 of this chapter defines the penalty for furnishing false particulars.

When a person signs any statement, amending statement, notice or intimation under this
chapter which he knows to be false – shall be punishable with imprisonment which may
extend to three months or with fine or with both.

Payment of Stamp Duty

As per section 71 of the act, the State government is free to make rules regarding the fess to
be given to the registrar along with the other documents for registration. Different states
impose different stamp duty on the partnership agreements/deeds, it means while creating a
partnership deed the partners must purchase stamp paper of appropriate value as may be
applicable in in the respective state, to be annexed with the agreement.

Advantages of Registration of a firm

The registration of a firm is done not only for the benefit of the firm but also for those who
deal with it. The following benefits are obtained from the registration of a firm:

1. Benefits to the Firm: The firm gets an unmitigated right towards the third parties in civil
suits for getting its rights discharged. In the non-existence of registration, the firm is not
entitled to sue outside partners in courts.

The mandatory requirements to be fulfilled before a suit against third party can be filed to
enforce contractual rights by the firm or on behalf of the firm are-

(a)that the firm must be a registered firm and

(b)that the persons suing are or have been shown in the Register of Firms as partners of the
firm.[7]

2. Benefits to Creditors: A creditor can employ any partner for recuperating his money due
from the firm. All partners whose names are set in the registration are personally accountable
to the unknowns. So, creditors can restore their money from any partner of the firm.

3. Benefits to Partners: The partners can seek the help of a court of law against each other
in case of disagreement among partners. The partners can sue external parties also for
restoring their amounts, etc.

4. Benefits to Incoming Partners: A new partner can contest for his rights in the firm if the
firm is registered. If the firm is not registered then he will have to rely upon the
trustworthiness of other partners.

5. Benefits to Outward-bound Partners: The registration of a partnership firm acts as an

advantage to the outward-bound partners in numerous ways. The outward-bound partners
may be divided into two categories:

(a) On the demise of a partner,

(b) On the superannuation of a partner.

On the demise of a partner his heirs are not accountable for the obligations acquired by the
firm after the date of his demise. In case of a superannuation partner, he remains to be
accountable up to the time he does not give public notice. The public notice is not recorded
 with the Registrar and he terminates his liabilities from the date of this notice. So, it is vital to
get a firm registered for getting this benefit.

INTRODUCTION
As per Section 4 of the Indian Partnership Act, 1932 partnership is the relation between
persons who have agreed to share profit of a business carried on by all or any one of them
acting for all. Persons who have entered into partnership with each other are individually
called partners and collectively they form a firm. The name under which their business is
carried on is called the firm name.

When more than one person wants to do a business together, they can start their business by
creating a partnership firm. Registration of partnership firm means filing of partnership deed
with registrar of firms. To get a partnership firm registered is optional except for the states of
Gujarat and Maharashtra. Partnership firm is registered with registrar of firms who is
appointed by state government. Different states impose different stamp duty on partnership
deed and therefore, partners must purchase stamp paper of appropriate value as may be
applicable in respective state. The stamp duty on the deed is based on the capital of the firm.
A registered firm is a legal person. Minimum 2 persons are needed to become partners of the
firm and maximum 100 persons are permitted. Capital is based on the business requirement
therefore; no minimum capital is required in a partnership firm.

In case of the dissolution, the whole firm is dissolved. The partnership terminates between
each and every partners of the firm. But when only one or more partners retire or become
incapacitated from acting as a partner due to death, insolvency or insanity, the partnership
between such partners and other is dissolved but others may decide to continue. It is called
dissolution of partnership. Dissolution of partnership does not affect continuation of
business. It involves only re-constitution of the firm and requires re-evaluation of asset and
liabilities of the firm. Dissolution of partnership does not involve final closure of the books

STEPS/PROCEDURE FOR REGISTRATION

OF PARTNERSHIP FIRM
Section 58 states that-

1. an application should be submitted in a prescribed form to the registrar of firms. The

submitted application should contain the following particulars-
1. Name of the firm
2. Location of the firm
3. Name of all other places where the business is carried out by the firm
4. Names and addresses of the partners in the firm
5. Duration of partnership
6. The date of joining of each partner of the firm
The application should be signed by all the partners.

1. The required fee is to be deposited to the registrar of firms.

2. After approval of the application, the registrar issues certificate of registration.
However, registration is deemed to be completed as soon as an application with the prescribed
fee and in prescribed form with necessary details concerning the particulars of the
partnership is delivered to the registrar. The recording of an entry in the register of firms is a
routine duty of registrar. Registration may also be effected even after a suit has been filed by
the firm but in that case, it is necessary to withdraw the suit first and get a firm registered
and file a fresh suit.
 Section 59- If registrar thinks that the provisions of section 58 have been duly complied with,
he shall record an entry of the statement in a register called register of firms and shall file the
statement. If the statement of any firm is not sent to the registrar within specified time as
specified in sub section (1A) of section 58, the firm may be registered after payment of penalty
of rupees hundred per year for the delay of its registration.

ESTABLISHMENT OF PARTNERSHIP FIRM

To establish a partnership firm, partnership deed in writing is to be created. Though as per
the partnership act, the partners may also orally enter into partnership agreement. But in my
opinion, it would be better to note down the terms and conditions and get the partnership
firm registered on a stamp paper. Partnership deed is the constitution of the firm which
determines the relationship of the partners with the firm as well as relationship of the
partners amongst themselves.

CONTENTS OF PARTNERSHIP DEED

1. NAME OF FIRM-
The name of the firm should not be similar to the name of the other firm or company. So, we
must be cautious while deciding the name of the firm and the nomenclature must be unique.
If the name of the firm is similar to the firm which already might have got its trademark
registered may file a suit in future claiming that you cannot run the business with the same
name because in such a case the business of the claiming firm might be hampered. Name of
the firm shall not contain any of the following words- King, Queen, Emperor, Royal, Empress,
Crown etc. or words implying the sanction, approval or patronage of the government except
when the state government signifies it’s consent to the use of such words as part of the firm
name by order in writing.

1. OBJECT OF THE FIRM-

All the business or object which the firm enters into or deals with will have to be specified and
should be clearly mentioned in the partnership deed.

1. PLACE OF BUSINESS-
The address of the office of the firm has to be clearly mentioned in the deed.

1. NAMES AND ADDRESSES OF PARTNERS-

Names and addresses of all the partners working with the firm are needed to be mentioned.

1. DATE OF COMMENCEMENT-
The date on which business is going to commence is also required to be mentioned in the
deed.

1. DURATION OF PARTNERSHIP-
It can be defined on the basis of the will of the partners. Till the time partners of the firm want
to continue with the firm they can do so as per their own choice. Duration of partnership also
depends on the completion of the project for which the partnership is created, if so created.

1. CAPITAL CONTRIBUTION-
Initial capital contribution by each partner is to be stated in the partnership deed. If the
partners have equally contributed then all the partners will be entitled to receive equal profits
and if any of the partner contributes more capital to the firm then such partner is entitled to
receive more profits as compared to other partners of the firm.

1. PROFIT & LOSS SHARING RATIO-

The profit and loss sharing ratio as decided amongst the partners is to be mentioned means
in what proportion the profit earned by a firm is divided amongst the partners or in what
proportion the loss occurred is shared by the partners. Generally, the partner who invests
more capital is entitled to more profit.

1. RATE OF INTEREST ON CAPITAL INVESTMENT-

 The rate of interest on capital investment should be specified and the rate of interest charged
on withdrawal of amount should also be specified.

1. SALARY, COMMISSION TO PARTNERS-

Salary and commission provided to the partners of the partnership firm have to be specified in
the partnership deed.

1. RESPONSIBILITY AND DUTIES OF PARTNERS–

Responsibilities and duties of the partners working with the firm is to be defined clearly as per
the departments allotted to them so that there is no confusion regarding the roles of the
partners.

1. METHOD OF PREPARING ACCOUNTS AND AUDIT–

This is also required to be stated in the deed.

1. RULES OF DEATH, RETIREMENT OR ADMISSION-

Rules regarding death, retirement or admission of any partner are to be specified in the deed.

Section 70- PENALTY FOR FURNISHING FALSE

PARTICULARS
If the information provided to the registrar is incomplete and misleading than in this penalty
under section 70 may be imposed on the partnership firm for making false declaration and
such penalty may include punishment which may extend to imprisonment for 3 months or
with fine or with both.

CONSEQUENCES OF NON-
REGISTRATION OF PARTNERSHIP FIRM
1. As per section 69 unregistered firm cannot file any case in any court.
2. No relief is available to the partners for set-off of claim.
3. Aggrieved partner cannot bring legal action against the firm or other partner of the firm if the
firm is not registered.
4. The third party can file a suit against an unregistered firm.

EXCEPTIONS IN WHICH RIGHTS ARE NOT AFFECTED ON

NON-REGISTRATION OF FIRM-
1. The right of partners to sue for the dissolution of the firm or for settlement of the accounts of
a dissolved firm or for realization of a property of the dissolved firm.
2. The right to claim a set-off or sue if value of suit does not go beyond rupees hundred in value.
3. The right of third parties to sue the partner or any firm.
4. The power of receiver of court to release the property of the insolvent partner and the power of
official assignees to bring an action.
CASE LAWS-

1. SHARAD VASANT KOTAK & OTHERS V. RAMNIKLAL MOHANLAL CHAWDA & ANOTHER
It was held that on the induction of the second respondent, the existing firm was only
reconstituted as per the facts of this case and therefore, it is not necessary to get a fresh
registration. The suit in question was not hit by section 69(2A) of the Act and the Appeal was
dismissed. There was no order as to the cost.

1. V. SUBRAMANIAM VS. RAJESH RAGHUVANDRA RAO, 2009

Sub-section 2A of Section 69 as introduced by the Maharashtra Legislature clearly violates
Articles 14, 19(1) (g) and 300A of the Constitution; it is in our opinion ultra vires and is hence
declared unconstitutional. Consequently this appeal is allowed and impugned judgment of the
Bombay High Court is set aside. The suit can now proceed ignoring sub-section 2A which we
have declared invalid. No costs.
1. NEELAKANTAN OMANA V. NEELAKANTAN RAVEENDRAN
The suit by partners demanding rendition of accounts is not maintainable if the firm is not
registered.

1. ORIENTAL FIRE & GENERAL INSURANCE CO. LTD. V. UOI

The insurance claim under insurance policy arises out of insurance contract and therefore,
the same cannot be enforced while filing a suit if the firm is unregistered.

1. SALEM CHIT FUNDS V. STATE OF TAMIL NADU

In this case Madras High Court held that the requirement of registered firms for filing the
declaration with the registrar regarding the return every year is valid.

1. GANDHI & CO. V. KRISHNA GLASS PVT. LTD.

In this case it was held that if the name of one of the partners is not shown in the register of
the firm, the suit filed by the firm must fail.

1. State Bank of India Vs M/s. Simko Engineering Works, 2005

It was held that a partnership firm has no independent entity of its own and all the liabilities
against the firm or all acts done by any one of its partners for and on behalf of the firm shall
also bind on all other partners. Section 20 is an exception to the implied authority. Partners
extend or restrict the implied authority of any partner by entering into a contract between
themselves. However, notwithstanding any such restriction, any act done by a partner on
behalf of the firm, which falls within his implied authority will bind the firm, unless the
person with whom he is dealing knows about the restriction or does not believe that partner
to be a partner. Liability to prove that such authority of partner is restricted is upon the
person who claims such a restriction.

Section 68 states about the evidentiary value of entries in the register of firms and section 60-
65 deals with subsequent changes and alterations. Section 71 deals with power to make
rules.

BASIC DOCUMENTS TO START A PARTNERSHIP FIRM IN

INDIA
1. Proof of registered address
2. Notarised partnership agreement
3. Self attested document of all partners of the firm which shall include copy of PAN card and
two photographs.

NOTARY OF PARTNERSHIP DEED

The signature of the partners should be made on the agreement in the presence of witnesses
before a notary. The partnership deed needs to be well drafted.

NO FOREIGN DIRECT INVESTMENT

Only Indian citizens can become a partner in the partnership firm. Foreign direct investment
is not allowed in a partnership firm.

MERITS OF PARTNERSHIP FIRM-

 Partners in a partnership firm are not required to take Director Identification Number. In case
of a private limited company or LLP, the directors have to obtain a digital certificate but not in
case of a partnership firm. Therefore, digital signature is not required in case of partnership
firm.
 If there is no requirement for text audit in a partnership firm, there is no need for the firm to
get its balance sheet audited as it is not mandatory.
 Filing of balance sheet or final accounts is also not required in case of partnership firm.
 There is no requirement for minimum paid up capital in case of partnership firm. Profit of
partnership firm is directly distributed among the partners.
 Low compliance of procedures and low cost is involved in partnership firm.
 Winding up is easy and the partners can wind up their partnership firm without taking prior
permission of any other person or authority.

LIMITATIONS OF PARTNERSHIP FIRM-

1. Potential investors are not easily available for future investments in partnership firms as in
case of private limited company and limited company because such investors may not be sure
of the safety and security of the amount which they might invest in a partnership firm after
due diligence or we may say that if potential investors are not sure of high rate of return by
investing in partnership firm, they might be reluctant to invest in partnership firm. The
partnership firm can be converted into private limited or limited company if the partners of
the partnership firm are willing to do so and if the partners of a partnership firm are
interested to raise more capital by attracting more potential investors.
2. Liabilities of partners in a partnership firm is unlimited. So, if a partnership firm borrows a
loan or if any other liability occurs on the partnership firm, the partners themselves have to
bear such joint and several unlimited liability. And the partners might require to meet such
liability even by selling their personal property.